Columbus McKinnon Corp (CMCO) 2007 Q2 法說會逐字稿

Good morning and welcome to the Columbus McKinnon Fiscal 2007 Second Quarter Earnings Conference Call. At this time all participants are in a listen only mode. Following the presentation we will conduct a question and answer session.

[OPERATOR INSTRUCTIONS]

Now, I will turn the meeting over to Mr. Timothy Tevens, President and CEO. Sir, you may begin.

Thank you, Candy.

Welcome, all, to the Columbus McKinnon conference call this morning to review the results of our second quarter of fiscal 2007. Earlier this morning we issued a press release and our second quarter results. With me here today in Amherst, New York is Karen Howard, our Vice President of Finance and Chief Financial Officer; Derwin Gilbreath, our Chief Operating Officer; and Joe Owen, our Vice President of our Hoist Group.

We do want to remind you that this press release and the conference call may contain some forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. These statements contain known and unknown risks, and other factors that could cause the actual results to vary. You should, in fact, read the periodic reports that CMCO files with the SEC to be sure you understand these risks.

Overall, our revenue for the second quarter exceeded the same quarter last year by over 7%, the bulk of this being volume-related. This continued to be driven by a very strong general industrial economy around the world. As you will hear shortly from Derwin, we have made strides in reducing our large backlog in orders. We have more work to do in this area, especially in certain divisions, but we believe we are well on our way to correcting it.

Our bookings in second quarter continued the trend of being in the mid to high single-digit area. Gross margin was up 11%, and operating income increased 21%, leading to an operating leverage of almost 30%. And net income was up $5.1 million, or 57% over last year's pro forma second quarter -- a very nice result.

Revenue for the Product segment in the second quarter was up 7% compared to the same quarter last year, and up slightly compared to the first quarter of '07. The increase from last year is primarily driven from increased demand from the end-user markets through our various distribution channels, as well as some price increase. International sales were up over 7% as well.

The Product segment gross profit was up 16% over the same quarter last year, and gross margin was strong at 29.4%. Operating income was up 34%, and the operating margin was very strong at 13.2%. The operating leverage continues to be very positive for the Product segment at 52%.

Bookings for our Product segment continue to be positive in the quarter and, overall, were up about 9% over the same quarter last year. Backlog was down $3.5 million compared with T1. As you know, the cycle time on most of the items in our Product segment is in days or weeks. Therefore, the backlog number represents about 5 weeks worth of shipments.

The Solutions segment sales were up about 8.2% from the same quarter last year, and down about 18% compared with the first quarter of this fiscal year. Recall that this segment can be and is volatile in terms of quarterly revenue because of the nature of bookings and processing large contracts.

Gross profits were down 55%, compared to last year, and down 58% from the first quarter of 2007. Operating income was down substantially in both comparisons. Backlog is also down to $4.4 million, as we have processed the backlog that was present at Univeyor, our Danish material handling Solutions business, which represents the largest part of this segment.

We did have some unique issues in processing a project in Europe. A supplier of software was unable to deliver their portion of the project, and as a result an overrun occurred. This is a fairly unique situation that will correct itself over the next one to two quarters. When combined with the fact that they have not booked a substantial order for many months, and the normal flow of standard product sales have not occurred, we have produced unsatisfactory results in this segment.

We do have some good news to report. We have booked over $6 million, U.S. dollars, in new orders at our Univeyor business in the first weeks of October and are working hard to correct the shortfall and would expect that to happen in the next couple of quarters or so.

One critical focus for our Company, as you all well know, has been the reduction of debt. Funded debt net of cash is down to about $152 million at the end of the second quarter, and as Karen will report in a moment, we have also been able to repurchase an additional $3 million at the 10% notes from the open market in October. We have achieved a 40% net debt to total capitalization at this point.

With that, I'll ask Karen to comment on the financial results.

Thank you, Tim, and good morning everyone. I am pleased to have the opportunity to review some of the financial highlights of Columbus McKinnon's fiscal 2007 second quarter and past year that ended on October 1.

Consolidated sales increased by 7.1% to $144.2 million in the second quarter of this year compared with last year's second quarter. Product segment sales, which accounted for approximately 89% of total sales for the quarter, increased by $8.4 million, or 6.9%, with strong double-digit sales increases in several major core product groups, including hoists and cranes.

Orders were solid in nearly all categories and especially strong for more capital-type equipment, such as engineered hoists and cranes. Accordingly, volume contributed a 5 percentage point increase for this segment over last year. Further, pricing and foreign currency translations favorably impacted the change by approximately 1 percentage point each.

Solutions segment sales increase $1.2 million, or 8.2%, compared with the second quarter of fiscal '06, with nearly all businesses contributing to the increase in this segment.

On a year-to-date basis, consolidated sales increased $15.3 million, or 5.6 %, over last year. Product segment sales were up 5.2%, and Solutions segment sales were up 8.7%.

The Company's quarterly sales pattern assuming a period of consistent economic conditions, typically shows sales strongest in the fourth quarter and weakest in the third quarter, with either the first or second quarter placing second and third, generally depending on the number of shipping days in them. The recent quarter had 63 shipping days, the same as the first quarter of this fiscal year.

While Product segment order activity is typically softer through the summer months of July and August, this is favorably impacted by shipments from backlog during the fiscal second quarter, resulting in a modest increase in Product segment revenues over the first quarter of fiscal '07.

Looking forward to the upcoming third quarter, it will have four fewer shipping days than the quarter just ended, and one more than the year-ago quarter. Included in the press release is a table showing the number of shipping days in each of the quarters of fiscal '07 and fiscal '06 for your reference.

Reviewing gross profit -- consolidated earnings leverage added $0.41 to gross profit for every dollar of incremental sales this quarter, compared with the prior year. Overall, consolidated gross profit increased $3.9 million, or 11%, with the Product segment contributing $5.2 million and realizing gross profit margin expansion of 230 basis points year-over-year to 29.4%.

Product segment gross profit as a percent of sales was higher than last year's second quarter due to better product mix and productivity improvement. The gross profit margin in the Solutions segment of 7.4% in the fiscal 2007 quarter, compared with 17.8% in the fiscal 2006 quarter, reflects weakness in our powered roller conveyor business, which was due to the lack of a significant overriding contract to cover fixed production costs, weak orders of package solution products, and unfavorable performance on a particular contract.

The good news is that quoting activity continues to be high, and over $6 million of orders are received in October thus far. It is believed the segment profitability performance of this magnitude is behind us.

On a year-to-date basis, consolidated gross profit is up $9.6 million, with gross margin expansion of 190 basis points to 27.9%. Consolidated selling expense as a percent of sales was 10.2% in the second quarter, up from 9.7% last year, due to increased investments in both domestic and international markets in accordance with our strategic growth initiative.

On a year-to-date basis, consolidated selling expenses followed a similar pattern at 10.3% of fiscal 2007 year-to-date sales, compared with 9.7% for fiscal 2006 year-to-date.

Consolidated G&A expense was 5.9% of sales in the second quarter compared with last year's 6.3%. This year's G&A reflects additional costs for our international expansion activities, new product development, and personnel training, offset by lower variable compensation and other expenses. Year-to-date G&A expenses were relatively consistent year-over-year at 6.1% of sales. Restructuring charges for the second quarter of fiscal 2007 reflect a benefit of $0.4 million relating to a gain on a sale of real property this quarter and the reversal of costs previously accrued, both relating to a facility that was rationalized in a prior year.

With operating income increasing by $2.8 million or 21.4%, our operating margin improved to 11.2% for this year's quarter, compared with 9.8% last year. A consolidated operating leverage contributed $0.30 to income from operations for each incremental sales dollar in the quarter. On a year-to-date to basis, operating margin expanded 150 basis points to 11.6%, realizing $0.39 of operating leverage over the prior year. With steady revenue growth, we see further sustainable opportunity for operating leverage in the 20% to 30% range.

Interest and debt expense is down $2.5 million over the prior year quarter and $4.7 million year-to-date due to lower debt levels. Knowing that we continue to focus on debt reduction, we further reduced out 10% notes by $3 million of open market purchases in October 2007, which will save us an additional $0.3 million of annual pretax interest expense going forward.

Other income and expense of $1.1 million of expense this quarter includes investment returns and interest income, as well a $0.4 million gain on the sale of excess land. The fiscal 2006 charge of $1.9 million includes several items. It includes $3.3 million of charges relating to our subordinated debt refinancing activities, partially offset by a $0.5 million gain on a sale of excess real estate and a sale of $0.7 million investment returns on our captive insurance company assets.

On a year-to-date basis, the fiscal 2007 charge of $2.5 million included the second quarter benefit previously noted, $0.9 million of investment returns and interest income, and offset by $4.6 million of financing costs. The year-to-date fiscal 2006 net charge of $1.1 million included the second quarter charges previously noted, offset by $0.6 million of investment returns.

Regarding income taxes, the effective tax rates for the fiscal 2007 second quarter and year-to-date were 37.7% and 40.4% respectively. The year-to-date rate was unfavorably impacted by the first quarter non-deductibility of incentive stock options expense associated with the adoption of FAS 123(R).

On a go forward basis, our expectation is for an effective tax rate in the 38% to 39% range, which will include a non-cash portion relating to the utilization of U.S. federal net operating losses or NOLs. The NOL carry-forward currently amounts to approximately $61.5 million. The effective tax rates for the fiscal 2006 second quarter and year-to-date were 36.1% and 24.6% respectively, favorably impacted by the reduction in reserves for utilization of our NOL carry-forward, which was fully reserved at that time.

At the end of fiscal 2006, we reversed the valuation allowance against deferred tax assets, including the NOL. Accordingly, while the NOL still remains, it no longer impacts the resulting effective tax rate. Furthermore, the cash tax payment savings for U.S. federal tax will continue to be available until the NOL is fully utilized.

Earnings per diluted share for the second quarter of 40% compared favorably to last year's $0.21, reflecting 110% improvement. Removing the refinancing costs and adjusting for a comparable effective tax and shares outstanding results in fiscal 2006 pro forma non-GAAP EPS of $0.28, comparable to this year's $0.44 or a 57% improvement.

Year-to-date actual EPS of $0.73 reflects an increase from last year's $0.70. Upon removing the financing costs from both periods, the FAS 123(R) adoption expenses from fiscal '07, and adjusting for comparable taxes and shares outstanding in fiscal '06, the fiscal '07 year-to-date pro forma non-GAAP EPS of $0.93 compares favorably to the fiscal '06 year-to-date pro forma no problem EPS of $0.57 or a 63% improvement.

Depreciation for the quarter was $2.1 million, while last year's was $2.3 million. On the year-to-date basis, it was $4.1 million compared with $4.5 million last year.

Capital expenditures for the second quarter were $2.4 million, with $2.1 million in the fiscal 2006 quarter. Year-to-date CapEx was $4.3 million, with last year being $3.8 million. The spending included investments in our new product development activities, our growing low-cost international facilities, productivity improvement equipment, as well as normal maintenance CapEx. We continue to expect capital expenditures to be in the $8- to $10 million range for fiscal '07.

Net cash provided by operating activities was $10.2 million in the quarter, with earnings contributing $16.1 million, offset by operating assets and liabilities utilizing $5.9 million. Inventories used $4.9 million in cash, primarily due to timing of purchases and production-related activities. We have continued to focus attention on our working capital management and believe these working capital increases to be temporary in nature.

At quarter's-end, debt net of cash was $151.9 million and total gross debt was $176.1 million. The quarter-end availability on our $75 million revolver, provided for under the senior credit agreement, was $64.1 million, representing $10.9 million of outstanding letters of credit and nothing drawn against the revolver. We were comfortably in full compliance with all financial covenants related to this agreement.

While our strategy emphasizes profitable sales growth with international expansion, it continues to include focus on debt and interest expense reductions to further improve our profitability and provide capital structure stability. During the quarter, net debt decreased by $11.6 million, reflecting continued improvement in our net debt to total capitalization percentage to 40.4%. Gross debt to total capitalization improved to 44% at the end of the quarter, down from 75% a year ago.

We're next targeting a corporate debt rating of BB or better. Ultimately, we're targeting a sustained 30% to 40% debt to total capitalization ratio, with an investment bank grade rating to give us flexibility to support our growth strategies.

With that, I thank you and turn it over it to Derwin.

Thank you, Karen, and good morning to everyone.

The second quarter continued a solid year performance for Columbus McKinnon, both domestically and internationally, with bookings for the quarter up 9% and sales up 7% compared to last year.

Domestically, sales continue to be strong through our channels, with some small specialty groups weak, such as consumer entertainment. In our view, continued expansion of new construction and maintenance activities in the energy and power generation industries is a key element for this growth and is expected to remain strong throughout the remainder of the year. Sales to rigging shops and catalog houses were also solid with 10% to 11% growth over last year.

Internationally, growth continues in Central South America, with sales for the quarter up more than 25% compared to last year, driven by the energy, mining, and basic raw material industry sectors. With an established infrastructure in place, sales growth is expected to continue to be strong in Latin America.

European sales were also up 22.4% and excluding exchange rates 18.6%. Both domestically and internationally, energy and public [work] infrastructure construction is expected to remain strong with both global energy consumption and prices expected to continue to trend upward in the long run. With the focus on these high-growth market sectors, continued development of innovative new products, such as our recently launched FEM-rated wire rope hoists, expansion of our quick ship programs, and further reductions in backlogs, the sales outlook for the remainder of the fiscal year remains positive performance for McKinnon. And with the continued emphasis on market-driven, value-based pricing, and further manufacturing productivity improvements, profit margins are expected to continue to improve.

Relative to operations, we continue to focus on meeting customer demands, including reducing backlog. The activities, such as hiring more direct [Levbur] employees, are well under way and reducing backlog.

The Product segment backlog was down 5.9%, and in some operations where the backlog was the highest, it was down 12%. The backlog is highest in larger capacity equipment related to major projects, and in many cases, the equipment is not required for some time. For example, we received an order from [Fort Daniel] for $1.4 million, and it is on hold pending the progress of the new metals plant being built in Jamaica. We expect release in January and shipment to the site four to six months after that, which is when the equipment is required.

In this particular group, our backlog was up 15.5% last quarter, and they have almost no orders desired for customers sooner than scheduled. This is a positive type of backlog growth. It reflects the U.S. industrial production capacity utilization published by the Federal Reserve Board -- being over 80% for eight months now.

Most of our packaged products have their backlog in the range of normal, but our quest is to further reduce lead times, which will also reduce backlog more than the current levels. We are now planning our capacity, so we have more flexible capacity for peak demands.

Last quarter I reported we reorganized most of our Product segments from a matrix organization to a business unit structure in North America. This new structure is helping us to more adequately address our Company-wide strategic plan by allowing our entire business to focus on customers, both channel partners and end-users.

This quarter we have strengthened our European operations by promoting two of our best senior European managers. One will be in charge of growing emerging markets and focus more on places like Poland, Hungary, Africa, Turkey, and Russia as examples. We have been quite successful to date with this growth. We are substantially increasing our focus on this type of market with this organizational change.

The second change was to promote a key manager to work on business development in Europe, with a focus on introducing other brands of products into Europe. For example, he will introduce across Europe our new wire rope designed to the European standard. These two changes will make a significant difference in our European potential for growth.

Speaking of the FEM-designed wire rope hoist, it continues to be a great success, surpassing our expectations in sales. And at the same time, we've been able to reduce lead times to one to two weeks. Additionally, we have just introduced the next size ranges, 15 to 20-tons, and received orders for six units in the first few days of the introduction.

Turning to inventory growth, it has been all in raw material with the exception of some inventory for new products. Some material has been purchased to void a known price increase. Some has been purchased because of longer steel lead times and availability of supply, some purchased from China due to a shortage several months ago, and some to respond to the surge in demand for larger capacity equipment. Plans are in place to reduce part of this increase, but inventory turns will be in the five to six range, as they were last year.

Finally on operating leverage, our operating leverage continues to be strong at $0.30 growth in operating income for incremental sales dollar over the quarter last year. The Product segment, however, was very, very strong at 52% versus the Solutions segment, which was obviously negative, an issue we certainly will fix.

Thank you. I now will turn it over to Tim.

Thanks, Derwin. Okay, Candy, we're open for questions at this point.

[OPERATOR INSTRUCTIONS]

Thank you. We have our first question from Joe Giamichael from Rodman and Renshaw. Your line is open.

Good morning, everyone.

Hello, Joe.

Hi, Joe.

Congratulations on the quarter.

Thank you.

Just a couple quick questions -- can you do the $1 million other income item? There was a benefit there. Can you just walk through what that was exactly?

Sure -- excuse me. It was predominantly investment returns on our investments held by our captive insurance company and interest income on our cash, as well as a $400,000 gain on the sale of some excess land that we had.

Got it, okay. That's perfect. And then I just wanted to touch on the working capital situation. You did a decent job explaining that you think that you'll be working that situation down. You've been building the inventory for the last two quarters. I can assume we should see a benefit from that on the cash side over Q3 and Q4?

Yes, that's our plan, specifically, as Derwin mentioned, in the inventory area.

And as you -- you're at the 40% debt to cap. I assume the 30% is still sort of your target area, and you'll still be looking -- continue with the debt repayment?

That's right.

Okay, great. Good quarter and thank you very much.

Thank you.

Thank you.

All right. Thank you, and next Mark Grzymski with Needham and Company. Your line is open.

Good morning, everyone.

Hello, Mark.

I just want to look at the Product segment here, and gross margins were strong in Q2, obviously a little weaker than Q1. I'm just curious what the outlook is for that segment given the raw material that you say you've been buying. I'm wondering if that's going to impact margins. Do you see things improving? Or the margins there, did they -- did we peak in Q1?

Well, Q1 is our second strongest quarter normally. So I think that historically speaking, we'd see a little better margin in Q1 over Q2, Q3, and then Q4, as you well know, Mark, is the strongest quarter we have. So I would expect gross margin to hover in the area that we're in now between Q2 and Q1.

Okay.

I mean Q3 -- having said that, very quickly Q3 might be a little weaker because of the lack of shipping days.

Okay, okay. Now, that makes sense. And then kind of moving to the Solutions and touching on the same thing there. I know there was some events there that impacted Q2, and you did talk about improvements in the upcoming quarters. I'm just kind of curious. With that, obviously, you can't tell us where your revenue projections are there, but what happens to margins here if you're still around the $15 million range?

We would expect margins to improve from Q2. obviously, we were very disappointed in the results this quarter, and it's specifically related to the Univeyor, which is the biggest portion of this Solutions segment at 70% or 75% or so of the volume. We think most of the pain is behind us there. We had one project that -- a very unique project I might add -- that went kind of haywire on us.

That wasn't the biggest problem. The biggest problem was the timing of bookings. They have a pretty robust quotations activity going on right now, but they just haven't been able to capture the orders as quickly as they would liked to overcome the fixed cost structure they have there. The good news is they're starting to flow now, and as I mentioned in October, we're seeing a pretty good volume come through. As a matter of fact, they were over budget in October.

But if the volume stays in this area, as you say -- let's say the $15 million area -- we would think that we would be back to a normal level of margin for this business -- back into the operating income of, I think, 4% to 5% is kind of normal for that.

Okay, okay, great. Now, have you send lead times in that area kind of push out a little bit? Or is it really just a -- are you really being just hurt by that one customer?

It's actually lack of orders and the one customer, and lead times are about the same.

Okay, okay. And then, Tim, just -- and Derwin and Karen maybe -- just kind of macro, if you could give us your view here domestically. I know there's a lot of skepticism out there in certain aspects of the industrial economy. Just curious where you're seeing some softness and where the most strength is, outside of those that you've already mentioned?

I think we still see bookings at a pretty high level, generally speaking, across all areas. Mid to high single-digit is kind of the area that we've been in for a while now, and we've continued to be in that area. I will talk about the strongest area seems to be in the capital side, believe it or not -- the large cranes, large wire rope hoists. The high dollar, high-ticket items seem to be extremely hot and continue in that area, we think, anecdotally, driven by energy, oil activity, power plants, people who would need to lift heavy loads, typically that would be buying.

That seems to be extremely robust, and we don't see it slowing. I'm looking at Derwin right now, and he's saying, 'Oh, we're not seeing a slowing,' so we're kind of in that camp.

Yes, I think a backlog of companies servicing that industry are obviously growing at really robust rates, so I guess that's just to confirm that.

Yes.

Yes. All right, great. Thanks, and good quarter.

Thanks, Mark.

All right. Thank you, and I have Shannon Mikus with Credit Suisse. Your line is open.

Hi. Can you talk a bit more about how you see the non-U.S. markets? What are the strongest areas that you're seeing? And maybe you can talk a bit more about your strategy internationally, including the recent promotions and appointments you've made in Europe.

Oh, good. Thank you. We do like to talk about international markets. It's actually been one of our strategies for quite a while now, and we're been growing that segment of our business quite nicely. I'd say that generally speaking, around the globe things seem to be pretty positive, pretty robust. Our Latin America business, from Mexico into Brazil, seems to be doing very well. Brazil is -- it was started there four or five years ago, and that continues to grow at a nice, solid double-digit pace for us.

Europe is very sound, very, very solid for us. The way we grow in Europe, and have grown over the years, is we expand by exporting, initially, into the market. And then we -- once we grow the business to a reasonable level of demand, we then put in place a sales force and support that sales force with a warehouse in the market, in the country that we'd be selling to. And that has worked well over the last 20 years or so we've been doing it. And that continues to be our strategy going forward.

And that's, in fact, why one of the key managers that Derwin mentioned, we've actually promoted him to do nothing but focus on those emerging markets and/or new markets to us. Italy, by the way, is -- would be a new market to us, where we would export to it and have been, and now we're looking to put -- set up our own shop in Italy, as an example, right now. And he is focused entirely on that.

Another fellow, who we've promoted, is going to be focused on bringing more product breadth to Europe. Our European colleagues do a great job with the product offerings they have. Typically that strategy has been a Western-designed line of products, mostly manual hoists that are manufactured in our Chinese locations, and then exported into the market and sold through this distribution channel that they have established over the last 20 years.

That's worked well for us, but now we want to enter into powered products and a whole line of other lifting tools that we have in the states that we would want to sell through that great distribution channel that they've established. This fellow -- this other fellow is dedicated to introducing that line of products into the Western European markets and making sure that we market and sell those products in a broader way. So that's kind of a second bump, if you will, of revenue that we would be looking for in the future.

Relative to the Far East, today we export into that market. We do have three -- excuse me, four plants in China that predominantly export back to the States, back to Latin America, and back into Europe. We sell a little bit in the Far East, but one of the things we want to do is sell more into that market. So we're in the process and have added some salespeople to sell there. It's an organic growth. It's a slow go for us. We have to actually set up salesmen in each individual market in China, which, if you think about the individual cities, that's kind of the approach that we're taking to grow that area.

Korea has always been a strong market for us in terms of exports, and we have a salesman that's dedicated to that area right now, as well as the other Asian tigers, we penetrate through a direct sales force that calls on those markets today. So we continue to invest in the sales force. We continue to invest in locations and people to sell our products around the world, and you'll see more and more of that going on.

Great, thank you.

Thank you. Your next question -- Peter Lisnic with Robert W. Baird. Your line is open.

Good morning, everyone.

Morning, Peter.

Morning, Peter.

Tim, can you just maybe give us some more color on that one project that's Solutions. I'm just wondering if it's -- it sounds like it's not a structural issue. But just wondering if we could get some more --

Sure.

-- more color on it.

Sure. It's a project that we've -- a similar project we've done before, and we have a supplier that actually writes code to run some of the systems that Univeyor makes the hardware for. The supplier -- we've worked with this group of engineers, software engineers, for a number of years. They historically have performed very well for us, and this one project, they did not perform very well, quite honestly. And they were unable to design, write the code, sufficient to get the productivity levels up of our equipment to the point where we had to relieve them and hire another software company to help us get to that level, which we did.

And of course, we had some additional costs. We've passed those costs on to our supplier, and the supplier's apparently in other problems, has other difficulties, and they're on, what I call the brink of bankruptcy, because of this project, as well as possibly others. So it was something very unique for us, very different. We typically do a pretty good job of selecting our software -- our suppliers. In this case, we had this fellow that worked with us before and did a great job and then somehow failed to perform in this one case.

Okay.

I think it's not structural. I think you're right on, Pete. I think it's more of a one-time blip that we need to get behind us.

Okay. Now, that explains it. Thanks. Thanks on that one. And then if I could ask the -- kind of your working down backlog or labor initiatives -- just one, are you concerned at all that you potentially could be losing some shares as other competitors are able to fill orders faster? Is that an issue?

I don't think so. I'll have Derwin comment on that, but that's not our sense right now.

I don't think so. I mean, we, you know, we -- for example, in the plant that we have the largest backlog, that's coming down the slowest, which is in the heavier equipment, so forth, our market share for this first half of the calendar year is unchanged in dollars and, in fact, is up in units. And that's where we have the biggest backlog. I don't know what it was for last quarter, because the data's not published yet. It's usually a quarter of lag before all that industrial data comes in.

Okay. And then during your comments, you also mentioned something called a quick ship program, which either was new to me or I forgot about, but what exactly is that?

We have several groups that have quick ship programs where we deliver very, very quickly -- you know, 24 hours, 48 hours -- and some groups like in Duff Norton. It's a different group, and they have one-week programs that are best in the industry. And so we've started to introduce more of these, and our coffing group has just started advertising the programs that they have. And so we're just trying to be very, very responsive to the marketplace.

And that's the result of kind of leaning out the operations and the businesses, and I'm just -- is there some sort of positive margin impact that you ought to be able to get from that?

Well, certainly, if you generate more sales, we'll have more margin. We do have one of our smaller business units that actually charges a couple of percent premium for the quick ship program, and they get the money. But it's a small group.

I think generally speaking, our lean process has allowed us to pull orders directly from the lines to ship to customers. And this is not what you would consider to be large orders. These would be one, two, three hoist kind of quantities, but someone needs them quickly.

Okay.

It's more of a competitive positioning than anything else, I think.

Okay, all right. Fair enough. And then one last question -- if you could just maybe give us a timetable of what the FEM product look -- FEM product launch looks like. We've got the 15 to 20 coming out now. What's next on the agenda?

The smallest size, the one to three-ton, is coming out this spring.

Okay.

And that will give us a one to 50-ton range, and that would probably be it for that product line.

One to 25 -- the 25.

One to 25 will be done. When's the 50-ton coming out?

We don't have that scheduled right now.

Okay. So it will be one to 25-ton will be done.

Yes, it's in the design phase at this stage.

The 50-ton is?

Right.

Okay. All right, that does it for me. Thanks very much.

Thanks, Pete.

All right, thank you. Next, [John Everidge] with Ironworks Capital. Your line is open.

Thanks. A couple unrelated questions I'd like to ask separately. First, could you repeat what the NOL is and what the kind of normalized book tax rate I should think about using in this quarter, net the non-recurring things like the restructuring charges and gains on real estate and stuff like that?

The NOL, John, carry-forward, at the end of the second quarter that we just ended, was about $61.5 million remaining.

Okay.

The effective -- the normal effective tax rate, our expectation is to be in the 38% to 39% range. Actually, for this quarter it was just a touch better than that at 37.7%, really just due to a mix of different jurisdictions.

Okay. And then the second question is -- and I apologize if you covered this already. I've been bouncing around between calls. But could you just talk a little bit about working capital and cash flow, free cash flow, if you will, goals for the Company near-term and longer term and the usage for that cash? It just looked like that year-over-year wasn't as good as cash flow from operations period as a comparison -- a lot of it sucked up by inventory and little bit by unbilled. But I just wondered if you could talk about if that's an opportunity for better cash production in the near quarters?

Yes, you're absolutely right. Our target, our longer-term target, is 15%, as we stated -- 15% working capital as it relates to sales. And we were pointed to that area and actually getting into the 17% area in the last year. Now, we've spiked a little bit, predominantly because of inventory. And I would say that our inventory is up for the reasons that Derwin had mentioned, predominantly buying raw material in advance of some price increases and actually stocking up a bit to meet demands.

Our expectations are that inventory is going to flush through and that our inventory churns will be closer to the five to six area, which is what we've normally been in, and working capital, as the result, will come down from the 20-ish % that we're in right now, in closer to the 17%, 18% area, is what our expectations are.

Perceivable bounce really depends on when the shipments occur and the timing of the collections. But generally speaking they're generally in the 58 to 60 days outstanding normally. So I think our expectations are short-term, let's say the next quarter or two, would be to push back into that high-teen area, as it relates to this percent of sales -- working capital as a percent of sale, and then longer term, next year or two, pointing towards the 15%.

Right. Thank you very much.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

All right, thank you. At this time, sir, we're showing no questions.

Thank you, Candy.

Let me summarize by saying our strategy is to leverage our superior material handling and engineering know how to continue our leadership in the U.S. markets are we expand our global presence. Our market share growth will be built upon new products designed specifically for the various market needs, incorporating our high quality standards and service support. I want to thank all of our Columbus McKinnon associates around the world for the hard work and ultimate success in making this quarter a pretty good number.

We continued to experience strong growth in bookings and revenue from our distribution channel partners who have experience growth from the broad end-user markets they serve. With the increase in revenue, we continue to see strong operating leverage, driven by the cost restructuring we have done in the last several years. We maintain our strong market position in domestic markets and have penetrated new markets around the world.

We believe we will continue to perform well but all need to recognize there are some issues in the world markets that could have an impact on the improvements we have seen to date. I think you all know about the geopolitical instability energy costs, although they have come down nicely short-term here. Interest rate increases, health care, product liability, and regulatory costs certainly have had an impact on Columbus McKinnon and might in the future.

We continued to drive lean concepts across our businesses, as this process has proven that we can continuously improve our operations around the world. We'll also continue to invest prudently in new markets and products to protect our market share in the U.S. and grow sales internationally to keep Columbus McKinnon's position as the leader in the material handling industry.

Again, I want to thank all of our associates for their efforts to make CM that leader. As always, we appreciate your time today. Have a good day.

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