UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended June 30, 2016  

OR

For the transition period from                to               

Commission File Number: 001-32401

 

MANITEX INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

(708) 430-7500

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  o    No  x

The number of shares of the registrant’s common stock, no par, outstanding at August 1, 2016 was 16,126,106

 

 

 

 

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MANITEX INTERNATIONAL, INC.

FORM 10-Q INDEX

TABLE OF CONTENTS

 

 

 

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PART 1—FINANCIAL INFORMATION

Item 1—Financial Statements

MANITEX INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

The accompanying notes are an integral part of these financial statements

 

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MANITEX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for share and per share amounts)

 

 

The accompanying notes are an integral part of these financial statements

 

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MANITEX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

 

The accompanying notes are an integral part of these financial statements

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MANITEX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

The accompanying notes are an integral part of these financial statements

 

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MANITEX INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In thousands, except share and per share data)

 

Note 1. Nature of Operations

The Company is a leading provider of engineered lifting solutions. The Company operates in three business segments: the Lifting Equipment segment, the ASV segment and the Equipment Distribution segment.

Lifting Equipment Segment

The Company is a leading provider of engineered lifting solutions. The Company designs, manufactures and distributes a diverse group of products that serve different functions and are used in a variety of industries. Through its Manitex, Inc. subsidiary it markets a comprehensive line of boom trucks, truck cranes and sign cranes. Manitex’s boom trucks and crane products are primarily used for industrial projects, energy exploration and infrastructure development, including, roads, bridges and commercial construction. Badger Equipment Company (“Badger”) is a manufacturer of specialized rough terrain cranes and material handling products. Badger primarily serves the needs of the construction, municipality and railroad industries.

PM Group S.p.A. (“PM”) is a leading Italian manufacturer of truck mounted hydraulic knuckle boom cranes with a 50-year history of technology and innovation, and a product range spanning more than 50 models. Its largest subsidiary, Oil & Steel, S.p.A (“O&S”), is a manufacturer of truck-mounted aerial platforms with a diverse product line and an international client base.

Manitex Liftking ULC (“Manitex Liftking” or “Liftking”) sells a complete line of rough terrain forklifts, a line of stand-up electric forklifts, cushioned tired forklifts with lifting capacities from 18 thousand to 40 thousand pounds and special mission oriented vehicles, as well as other specialized carriers, heavy material handling transporters and steel mill equipment. Manitex Liftking’s rough terrain forklifts are used in both commercial and military applications. Specialty mission oriented vehicles and specialized carriers are designed and built to meet the Company’s unique customer needs and requirements. The Company’s specialized lifting equipment has met the particular needs of customers in various industries that include utility, ship building and steel mill industries.

CVS Ferrari, srl (“CVS”) designs and manufactures a range of reach stackers and associated lifting equipment for the global container handling market, that are sold through a broad dealer network. The Valla product line offers a full range of precision pick and carry cranes from 2 to 90 tons, using electric, diesel, and hybrid power options. Its cranes offer wheeled or tracked and fixed or swing boom configurations, with special applications designed specifically to meet the needs of its customers.

Manitex Sabre, Inc.(“Sabre”) manufactures a comprehensive line of specialized mobile tanks for liquid and solid storage and containment solutions with capacities from 8,000 to 21,000 gallons. Its mobile tanks are sold to specialized independent tank rental companies and through the Company’s existing dealer network. The tanks are used in a variety of end markets such as petrochemical, waste management and oil and gas drilling.  On March 12, 2015, the Company acquired certain assets of Columbia Tank and merged its operations with Sabre.  

ASV Segment

A.S.V., LLC (“ASV”) manufactures a line of high quality compact track and skid steer loaders. The products are used in the site clearing, general construction, forestry, golf course maintenance and landscaping industries, with general construction being the largest market. The ASV products are distributed through the Terex distribution channels as well as through the Company and other independent dealers. The Company has a 51% ownership interest in ASV.

Equipment Distribution Segment

The Equipment Distribution segment comprises the operations of Crane & Machinery (“C&M”), a division of Manitex International, North American Equipment, Inc. (“NAE”) and North American Distribution, Inc. (“NAD”).  The segment markets products used primarily for infrastructure development and commercial construction applications that include road and bridge construction, general contracting, roofing, scrap handling and sign construction and maintenance. C&M is a distributor of Terex rough terrain and truck cranes products and supplies repair parts for a wide variety of medium to heavy duty construction equipment and sells domestically and internationally, predominately to end users, including the rental market. It also provides crane equipment repair services in the Chicago area. The segment markets previously-owned construction and heavy equipment and trailers both domestically and internationally through NAE. The segment purchase previously owned equipment of various ages and conditions and often refurbishes the equipment before resale.  The segment also sells Valla and ASV products through NAD.    

 

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Discontinued Operations

 

Manitex Load King, LLC (“Load King”) manufactured specialized custom trailers and hauling systems typically used for transporting heavy equipment. Load King trailers served niche markets in the commercial construction, railroad, military and equipment rental industries through a dealer network.  Load King was sold on December 28, 2015 and is presented as a discontinued operation.

 

 

2. Basis of Presentation

The accompanying consolidated financial statements, included herein, have been prepared by the Company without audit pursuant to the rules and regulations of the United States Securities and Exchange Commission. Pursuant to these rules and regulations, certain information and footnote disclosures normally included in financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals, except as otherwise disclosed) necessary for a fair presentation of the Company’s financial position as of June 30, 2016, and results of its operations and cash flows for the periods presented. The consolidated balances as of December 31, 2015 were derived from audited financial statements but do not include all disclosures required by generally accepted accounting principles. The accompanying consolidated financial statements have been prepared in accordance with accounting standards for interim financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The results of operations for the interim periods are not necessarily indicative of the results of operations expected for the year.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at the amounts the Company’s customers are invoiced and do not bear interest. Accounts Receivable is reduced by an allowance for amounts that may become uncollectible in the future. The Company’s estimate for the allowance for doubtful accounts related to trade receivables includes evaluation of specific accounts where the Company has information that the customer may have an inability to meet its financial obligations. The Company had allowances for doubtful accounts of $361 and $240 at June 30, 2016 and December 31, 2015, respectively.

Inventory Valuation

Inventory consists of stock materials and equipment stated at the lower of cost (first in, first out) or market. All equipment classified as inventory is available for sale. The Company records excess and obsolete inventory reserves. The estimated reserve is based upon specific identification of excess or obsolete inventories. Selling, general and administrative expenses are expensed as incurred and are not capitalized as a component of inventory.

Accrued Warranties

Warranty costs are accrued at the time revenue is recognized. The Company’s products are typically sold with a warranty covering defects that arise during a fixed period of time. The specific warranty offered is a function of customer expectations and competitive forces. The Equipment Distribution segment does not accrue for warranty costs at the time of sales, as they are reimbursed by the manufacturers for any warranty that they provide to their customers.

A liability for estimated warranty claims is accrued at the time of sale. The liability is established using historical warranty claim experience. Historical warranty experience is, however, reviewed by management. The current provision may be adjusted to take into account unusual or non-recurring events in the past or anticipated changes in future warranty claims. Adjustments to the initial warranty accrual are recorded if actual claim experience indicates that adjustments are necessary. Warranty reserves are reviewed to ensure critical assumptions are updated for known events that may impact the potential warranty liability.

Revenue Recognition

Revenue and related costs are recognized when title passes and risk of loss passes to our customers which generally occurs upon shipment depending upon the terms of the contract.  Under certain contracts with our customers title passes to the customers when the units are completed. The units are segregated from our inventory and identified as belonging to the customer, the customer is notified that the units are complete and awaiting pick up or delivery as specified by the customer before income is recognized. Additionally, the customer is requested to sign an “Invoice Authorization Form” which acknowledges the contract terms and acknowledges that the customer has economic ownership and control over the unit. It also acknowledges that we are going to invoice the unit per terms of the contract. The Company insures any custodial risk that it may retain.

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For FOB contracts, customers may be invoiced prior to the time customers take physical possession. Revenue is recognized in such cases only when the customer has a fixed commitment to purchase the units, the units have been completed, tested and made available to the customer for pickup or delivery, and the customer has authorized in writing that we hold the units for pickup or delivery at a time specified by the customer. In such cases, the units are invoiced under our customary billing terms, title to the units and risks of ownership pass to the customer upon invoicing, the units are segregated from our inventory and identified as belonging to the customer and we have no further obligations under the order. The Company insures any custodial risk that it may retain.

In addition, our policy requires in all instances certain minimum criteria be met in order to recognize revenue, specifically:

Interest Rate Swap Contracts—The Company enters into derivative instruments to manage its exposure to interest rate risk related to certain foreign term loans. Derivatives are initially recognized at fair value at the date the contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in current earnings immediately unless the derivative is designated and effective as a hedging instrument, in which case the effective portion of the gain or loss is recognized and is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedging instrument affects earnings (date of sale). As part of the acquisition of PM Group, which was acquired on January 15, 2015, the Company acquired interest rate swap contracts, which manage the exposure to interest rate risk related to term loans with certain financial institutions in Italy. These contracts have been determined not to be hedge instruments under ASC 815-10.

 

Litigation Claims

In determining whether liabilities should be recorded for pending litigation claims, the Company must assess the allegations and the likelihood that it will successfully defend itself. When the Company believes it is probable that it will not prevail in a particular matter, it will then make an estimate of the amount of liability based, in part, on the advice of legal counsel.

Income Taxes

The Company’s provision for income taxes consists of U.S. and foreign taxes in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that the Company expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. The effective tax rate is based upon the Company’s anticipated earnings both in the U.S. and in foreign jurisdictions.

Comprehensive Income

Reporting “Comprehensive Income” requires reporting and displaying comprehensive income and its components. Comprehensive income includes, in addition to net earnings, other items that are reported as direct adjustments to stockholder’s equity. Currently, the comprehensive income adjustment required for the Company has two components. First is a foreign currency translation adjustment, the result of consolidating its foreign subsidiaries. The second component is a derivative instrument fair market value adjustment (net of income taxes) related to forward currency contracts designated as a cash flow hedge.

Business Combinations

The Company accounts for acquisitions in accordance with guidance found in ASC 805, Business Combinations. The guidance requires consideration given, including contingent consideration, assets acquired and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition costs will generally be expensed as incurred, (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.

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ASC 805 requires that any excess of purchase price over fair value of assets acquired, including identifiable intangibles and liabilities assumed be recognized as goodwill. In accordance with ASC 805, any excess of fair value of acquired net assets, including identifiable intangibles assets, over the acquisition consideration results in a bargain purchase gain. Prior to recording a gain, the acquiring entity must reassess whether all acquired assets and assumed liabilities have been identified and recognized and perform re-measurements to verify that the consideration paid, assets acquired and liabilities assumed have been properly valued.

PM Group and Columbia Tank results are included in the Company’s results from their respective dates of acquisition of January 15, 2015 and March 12, 2015.

Reclassification

Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the current year’s presentation.

 

In conjunction with the adoption of new accounting standards, certain debt issuance costs at December 31, 2015, have been reclassified to conform to the current year’s presentation.

Supplemental Cash Flow Disclosures

Interest received and paid, income tax refunds received and income taxes paid and non-cash transactions for the periods ended June 30, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

3. Acquisitions

PM Group

On July 21, 2014 Manitex International, Inc. (the “Company”) entered into a series of agreements to acquire PM Group S.p.A, (“PM Group”), a manufacturer of truck mounted cranes based in San Cesario sul Panaro, Modena, Italy. On January 15, 2015, the Company’s acquisition of PM closed.

The fair value of the purchase consideration is shown below:

 

 

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In accordance ASC 805, Business Combinations, the assets acquired and liabilities assumed are valued based on their estimated fair values as of the date of the acquisition. The Company engaged a valuation expert and a tax advisor to provide guidance and assistance to management which was considered and in part relied upon in completing its purchase price allocation. The excess of the purchase price over the aggregate estimated fair value of net assets acquired was allocated to goodwill. The following table summarizes the revised allocation of the PM acquisition consideration to the fair value of the assets acquired and liabilities assumed at the date of acquisition:

Purchase price allocation:

 

 

Contingent Liability . In accordance with ASC 805, the acquirer is to recognize the acquisition date fair value of contingent liability. The Company entered into an Option Agreement with one of the PM Group senior banks under which the bank will sell to the Company PM debt with a face value of €5,000. Under the Option Agreement, the bank shall receive €2,500 if PM has 2017 EBITDA, as defined in the agreement, of between €14,500 and €16,500, and €5,000 if 2017 EBITDA exceeds €16,500. If 2017 EBITDA, as defined in the agreement, is less than €14,500, the bank is to sell the debt to the Company for €0.001. Given the disparity between the EBITDA threshold and the Company’s projected financial results, it was determined that a Monte Carlo simulation analysis was appropriate to determine the fair value of contingent consideration. It was determined that the probability weighted average payment is €1,093 or $1,270. Based thereon, we determined the fair value of the contingent liability to be €1,093 or $1,270. This amount is included in other long-term liabilities in the above table.

Non-recourse PM debt : Under the transaction, PM remains obligated for the following debt:

 

 

Non-interest bearing debt . In connection with the acquisition, the Company assumed non-interest bearing debt of €10,289. The fair value of the non-interest bearing debt was determined to be €8,829 or $10,435. The fair value of the non-interest bearing debt was calculated to equal the present value of future debt payments discounted at a market rate of return commensurate with similar debt instruments with comparable levels of risk and marketability. A rate of 5.24% was determined to be the appropriate rate following an assessment of the risk inherent in the debt issued and the market rate for debt of this nature using corporate credit ratings.

The interest rate swap derivative was valued at its fair value, which is based on quotes from a financial institution.

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Tangible assets and liabilities: The tangible assets and liabilities were valued at their respective carrying values by PM, except for certain adjustments necessary to state such amounts at their estimated fair values at the acquisition date. Significant fair market adjustments were made to decrease accounts receivable by $260, increase inventory by $911, decrease fixed assets by $4,699 and to decrease liabilities by $345.

Intangible assets: There are three fundamental methods applied to value intangible assets outlined in FASB ASC 820. These methods include the Cost Approach, the Market Approach, and the Income Approach. Each of these valuation approaches were considered in our estimation of value.

Trade names and trademarks, patented and unpatented technology: Valued using the Relief from Royalty method, a form of both the Market Approach and the Income Approach. Because the Company has established trade names and trademarks and has developed patented and unpatented technology, we estimated the benefit of ownership as the relief from the royalty expense that would need to be incurred in absence of ownership.

Customer relationships: Because there is a specific earnings stream that can be associated with customer relationships, we determined the fair value of these relationships based on the excess earnings method, a form of the Income Approach.

Goodwill: Goodwill represents the excess of total consideration paid over the fair value of net assets acquired. The recognition of goodwill of $30,173 reflects the inherent value in the PM reputation, which has been built since being founded in 1959 and the prospects for significant future earnings.

In calculating the Company’s deferred tax liabilities the fact that goodwill is not deductible was considered.

Acquisition transaction costs: Cost and expenses related to the acquisition have been expensed as incurred and recorded in selling, general and administrative expenses. The Company incurred fees of $194 for legal services, $750 for acquisition related bonus payments, $347 for accounting services in connection with the prior year audit of PM financial statements and $294 for other costs related to the acquisition.

The results of the acquired PM operations have been included in our consolidated statement of operations since the acquisition date. PM is included in the Lifting segment for segment reporting purposes.

 

Columbia Tanks

On March 12, 2015 the Company’s subsidiary, Manitex Sabre, entered into an inventory purchase agreement and an equipment purchase agreement with Columbia Tanks LLC, an Indiana company and J.F. Henry, the “Member”, for the purchase of inventory and used manufacturing equipment. In a separate agreement with F.H. Associates, the Company entered into a three year lease of a 99,000 square foot manufacturing facility at an annual rent commencing at $240 per annum and increasing to $270 and $300 for the second and third years, respectively.  The lease is renewable after three years at the Company’s option.

The fair value of the purchase consideration was $1,214 in total as shown below:

 

 

Seller Note . In connection with the inventory and equipment purchases, the Company issued two non-interest bearing notes for $450 and $390 that mature on August 31, 2016 and May 31, 2016, respectively. The fair value of Inventory Note and the Equipment Note was determined to be $436 and $378. The fair value of the notes was calculated to equal the present value of future debt payments discounted at a market rate of return commensurate with similar debt instruments with comparable levels of risk and marketability. A rate of 4.0% was determined to be the appropriate rate following an assessment of the risk inherent in the debt issued and the market rate for debt of this nature using corporate credit ratings.

Under the acquisition method of accounting, in accordance ASC 805, Business Combinations, the assets acquired and liabilities assumed are valued based on their estimated fair values as of the date of the acquisition. The purchase price allocation is preliminary and is subject to final review of inventory, fixed assets and related intangibles.

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The following table summarizes the allocation of the Columbia acquisition consideration to the fair value of the assets acquired:

Purchase price allocation:

 

 

Tangible and Intangible Assets and Liabilities: The tangible assets were valued at their respective purchase price. Management has determined that the amount paid to acquire the assets approximates the fair value of the assets acquired.

 

 

4. Financial Instruments—Forward Currency Exchange Contracts and Interest Rate Swap Contracts

The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring and nonrecurring basis as of June 30, 2016 and December 31, 2015 by level within the fair value hierarchy. As required by ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The following is summary of items that the Company measures at fair value on a recurring basis except as noted:

 

 

In connection with the acquisition of PM, the Company recorded a contingent liability related to an Option Agreement with one of PM’s senior lenders.  The agreement calls for a payment to be made to the lender based on PM’s 2017 EBITDA.  It was determined that Monte Carlo simulation analysis was the appropriate way to determine the fair market value of the contingent liability at the date of acquisition and at June 30, 2016.  At June 30, 2016, the fair value was determined to be $330, and as result, a gain of $915 was recognized which represents the difference between the updated fair value and the existing carrying value (including previous exchange rate adjustments).

 

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Fair Value Measurements

ASC 820-10 classifies the inputs used to measure fair value into the following hierarchy:

 

Fair value of the forward currency contracts are determined on the last day of each reporting period using observable inputs, which are supplied to the Company by the foreign currency trading operation of its bank and are Level 2 items.

 

 

5. Derivatives Financial Instruments

The Company’s risk management objective is to use the most efficient and effective methods available to us to minimize, eliminate, reduce or transfer the risks which are associated with fluctuation of exchange rates between the Canadian dollar, Euro, Chilean Peso and the U.S. dollar.

Forward Currency Contracts

When the Company’s Canadian subsidiary receives a significant new U.S. dollar order, management will evaluate different options that may be available to mitigate future currency exchange risks. The decision to hedge future sales is not automatic and is decided case by case. The Company will only use hedge instruments to hedge firm existing sales orders and not estimated exposure, when management determines that exchange risks exceeds desired risk tolerance levels. The forward currency contracts used to hedge future sales are designated as cash flow hedges under ASC 815-10 provided certain criteria are met.

The Company enters into forward currency exchange contracts in relationship such that the exchange gains and losses on the assets and liabilities denominated in other than the reporting units’ functional currency would be offset by the changes in the market value of the forward currency exchange contracts it holds. The forward currency exchange contracts that the Company has to offset existing assets and liabilities denominated in other than the reporting units’ functional currency have been determined not to be considered a hedge under ASC 815-10. The Company records at the balance sheet date the forward currency exchange contracts at its market value with any associated gain or loss being recorded in current earnings. Both realized and unrealized gains and losses related to forward currency contracts are included in current earnings and are reflected in the Statement of Income in the other income expense section on the line titled foreign currency transaction gains (losses). Items denominated in other than a reporting units functional currency includes U.S. denominated accounts receivables and accounts payable held by our Canadian subsidiary and certain intercompany receivables due from the Company’s Canadian and Italian subsidiaries.

As required, forward currency contracts are recognized as an asset or liability at fair value on the Company’s Consolidated Balance Sheet. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings (date of sale). Gains or losses on cash flow hedges when recognized into income are included in net revenues. Gains and losses on the derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. The Company expects minimal ineffectiveness as the Company has hedged only firm sales orders and has not hedged estimated exposures. As of June 30, 2016, the Company had no outstanding forward currency contracts that were in place to hedge future sales. Therefore, there are currently no unrealized pre-tax gains or losses which will be reclassified from other comprehensive income into earnings during the next 12 months.

 

 

At June 30, 2016, the Company had entered into certain forward currency exchange contracts. The contracts obligate the Company to purchase CDN $3,432. The contracts mature between July 11, 2016 and July 26, 2016.  Under the contract, the Company will purchase Canadian dollars at exchange rates between .7225 and .7755.  The Canadian to US dollar exchange rate was .7742 at June 30, 2016.  

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PM Group has an intercompany receivable denominated in Euros from its Chilean subsidiary. At June 30, 2016, the Company has entered into two forward contracts that mature on July 11, 2016.  The purpose of which is to mitigate the income effect related to this intercompany receivable that results with a change in exchange rate between the Euro and the Chilean peso. The first contract obligates the Company to purchase €2,096 at $1.0912. The second contract obliges the Company to sell 1,700,000 Chilean pesos at an exchange rate of 743.25 per U.S. dollar. These two contracts achieve the desired purpose as U.S. dollar amounts involved in the two forward contracts offset each other.

Interest Rate Swap Contracts

The Company uses financial instruments available on the market, including derivatives, solely to minimize its cost of borrowing and hedge the risk of interest rate and exchange rate fluctuation. In January 2009, prior to the January 15, 2015 acquisition date, PM entered into the following contract in order to hedge the interest rate risk related to its term loans with two financial institutions:

A contract signed by PM, for an original notional amount of € 20,000 (€ 20,000 at June 30, 2016), maturing on February 3, 2017 with interest payable every February 3 and August 3 each year. PM pays interest at a rate of 3.48% and receives from the counterparties interest at the Euro Interbank Offered Rate (“Euribor”) for the period in question.  An additional contract was signed by PM Group, for an original notional amount of € 482 (€ 440 at June 30, 2016), maturing on October 1, 2020 with interest paid monthly.   PM pays interest at a rate of 3.90% and receives from the counterparties interest at the “Euribor” rate for the period in question if greater than 0.90%.

 

As of June 30, 2016, the Company had the following forward currency contracts and interest rate swaps:

 

 

The following table provides the location and fair value amounts of derivative instruments that are reported in the Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015:

Total derivatives NOT designated as a hedge instrument

 

 

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The following tables provide the effect of derivative instruments on the Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015:

 

 

The Counterparty to each of the currency exchange forward contracts is a major financial institution with credit ratings of investment grade or better and no collateral is required. Management continues to monitor counterparty risk and believes the risk of incurring losses on derivative contracts related to credit risk is unlikely.

 

 

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6. Net Earnings (Loss) per Common Share

Basic net earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of convertible debt and restricted stock units. Details of the calculations are as follows:

 

 

There are 267,276 and 268,048 restricted stock units which are anti-dilutive and therefore not included in the average number of diluted shares shown above for the three and six months ended June 30, 2016, respectively.   There are 155,219 and 194,067 restricted stock units which are anti-dilutive and therefore not included in the average number of diluted shares shown above for the three and six months ended June 30, 2015, respectively.

 

 

 

 

7. Equity

Stock Issuance

Shares issued to Terex Corporation

On March 1, 2016, the Company issued 30,425 shares of common stock to the Terex Corporation as the Company elected to pay $150 of the final principal payment due March 1, 2016 in shares of the Company’s common stock. The share price for the transaction was $4.93 which was determined based upon the average closing price for the twenty trading days ending the day before the payment was due.  

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Stock issued to employees and Directors

The Company issued shares of common stock to employees and Directors as restricted stock units issued under the Company’s 2004 Incentive Plan vested. Upon issuance entries were recorded to increase common stock and decrease paid in capital for the amounts shown below. The following is a summary of stock issuances that occurred during the period:

 

 

On March 13, 2015, the Company paid a portion of officers and employee 2014 bonuses in stock. This resulted in an issuance of 22,868 shares with an aggregate value of $212. Upon issuance, the Company’s common stock was increased by $212 and the bonus accrual was decreased by a corresponding amount.

Stock Repurchase

The Company purchases shares of Common Stock from certain employees at the closing share price on the date that employees’ restricted shares are issued (which is also the vesting date).  The stock is purchased from the employees to satisfy employees’ withholding tax obligations related to the stock when issued.  Common stock is decreased by the value of the shares purchased.  The below table summarized shares repurchased from employees during the current year through June 30, 2016:

 

 

 

 

2004 Equity Incentive Plan

In 2004, the Company adopted the 2004 Equity Incentive Plan and subsequently amended and restated the plan on September 13, 2007, May 28, 2009 and June 2, 2016. The maximum number of shares of common stock reserved for issuance under the plan is 1,329,364 shares. The total number of shares reserved for issuance however, can be adjusted to reflect certain corporate transactions or changes in the Company’s capital structure. The Company’s employees and members of the board of directors who are not our employees or employees of our affiliates are eligible to participate in the plan. The plan is administered by a committee of the board comprised of members who are outside directors. The plan provides that the committee has the authority to, among other things, select plan participants, determine the type and amount of awards, determine award terms, fix all other conditions of any awards, interpret the plan and any plan awards. Under the plan, the committee can grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units, except Directors may not be granted stock appreciation rights, performance shares and performance units. During any calendar year, participants are limited in the number of grants they may receive under the plan. In any year, an individual may not receive options for more than 15,000 shares, stock appreciation rights with respect to more than 20,000 shares, more than 20,000 shares of restricted stock and/or an award for more than 10,000 performance shares or restricted stock units or performance units. The plan requires that the exercise price for stock options and stock appreciation rights be not less than fair market value of the Company’s common stock on date of grant.

The Company awarded under the Amended and Restated 2004 Equity Incentive Plan a total of 183,850 restricted stock units to employees and directors on January 4, 2016. The restricted stock units are subject to the same conditions as the restricted stock awards except the restricted stock units will not have voting rights and the common stock will not be issued until the vesting criteria are satisfied.

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The following table contains information regarding restricted stock units:

 

 

On January 4, 2016, the Company granted an aggregate of 23,250  restricted stock units to five independent Directors pursuant to the Company’s 2004 Equity Incentive Plan. Restricted stock units of 7,673, 7,673 and 7,904 vest on January 4, 2017, 2018 and 2019, respectively.

On January 4, 2016, the Company granted 160,600 restricted stock units to employees pursuant to the Company’s 2004 Equity Incentive Plan.   Restricted stock units of 52,998, 52,998 and 54,604 vest on January 4, 2017, 2018 and 2019, respectively.

The value of the restricted stock is being charged to compensation expense over the vesting period. Compensation expense includes expense related to restricted stock units of $281 and $292 for the three and $566 and $654for the six months ended June 30, 2016 and 2015, respectively.  Additional compensation expense related to restricted stock units will be $562, $740 and $368 for the remainder of 2016, 2017 and 2018, respectively.

 

 

8. New Accounting Pronouncements

 

Recently Issued Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, deferral of the effective date, which amends ASU 2014-09.  As a result, the effective date is the first quarter of 2018, with early adoption permitted.  The Company is evaluating the impact that adoption of this guidance will have on the determination or reporting of its financial results.

 

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” (“ASU 2015-11”). ASU 2015-11 requires inventory be measured at the lower of cost and net realizable value and options that currently exist for market value be eliminated. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. ASU 2015-11 should be applied prospectively. The Company is evaluating the impact adoption of this guidance will have on determination or reporting of its financial results.

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (“ASU 2015-17”), Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in ASU 2015-17 seek to simplify the presentation of deferred income taxes and require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early application permitted for all entities as of the beginning of an interim or annual reporting period. The main impact of adoption of the standard was the reclassification of current deferred tax assets that resulted in a reduction in deferred tax liabilities.   

 

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments in ASU 2016-01, among other things, require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost. The effective date will be the first quarter of fiscal year 2018. The Company is evaluating the impact the adoption of this new standard will have on its consolidated financial statements.

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In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to recognize assets and liabilities for leases with lease terms of more than 12 months and disclose key information about leasing arrangements. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. The update is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is in the process of evaluating the impact of this update on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815)” (“ASU 2016-05”). ASU 2016-05 provides guidance clarifying that novation of a derivative contract (i.e. a change in counterparty) in a hedge accounting relationship does not, in and of itself, require designation of that hedge accounting relationship. The effective date will be the first quarter of fiscal year 2017, with early adoption permitted. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815)” (“ASU 2016-06”). ASU 2016-06 simplifies the embedded derivative analysis for debt instruments containing contingent call or put options by clarifying that an exercise contingency does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis. The effective date will be the first quarter of fiscal year 2017, with early adoption permitted. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606) Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”). ASU 2016-08 further clarifies principal and agent relationships within ASU 2014-09. Similar to ASU 2014-09, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 is intended to simplify several aspects of accounting for share-based payment awards. The effective date will be the first quarter of fiscal year 2017, with early adoption permitted. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

 

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing” (“ASU 2016-10”).  The amendments in ASU 2016-10 are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services in contracts with customers and to improve the operability and understandability of licensing implementation guidance related to the entity's intellectual property.  Similar to ASU 2014-09, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017.  The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

 

Except as noted above, the guidance issued by the FASB during the current year is not expected to have a material effect on the Company’s consolidated financial statements.

 

 

9. Inventory

The components of inventory are as follows:

 

 

The Company has established reserves for obsolete and excess inventory of $2,395 and $1,724 as of June 30, 2016 and December 31, 2015, respectively.

 

 

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10. Goodwill and Intangible Assets

 

 

Amortization expense for intangible assets was $1,788 and $1,513 for the three months, and $3,566 and $2,633 for the six months ended June 30, 2016 and 2015, respectively.

Changes in goodwill for the six months ended June 30, 2016 are as follows:

 

 

During the three months ended June 30, 2016, the Company evaluated its goodwill using quantitative Step 1 analysis.  The Step 1 calculations for the Equipment Distribution segment indicate impairment.  Accordingly, a Step 2 valuation for the Equipment Distribution segment was completed and resulted in the Equipment Distribution segment’s goodwill being written off.

 

 

11. Accrued Expenses

 

 

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12. Accrued Warranty

The liability is established using historical warranty claim experience. Historical warranty experience is, however, reviewed by management. The current provision may be adjusted to take into account unusual or non-recurring events in the past or anticipated changes in future warranty claims. Adjustments to the initial warranty accrual are recorded if actual claim experience indicates that adjustments are necessary. Warranty reserves are reviewed to ensure critical assumptions are updated for known events that may impact the potential warranty liability.

 

 

 

13. Credit Facilities and Debt

 

North American Credit Facilities

 

At June 30, 2016, the Company and its U.S. and Canadian subsidiaries have a credit agreement (as amended, the“Credit Agreement”) with Comerica Bank (“Comerica”) and another lender who is a participant under the Credit Agreement.  The Credit Agreement provides the Company with (a) a Senior Secured Revolving Credit Facility to the U.S. Borrowers (“U.S. Revolver”), and (b) Senior Secured Revolving Credit Facility to the Canadian Borrower (“Canadian Revolver”). The Canadian Revolving Credit facility also contained an additional Specialized Export Facility. At June 30, 2016, the U.S Revolver, the Canadian Revolver and the Specialized Export Facilities had outstanding loan balances of $27,355, $8,044 and $1,527, respectively.  On July 20, 2016, all outstanding balances related to these facilities were repaid and the aforementioned credit agreements were terminated.  In connection with the Credit Agreement termination the Company expensed $1,439 in deferred financing fees and expenses, which is included in interest expense.

On July 20, 2016, the Company together with its U.S. and Canadian wholly-owned subsidiaries entered into a Loan and Security  Agreement (“Loan Agreement”) with The Private Bank and Trust Company (“Private Bank”).  The Loan Agreement provides a  revolving credit facility in an aggregate amount of $45,000 with a maturity date of July 20, 2019.  The Company’s Canadian subsidiary (the “Canadian Borrower”) has a specific sublimit of $12,000 as part of the Loan Agreement.

The Loan Agreement subjects the Company and its domestic subsidiaries (the “U.S. Borrowers”) and the Canadian Borrower to a Fixed Charge Coverage of 1.20 to 1.00 measured on a quarterly basis through the term of the agreement.  The indebtedness is collateralized by substantially all of the Company’s assets, except of the assets of ASV and PM, as well as the Company’s equity interest in these two companies.  The Loan Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company’s ability to, among other things, incur additional indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, pay dividends or make distributions, repurchase stock, in each case subject to customary exceptions for a credit facility of this size.  

The Loan Agreement provides that the Company can opt to pay interest on the revolving credit at either a base rate plus a spread, or a LIBOR rate plus a spread.  The base rate spread ranges from 0.25% to 1.00% depending on the Senior Leverage Ratio (as defined in the Loan Agreement), but is fixed at 1.00% for the first six months.  The LIBOR spread ranges from 2.25% to 3.00% also depending on the Senior Leverage Ratio, but is fixed at 3.00% for the first six months.  Funds borrowed under the LIBOR option can be borrowed for period of one, two, or three months and are limited to four LIBOR contracts outstanding at any time. Base rate and 30 day LIBOR rates were 3.50% and 0.49%, respectively at the Private Bank at July 20, 2016.  In addition, Private Bank assesses a 0.50% unused line fee that is payable monthly.

The $45,000 revolving credit facility is a secured financing facility under which borrowing availability is limited to existing collateral as defined in the Loan Agreement.  The maximum borrowing available to the U.S. Borrowers is limited to: (1) 85% of eligible receivables; plus (2) 50% of eligible inventory valued at the lower of cost or market subject to a $25,000 limit; plus (3) 80% of eligible used equipment, as defined, valued at the lower of cost or market subject to a $2,000 limit.  The maximum borrowing limit available to the Canadian borrower is limited to: (1) 85% of eligible receivables; plus, (2) 60% of eligible inventory valued at the

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lower of cost or market subject to a limit of $8,500.  The 60% Canadian inventory advance rate is scheduled to be reduced to 50% at 1% monthly decrements starting on December 31, 2016.  Additionally, the Canadian inventory limit of $8,500 is scheduled to be reduced to $7,000 in October 2016.

The Loan Agreement permits the Company to provide unsecured guarantees of indebtedness owed by CVS to foreign banks in respect to working capital financing, not to exceed the lessor of $9,000 or the amount of such indebtedness.

The Loan Agreement has a Letter of Credit facility of $3,000, which is fully reserved against availability.

Notes Payable—Terex- ASV Acquisition

On December 19, 2014, the Company executed a note payable to Terex Corporation for $1,594. The note matures on December 19, 2016 and has an annual interest rate of 4.5%. Interest is payable semi-annually beginning on June 19, 2015. The note was issued in connection with acquisition of 51% interest in ASV from Terex Corporation. The note has an outstanding balance of $1,594 at June 30, 2016.

 

Columbia Notes

 

In connection with Columbia acquisition the Company issued two notes an equipment note and an inventory note.  At June 30, 2016, the equipment note has been paid in full and the inventory note had an outstanding balance of $50.  The Company is required to make two final installments of $25 on July 31 and August 31, 2016.

 

Note Payable—Bank

At June 30, 2016, the Company has a $322 note payable to a bank. The note dated January 5, 2016 had an original principal amount of $701 and an annual interest rate of 3.5%. Under the terms of the note the company is required to make eleven monthly payments of $65 commencing January 30, 2016. The proceeds from the note were used to pay annual premiums for certain insurance policies carried by the Company. The holder of the note has a security interest in the insurance policies it financed and has the right upon default to cancel these policies and receive any unearned premiums.

CVS Debt

CVS Short-Term Working Capital Borrowings

At June 30, 2016, CVS had established demand credit facilities with twelve Italian banks. Under the facilities, CVS can borrow up to €335 ($370) on an unsecured basis and additional amounts as advances against orders, invoices and letter of credit with a total maximum facilities (including the unsecured portion) of €20,493 ($22,608). The Company has granted guarantees in respect to available credit facilities in the amount of €588 ($648).  The maximum amount outstanding is limited to 80% of the assigned accounts receivable if there is an invoice issued or 50% if there is an order/contract issued. The banks will evaluate each request to borrow individually and determine the allowable advance percentage and interest rate. In making its determination the bank considers the customer’s credit and location of the customer.

At June 30, 2016, the banks had advanced CVS €10,972 ($12,104) at variable interest rates which currently range from 2.72% to 6.70%.

At June 30, 2016, the Company has guaranteed €588 ($648) of CVS’s outstanding debt. Additionally, various Italian banks have issued performance bonds which total €1.4 million ($1.6 million) and none are guaranteed by the Company.

Notes Payable

At June 30, 2016, CVS has a €583 ($644) note payable to a bank. The note dated March 27, 2015 had an original principal amount of €1,000 ($1,103) and an annual interest rate of EURIBOR 3 month plus 140 basis points. Under the terms of the note CVS is required to make twelve quarterly principal and interest payments beginning on June 30, 2015 through March 31, 2018. The Company does not guarantee any of the borrowing.

At June 30, 2016, CVS has a €2,363 ($2,607) note payable to a bank. The note dated March 4, 2015 had an original principal amount of €2,363 ($2,607) and an annual interest rate of 0.50% on €2,127 ($2,347) and 3.65% on the balance of €236 ($260). Under the terms of the note CVS is required to make sixteen semi-annual principal payments beginning on December 31, 2016 thru June 30, 2024.

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CVS is also required to make nineteen semi-annual interest payments beginning on June 30, 2015 through June 30, 2024. The Company is guaranteeing €236 ($260) of the borrowing.

At June 30, 2016, CVS has a €837 ($924) note payable to a bank. The note dated October 20, 2015 had an original principal amount of €1,000 ($1,103) and an annual interest rate of 1.850%. Under the terms of the note CVS is required to make twelve quarterly principal and interest payments beginning on January 20, 2016, through October 20, 2018. The Company does not guarantee any of the borrowing.

Acquisition note—Valla

In connection with the acquisition of Valla, the Company executed a note payable.  At June 30, 2016, the note a balance of €79 ($87) and is payable on December 31, 2016.

ASV Loan Facilities

In connection with the ASV arrangement, ASV entered into two separate loan facilities on December 19, 2014, one with JPMorgan Chase Bank, N.A. (“JPMCB”), and the other with Garrison Loan Agency Services LLC (“Garrison”). These two facilities are for the exclusive use of ASV and restrict the transfer of cash outside of ASV.

Both loan facilities are secured by certain assets of ASV and by a pledge of the equity interest in ASV. Pursuant to an intercreditor agreement dated as of December 19, 2014 among JPMCB, Garrison and ASV (“ASV Intercreditor Agreement”), the parties have agreed that (i) JPMCB shall have a first-priority security interest in substantially all personal property of ASV and (ii) Garrison shall have a first priority security interest in (a) substantially all real property of ASV and (b) a pledge of 100% of the equity interest in ASV issued to Company and to Terex. ASV’s loans are solely obligations of ASV and have not been guaranteed by the Company and are not collateralized by any assets outside of ASV.

ASV Revolving Loan Facility with JPMCB

On December 19, 2014 ASV entered into a $35,000 revolving loan facility as amended with JPMCB (“JPMCB Credit Agreement”) as the administrative agent, which loan facility includes two sub-facilities: (i) a $1,000 as amended sub-facility for letters of credit, and (ii) a $7,500 sub-facility for loans to be guaranteed by the Export-Import Bank of the United States of America (“Ex-Im Bank Loans”). A portion of the JPMCB Credit Agreement was used to fund certain transaction costs and payments required by ASV under the ASV arrangement. The remainder of the loan amount will be available to ASV for its general working capital needs.

The $35,000 revolving loan facility is a secured financing facility under which borrowing availability is limited to existing collateral as defined in the agreement. The maximum amount available is limited to (1) the sum of 85% of eligible receivables, plus (2) the lesser of (i) 65% of eligible inventory valued at the lower of cost or market value or (ii) 85% of eligible inventory valued at the net orderly liquidation value, reduced by (3) (i) certain reserves determined by JPMCB, (ii) the amount of outstanding standby letters of credit issued under the JPMCB Credit Agreement and (iii) the amount of outstanding Ex-In Bank loans. The facility matures on December 19, 2019. At June 30, 2016, ASV had drawn $12,307 under the JPMCB Credit Agreement. The JPMCB Credit Agreement bears interest at ASV’s option at JPMCB’ prime rate plus a spread or an adjusted LIBOR rate plus a spread. The interest rate spread for prime rate is between 0.50% and 1.00% and for LIBOR the spread is between 1.50% and 2.00% in each case with the spread being based on the aggregate amount of funds available for borrowing by ASV under the JPMCB Credit Agreement, as defined in the JPMCB Credit Agreement. The base rate and LIBOR spread is currently 1.00% and 2.00%, respectively. Funds borrowed under the LIBOR options can be borrowed for periods of one, two, three or six months. At June 30, 2016, the maximum ASV could borrow based on available collateral was capped at $19,429.

The indebtedness of ASV under the JPMCB Credit Agreement is collateralized by substantially all of ASV’s assets, but subject to the terms of the ASV Intercreditor Agreement. The facility contains customary limitations including, but not limited to, limitations on additional indebtedness, acquisitions, and payment of dividends. ASV is also required to comply with certain financial covenants as defined in the JPMCB Credit Agreement including maintaining a Minimum Fixed Charge Coverage ratio of not less than 1.10 to 1.0.

Under the JPMCB Credit Agreement, the banks are also paid a commitment fee payable in monthly installments equal to (i) the average daily amount of funds available but undrawn multiplied by (ii) an annual rate of 0.25%.

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ASV Term Loan with Garrison

On December 19, 2014 ASV entered into a $40,000 term loan facility as amended with Garrison (“Garrison Credit Agreement”) as the administrative agent. A portion of the Garrison Credit Agreement was used to fund certain transaction costs and payments required by ASV under the ASV arrangement.

At June 30, 2016, ASV had a remaining principal balance of $33,000 (less $1,882 debt issuance cost, for a net debt of $31,118) under the Garrison Credit Agreement. The Garrison Credit Agreement bears interest, at a one-month adjusted LIBOR rate plus a spread of between 10.5% and 11.0%. The spread is based on the ratio of ASV’s total debt to its EBITDA, as defined in the Garrison Credit Agreement. The LIBOR spread is currently 11.0%. The interest rate for the period ending June 30, 2016 was 11.5%.  Debt issuance costs offset against the Garrison term note totaled $1,882 at June 30, 2016 (resulting in an effective rate of 12.2%).

ASV is obligated to make quarterly principal payments of $500 commencing on April 1, 2015. Any unpaid principal is due on maturity, which is December 19, 2019. Interest is payable monthly.

The indebtedness of ASV under the Garrison Credit Agreement is collateralized by substantially all of ASV assets, but subject to the terms of the ASV Intercreditor Agreement. The facility contains customary limitations including, but not limited to, limitations on additional indebtedness, acquisitions, and payment of dividends. ASV is also required to comply with certain financial covenants as defined in the Garrison Credit Agreement including maintaining (1) a Minimum Fixed Charge Coverage ratio of not less than 1.10 to 1.0 which shall step up to 1.50 to 1.00 by March 31, 2017, (2) a Leverage Ratio of 4.75 to 1.00, which shall step down to 2.50 to 1.00 by March 31, 2018 and (3) a limitation of $1,600 in capital expenditures in any fiscal year.

PM Group Short-Term Working Capital Borrowings

At June 30, 2016, PM Group had established demand credit and overdraft facilities with seven Italian banks and seven banks in South America. Under the facilities, PM Group can borrow up to approximately €23,593 ($26,028) for advances against invoices, and letter of credit and bank overdrafts. Interest on the Italian working capital facilities is charged at the 3-month or 6-month Euribor plus 200 basis points, while interest on overdraft facilities is charged at the 3 month Euribor plus 350 basis points. Interest on the South American facilities is charged at a flat rate of points for advances on invoices ranging from 8% - 25%.

At June 30, 2016, the Italian banks had advanced PM Group €16,030 ($17,684), at variable interest rates, which currently range from 1.47% to 1.72%. At June 30, 2016, the South American banks had advanced PM Group €428 ($472). Total short-term borrowings for PM Group were €16,458 ($18,156) at June 30, 2016.

PM Group Term Loans

At June 30, 2016, PM Group has a €12,903 ($14,235) term loan with two Italian banks, BPER and Unicredit. The term loan is split into three separate notes and is secured by PM Group’s common stock.  Debt issuance costs offset against these term loans totaled  €443 ($489) at June 30, 2016.

The first note has an outstanding principal balance of €3,935 ($4,342), is charged interest at the 6-month Euribor plus 236 basis points, effective rate of 2.18% at June 30, 2016. The note is payable in semi-annual installments beginning June 2017 and ending December 2021. The second note has an outstanding principal balance of €4,865 ($5,367), is charged interest at the 6-month Euribor plus 286 basis points, effective rate of 2.68% at June 30, 2016. The note is payable in semi-annual installments beginning June 2017 and ending December 2021. The third note has an outstanding principal balance of €4,103 ($4,526) and is non-interest bearing. The note is payable in two semi-annual installments beginning June 2016 and ending December 2017 and a final balloon payment in December 2022. Accrued deferred interest on these notes through the date of acquisition at January 15, 2015, totaled €4,857 ($5,358) and is payable in semi-annual installments beginning June 2015 and ending December 2016. At June 30, 2016, the remaining deferred interest was €1,003 ($1,107) as the original amount was reduced when the payments of the installments were made.

An adjustment in the purchase accounting to value the non-interest bearing debt at its fair market value was made. At January 15, 2015 it was determined that the fair value of the debt was €1,460 or $1,661 less than the book value. This reduction is not reflected in the above descriptions of PM debt. This discount is being amortized over the life of the debt and being charged to interest expense. As of June 30, 2016 the remaining balance was €911 or $1,005 and has been offset to the debt.

 

PM Group is subject to certain financial covenants as defined by the debt restructuring agreement with BPER and Unicredit including maintaining (1) Net debt to EBITDA, (2) Net Debt to equity, and (3) EBITDA to net financial charges ratios. The covenants are measured on a semi-annual basis.

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At June 30, 2016 PM Group has unsecured borrowings with five Italian banks totaling €13,404 ($14,787). Interest on the unsecured notes is charged at the 3-month Euribor plus 250 basis points, effective rate of 2.22% at June 30, 2016. Principal payments are due on a semi-annual basis beginning June 2019 and ending December 2021. Accrued interest on these borrowings through the date of acquisition at January 15, 2015, totaled €801 ($884) and is payable in semi-annual installments beginning June 2019 and ending December 2019.

Autogru PM RO, a subsidiary of PM Group, fully repaid the former note payable and entered into two new note payables in October 2015 totaling €947 ($1,045). The first note is payable in 60 monthly principal installments of €8 ($9), plus interest at the 1-month Euribor plus 300 basis points, effective rate of 3.00% at June 30, 2016, maturing October 2020. At June 30, 2016, the outstanding principal balance of the note was €439 ($484). The second new note is payable in one instalment in October 2016 is charged interest at the 1-month Euribor plus 250 basis points, effective rate of 2.50% at June 30, 2016. At June 30, 2016, the outstanding principal balance of the note was €440 ($485).

PM has interest rate swaps with a fair market value at June 30, 2016 of €750 or $827 which has been included in debt.

Capital leases

Georgetown facility

The Company leases it Georgetown facility under a capital lease that expires on April 30, 2028.  The current monthly rental payment is $62.  The lease has rent escalation provision pursuant to which rent is increased commencing on September 1, 2016, and each subsequent September 1 during the term of the lease by 3% per increase.  At June 30, 2016, the outstanding capital lease obligation is $5,360.

  

Winona facility

The Company had a five year lease which expired in July 10, 2014 that provides for monthly lease payments of $25 for its Winona, Minnesota facility. The Company has an option to purchase the facility for $500 by giving notice to the landlord of its intent to purchase the Facility. The Landlord must receive such notice at least three months prior to end of the Lease term. The purchase of the facility is expected to be completed during 2016. At June 30, 2016, the Company has outstanding capital lease obligation of $500, the amount of the purchase option.

 

Equipment

The Company has entered into a lease agreement with a bank pursuant to which the Company is permitted to borrow 100% of the cost of new equipment with 60  months repayment periods, respectively. At the conclusion of the lease period, for each piece of equipment the Company is required to purchase that piece of leased equipment for one dollar.

The equipment, which is acquired in ordinary course of the Company’s business, is available for sale and rental prior to sale.

Under the lease agreement the Company can elect to exercise an early buyout option at any time, and pay the bank the present value of the remaining rental payments discounted by a specified Index Rate established at the time of leasing. The early buyout option results in a prepayment penalty which progressively decreases during the term of the lease. Alternatively, the Company under the like-kind provisions in the agreement can elect to replace or substitute different equipment in place of equipment subject to the early buyout without incurring a penalty.

The following is a summary of amounts financed under equipment capital lease agreements:

 

 

The Company has one additional capital lease. As of June 30, 2016, the capitalized lease obligation was $14.

 

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Operating leases

 

The Company entered into three sale lease back transactions during the three months ended March 31, 2016 with total proceeds of $4,080.  These transactions are accounted for as operating leases have 60 month terms and require monthly payments ranging from $18 to $42.

 

 

Note 14. Convertible Notes

Related Party

On December 19, 2014, the Company issued a subordinated convertible debenture with a $7,500 face amount payable to Terex, a related party. The convertible debenture, is subordinated, carries a 5% per annum coupon, and is convertible into Company common stock at a conversion price of $13.65 per share or a total of 549,451 shares, subject to customary adjustment provisions. The debenture has a December 19, 2020 maturity date.

From and after the third anniversary of the original issuance date, the Company may redeem the convertible debenture in full (but not in part) at any time that the last reported sale price of the Company’s common stock equals at least 130% of the Conversion Price (as defined in the debenture) for at least 20 of any 30 consecutive trading days. Following an election by the holder to convert the debenture into common stock of the Company in accordance with the terms of the debenture, the Company has the discretion to deliver to the holder either (i) shares of common stock, (ii) a cash payment, or (iii) a combination of cash and stock.

In accounting for the issuance of the note, the Company separated the note into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Note as a whole. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the note using the effective interest method with an effective interest rate of 7.5 percent per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

On December 19, 2014, the components of the note were as follows:

 

 

Additionally in connection with the transaction a $321 deferred tax liability was established and was recorded as a deduction to paid in capital. The deferred tax liability was recognized as the excess of the principal amount being amortized and charged to interest expenses that is not tax deductible.

As of June 30, 2016, the note had a remaining principal balance of $6,802 and an unamortized discount of $698. The difference between current unamortized discount and the $893 initially recorded represents $195 of amortization of excess discount.

Perella Notes

On January 7, 2015, the Company entered into a Note Purchase Agreement (the “Perella Note Purchase Agreement”) with MI Convert Holdings LLC (which is owned by investment funds constituting part of the Perella Weinberg Partners Asset Based Value Strategy) and Invemed Associates LLC (together, the “Investors”), pursuant to which the Company agreed to issue $15,000 in aggregate principal amount of convertible notes due January 7, 2021 (the “Perella Notes”) to the Investors. The Notes are subordinated, carry a 6.50% per annum coupon, and are convertible, at the holder’s option, into shares of Company common stock, based on an initial conversion price of $15.00 per share, subject to customary adjustments. Following an election by the holder to convert the debenture into common stock of the Company in accordance with the terms of the debenture, the Company has the discretion to deliver to the holder either (i) shares of common stock, (ii) a cash payment, or (iii) a combination of cash and stock.  Upon the occurrence of certain fundamental corporate changes, the Perella Notes are redeemable at the option of the holders of the Perella Notes. The Perella Notes are not redeemable at the Company’s option prior to the maturity date, and the payment of principal is subject to acceleration upon an event of default. The issuance of the Perella Notes by the Company was made in reliance upon the exemptions from registration provided by Rule 506 and Section 4(2) of the Securities Act of 1933.

In connection with the issuance of the Perella Notes, on January 7, 2015, the Company entered into a Registration Rights Agreement with the Investors (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company has agreed to

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register the resale of the shares of common stock issuable upon conversion of the Perella Notes. The Company filed a Registration Statement on Form S-3 to register the shares with the Securities and Exchange Commission, which was declared effective on February 23, 2015.

In accounting for the issuance of the note, the Company separated the note into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Note as a whole. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the note using the effective interest method with an effective interest rate of 7.5 percent per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

On January 7, 2015, the components of the note were as follows:

 

 

Additionally in connection with the transaction a $257 deferred tax liability was established and was recorded as a deduction to paid in capital. The deferred tax liability was recognized as the excess of the principal amount being amortized and charged to interest expenses is not tax deductible.

As of June 30, 2016, the note had remaining principal balance of $14,438 and an unamortized discount of $562. The difference between current unamortized discount and the $714 initially recorded represents $152 of amortization of excess discount. Debt issuance costs offset against this note totaled $416 at June 30, 2016.

 

 

Note 15. Legal Proceedings and Other Contingencies

The Company is involved in various legal proceedings, including product liability, employment related issues, and workers’ compensation matters which have arisen in the normal course of operations. The Company has product liability insurance with self- insurance retention that range from $50 to $500. ASV product liability cases that existed on date of acquisition have a $4,000 self-retention limit.

The Company has been named as a defendant in several multi-defendant asbestos related product liability lawsuits. In certain instances, the Company is indemnified by a former owner of the product line in question. In the remaining cases the plaintiff has, to date, not been able to establish any exposure by the plaintiff to the Company’s products. The Company is uninsured with respect to these claims but believes that it will not incur any material liability with respect to these claims.

When it is probable that a loss has been incurred and possible to make a reasonable estimate of the Company’s liability with respect to such matters, a provision is recorded for the amount of such estimate or the minimum amount of a range of estimates when it is not possible to estimate the amount within the range that is most likely to occur. The Company established reserves for several ASV and PM lawsuits in conjunction with the accounting for these two acquisitions.

 

Additionally beginning on December 31, 2011, the Company’s workmen’s compensation insurance policy has per claim deductible of $250 and aggregates of $1,000, $1,150, $1,325, $1,875 and $1,575 for 2012, 2013, 2014, 2015 and 2016 policy years, respectively. The Company is fully insured for any amount on any individual claim that exceeds the deductible and for any additional amounts of all claims once the aggregate is reached. The Company currently has several workmen compensation claims related to injuries that occurred after December 31, 2011 and therefore are subject to a deductible. The Company does not believe that the contingencies associated with these worker compensation claims in aggregate will have a material adverse effect on the Company.  

On May 5, 2011, Company entered into two separate settlement agreements with two plaintiffs. As of June 30, 2016, the Company has a remaining obligation under the agreements to pay the plaintiffs $1,425 without interest in 15 annual installments of $95 on or before May 22 of each year. On, February 3, 2016, the Company entered into another legal settlement with a single plaintiff for €640 ($706). The liability had been fully accrued and resulted in no gain or loss. The Company has paid €280 ($309). As of June 30, 2016 the Company has a remaining obligation under the agreement to pay the plaintiff €360 ($397) without interest. As of June 30, 2016, the Company has in 16 remaining monthly installments – four monthly installments of €30 ($33), followed by twelve monthly installments of €20  ($22).

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It is reasonably possible that the “Estimated Reserve for Product Liability Claims” may change within the next 12 months. A change in estimate could occur if a case is settled for more or less than anticipated, or if additional information becomes known to the Company.

 

 

16. Business Segments

The Company is a leading provider of engineered specialty lifting and loading products. The Company operates in three business segments:  Lifting Equipment, ASV and Equipment Distribution.

Lifting Equipment Segment

The Lifting Equipment segment is a leading provider of engineered lifting solutions. The Company designs, manufactures and distributes, predominately through a network of dealers, a diverse group of products that serve different functions and are used in a variety of industries. The Company markets a comprehensive line of boom trucks, a truck crane and sign cranes, a complete line of rough terrain forklifts, including both the Liftking and Noble product lines, as well as special mission oriented vehicles, and other specialized carriers, heavy material handling transporters and steel mill equipment. The Company also manufacturers a number of specialized rough terrain cranes and material handling products, including 15 and 30-ton cab down rough terrain cranes. Company lifting products are used in industrial applications, energy exploration and infrastructure development in the commercial sector and for military applications. The company’s specialized rough terrain cranes primarily serve the needs of the construction, municipality, and railroad industries. Through one of its Italian subsidiaries, the Company manufactures and distributes reach stackers and associated lifting equipment for the global container handling markets.  The Valla product line offers a full range of pick and carry cranes from 2 to 90 tons, using electric, diesel, and hybrid power options. Its cranes offer wheeled or tracked, fixed or swing boom configurations, with dozens of special applications designed specifically to meet the needs of its customers. The Company also manufactures and markets a comprehensive line of specialized trailer tanks for liquid and solid storage and containment. The tank trailers are used in a variety of end markets such as petrochemical, waste management and oil and gas drilling. As of January 15, 2015, the Company acquired the PM Group S.p.A. (“PM”). PM is a leading Italian manufacturer of truck mounted hydraulic knuckle boom cranes with a 50-year history of technology and innovation, and a product range spanning more than 50 models. Its largest subsidiary, Oil & Steel, S.p.A. (“O&S”), is a manufacturer of truck-mounted aerial platforms with a diverse product line and an international client base.

PM Group results are included in the Company’s results from January 15, 2015, the date of acquisition.

ASV Segment

ASV manufactures a line of high quality compact rubber tracked and skid steer loaders. The ASV products are distributed through Terex Corporation (“Terex”) distribution channels as well as through the Company and other independent dealers. This independent dealer network now has over 100 locations.  The products are used in the site clearing, general construction, forestry, golf course maintenance and landscaping industries, with general construction being the largest market.

 

Equipment Distribution Segment

The Equipment Distribution segment comprises the operations of Crane & Machinery (“C&M”), a division of Manitex International, North American Equipment, Inc. (“NAE”) and North American Distribution, Inc. (“NAD”).  The segment markets products used primarily for infrastructure development and commercial construction applications that include road and bridge construction, general contracting, roofing, scrap handling and sign construction and maintenance. C&M is a distributor of Terex rough terrain and truck cranes products and supplies repair parts for a wide variety of medium to heavy duty construction equipment and sells domestically and internationally, predominately to end users, including the rental market. It also provides crane equipment repair services in the Chicago area. The segment markets previously-owned construction and heavy equipment and trailers both domestically and internationally through NAE.  NAE purchase previously owned equipment of various ages and conditions and often refurbishes the equipment before resale.  The segment also sells Valla products through NAD.

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The following is financial information for our three operating segments, i.e., Lifting Equipment, Equipment Distribution and ASV:

 

 

During the quarter ended March 31, 2016, the Company’s CVS subsidiary sold its terminal tractor product line to a related party.  The transaction totaled €2,839 ($3,119) inclusive of VAT taxes and resulted in a gain of €1,987 ($2,212), which is included in other income on the Consolidated Statement of Operations.  In connection with this transaction, CVS paid a $540 commission to the Distribution segment for services that were provided.  Revenues for the Distribution segment include this commission.  The Lifting segments operating expense includes an offsetting commission expense.  Both aforementioned intercompany commission revenue and expense has been eliminated in the Company’s consolidated results for the three months ended March 31, 2016 and the six months ended June 30, 2016.  

 

Lifting Equipment segment operating earnings includes amortization of $1,116 and $1,102 for the three months, and $2,220 and $2,132 for the six months ended June 30, 2016 and 2015, respectively. The Equipment Distribution segment operating earnings includes amortization of $36 and $36 for the three months and $73 and $73 for the six months ended June 30, 2016 and 2015, respectively. The ASV segment operating earnings includes amortization of $636 and $637 for the three months, and $1,273 and $1,272 for the six months ended June 30, 2016 and 2015, respectively.

 

 

 

17. Transactions between the Company and Related Parties

In the course of conducting its business, the Company has entered into certain related party transactions.

On December 16, 2014, the Company, BGI USA Inc. (“BGI”), Movedesign SRL and R & S Advisory S.r.l., entered into an operating agreement (the “Operating Agreement”) for Lift Ventures LLC (“Lift Ventures”), a joint venture entity. The purposes for which Lift Ventures is organized are the manufacturing and selling of certain products and components, including the Schaeff line of electric forklifts and certain LiftKing products. Pursuant to the Operating Agreement, the Company was granted a 25% equity stake in the Lift Ventures in exchange for the contribution of certain inventory and a license of certain intellectual property related to the Company’s products.

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The Company, through its subsidiaries, purchases and sells parts to BGI USA, Inc. (“BGI”) including its subsidiary SL Industries, Ltd (“SL”). BGI is a distributor of assembly parts used to manufacture various lifting equipment. SL Industries, Ltd is a Bulgarian subsidiary of BGI that manufactures fabricated and welded components used to manufacture various lifting equipment. The Company’s President of Manufacturing Operations is the majority owner of BGI.

The Company through its Manitex Liftking subsidiary provides parts and services to LiftMaster, Ltd (“LiftMaster”) or purchases parts or services from LiftMaster. LiftMaster is a rental company that rents and services rough terrain forklifts. LiftMaster is owned by the Vice President of Manitex Liftking a wholly owned subsidiary of the Company, Manitex Liftking, ULC, and a relative of his.

As of June 30, 2016 the Company had an accounts receivable of $54  and $69 from Lift Ventures and SL, respectively and accounts payable of $7, $128 and $396 to BGI, Lift Ventures and SL, respectively.  As of December 31, 2015 the Company had an accounts receivable of $157 and $41 from SL and Lift Ventures, respectively and accounts payable of $150, $244 and $2 to SL, Lift Ventures and BGI respectively.

The following is a summary of the amounts attributable to certain related party transactions as described in the footnotes to the table, for the periods indicated:

 

 

Transactions with Terex

At June 30, 2016, ASV has accounts receivable due from Terex for $461 which is shown on the balance on the line titled “accounts receivable from related party” and accounts payable of $1,557 on the line titled “accounts payable related parties”.  At December 31, 2015, accounts receivable due from Terex was $388 and accounts payable owed to Terex was $1,413.

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The Company has the following notes payable to Terex:

 

 

See Note 13 and Note 14 for additional details regarding the above debt obligations.

The following is a summary of the amounts attributable to certain Terex transactions as described in the footnotes to the table, for the periods indicated:

 

 

In addition to the above referenced purchases, ASV expensed $739 and $1,503 for the three and six months ended June 30, 2016 in connection with the Distribution and Cross Marketing Agreement and $1,229 and $2,136 for the same comparable periods in 2015.

For the three and six months ended June 30, 2016, ASV expensed $51 and $102 in connection with the Service Agreement and $18 and $101 for the same comparable periods in 2015, respectively.      

 

On March 4, 2016, CVS and Terex Operations Italy S.R.L. (“TOI”) entered into an agreement whereby TOI acquired certain inventories and intellectual property related to CVS’ terminal tractor line.  The transaction totaled €2,839 ($3,119) inclusive of VAT taxes and resulted in a gain of €1,987 ($2,212), which is included in other income on the Consolidated Statement of Operations.  The transaction also contained a contract manufacturing requirement for CVS to continue production of the terminal tractor line for TOI for a period of nine months.  After this period of time CVS will have the access to terminal tractor equipment directly from TOI under a private label agreement.  

 

On March 11, 2016, Terex made an additional $2,450 equity contribution to ASV.

 

 

 

18. Income Taxes

 

The Company’s provision for income taxes consist of U.S. and foreign taxes in amounts necessary to align the Company’s year-to-date tax provision with the effective tax rate that the Company expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments for changes in estimate as necessary. The estimated annual effective tax rate is based upon the Company’s anticipated earnings both in the U.S. and in foreign jurisdictions. The annual effective tax rate for 2016 inclusive of a valuation allowance (but excluding discrete items), is estimated to be 96.6%.   

 

The estimated annual effective tax rate for 2016 of 96.6% is higher than the statutory rate of 35% primarily in connection with the amount of the valuation allowance included in the determination of the effective tax rate.

In assessing the realizability of deferred tax assets, we evaluate whether it is more likely than not (more than 50%) that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losses can be utilized. We assess all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable. As of June 30, 2016, we are projected to be in a cumulative loss position during the three year period ending in December 31, 2016, which is considered to be a significant piece of negative evidence.

Based on these factors, most notably the projected three year cumulative loss, the Company is establishing a full valuation allowance against the portion of its U.S. net deferred tax asset and projected 2016 loss that cannot be realized by carrying back the projected 2016 tax loss for a refund of taxes paid in prior years.

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Separate from the impact of the valuation allowance, our estimated annual effective rate for 2016 is approximately 11.3% which is lower than the statutory rate of 35% due  to earnings in foreign jurisdictions which are taxed at lower rates, and the non-taxable portion of ASV’s earnings.

For the three months ended June 30, 2016, the Company recorded an income tax (benefit) of $(1,125) which consisted primarily of anticipated federal, state and local, and foreign taxes. For the three months ended June 30, 2015, the Company recorded an income tax expense of $121 which consisted primarily of anticipated federal, state and local, and foreign taxes.

The Company recorded income tax (benefit) expense of $(608) and $152 for the six months ended June 30, 2016 and 2015, respectively.  

The Company’s total unrecognized tax benefits as of June 30, 2016 and 2015 were approximately $936 and $896, which, if recognized, would affect the Company’s effective tax rate. Included in the unrecognized tax benefits is a liability for the PM Group’s potential IRES and IRAP audit adjustments for the tax years 2009 – 2013. Depending upon the final resolution of the PM Group’s audit, the liability could be higher or lower than the amount recorded at June 30, 2016.

 

The Company’s provision for income taxes consists of U.S. and foreign taxes in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that the Company expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments for changes in estimate as necessary. The 2016 estimated annual effective tax rate inclusive of a valuation allowance is based upon the Company’s anticipated earnings both in the U.S. and in foreign jurisdictions.

 

 

19. Discontinued Operations

On December 28, 2015, the Company completed the sale of the membership interests of Load King, LLC

 

The following is the detail of major line items that constitute the income from discontinued operations:

 

 

 

 

 

 

 

 

20.  Subsequent Events

 

New Credit Agreement

 

On July 20, 2016, the Company repaid all of the outstanding balances related to the Comerica credit facility and terminated such credit facility. As result of the termination, the Company expensed (as additional interest expense) $1,439 in deferred financing fees and expenses during the quarter ended June 30, 2016.  Simultaneously, the Company entered into a new Loan Agreement with The Private Bank that provided a $45,000 revolving credit facility that is detailed in Note 13 – Credit Facilities and Debt.

 

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements and are intended to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to, among other things, the Company’s expectations, beliefs, intentions, future strategies, future events or future financial performance,

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and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include, without limitation: (1) projections of revenue, earnings, capital structure and other financial items, (2) statements of our plans and objectives, (3) statements regarding the capabilities and capacities of our business operations, (4) statements of expected future economic conditions and the effect on us and on our customers, (5) expected benefits of our cost reduction measures, and (6) assumptions underlying statements regarding us or our business. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements are only predictions. Our actual results may differ materially from information contained in these forward looking-statements for many reasons, including, without limitation, those described below and in our 2015 Annual Report on Form 10-K for the fiscal year ended December 31, 2015, in the section entitled “Item 1A. Risk Factors,”

The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. We do not undertake, and expressly disclaim, any obligation to update this forward-looking information, except as required under applicable law. The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto of the Company appearing elsewhere within this Form 10-Q.

OVERVIEW

The Company is a leading provider of engineered lifting solutions. The Company operates in three business segments: the Lifting Equipment segment, the ASV segment and the Equipment Distribution segment.

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Lifting Equipment Segment

The Company is a leading provider of engineered lifting solutions. The Company designs, manufactures and distributes a diverse group of products that serve different functions and are used in a variety of industries. Through its Manitex, Inc. subsidiary it markets a comprehensive line of boom trucks, truck cranes and sign cranes. Manitex’s boom trucks and crane products are primarily used for industrial projects, energy exploration and infrastructure development, including, roads, bridges and commercial construction. Badger Equipment Company (“Badger”) is a manufacturer of specialized rough terrain cranes and material handling products. Badger primarily serves the needs of the construction, municipality and railroad industries.

PM Group, S.p.A. (“PM”) is a leading Italian manufacturer of truck mounted hydraulic knuckle boom cranes with a 50-year history of technology and innovation, and a product range spanning more than 50 models. Its largest subsidiary, Oil & Steel, S.p.A. (“O&S”), is a manufacturer of truck-mounted aerial platforms with a diverse product line and an international client base.

Manitex Liftking ULC (“Manitex Liftking” or “Liftking”) sells a complete line of rough terrain forklifts, a line of stand-up electric forklifts, cushioned tired forklifts with lifting capacities from 18 thousand to 40 thousand pounds and special mission oriented vehicles, as well as other specialized carriers, heavy material handling transporters and steel mill equipment. Manitex Liftking’s rough terrain forklifts are used in both commercial and military applications. Specialty mission oriented vehicles and specialized carriers are designed and built to meet the Company’s unique customer needs and requirements. The Company’s specialized lifting equipment has met the particular needs of customers in various industries that include utility, ship building and steel mill industries.

CVS Ferrari, srl (“CVS”) designs and manufactures a range of reach stackers and associated lifting equipment for the global container handling market, that are sold through a broad dealer network. The Valla product line offers a full range of precision pick and carry cranes from 2 to 90 tons, using electric, diesel, and hybrid power options. Its cranes offer wheeled, tracked and fixed or swing boom configurations, with special applications designed specifically to meet the needs of its customers.

Manitex Sabre, Inc. (“Sabre”) manufactures a comprehensive line of specialized mobile tanks for liquid and solid storage and containment solutions with capacities from 8,000 to 21,000 gallons. Its mobile tanks are sold to specialized independent tank rental companies and through the Company’s existing dealer network. The tanks are used in a variety of end markets such as petrochemical, waste management and oil and gas drilling.  On March 12, 2015, the Company acquired certain assets of Columbia Tank and merged its operations with Sabre.  

ASV Segment

A.S.V., LLC (“ASV”) manufactures a line of high quality compact track and skid steer loaders. The products are used in the site clearing, general construction, forestry, golf course maintenance and landscaping industries, with general construction being the largest market. The ASV products are distributed through the Terex distribution channels as well as through the Company and other independent dealers. The Company has a 51% ownership interest in ASV.

Equipment Distribution Segment

The Equipment Distribution segment comprises the operations of Crane & Machinery (“C&M”), a division of Manitex International, North American Equipment, Inc. (“NAE”) and North American Distribution, Inc. (“NAD”).  The segment markets products used primarily for infrastructure development and commercial construction applications that include road and bridge construction, general contracting, roofing, scrap handling and sign construction and maintenance. C&M is a distributor of Terex rough terrain and truck cranes products and supplies repair parts for a wide variety of medium to heavy duty construction equipment and sells domestically and internationally, predominately to end users, including the rental market. It also provides crane equipment repair services in the Chicago area. The segment markets previously-owned construction and heavy equipment and trailers both domestically and internationally through NAE.  The segment purchase previously owned equipment of various ages and conditions and often refurbishes the equipment before resale.  The segment also sells Valla products through NAD.    

 

Discontinued Operations

 

Manitex Load King, LLC (“Load King”) manufactures specialized custom trailers and hauling systems typically used for transporting heavy equipment. Load King trailers serve niche markets in the commercial construction, railroad, military and equipment rental industries through a dealer network.  Load King was sold on December 28, 2015 and is presented as a discontinued operation

 

 

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Economic Conditions

Beginning with the recent resurgence of the U.S. onshore oil industry, a significant portion of the Company’s revenues has been attributed to the North American energy sector.  Crude oil prices fell sharply during the fourth quarter of 2014 and remained in the fifty dollar per barrel range through June 2015. After that point oil prices began to again erode significantly decreasing to under $30 dollar a barrel. As result, the number of oil rigs in service has dropped from approximately from 1,600 in January 2015 to 500 at the end of 2015.

As a result of this decrease in rig count, the oil and gas industry further curtailed purchasing that began in 2014 and began selling excess equipment into the general construction market, which further depressed the demand for boom trucks.  We have recently observed a slight moderating of the sell-off of excess equipment by the energy sector and are hopeful that the selloff of excess equipment by the energy sector will be largely completed by the end of 2016.  The aforementioned factors resulted in a significant decrease in revenues during 2015 and during the first six months of 2016 from the sale of boom trucks, mobile tanks and used equipment.  

 

 

The market for a number of the Company’s products, including the PM knuckle boom cranes, ASV compact track loader skid steer loaders, military forklifts and port handling equipment have not been significantly affected by the decrease in oil prices. The markets for these products have either been stable or growing. In particular the market for knuckle boom cranes, including the North American market, is continuing to grow. PM currently has a very small share of the market for knuckle boom cranes in North America. The Company has started to manufacture knuckle boom cranes in the United State and is marketing them through the Company’s current distribution channels. The Company currently has a strong presence in North America for its boom trucks. The Company believes that it can significantly increase the Company’s share for knuckle boom cranes in North American. The Company believes this is an immediate opportunity that will continue to grow over time.

At the end of the quarter, the Company backlog was $64 million, including orders from ASV and PM that now comprise 34% of the total backlog at June 30, 2016.

 

Factors Affecting Revenues and Gross Profit

The Company derives most of its revenue from purchase orders from dealers and distributors. The demand for the Company’s products depends upon the general economic conditions of the markets in which the Company competes. The Company’s sales depend in part upon its customers’ replacement or repair cycles. Adverse economic conditions, including a decrease in commodity prices, may cause customers to forego or postpone new purchases in favor of repairing existing machinery. Additionally, our Manitex Liftking and ASV subsidiaries are impacted by residential housing starts.  Liftking is further impacted by the timing of orders received for military.  CVS revenues are impacted in part by the timing of contract awards related to major port projects.

Gross profit varies from period to period. Factors that affect gross profit include product mix, production levels and cost of raw materials. Margins tend to increase when production is skewed towards larger capacity cranes, special mission oriented vehicles, specialized carriers and heavy material transporters.

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Net (loss) income from continuing operations for the three month periods ended June 30, 2016 and 2015  

For the three months ended June 30, 2016 and 2015 the Company had a net loss from continuing operations of $1.4 million and net income of $0.3 million, respectively.

For the three months ended June 30, 2016, the net loss from continuing operations of $1.4 million consisted of revenue of $96.3 million, cost of sales of $79.4 million, research and development costs of $1.4 million, SG&A expenses of $13.6 million, interest expense of $5.1 million, foreign currency gain of $0.1 million, other income of $0.6 million and income tax benefit of $1.1 million.

For the three months ended June 30, 2015, the net income from continuing operations of $0.3 million consisted of revenue of $100.5 million, cost of sales of $81.6 million, research and development costs of $1.9 million, SG&A expenses of $12.5 million, interest expense of $3.8 million, foreign currency transaction loss of $0.3 million and income tax expense of $0.1 million.

Net revenues and gross profit —For the three months ended June 30, 2016, net revenues and gross profit were $96.3 million and $16.8 million, respectively. Gross profit as a percent of revenues was 17.5% for the three months ended June 30, 2016. For the three months ended June 30, 2015, net revenues and gross profit were $100.5 million and $18.9 million, respectively. Gross profit as a percent of revenues was 18.8% for the three months ended June 30, 2015.

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Net revenues decreased $4.2 million or 4.2% to $96.3 million for the three months ended June 30, 2016 from $100.5 million for the comparable period in 2015.   Revenues increased $1.3 million in the Lifting segment and decreased $0.4 million and $4.9 million in the Equipment Distribution segment and ASV segment, respectively.  The revenue increase for the Lifting Segment is attributed to increased revenues generated from the sale of container handling equipment and from the sale of forklifts to the military customers.  These increases were mostly offset by decreased revenues from the sale of straight mast cranes and from specialized mobile tanks.  The increase in sales of container handling equipment is principally due to an expansion into a new market. The increase in military sales is due to the receipt of large military orders.  The decrease in revenues for straight mast cranes, specialized mobile tanks and Distribution segment is due to decreased demand from end markets.  The decrease in ASV revenues is principally due to a decrease in undercarriage sales, which are sold to another manufacturer of compact track loaders.  The other manufacturer accelerated their orders in the prior year to accommodate facility modifications.    

Our gross profit percent decreased 1.3% to 17.5% for the three months ended June 30, 2016 from 18.8% for the three months ended June 30, 2015. The 18.8% was after a reclassification entry that increased costs of sales by $1.7 million.  Without this entry margins for three months ended June 30, 2015 would have been 20.5%.  The $1.7 million represents costs for the three months ended March 31, 2015, which were included in selling general and administrative expense that were determined after a review of PM expense classification to be cost of sales items.  PM is an Italian subsidiary that was acquired in January 2015.  The decrease in gross margin percent is attributed to a decrease in the gross profit percent for straight mast cranes and specialized mobile tanks, which is attributed to a skewing towards cranes with lower lifting capacity that have lower margins and the effect a decrease in revenues.  This unfavorable effect was partially offset by an increase in military sales that have higher margins and an improvement in margins for knuckle boom cranes. Gross margins was also adversely affected by approximately $0.8 million of restructuring related costs.

Research and development —Research and development was $1.4 million for the three months ended June 30, 2016 compared to $1.9 million for the same period in 2015.  The decrease in research and development is due to timing of expenditures related to specific projects and is not indicative of a long term trend.   Research and development expense for the six months 2016 were only 5% below 2015 expenditures.

Selling, general and administrative expense —Selling, general and administrative expense for the three months ended June 30, 2016 was $13.6 million compared to $12.5 million for the comparable period in 2015, an increase of $1.1 million. The three months ended June 30, 2015, included a reclassification of $1.7 million of expense for the three months ended March 31, 2015 from selling, general and administrative expense to cost of sales.  This reclassification was made after a review of the classification of PM expense s (PM was acquired in January 2015.) Without the effect of this reclassification expenses would have decreased by $0.6 million, which is attributable to our cost reduction program.  Included in SG&A costs for the second quarter 2016 were approximately $0.3 million costs for a major construction show in Bauma, Germany for the Lifting segment.

Operating income —For the three months ended June 30, 2016 and 2015 the Company had operating income of $1.9 million and $4.5 million, respectively. Operating income decreased due to changes in revenue, cost of sales and operating expenses explained above.

Interest expense —Interest expense was $3.6 million (excluding write off deferred financing costs) for the three months ended June 30, 2016 compared to $3.8 million for the comparable period in 2015, a decrease of $0.2.  The decrease in interest expense is attributed to decreases in borrowing partially offset by an increase in interest rates for our North American credit facilities and for the ASV term loan.

Interest expense for the three months ended June 30, 2016 includes an additional $1.4 million for deferred financing costs which were expensed during the period as associated debt was refinanced.

Foreign currency transaction gains and losses —For the three months ended June 30, 2016, the Company had a foreign currency gain of $0.1 million compared to losses of $0.3 for the comparable period in 2015.  

As stated in the past, the Company attempts to purchase forward currency exchange contracts such that the exchange gains and losses on the assets and liabilities denominated in other than the reporting units’ functional currency will be offset by the changes in the market value of the forward currency exchange contracts it holds.  Currency risks can be reduced but not eliminated in part because the Company has not been able to identify a strategy to effectively hedge the currency risks related to the Argentinian peso.

A substantial portion of the 2015 loss relates changes in the Argentinian peso exchange rate.  The Company has not been able to identify a strategy to effectively hedge the currency risks related to the Argentinian peso.  The Company records at the balance sheet date the forward currency exchange contracts at their market value with any associated gain or loss being recorded in current earnings as a currency gain or loss.

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Other expense— For the three months ended June 30, 2016, other income of $0.6 million is principally attributed to two items.  The Company recognized a gain of $0.9 million when it calculated the fair market value of a contingent liability associated with the PM acquisition and wrote off $0.3 million of goodwill associated with the Distribution segment.  

         

Income tax — For the three months ended June 30, 2016 and 2015 the Company recorded an income tax (benefit) expense of $(1.1) and $0.1 million, respectively. The Company’s provision for income taxes consists of U.S. and foreign taxes in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that the Company expects to achieve for the full year. The annual effective tax rate inclusive of a valuation allowance (but excluding discrete items) for 2016 is estimated to be approximately 96.6%, while the actual annual effective tax rate for 2015 was 15.4%.

The 2016 estimated annual effective tax rate of 96.6% is higher than the statutory rate of 35% primarily in connection with the amount of the valuation allowance included in the determination of the effective tax rate.  

In assessing the realizability of deferred tax assets, we evaluate whether it is more likely than not (more than 50%) that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losses can be utilized. We assess all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable. As of June 30, 2016, we are projected to be in a cumulative loss position during the three year period ending in December 31, 2016, which is considered to be a significant piece of negative evidence.

Based on these factors, most notably the projected three year cumulative loss, the Company established a full valuation allowance against the portion of its U.S. net deferred tax asset and projected 2016 loss that cannot be realized by carrying back the projected 2016 tax loss for a refund of taxes paid in prior years.

Separate from the impact of the valuation allowance, our estimated annual effective rate for 2016 is approximately 11.3% which is lower than the statutory rate of 35% due to earnings in foreign jurisdictions which are taxed at lower rates, and the non-taxable portion of ASV’s earnings.

 

Net (loss) income —For the three months ended June 30, 2016 and 2015 the Company had a net loss of $1.4 million and net income of $0.3 million, respectively.  The change is explained above.

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Net income for the six month periods ended June 30, 2016 and 2015

 

For the six months ended June 30, 2016 and 2015 the Company had a net loss of $0.1 million and net income of $0.4 million, respectively.

For the six months ended June 30, 2016 the net loss of $0.1 million consisted of revenue of $ 198.6 million, cost of sales of $163.3 million, research and development costs of $2.9 million, SG&A expenses of $27.2 million, interest expense of $8.2 million, foreign currency transaction loss of $0.5 million, other income of $2.8 million, loss of $0.1 million in a non-marketable equity investment and income tax benefit of $0.6 million.

For the six months ended June 30, 2015, the net income of $0.3 million consisted of revenue of $201.6 million, cost of sales of $164.6 million, research and development costs of $3.0 million, SG&A expenses of $27.4 million, interest expense of $6.7 million, foreign currency transaction gains of $0.7 million, loss of $0.1 million in a non-marketable equity investment and income tax expense of $0.2 million.

Net revenues and gross profit —For the six months ended June 30, 2016, net revenues and gross profit were $198.6 million and $35.3 million, respectively. Gross profit as a percent of revenues was 17.8% for the six months ended June 30, 2016. For the six months ended June 30, 2015, net revenues and gross profit were $201.6 million and $36.9 million, respectively. Gross profit as a percent of revenues was 18.3% for the six months ended June 30, 2015.

 

Net revenues decreased $2.9 million or 1.4% to $198.6 million for the six months ended June 30, 2016 from $201.6 million for the comparable period in 2015.   Revenues increased $3.7 million and $1.6 in the Lifting segment and the Distribution segment and decreased $8.6 million for the ASV segment, respectively. 2016 includes a complete quarter of revenues for PM Group, compared to seventy five days from the date of acquisition in the three months ended March 31, 2015 and accounted for $3.3 million, or the

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majority of the six month increase in revenue.   Increased sales of port handling equipment and military forklift were mostly offset by decreased sales in straight mast cranes.  The decrease in revenues for straight mast cranes is due to decreased demand from end markets.  The increase in sales of container handling equipment is principally due to an expansion into a new market.  The increase in military sales is due to the receipt of large military orders.  The decrease in ASV revenues is principally due to a decrease in undercarriage sales, which are sold to another manufacturer of compact track loaders.  The other manufacturer accelerated their orders in the prior year to accommodate facility modifications.    

 

Our gross profit percent decreased 0.5% to 17.8% for the six months ended June 30, 2016 from 18.3% for the six months ended June 30, 2015.  The decrease in gross margin percent is attributed to a decrease in the gross profit percent for straight mast cranes and specialized mobile tanks, which is attributed to a skewing towards cranes with lower lifting capacity that have lower margins and the effect a decrease in revenues. This unfavorable effect was mostly offset by an increase in military sales that have higher margins and an improvement in margins for knuckle boom cranes.  

Research and development —Research and development was $2.9 million for the six months ended June 30, 2016 compared to $3.0 million for the same period in 2015.  

Selling, general and administrative expense —Selling, general and administrative expense for the six months ended June 30, 2016 was $27.2 million compared to $27.4 million for the comparable period in 2015, a decrease of $0.2 million.

Operating income —For the six months ended June 30, 2016 and 2015 the Company had operating income of $5.2 million and $6.6 million, respectively. Operating income decreased due to changes in revenue, cost of sales and operating expenses explained above.

Interest expense —Interest expense was $6.7 million (excluding write off deferred financing costs) for the six months ended June 30, 2016 and 2015.  Interest expense did not change significantly as the favorable impact that resulted from a decrease in debt was offset by increased interest rates for our North American credit facilities and for the ASV term loan.

Interest expense for the six months ended June 30, 2016 includes an additional $1.4 million for deferred financing costs which were expensed during the period as associated debt was refinanced.

Foreign currency transaction gains and losses —For the six months ended June 30, 2016, the Company had a foreign currency loss of $0.5 million compared to a gain of $0.7 for the comparable period in 2015.  As stated in the past, the Company attempts to purchase forward currency exchange contracts such that the exchange gains and losses on the assets and liabilities denominated in other than the reporting units’ functional currency will be offset by the changes in the market value of the forward currency exchange contracts it holds.  Currency risks can be reduced but not eliminated in part because the Company has not been able to identify a strategy to effectively hedge the currency risks related to the Argentinian peso.   The Company records at the balance sheet date the forward currency exchange contracts at their market value with any associated gain or loss being recorded in current earnings as a currency gain or loss.

A substantial portion of the 2016 loss is attributable to exchange losses related to the Argentinian peso.  The Company has not been able to identify a strategy to effectively hedge currency risks related to the Argentinian peso.  The 2016 currency loss also reflects the recognition of deferred loss of $0.2 million related to an intercompany receivable.  The loss had been previously deferred in other comprehensive income as there was an intercompany receivable that was not expected to be repaid.  The repayment of the receivable resulted in the recognition of the previously deferred loss.  

The currency gain for the six months ended June 30, 2015 is principally related to currency gains at PM. The six month gain is net of $0.9 million gain for the three months ended March 31, 2015 offset by a loss of $0.3 million for the three months ended June 30, 2015. Subsequent to the first quarter, the Company implemented certain programs to mitigate currency risk at our PM subsidiary. There are still certain currency risks at PM for which an effective hedging strategy may not be available

     

Income tax — For the six months ended June 30, 2016 and 2015 the Company recorded an income tax (benefit) expense of $(0.6) and $0.2 million, respectively. The Company’s provision for income taxes consists of U.S. and foreign taxes in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that the Company expects to achieve for the full year. The annual effective tax rate inclusive of a valuation allowance (but excluding discrete items) for 2016 is estimated to be approximately 96.6%, while the actual annual effective tax rate for 2015 was 15.4%.

The 2016 estimated annual effective tax rate of 96.6% is higher than the statutory rate of 35% primarily in connection with the amount of the valuation allowance included in the determination of the effective tax rate.

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In assessing the realizability of deferred tax assets, we evaluate whether it is more likely than not (more than 50%) that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losses can be utilized. We assess all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable. As of June 30, 2016, we are projected to be in a cumulative loss position during the three year period ending in December 31, 2016, which is considered to be a significant piece of negative evidence.

Based on these factors, most notably the projected three year cumulative loss, the Company established a full valuation allowance against the portion of its U.S. net deferred tax asset and projected 2016 loss that cannot be realized by carrying back the projected 2016 tax loss for a refund of taxes paid in prior years.

Separate from the impact of the valuation allowance, our estimated annual effective rate for 2016 is approximately 11.3% which is lower than the statutory rate of 35% due to earnings in foreign jurisdictions which are taxed at lower rates, and the non-taxable portion of ASV’s earnings.

 

Other expense— For the six months ended June 30, 2016, other income of $2.8 million is principally attributed to three items: (1) the recognition of a gain of $2.2  million on the sale of certain intellectual property (see note 17 for further details), (2) the write off $0.3 million of goodwill associated with the Distribution segment, and (3) the Company recognized a gain of $0.9 million when it calculated the fair market value of a contingent liability associated with the PM acquisition.  

Net (loss) income —For the six months ended June 30, 2016 and 2015 the Company had a net loss of $0.1 million and net income of $0.4 million, respectively.  The change is explained above.

Segment information

Lifting Equipment Segment

 

 

Net revenues           

 

 

Net revenues increased $1.3 million to $67.1 million for the three months ended June 30, 2016 from $65.8 million for the comparable period in 2015.  The revenue increase for the Lifting Segment is attributed to increased revenues generated from the sale of container handling equipment and from the sale of forklifts to the military customers.  These increases were mostly offset by decreased revenues from the sale of straight mast cranes and from specialized mobile tanks.  The increase in sales of container handling equipment is principally due to an expansion into a new market. The increase in military sales is due to the receipt of large military orders.  The decrease in revenues for straight mast cranes, specialized mobile tanks and Distribution segment is due to decreased demand from end markets.  

 

 

Net revenues increased $3.7 million to $136.1 million for the six months ended June 30, 2016 from $132.4 million for the comparable period in 2015.  2016 includes a complete quarter of revenues for PM Group, compared to seventy five days from the date of acquisition in the three months ended March 31, 2015 and accounted for $3.3 million, or the majority of the six month increase in revenue.  Increased sales of port handling equipment and military forklift were mostly offset by decreased sales in straight mast cranes.  The decrease in revenues for straight mast cranes is due to decreased demand from end markets.  The increase in sales of container handling equipment is principally due to an expansion into a new market.  The increase in military sales is due to the receipt of large military orders

 

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Operating income and operating margins

For the three month period operating income decreased approximately $1.5 million to  $2.7 million for the three months ended June 30, 2016 or 4.0% of net revenues from $4.1 million or 6.3% of net revenues for the three months ended June 30, 2015.   The decrease in operating income is attributed to a decrease in gross profit, the impact of having a lower gross profit percentage for 2016 as compared to 2015.  The erosion in gross profit was partially offset by lower operating expenses (after excluding the reclassification impact discussed in three month M,D&A section above).

 

Operating income of $6.9 million for the six months ended June 30, 2016 was equivalent to 5.1% of net revenues compared to $6.9 million or 5.2% of revenues in the three months ended June 30, 2015.  Operating income was essentially flat between the periods.  The effect of lower gross margin percent was offset by an increase in revenues and lower operating expenses. The decrease in gross margin percent is attributed to a decrease in the gross profit percent for straight mask cranes and specialized mobile tanks, which is attributed to a skewing towards cranes with lower lifting capacity that have lower margins and the effect a decrease in revenues.  This unfavorable effect was mostly offset by an increase in military sales that have higher margins and an improvement in margins for knuckle boom cranes.  

 

ASV Segment

 

 

Net revenues

 

Net revenues for the three months ended June 30, 2016 were $27.3 million compared to $32.2 million for the three months ended June 30, 2015. Net revenues of $27.3 million were $4.9 million lower than the second quarter of 2015, with the shortfall in revenues resulting from a $4.4 million decrease in undercarriages sales and parts. Undercarriage sales in the second quarter of 2015 were elevated due to acceleration of orders by the customer to accommodate their production schedules. Sales of machines in total were down 12.9% but showed an improved mix, as sales of tracked machines were up year over year and comprised over 90% of machine sales in the quarter. ASV branded product sales increased 23% on a quarter over quarter basis.

 

Net revenues for the six months ended June 30, 2016 were $55.7 million compared to $64.3 million for the six months ended June 30, 2015. Net revenues of $55.7 million were $8.5 million lower than the comparable 2015 period.   The decrease in ASV revenues is principally due to a decrease in undercarriage sales, which are sold to another manufacturer of compact track loaders.  The other manufacturer accelerated their orders in the prior year to accommodate facility modifications.    

   

Operating income and operating margins

Operating income of $2.1 million for the three months ended June 30, 2016 was equivalent to 7.5% of net revenues compared to $2.0 million or 6.1% of revenues in the three months ended June 30, 2015.  There was only a minimum change in operating income between periods the impact that lower revenues had was offset by an increase in the gross profit percent and a small decrease in operating expenses.  The gross margin percent increase is primarily due to a change in product mix due to an increase in compact tract loaders, which are sold for higher margins and decrease in undercarriage sales which are sold at lower margins.

For the six month period operating income decreased approximately $0.9 million to  $3.1 million for the six months ended June 30, 2016 or 5.5% of net revenues from $4.0 million or 6.2% of net revenues for the six months ended June 30, 2015. The decrease in operating profit is attributed to a decrease in gross profit due to decrease in revenue.  The impact of lower revenues was partially offset by a slight improvement in the gross margin percent and a decrease in operating expenses.   

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Equipment Distribution Segment

 

 

Net revenues

 

Net revenues decreased $0.4 million to $3.5 million for the three months ended June 30, 2016 from $3.9 million for the comparable period in 2015. Sales of new and remarketed equipment were lower than the comparative period reflecting the continuing soft demand for equipment. This was partially offset by improved parts, service and rental revenues.          

Net revenues increased $1.6 million to $9.0 million for the six months ended June 30, 2016 from $7.4 million for the comparable period in 2015. Sales of new and remarketed equipment were lower than the comparative period with the exception of sales at zero margin to expand the division’s rental fleet operations. The lower level of retail sales, reflecting the continuing soft demand for equipment, was partially offset by improved parts, service and other revenues that benefited from improving construction activity.  Sales of remarketed product were lower in part due to lower demand from Canada due to the adverse currency impact from the strong US dollar. Revenues for the segment for 2016 include a $0.5 million of intercompany commission received in connection with services that were provided for the Company’s sale of its terminal tractor product line to a related party.         

Operating income and operating margins

 

The Equipment Distribution segment had an operating loss of $0.9 million and income of $0.2 million for the three months ended June 30, 2016 and 2015, respectively. Operating loss was $0.9 million in the quarter with reduced gross margin from lower equipment sales and higher operating expenses for costs related to the expansion of the rental fleet operations. The company has recently entered into a series of operating leases to finance equipment put into a rental fleet.  As the rental program is still new, the rental utilization is still relatively low.  Currently, the lease costs are exceeding the rental income and is a principal reason for the increased loss.  It is anticipated losses will continue for a while, however, as rental program matures the losses are expected to decrease and the program is expected to becomes profitable in the foreseeable future.              

 

The Equipment Distribution segment had an operating a loss of $0.7 million and income of $0.2 million for the six months ended June 30, 2016 and 2015, respectively. The operating loss was the result of lower equipment sales and higher operating expenses for costs related to the expansion of the rental fleet operations.  See comments for the three months above.          

    

Reconciliation to Statement of Income:

 

 

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Liquidity and Capital Resources

Cash and cash equivalents were $9.9 million at June 30, 2016 compared to $8.6 million at December 31, 2015. In addition, the Company has a North American Credit Facility, which matures on July 20, 2019.    The company refinanced North American credit facilities that existed on June 30, 2016 on July 20, 2016.  The Company had approximately $4.3 million under the new North American credit facility on July 20, 2016.  Additionally, ASV has a revolving credit facility, which is for its sole use.  ASV has a revolving credit facility with approximately $7.1 million of availability.

At June 30, 2016, CVS had established demand credit facilities with twelve Italian banks. Under the facilities, CVS can borrow up to €0.3 million ($0.4 million) on an unsecured basis and additional amounts as advances against orders, invoices and letter of credit with a total maximum facilities (including the unsecured portion) of €20.5 million ($22.6 million). The maximum amount outstanding is limited to 80% of the assigned accounts receivable if there is an invoice issued or 50% if there is an order/contract. The banks will evaluate each request to borrow individually and determine the allowable advance percentage and interest rate. In making its determination the bank considers the customer’s credit and location of the customer. At June 30, 2016, the banks had advanced CVS €11.0 million ($12.1 million) and had issued performance bonds which total €1.4 million ($1.6 million), which also count against the maximum that can be borrowed under these facilities.

At June 30, 2016, the PM Group had established working capital facilities with seven Italian and seven South American banks. Under these facilities, the PM Group can borrow $26.0 million against orders, invoices and letters of credit. At June 30, 2016, the PM Group had received advances of $18.2 million. Future advances are dependent on having available collateral.

For the six months ended June 30, 2016, term debt repayments of $9.2 million were made.

 

During the six months ended June 30, 2016, total debt (before the offset of deferred bank fees) increased by $2.4 million to $178.3 million at June 30, 2016 from $175.9 million at December 31, 2015.

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The following is a summary of the net increase in our indebtedness from December 31, 2015 to June 30, 2016:

 

 

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Outstanding borrowings

The following is a summary of our outstanding borrowings at June 30, 2016:

(In millions)

 

 

Future availability under credit facilities

As stated above, the Company had cash of $9.9 million and approximately $4.3 million available to borrow under its North American credit facility.   ASV has a revolving credit facility with approximately $7.1 million of availability which is for its sole use.

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CVS and the PM Group have their own working capital facilities. As stated above, any future advances against the Italian facilities are dependent on having available collateral. Additionally, the Company is permitted to make limited advances to the Italian operations if needed under the Company’s credit facilities.

The Company needs cash to fund normal working capital needs and to make scheduled debt payments as shown in the above table. Both the North American credit facilities are asset based. The maximum the Company may borrow under either facility is the lower of the credit line or the available collateral, as defined in the credit agreements. Collateral under the agreements consists of stated percentages of eligible accounts receivable and inventory.

Under the collateral formulas in the North American credit facilities inventory collateral is equal to a stated percent of eligible inventory (generally ranging from 50% to 65%) and caps total borrowing against our inventory.  If our revenues were to increase significantly in the future, the provision limiting borrowing against inventory may result in additional cash constraints. If this were to occur, we would attempt to negotiate higher inventory caps with our banks.  There is, however, no assurance that the banks would agree to increase the caps.

The $45,000 revolving credit facility is a secured financing facility under which borrowing availability is limited to existing collateral as defined in the agreement.  The maximum borrowing available to U.S. Borrowers is limited to: (1) 85% of eligible receivables; plus (2) 50% of eligible inventory valued at the lower of cost or market subject to a $25,000 limit; plus (3) 80% of eligible used equipment, as defined, valued at the lower of cost or market subject to a $2,000 limit.  The maximum borrowing limit available to the Canadian borrower is limited to: (1) 85% of eligible receivables; plus, (2) 60% of eligible inventory valued at the lower of cost or market subject to a limit of $8,500.  The 60% Canadian inventory advance rate is scheduled to be reduced to 50% at 1% monthly decrements starting on December 31, 2016.  Additionally, the Canadian inventory limit of $8,500 is scheduled to be reduced to $7,000 in October 2016

The Company expects cash flows from operations and existing availability under the current revolving credit facilities, nevertheless, will be adequate to fund future operations. If in the future, we were to determine that additional funding is necessary, we believe that it would be available.

We will likely need to raise additional capital through debt or equity financings to fund any future acquisitions.  There is no assurance that such financing will be available or, if available, on acceptable terms.

2016

Operating activities consumed $7.3 million of cash for the six months ended June 30, 2016 comprised of net loss of $0.1 million, non-cash items that totaled $6.4 million and changes in assets and liabilities, which consumed $13.6 million. The principal non-cash items are depreciation and amortization of $6.2 million, increases in allowance for doubtful accounts and inventory reserves that together total $0.8 million, share based compensation of $0.6 million and amortization of deferred financing costs of $2.1 million offset by the gain of $2.2 million on disposal of intellectual property and $0.9 million gain on the revaluation of a contingent acquisition liability. The proceeds related to the sale of intellectual property is included in investing section of the cash flow statement.  Increases and decreases in other non-cash items largely offset each other.

The change in assets and liabilities consumed $13.6 million.  The changes in assets and liabilities had the following impact on cash flows: accounts receivable consumed $11.7 million, inventory generated $0.9 million, prepaid expenses consumed $0.3 million, other assets generated $0.2 million, accounts payable consumed $1.9 million, accrued expenses consumed $1.6 million, other current liabilities generated $0.9 million, and other long-term liabilities consumed $0.2 million.  The increase in accounts receivable is principally due to the fact the collection of single large receivable was delayed.  This accounts receivable has now been fully collected.  The change in other current liabilities is related to an increase in deposits received from customers.  The fluctuation in the remaining assets and liabilities are within a range that would normally be expected to occur.

Investing activities for the six months ended June 30, 2016 generated $3.5 million of cash.  The Company received $2.2 million when the terminal tractor product line was sold and ASV received a $2.5 million capital contributed from the noncontrolling member.   The Company used $1.3 million of cash to purchase machinery and equipment.

Financing activities generated $4.7 million in cash for the six months ended June 30, 2016.  Cash was generated by increases in borrowing under the revolving credit facilities of $0.7 million, and the working capital facilities of $10.0 million and by $4.1 million from a sales and lease back transaction.  Additionally, the Company borrowed $0.7 million to finance a portion of 2016 insurance premiums.  Other financing activities consumed $10.8 million which is primarily related to debt repayments (including capital lease obligations).

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2015

Operating activities consumed $8.4 million of cash for the six months ended June 30, 2015 comprised of net income of $0.4 million, non-cash items that totaled $7.4 million and changes in assets and liabilities, which consumed $16.2 million. The principal non-cash items are depreciation and amortization of $5.8 million, shared based compensation of $0.9 million and amortization of deferred financing costs of $0.6 million. Other non-cash items in aggregate equal $0.1 million.

The change in assets and liabilities which consumed $16.2 million in cash is principally attributed to paying taxes on the conversion of ASV to an LLC for which a payable of $16.5 million had been established at December 31, 2014. Changes in other assets and liabilities consumed an additional $0.3 million as items generating cash and consuming cash essentially offset. Decrease in accounts receivables, and increase in other current liabilities and other long-term liabilities generated $11.4 million, $1.3 million and $1.0 million respectively. Increases in inventory and prepaid expenses and a decrease in accrued expenses consumed $6.9 million, $3.2 million and $3.0 million, respectively. Additionally, discontinued operations consumed $0.9 million of cash.  The decrease in accounts receivable is the result of collecting accounts receivable faster. The increases in other current liabilities results from an increase in customer deposits. The increase in inventory is attributed to an increase of PM inventory in the United States and increase inventory to support military contracts that will begin to ship in the second half of the year. The increase in PM inventory in the United States is to support production of the knuckle boom crane in the United States and to support the Company’s effort to improve market penetration in North America. The increase in prepaid expense is related to an increase in prepaid income taxes and increase in prepaid insurance. The decrease in accrued expenses is attributed to decreases in income taxes payable and the accrual for management bonuses.

Investing activities for the six months ended June 30, 2015 consumed $15.1 million of cash including $13.7 million used for the acquisition of businesses and $1.4 million to purchase equipment.

Financing activities generated $26.3 million in cash for the six months ended June 30, 2015. The Company generated $27.9 million net of expenses to finance the PM acquisition by issuing a $15.0 convertible note and entering into a $14.0 million term loan. Other financing activities consumed $1.6 million.

Related Party Transactions

For a description of the Company’s related party transactions, please see Note 17 to the Company’s consolidated financial statements entitled “Transactions between the Company and Related Parties.”

Critical Accounting Policies

See Item 7, Management’s Discussion and Analysis of Results of Operations and Financial Condition in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, for a discussion of the Company’s other critical accounting policies.

Impact of Recently Issued Accounting Standards

 

Recently Issued Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, deferral of the effective date, which amends ASU 2014-09.  As a result, the effective date is the first quarter of 2018, with early adoption permitted.  The Company is evaluating the impact that adoption of this guidance will have on the determination or reporting of its financial results.

 

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” (“ASU 2015-11”). ASU 2015-11 requires inventory be measured at the lower of cost and net realizable value and options that currently exist for market value be eliminated. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. ASU 2015-11 should be applied prospectively. The Company is evaluating the impact adoption of this guidance will have on determination or reporting of its financial results.

 

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In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (“ASU 2015-17”), Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in ASU 2015-17 seek to simplify the presentation of deferred income taxes and require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early application permitted for all entities as of the beginning of an interim or annual reporting period. The Company has not determined the full impact of implementation of this standard, but believes it will not be material to net income.  The Company believes that the main impact of adoption of the standard will be the reclassification of current deferred tax assets that will result in a reduction in deferred tax liabilities.   

 

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments in ASU 2016-01, among other things, require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost. The effective date will be the first quarter of fiscal year 2018. The Company is evaluating the impact the adoption of this new standard will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” (“ASU 2016-02”) requires lessees to recognize assets and liabilities for leases with lease terms of more than 12 months and disclose key information about leasing arrangements. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. The update is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is in the process of evaluating the impact of this update on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815),” (“ASU 2016-05”). ASU 2016-05 provides guidance clarifying that novation of a derivative contract (i.e. a change in counterparty) in a hedge accounting relationship does not, in and of itself, require designation of that hedge accounting relationship. The effective date will be the first quarter of fiscal year 2017, with early adoption permitted. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815),” (“ASU 2016-06”). ASU 2016-06 simplifies the embedded derivative analysis for debt instruments containing contingent call or put options by clarifying that an exercise contingency does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis. The effective date will be the first quarter of fiscal year 2017, with early adoption permitted. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606) Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” (“ASU 2016-08”). ASU 2016-08 further clarifies principal and agent relationships within ASU 2014-09. Similar to ASU 2014-09, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,” (“ASU 2016-09”). ASU 2016-09 is intended to simplify several aspects of accounting for share-based payment awards. The effective date will be the first quarter of fiscal year 2017, with early adoption permitted. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

 

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing,” (“ASU 2016-10”).  The amendments in ASU 2016-10 are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services in contracts with customers and to improve the operability and understandability of licensing implementation guidance related to the entity's intellectual property.  Similar to ASU 2014-09, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017.  The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

    

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In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing” (“ASU 2016-10”).  The amendments in ASU 2016-10 are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services in contracts with customers and to improve the operability and understandability of licensing implementation guidance related to the entity's intellectual property.  Similar to ASU 2014-09, the effective date will be the first quarter of fiscal year 2018 with early adoption permitted in the first quarter of fiscal year 2017.  The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

Except as noted above, the guidance issued by the FASB during the current year is not expected to have a material effect on the Company’s consolidated financial statements.

 

Off-Balance Sheet Arrangements

Comerica has issued 3 standby letters of credit at June 30, 2016.  The first standby letter of credit is $0.625 million in favor of an insurance carrier to secure obligations which may arise in connection with future deductibles payments that may be incurred under Company’s workman compensation insurance policies.  The second standby letter of credit is $0.145 million in favor of a governmental agency to secure potential future warranty claims.  The third standby letter of credit is $20 thousand in favor of a governmental agency to secure obligations which may arise in connection with workman compensation claims.

 

JP Morgan Chase has issued a $0.2 million standby letter of credit in favor of an insurance carrier to secure obligations which may arise in connection with future deductibles payments that may be incurred under the Company’s workman compensation insurance policies.

Additionally, various Italian banks have issued performance bonds which total €1.4 million ($1.6 million) and none are guaranteed by the Company.

For the six months ended June 30, 2016, the Company entered into three 60 month equipment operating leases in a sales and lease back transaction and received $4.1 million.  

 

 

Item 3—Quantitative and Qualitative Disclosures about Market Risk

The Company’s market risk disclosures have not materially changed since the 2015 Form 10-K was filed. The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A of the Company’s Annual Report on Form 10-K, for the year ended December 31, 2015.

Item 4—Controls and Procedures

Disclosure Controls and Procedures

The Company under the supervision and with the participation of management, including the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal financial officer), evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2016.

Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of June 30, 2016 to provide reasonable assurance that (1) information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

The effectiveness of any system of controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that our controls and procedures will detect all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained.

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Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II—OTHER INFORMATION

Item 1—Legal Proceedings

The Company is involved in various legal proceedings, including product liability and workers’ compensation matters which have arisen in the normal course of operations. The Company has product liability insurance with self-insurance retention that ranges from $50 thousand to $0.5 million. ASV product liability cases that existed on date of acquisition have a $4 million self-retention limit. The Company has a $250 thousand per claim deductible on worker compensation claims and aggregates of $1.2 million, $1.3 million, $1.9 million, and $1.6 million for 2013, 2014, 2015 and 2016 policy years, respectively. Certain cases are at a preliminary stage and it is not possible to estimate the amount or timing of any cost to the Company. However, the Company does not believe that these contingencies, in the aggregate, will have a material adverse effect on the Company. Reserves have been established for several liability cases related to the ASV and PM acquisitions. When it is probable that a loss has been incurred and possible to make a reasonable estimate of the Company’s liability with respect to such matters, a provision is recorded for the amount of such estimate or the minimum amount of a range of estimates when it is not possible to estimate the amount within the range that is most likely to occur.

Item 1A—Risk Factors

As of the date of this filing, there have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2015.

Item 2—Unregistered Sales of Equity Securities and Use of Proceeds.

The Company’s credit agreement with Comerica Bank directly restricts the Company’s ability to declare or pay dividends without Comerica’s consent. In addition, pursuant to the Company’s credit agreement with Comerica and other lenders, the Company must maintain as specified in the agreements certain fixed coverage ratios and debt to EBITDA ratios.

ISSUER PURCHASE OF EQUITY SECURITIES

 

 

Item 3—Defaults Upon Senior Securities

None

Item 4—Mine Safety Disclosures

Not applicable.

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Item 5—Other Information

 

None

 

Item 6—Exhibits

See the Exhibit Index set forth below for a list of exhibits included with this Quarterly Report on Form 10-Q.

 

 

EXHIBIT INDEX

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

August 4, 2016

 

August 4, 2016

 

 

 

 

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