Columbus McKinnon Corporation
Q4 2014 Earnings Call Transcript

Published: 12 Mar 2015

[Operator:]

Welcome to the Magnetek Q4 and Fiscal Year 2014 Earnings Conference Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Please note that 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 fourth quarter and fiscal year 2014 earnings conference call. As the operator said, this conference call is being recorded today, March 12, 2015, and is being webcast live on Magnetek's website at magnetek.com. During the call, we may refer to slides, which are available on our website as well. The webcast will be available for replay on our website for one year. The results of our 2014 fourth quarter and fiscal year 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 reflected on slide two, statements made during this conference call may be forward-looking in nature. 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. And now, I will turn the call over to Pete to provide the opening remarks.

[Peter M. McCormick:]

Thanks Lynn, and good morning. Needless to say, we are extremely pleased with the performance in the fourth quarter and fiscal 2014 overall. Strong execution by our team resulted in higher year-over-year sales and excellent profitability and cash flow. The year started out a bit slower, as it typically does, due to seasonal buying patterns in our served material handling markets. To assure acceptable levels of profit during that period, we implemented a number of pricing, repositioning and cost reduction actions in early 2014. As demand increased and sales grew over time, we remained judicious in our spending, resulting in significant operating leverage in our business and outstanding profitability over the past few quarters. We also generated sufficient cash to fund our organic growth initiatives and meet our pension obligations. Marty will speak in depth about the pension in the financial report, so I'll just say that we are very pleased that we have been able to further improve the funded status of the plan during 2014. Given this, we expect a favorable impact on our earnings and cash flow going forward. Before Marty gives us the details of the fourth quarter and the year, I'd like to take a moment to provide some of the 2014 highlights in each of our core businesses, as well as mention a milestone for the company. In July 2014, Magnetek celebrated 30 years since its incorporation. And while we marked this anniversary, we are reminded that the roots of the company date back over 100 years. The Mechanical Appliance Company in Milwaukee, founded in 1901, later became Louis Allis, and this is where our elevator drive business later originated. Telemotive Industrial Controls, which became Magnetek's radio control business, pioneered the use of radio controls on overhead cranes back in 1959. The precursor of Magnetek's mining drive business, Power Control Corporation, was formed in Pittsburgh back in 1965. And Electromotive Systems, which was founded in 1981, became Magnetek's crane control business and was the first company to use adjustable frequency drives to control overhead cranes. So, it's been 30 years since Magnetek was incorporated, over 100 years of pioneering innovation, from the foundation of the company today. Now, to some of the 2014 highlights in each of our businesses. In our material handling business, we saw some fairly large orders during the second half of the year. One of those orders, valued at over $1 million, involve modernizing the controls on the power plant cranes at the Hoover Dam. Another involved the completion of a $1 million project to automate a crane and monorail system for an airplane wing assembly plant for Boeing. And a third large order of note was for a highly engineered project for a Nucor steel plant. So, we definitely saw a shift in mix back to larger projects in the second half of the year. In addition to introducing some next-generation products, we also received two patents during the year for new features on our IMPULSE drive crane controls. Turning to our radio control business, in May, we announced that we received hazardous location certifications on some of our wireless controls, meaning they are certified to control equipment used worldwide in applications such as oil and gas, petrochemical, above ground mining and chemical plants. We also introduced a new line of Mini wireless control products designed for controlling small fluid power machines for use in applications such as agriculture, construction, forestry and work trucks. In our elevator drive business, early in the year, we surpassed the 2,000-unit installed mark for our Quattro energy saving drive. Sales of our Quattro drives during fiscal 2014 were up nearly 50% year-over-year, as the worldwide focus on green energy continues to expand. We attribute some of that growth to the successful modernization marketing campaign we launched in 2014 to educate building owners on the advantages of modernizing their existing DC elevator systems. And finally, in our mining business, we've been working on qualification testing on our first Traction Drive System operating in a gold mine with a production machine in underground test. Adoption of our products in additional mining applications, such as gold, potash and salt will allow us to weather the current downturn in coal mining and should reduce our reliance on the coal industry. And with our drives now approved for use on a growing number of our OEM partners' machines in China, we also expanded sales of our mining products in this part of the world during fiscal 2014. So, we are poised for continued momentum into 2015, which I will discuss further after Marty provides the fourth quarter and fiscal year 2014 financial report.

[Marty J. Schwenner:]

Thanks Pete, and good morning. I'd like to briefly cover our results for the quarter and the full-year, then move to a pension update, as we've had a lot of activity there, and then close today by touching on our first quarter outlook. We had a really strong finish to the year, which is somewhat obscured by the fact that we booked a $37 million settlement charge related to our pension plan. So, my prepared comments today will focus on our results excluding that charge. We reached $29 million in sales in the fourth quarter, which was up about 15% over last year. Gross margins continued to accelerate reaching nearly 38.5% of sales, up more than 400 basis points year-over-year. Factors contributing to that success were of course higher volume, shipments of some larger projects and continued focus on cost control. We also shipped about a $1 million worth of spare parts for wind inverters at healthy margins during the quarter. Normalized operating expenses were about $7.3 million in the fourth quarter compared to prior year operating expenses of about $7.7 million. Pension expense, excluding the settlement charge, was about $500,000 in the fourth quarter, compared to prior year pension expense of about $1.7 million. This favorable variance was partially offset by higher incentive compensation provisions, higher R&D costs and higher variable selling expenses. Our operating profit adjusted to exclude the pension settlement charge was $3.8 million or more than 13% of sales, compared to prior year OP of just under $1 million or less than 4% of sales. Tax expense also declined as expected, and our adjusted earnings per share from continuing operations totaled $1.01 per share as compared to $0.22 per share in the fourth quarter of last year. In summary for the quarter, higher volume, better sales mix and great execution combined to drive profitability significantly higher. On a full-year basis, it was really a tale of two halves. We started the year very slowly, as we often do, with Q1 revenue of $24 million and continuing operations earnings of $0.35 per share. Given these results, we took action early on in the year to get our cost better controlled. Volume picked up in the second quarter, increasing to $27 million, and our earnings improved to $0.74 per share from continuing operations. So, we closed the first half with sales of $51 million and earnings of about $1.10 per share from continuing operations. In the second half of the year, our volume picked up substantially and we continued to hold the line on costs resulting in significant leverage in the business. Second half sales volume was nearly $59 million, gross margins increased to nearly 38% of sales and earnings per share from continuing operations were about $1.90 in the second half of the year. For the full-year then, sales were nearly $110 million, an increase of 6%, and full-year gross margin improved to 36.4%, up 220 basis points from 2013. Total year adjusted operating income was $11.4 million or 10.4% of sales even after booking normalized pension expense of $3.3 million during the year. Overall, we had an exceptional year in terms of growth and profitability, exceeding both our sales growth and our operating income objectives. Moving to the balance sheet, working capital was well managed with accounts receivable days at 53 and our inventory turnover at 5.2 turns. Total cash balances were approximately $10 million after contributing $19 million in cash to our pension plan during the year. So, liquidity was healthy entering 2015. Expanding a bit on the pension, we had a number of other developments during the year. We ran a lump sum program, which we offered to about 3,000 participants. The program was quite successful, as a total of 2,230 participants or 75% accepted the lump sum option and were paid their full pension benefit in December. As a result, those people are no longer in our pension plan. The lump sum window reduced the size of our plan by about $47 million or 22% and should benefit us in terms of reducing the volatility, mortality risk and administrative costs of our plan going forward. We also made a voluntary contribution of 250,000 shares of company common stock to our pension plan in September, valued at more than $7 million. This contribution helped us narrow our funding gap, reducing future required cash contributions and future pension expense. We re-allocated our assets early in 2014, increasing our position in fixed income, which helped us reduced our volatility, while generating asset returns greater than 10% during the year. At the end of 2014, we liquidated our alternative investment position, reinvesting those proceeds into equity and fixed income funds with greater transparency in terms of valuation. Finally, at the end of the year, we re-measured our pension plan using an updated discount rate and revised mortality tables, each of which had a negative impact. We used a discount rate of 3.55% to determine our reliability, which was down about 90 basis points from the prior year and near historical lows. Despite the unfavorable impact from lower interest rates and assumed mortality improvements, our net pension liability at the end of the year was valued at about $27 million, down from the $48 million net liability entering fiscal year 2014. With respect to pension funding, which impacts our cash flow, we pre-funded our 2015 required contribution late in 2014. As a result, no mandatory minimum contributions are required in fiscal year 2015. Our aggregate funding amounts beyond 2015 to achieve fully funded status are estimated at $25 million, of which a total funding amount of $16 million is projected in years 2016 through 2021, a six-year period, and that's assuming no change in interest rates from year-end levels. Pension expense, which impacts our income statement, is expected to total $2 million in fiscal 2015 and should slowly decline from that level going forward, assuming we hit our asset return expectations. We could accelerate the reduction in pension expense through voluntary contributions in the interim, which would also further close the funding gap. To wrap it up then, we had a great year in terms of business performance and also a year of substantial progress in improving our pension situation, which we've seen convert into a higher value for the company. Regarding our 2015 first quarter outlook, book-to-bill was about 94% in the fourth quarter. In addition, as Pete mentioned, the first quarter is historically our weakest quarter due to seasonal buying patterns in material handling markets, and that was the case again this year, as we started out fairly soft in January. As a result, we would expect first quarter sales to decline somewhere in the 10% to 15% range from fourth quarter sales. However, we should show year-over-year sales growth as compared to the first quarter of fiscal 2014, and with lower pension expense and tax provisions, profitability should be higher than last year's first quarter as well. Quotation (16

[Peter M. McCormick:]

Thanks Marty. It certainly was a great year, and I want to thank all of our employees for their contributions to Magnetek's ongoing success. Turning to our growth initiatives in 2015, we remain focused on a combination of innovative product offerings, market share gains and entry into new markets. We see opportunities for growth in wireless controls and automation in our material handling business, as well as the continuing rebound of larger project work. We also continue to see growth in the use of our wireless controls in fluid power and smaller equipment applications. In mining, as I mentioned earlier, we are developing products for new mining applications beyond coal. While at the same time, we continue to work on product development activities that will position us for growth when the coal mining market rebounds. And finally, in our elevator business, we expect the continued focus on energy savings to be a driving factor in the growth of our elevator products. The Asia-Pacific market should provide additional geographic expansion opportunities for this business as well. So in summary, we continue to believe that through a combination of organic sales growth, reliable and consistent profitability and cash flow, and additional reductions in our pension obligation, we have great opportunities to continue to increase the value of the company for all of our stakeholders. Thank you for your attention. And now, we would be happy to take your questions.

[Operator:]

Thank you. We'll now begin the question-and-answer session. And we have Steve McManus from Sidoti & Company. Please go ahead.

[Steve J. McManus:]

Hey, everyone. Thanks for taking my questions.

[Peter M. McCormick:]

Good morning, Steve.

[Steve J. McManus:]

I guess my first question is regarding the wireless control market within the fluid power industry. Have you had any success so far? Is this a new market or I guess just provide a little color on that?

[Peter M. McCormick:]

Sure. Well, we entered what we call the mobile hydraulic market or the fluid power market a few years back. So historically, Magnetek had not been in that market. But as we continued to develop products, we came out with products for that market and we've been making some headway there. We now have some meaningful market share there, but it's still relatively small compared to the market. So I think we have a lot of room for growth in that market.

[Steve J. McManus:]

All right, that's great. Thanks. And also there was a – in the fourth quarter, there was a pick-up in the renewable energy segment, which was a bit of a surprise. Can you talk a little bit about that and what drove growth during the quarter and what you expect I guess going out into 2015?

[Marty J. Schwenner:]

Steve, this is Marty. Yeah, we had a fairly strong quarter in terms of the parts sales for the installed base of wind turbines that are currently operating. As I think most people know, we withdrew from new developments in the market a couple of years ago. So, there is no ongoing development expenses and really no ongoing selling expenses, and we've written off the fixed assets and a good portion of the inventory. But what's happened is we do receive from time-to-time spare parts orders from the operators of the wind farms. And in the fourth quarter, we did about $1 million worth of those parts sales at fairly healthy margins. But it's hard to gauge when we're going to get orders and what the magnitude might be, but we are generating some pretty healthy margins. Just to put the $1 million into perspective, for the full-year, we did about $1.7 million of revenues. So, the majority of that was in the fourth quarter. I think today, our backlog is probably around $300,000. So it's a little bit of a lumpy business, but it's turned into a nice opportunity for us.

[Steve J. McManus:]

Okay, thanks Marty. That helps a lot. And then my last question, so with cash contributions to the plan kind of on hold for 2015, what are you guys expecting on directing excess cash at?

[Marty J. Schwenner:]

I think we don't really see the need to immediately change our business model or change our portfolio of products. As I think everybody is aware, we've been putting a fairly massive amount of cash into the plan for some time now, and we closed the year at about $10 million. So I think what we'd like to do is maybe replenish a little bit of cash on the balance sheet, and we're currently looking at various resource allocation strategies. Required funding for 2015, as we said, we did that in 2014. So we're not looking at making any mandatory contributions. But one of the options for us would be to continue to make some voluntary excess contributions to the plan to try to narrow the funding gap further, put a little bit of cash on the balance sheet and perhaps allocate a little bit more to some may be longer term growth opportunities for the business.

[Steve J. McManus:]

Okay, great. Thanks a lot. That's all for me, guys.

[Peter M. McCormick:]

Thanks Steve.

[Operator:]

And your next question comes from Eric Gomberg from Dane Capital Management. Please go ahead.

[Eric Gomberg:]

Hey, congratulations on the strong quarter and the strong year.

[Peter M. McCormick:]

Thanks Eric.

[Marty J. Schwenner:]

Thank you.

[Eric Gomberg:]

It sounds like you had a couple of larger size wins in the quarter. And I think in the press release, you talked about looking at some larger opportunities. I'm just curious what, if any, margin differential there is kind of on the larger projects versus an average opportunity?

[Peter M. McCormick:]

Right. Well, first, you're correct. We're seeing more larger projects, which is great for us. If we go back a couple of years, that's really what had been lacking was the large project business. So, we're seeing a very steady bookings of these larger projects. And with the larger projects, there's a lot more engineering content. And so, yeah, I would say that that does help our margins with the larger projects. So, we do see an improvement there.

[Eric Gomberg:]

Okay. And you said that, with the lower pension expense, it should add I think something like $0.34 to 2015 results. Could you comment on the potential positive impact of lower taxes due to your ability utilize NOLs this year? What that should do to EPS?

[Marty J. Schwenner:]

Sure. I think if you look at the full-year, we booked a tax provision of $700,000 in 2014. And we did see that come down in the fourth quarter to around $100,000, and that might be the ongoing rate going forward from a book standpoint. Given the lack of the cash going into the pension, that of course represents a tax deduction for us. So I think the way we look at it is that our book pension expense and the funding amounts are converging around this $2 million to $3 million level for the foreseeable future. So from a tax standpoint, those items cancel each other out. So our book income is effectively our taxable income. And then as you're aware, we have significant net operating loss carry-forward tax assets that we can utilize to avoid the payment of nearly all taxes, with the exception of a 2% alternative minimum tax. So really our book income converts entirely to cash through use of the NOLs, so.

[Eric Gomberg:]

Okay. I don't know if you have this number in front of you, but I think most prognosticators expect interest rates to be going up at some point, whether in quarters or in years, but to be going up at some point in the U.S. Just wondering hypothetically, if interest rates went up 100 basis points by the end of the year, what that would do to kind of pension funding obligations and how that would – how if at all that would accrue to shareholders?

[Marty J. Schwenner:]

That's a good question. During 2014, Congress extended the pension funding relief, which really expanded the corridor around the 25-year average interest rate. So the near-term increases in rates don't significantly affect the funding amount, but it may have an impact on our book liability. We've said for some time that 100 basis points represented about $20 million to the liability. And with the new smaller plan that we have now, 100 basis points is probably more like $16 million in terms of the liability. That then has an impact on our future pension expense. We also put in place a slide (26

[Eric Gomberg:]

And then I have to dovetail into my last question regarding the PBGC. Given your historic significant free cash flow generation, that's essentially all gone to funding the pension liability, you talked about shoring up the balance sheet and perhaps investing in some growth opportunities. But kind of big picture for someone who has a multi-year view on Magnetek and the stock, how should we think about how management's thinking about excess capital over time?

[Marty J. Schwenner:]

I think we intend to be very thoughtful about our future cash allocation, and we're very aware and very cognizant of the fact that we've had a lot of people who've been invested in the company for a fairly long time. And while they've seen some fairly nice appreciation in the share price over the last couple of years, those that have larger positions may have some difficulty to unwind that position without moving the share price back down maybe significantly depending on those volumes. So we're aware of the fact that people have believed in the strategy and invested fair amounts of money, and we as management would not be opposed to some sort of a dividend allocation strategy in the future, if we were fairly certain that that was the best use of our cash and in the event that the terms of this waiver and so on would permit sort of a dividend or return to shareholders.

[Eric Gomberg:]

Okay, great. Thanks so much.

[Peter M. McCormick:]

Thanks Eric.

[Operator:]

And your next question comes from Justyn Putnam from Talanta Investment Group. Please go ahead.

[Justyn Putnam:]

Good morning, gentlemen. Thank you for taking my question.

[Peter M. McCormick:]

Hi Justyn, how are you?

[Justyn Putnam:]

Hey, good morning. Good morning. I just want to follow-up on the previous caller's question too. I guess first, Marty, can you give a little more detail about the discussions with the PBGC? Is that going well? Do you have any expectations for that probably getting rid of the way...?

[Marty J. Schwenner:]

Well, in terms of – I don't have any insight into the inner-workings at the PBGC and it's a governmental agency. They have demonstrated in the past, of course, their willingness to work with us by granting us the funding waiver initially. Where we're at currently is they've asked for documentation of all of the previous funding amounts that we've made to the plan, as well as some sort of forecast of what we see clearly with the future pension funding, but also what we see in terms of our business performance. So it's a work-in-process and it's a governmental agency and there's not always the same sense of urgency...

[Justyn Putnam:]

Right.

[Marty J. Schwenner:]

As there is in private industries (30

[Justyn Putnam:]

Right. But you feel like you provided them with all the information they've asked for and now you're just waiting to hear back?

[Marty J. Schwenner:]

Yeah, it's an ongoing dialogue. They asked for things, we provide things. They ask for a few more things, we provide those things. But I think our relationship is solid over there.

[Justyn Putnam:]

Okay. And then, Pete, I'd like to ask you a question about that too since you're Member of the Board and maybe can give us a little bit of insight in the Board's perspective on paying down the pension plan further. What are the advantages that you see of doing that as opposed to other capital allocation strategy? I know your plan is no longer at risk (31

[Peter M. McCormick:]

Right. Well, okay. Well, first of all, I wouldn't really call it a Board issue. The management, that's our job is to manage the business, and so that's what Marty and I look at. Obviously, we review with the Board what our strategy is and what we're looking at. And frankly, for the last four years, we've been trying to get ourselves in a better place so to speak. And I think that we've accomplished that. Now, we have a lot more options. If we look at what we've contributed towards the pension, most of our free cash flow's gone towards that over the last four years. So here we are, now we've taken some pretty aggressive actions this last year to work down the pension, lump sum some of the participants out, contribute some stock. Now, we got the number to where I would call it a – the liability is a relatively small number compared to where it's been. So now, we have more options and we're looking at that. And one of the things that we accomplished is that we technically do not have to make a pension contribution for the foreseeable future. That's the first time we've been in that position for a long time. So now it becomes something if we choose to do it, we can. I think we're in the evaluation phase of what makes sense. And so, I don't – I wouldn't rule anything out. But right now, we're looking at, well, should we – there's nothing wrong with actually generating cash and having cash on the balance sheet either. So, I think we're looking at what makes sense for us as we go forward.

[Justyn Putnam:]

Okay, okay. All right, thank you for that perspective.

[Operator:]

And we have no further questions at this time. I'll now turn the call back over to Lynn Bostrom for final remarks.

[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. Thank you for participating, and you may now disconnect.