Columbus McKinnon Corporation
Q2 2014 Earnings Call Transcript

Published: 5 Aug 2014

[Operator:]

Welcome to the Magnetek Q2 Fiscal Year 2014 Earnings Call. My name is Adrienne, and I'll be your operator for today's call. [Operator Instructions] Please note, this conference is being recorded. I'll now turn the call over to Lynn Bostrom, Director of Communications. Lynn Bostrom, you may begin.

[Lynn Bostrom:]

Good morning. Thank you for joining us today for Magnetek's Second Quarter 2014 Earnings Conference Call. As the operator said, this conference call is being recorded today, August 5, 2014, and is being webcast live on Magnetek's website at magnetek.com. Throughout the call, we will refer to slides which are available on our website as well. Listeners are encouraged to follow along with the slides. The webcast will be available for replay on our website for 1 year. The results of our 2014 second fiscal quarter were released this morning, and the press release and charts have been posted to Magnetek's website. Please note that reconciliations to non-GAAP measures may be discussed and are included in the press release, charts and slides. Speaking on the call today are Magnetek's President and Chief Executive Officer, Peter McCormick; and our Vice President and Chief Financial Officer, Marty Schwenner. Before turning the call over to Pete, I'd like to remind you that, 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. And now I'll turn the call over to Pete to provide the opening remarks.

[Peter M. McCormick:]

Thanks, Lynn, and good morning. We were extremely pleased with our second quarter performance as momentum in our business increased throughout the quarter, and we posted great results. Second quarter bookings and sales were up strongly over first quarter levels and profitability was up significantly, both at the gross profit and operating profit line. On a year-over-year basis, sales were nearly identical yet gross profit, operating profit and earnings per share were again all significantly higher. Our results reflect, in part, improved conditions in our served markets throughout much of the quarter, but more importantly, our results reflect diligent execution of actions taken over time, aimed at improving the leverage in our business. We've noted over the last couple of quarters that we've been focused on improving our performance through repositioning, pricing and aligning our cost structure with recent lower levels of sale. In our second quarter, the combined effect of those actions, along with higher sales volume, delivered gross margins of 36% and operating profit margin greater than 10%. So we not only posted healthy sequential growth in our business, but we also controlled our costs and managed our assets well. We challenged our employees to rethink the way we go about our business in many areas and our people responded and met the challenge. So overall, an outstanding quarter for us. Looking forward, economic indicators point to continued measured improvement throughout the remainder of 2014. When taken collectively with current industry projections and our recent incoming order rates, we believe we are well positioned to achieve results of the balance of 2014 similar to those of our second quarter. I'll turn it over to Marty now to discuss the details of the quarter, and then I'll finish up with some comments about the areas we're focusing on for the second half of the year and beyond.

[Marty J. Schwenner:]

Thanks, Pete, and good morning. I'd like to cover the quarter in a bit more detail, provide a brief update on pension developments and then close with a few comments related to our tax situation. Turning to the slide, titled Q2 Results of Continuing Operations. Second quarter sales were more or less identical to last year at $27 million, but were up 12% sequentially from the first quarter, which appears, in hindsight, to have been the near-term bottom for us in terms of sales. Gross margins of 36% were up 140 basis points over last year, and 220 basis points sequentially over the first quarter from a combination of selective pricing actions, operational efficiency gains and control of overhead expenses, along with some improvement in sales mix. It's clear that we've got better leverage in our business and with the better volume in the second quarter over first quarter levels, we were able to demonstrate that through improvements in gross profit. Second quarter operating expenses declined $900,000 from last year, due mainly to lower pension expense and lower selling expenses, both in the area of payroll and discretionary spending. We also recorded a favorable adjustment of about $200,000 related to stock compensation expense, but this amount was more than offset during the quarter by increased incentive compensation provisions. The margin improvements, along with the reduction in operating expenses, resulted in a year-over-year increase in operating income of nearly 90% to more than $2.7 million or 10.2% of sales. After tax, income from continuing operations more than doubled, as did earnings per share from continuing operations, to $0.74 in the current year quarter compared to $0.36 last year. Second quarter earnings per share also more than doubled from the $0.35 we posted in our current year first quarter. In summary, then, we had great execution in the second quarter, and that's reflected in our results. Turning to the balance sheet. We closed the second quarter with about $16 million in cash, up about $1 million from the beginning of the year after contributing $4 million to our pension plan in the first 6 months of 2014. Looking to the third quarter. Our second quarter book-to-bill ratio was positive, with total bookings of $27.4 million. In addition, our order rates have remained strong early in the third quarter, so we believe that third quarter sales should be similar to the second quarter level. Moving on to our pension. Our assets have increased by about $7 million in the first 6 months of 2014 due to contributions of $4 million and favorable investment returns of 7%, partially offset by payments to participants of about $8 million. On the liability side, interest rates were down about 50 basis points for the first 6 months of 2014, so our liability is estimated to be about $10 million higher. On a net basis, then, our pension liability may be slightly higher that it was entering the year due mainly to the declining interest rate environment in the first half of 2014. In terms of de-risking strategies, we intend to move forward with a lump sum window proposal to about 3,000 of the deferred vested participants in our pension plan. In fact, informational letters describing the program were mailed last week. The estimated pension liability related to these participants is about $55 million, and we're targeting a 65% to 70% acceptance rate, which could reduce our pension liability by $35 million to $40 million. The program is estimated to be funding neutral, meaning, we'll reduce our pension assets and liability by like amounts so the program does not negatively impact the health of the plan. The lump sum program should result in reduced mortality risk, lower future fees and administrative costs and less volatility, but will still allow for increases in our equity value as we continue to reduce our pension through ongoing contributions. We believe the lump sum window is a prudent next step toward our longer-term goal of annuitization of our pension plan at some point in the future. It's an ambitious and complex program, but we're planning on completing the lump sum window later in the year, likely in the fourth quarter. I'd like to close today with a few comments regarding our tax position. For some years now, we've been recording an income tax provision of approximately $1 million annually despite the fact that we have over $200 million of net operating loss carry-forwards or NOLs for tax purposes. As an example, over the past 4 years, we recorded about $4 million in booked tax expense, reducing our net income by that amount. Over the same period, our cash income taxes paid have been less than $100,000. So there's been somewhat of a disconnect between our booked income tax provision and our taxes paid. It's a bit technical, but the tax provision results from a permanent difference in treatment of goodwill amortization for book and tax purposes from acquisitions we made nearly 15 years ago. The majority of that tax amortization is expiring at the end of this year. As a result, our tax provision for book purposes will decline from current quarterly amounts of $240,000 to about $70,000 in the fourth quarter of this year, which should increase fourth quarter earnings per share by about $0.05. Beyond 2014, our annual tax provision should be less than $100,000 as compared to the historical provision of $1 million. So this reduction is expected to increase earnings per share by about $0.25 per year going forward, beginning in 2015. In simple terms, what's happening is our tax provision for books should be declining and more representative of our actual tax position, given our sizeable NOLs. Of course, as our tax provision declines, our net income and earnings per share will go up accordingly. As a final note on taxes, we currently expect our pension contribution to decrease to about $7 million in 2015. If that estimate holds up, and if our business continues to perform well, we should be in a position next year where we'll generate taxable income and will actually begin to utilize some of our tax loss carry-forwards. To wrap it up, then, we had an outstanding second quarter and there's a strong probability that the second half of the year will be better than the first half in both sales and profits. We are taking steps to more proactively resolve our pension, which should increase the value of the company. Our tax expense should decline in the future, further increasing income, and we should finally begin to take advantage of our NOL position for tax purposes in 2015 and beyond. At this point, I'll turn it back over to Pete for some closing remarks.

[Peter M. McCormick:]

Nice report, Marty. As we look toward the remainder of 2014, economic indicators, combined with favorable incoming order rates and current industry projection, lead us to be optimistic about our prospects for the remainder of the year. Material handling markets make up more than 70% of our sales, thus, we are encouraged by recent reports from trade organizations that suggest an improved outlook and accelerating growth for U.S. manufacturing and electrical equipment during the second half of 2014. We plan to continue to control our costs, and if we're able to maintain current incoming order rates throughout the third quarter, we should be able to post quarterly operating results in the second half of the year similar to our second quarter results. Looking forward, we intend to continue our strategy of organic growth generated through new product introductions, market share gain and channel expansion, including into new markets and new regions outside North America. Radio Control provides one example. We have mentioned several times over the past few quarters, our belief that Radio Control provides us with significant long-term growth potential. We are working to broaden our radio product portfolio and, in fact, recently launched a line of mini transmitters, offering more simplified control at lower price points. This new line should appeal to users of smaller, low cost, fluid power machines in markets such as agriculture, construction, forestry and work trucks in addition to industrial applications. We're also seeing positive momentum from our recently announced Hazardous Location Certification that allow us to sell our radio controls for applications in the oil and gas industry. In addition to new applications and industries, we continue to expand our wireless control sales into Asia and Europe. Of course, entering new markets and new geographic regions takes a little more time to see meaningful results. In terms of our material handling drives, we are starting to see larger projects released. Our controls are now being used in large dredging crane applications, for example, which is a relatively new market for us. We also continue to grow sales of our energy regenerating drives for larger crane applications. Our elevator business was quite strong during the second quarter, and we see that momentum continuing. We launched a major marketing initiative towards encouraging building owners to modernize their elevators with DC energy-saving drives rather than undertaking costly replacement of their entire DC drive and motor system. This message seems to be resonating with elevator consultants and building owners as we explain the significant savings they can realize in installation, equipment cost and energy. We're also launching several new products in the next few months that expand our AC portfolio, and we're working to penetrate the large modernization market in Asia. Finally, while our mining business continues to be impacted by the soft demand for coal globally, we are increasing our sales efforts and continuing to work towards penetration of the hard rock and above-ground mining markets. From a mid- to longer-term perspective, our strategy continues to be focused around increasing the value of our company by growing sales and profits organically, generating consistent cash flow and further reducing our pension obligation. As Marty discussed, given the expectation of reduced pension funding in 2015 and beyond, we are moving to a point where we will have greater resources to reinvest in our business in order to increase future growth and profitability. We are pleased with the consistent progress we have made over time to better position the company for more aggressive growth in the future. Thank you for your attention, and now we'd be happy to take your questions.

[Operator:]

[Operator Instructions] And we have no questions at this time. I will now turn the call back over to Lynn Bostrom.

[Lynn Bostrom:]

Thank you for joining us today. We look forward to your participating in our next quarterly call.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating, and you may now disconnect.