Columbus McKinnon Corporation
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Welcome to the Magnetek Third Quarter Fiscal Year 2013 Earnings Call. My name is Hilda, and I will be your operator for today. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ms.Lynn Bostrom, Director of Communications. Ms. Bostrom, you may begin.

[Lynn Bostrom:]

Good morning. Thank you for joining us today. I trust everyone has received Magnetek's third quarter fiscal year 2013 results. This information is available under Financial News in the Investor Relations section of our website at magnetek.com. As the operator said, this conference call is being recorded today, November 6, 2013, and is being webcast live on Magnetek's website. Throughout the call, we'll refer to slides, which are available on our website as well. Listeners are encouraged to view these materials in conjunction with the call. The webcast will be available for replay on our website following the call for at least 3 months or as long as the content remains timely. As stated on Slide 2, statements made during this conference call are intended to come within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and may be forward-looking and subject to risks. Factors that could cause actual events to differ materially from these statements are discussed in the company's press releases and periodic filings with the SEC, including our Form 10-K. Magnetic's President and Chief Executive Officer, Peter McCormick; and our Vice President and Chief Financial Officer, Marty Schwenner, will be speaking on the call today. Mr. McCormick will provide the opening remarks.

[Peter M. McCormick:]

Thanks, Lynn, and good morning. Our third quarter performance was somewhat impacted by lower activity levels in our served markets. In the material handling industry, our largest served market, reports indicate new crane orders have been down significantly in 2013 compared to 2012. The projects being initiated in this market tend to be smaller than in years past as well. We also serve the coal mining industry, which is been in a downturn for over a year now. These economic and market realities resulted in a modest decrease in revenues for our third quarter, both sequentially and year-over-year. For a couple of quarters now, sluggish economic conditions have contributed to a flattening in our business. We have managed the business well during this challenging time, by implementing a series of actions during the third quarter to address this softness, allowing us to maintain consistent profitability and generate healthy margins and levels of cash. Our focus on the bottom line allowed us, despite the weakness in the end market to achieve an EBITDA level in the $3.5 million range for the quarter. We have also made significant progress towards reducing our pension obligation, which we will elaborate on in more detail shortly. So overall, we are experiencing the effects of diminished demand in some markets we serve, and pleased with our ability to adjust our business accordingly in order to provide consistent value to our shareholders. I'll speak a bit more about this after Marty covers the details of the quarter.

[Marty J. Schwenner:]

Thanks, Pete, and good morning. I'd like to briefly cover our third quarter results and then shift the discussion to a recent pension development, which as Pete indicated have been quite favorable for us. Looking at the slide titled Q3 Results of Continuing Operations, total company sales were down slightly year-over-year in the third quarter of fiscal 2013, due mainly to lower sales in served material handling markets. Industry indicators seem to support the case that our served material handling market reached a recent peak in the second half of 2012 and new orders have fallen off since that time. On a sequential basis, sales were also down slightly, due mainly to seasonal factors and material landing. Despite the lower sales, gross margins were better than 35% in the third quarter, up from 34.6% in the second quarter as we continue to improve shop floor efficiencies and also realize some selective pricing and mix improvement. Third quarter operating expenses decreased year-over-year due to lower R&D costs, lower pension expense and lower incentive compensation provisions. These cost decreases were partially offset by higher selling expenses. Our continuing operations generated $1.5 million of operating income with diluted earnings per share of $0.35, while third quarter adjusted EBITDA was $3.5 million or more than 13% of sales. We continued to manage our working capital well in the third quarter with our inventory turnover rate remained very near our historical average of 5 turns. And receivable days is constant with the second quarter levels at about 53 days. We contributed about $7.7 million to our pension plan assets during the third quarter, and closed the quarter with $21 million in cash. So our liquidity remains solid. I'd like to spend a few moments to provide a brief update on our pension as we continue to have positive developments in that area. We have stated for some time that we believe our best path to value is to reduce our pension by funding our plan through contributions, ultimately shifting our enterprise value from the pension liability to equity. To provide a few data points regarding our funding, we've contributed about $28 million to the pension in fiscal 2012 and 2013 to date. Over the past 39 months, we have contributed $38 million to nearly $1 million per month to the plan. Going back a bit further, since our pension plan assets bottomed out in 2009 as equity markets declined, we've contributed $54 million to our pension, all with cash generated from operations. So we've executed well in our business over a number of years and stayed the course with funding our pensions. A major driver of our pension obligation is the low interest rate environment, as interest rates decline, pension liabilities increase. As a reminder, every 100 basis point change in interest-rate impacts our pension liability by about $20 million. From 2009 to the end of 2012, our discount rate dropped from 6 1/4% to 3 1/2% or nearly 300 basis points, which clearly resulted in a far higher liability. While recently, discount rates have increased through the first 9 months of 2013 by about 90 basis points resulting in a reduction in our liability of about $18 million. Also note that while the discount rate today of about 4.5%, represents a decent improvement from December 2012, the rate is still well below where we were several years ago. At the same time, our annual invested returns on our pension assets has been in the 12% range for the past couple of years, better than our expected return rates. The combination of contributions over time, positive returns on our pension assets and recent interest-rate increases has improved the funded status of our plan significantly. In fact, we're now at a point where our plan is no longer considered at risk under the funding rule, which results in lower funding requirements going forward and lower PBGC premiums. Many of these developments are not yet reflected in our operating results or our balance sheet, as we'll measure our plan at the end of December 2013 and then adjust balances accordingly. We can however project a few things forward with what we know today, provided our actual assumptions are fairly close to actual experienced over the next couple of months, it appears that our balance sheet liability at the end of fiscal 2013 would be in the range of $50 million to $55 million, compared to $85 million number currently on the balance sheet. The liability would then be about $50 million lower than it was entering 2013. Our total funding obligations beyond 2013 to achieve fully funded status are estimated at approximately $48 million. This is down from about $92 million at the end of fiscal 2012. Funding amount for fiscal 2014 are currently estimated at about $20 million, but the funding for fiscal 2015 then drops to around $7 million and remains at that level for several years. From a pension expense standpoint, which is a non-cash charge to the income statement, we would expect fiscal 2014 pension expense to decline to less than $4 million from the current year expense of $6.4 million, which would represent a year-over-year improvement of about $0.80 to $0.85 on a per share basis. Going forward, a best case macro environment for us would be a continuation of what we've seeing so far in 2013. The interest rates continue a gradual move higher without derailing the economy or the equity market. While conditions in certain of our end markets are not at peak level, we've been generating between $3 million and $4 million of adjusted EBITDA for a number of quarters now, even with topline sales essentially flat during the year. We're projecting to end this year with about $20 million in cash, which is equal to our estimated pension contributions for 2014. As a result, whatever cash we generate in 2014, would accumulate on the balance sheet. So even if conditions remain flat we would likely close 2014 with cash of approximately $12 million to $14 million and at that point, again our 2015 contributions based on what we know today will drop to around $7 million. In summary then, we have got sufficient cash on hand and a cash generating business. So we would anticipate that as we continue to make progress in reducing our pension, more of our enterprise value will continue to shift to equity. At this point, I'll turn it back over to Pete for closing remarks.

[Peter M. McCormick:]

Thanks, Marty. Great report. And as you could see, we have made significant progress in reducing our pension obligation, which is also being reflected in the valuation of the company. As we've stated for a number of quarters, our strategy is to create value for our shareholders by growing organically, consistently generating cash and reducing our pension obligation. We're optimistic about our long-term ability to grow organically, particularly in certain areas of our business. Radio control for example, continues to provide significant opportunities. We're working to expand this business through our newly established sales channels in Asia and Europe, promoting the adoption of the technology for new applications and broadening our product portfolio. In our served material handling industry, data indicates continued softness through the first half of 2014, before a rebound late next year. We continue to focus on gaining end user specification and expanding our product offering, including our popular new energy regenerating systems. The demand for sophisticated control systems that provide real time crane diagnostics wherever the operator maybe, on a crane, in his office, or holding the transmitter on mobile device is another area of opportunity. Special applications software, drive and radio control bundling and drive feature enhancement, provide other opportunities to outperform our competition and lather the softness in the material handling industry. We're also working to expand revenue growth for our material handling products outside North America. Turning to our mining business. There is a great deal of uncertainty as for the timing of a rebound. We expect continued softness in our mining business through 2014 as revenue improvements for us may lag behind the industry's recovery. In response, we're working on product and channel development initiatives to serve new applications and new markets. We see opportunities to expand with existing partners overseas. The use of radio controlled products for mining application and the integration of mining drives with radio technology also provide growth opportunities. Finally, in our elevator business, in addition to serving our North American customers, with our expanding portfolio of products, including our energy regenerating Quattro drive, we are focused on international growth initiatives in select established and developing elevator markets. Through these initiatives, and a focus on cost control, we expect to be able to outpace the modest growth projected for the overall economy. While our revenue projections are relatively flat, given the market conditions, we have a cost structure in place to continue to achieve $3.5 million to $4 million in EBITDA per quarter. We have made improvements in our asset management throughout the year and are generating sufficient cash to fund our growth initiatives and meet our pension obligations. So in conclusion, we believe, we have significantly opportunity to enhance shareholder value, through a consistent profitability and cash generation and a reduction in our pension obligation. Thank you for your attention, and now we'd be happy to take your questions.

[Operator:]

[Operator Instructions] At this moment I'm not showing any questions in queue.

[Lynn Bostrom:]

Thank you for joining us today. We look forward to you joining us on our next quarterly call.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating. You may now disconnect.