Columbus McKinnon Corp (CMCO) 2009 Q2 法說會逐字稿

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  • Operator

  • Welcome and thank you for standing by for the Columbus McKinnon quarterly conference call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS.) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

  • Now I'll turn the meeting over to Mr. Tim Tevens, President and CEO of Columbus McKinnon. Sir, you may begin.

  • Tim Tevens - CEO

  • Thank you, Christina. Good morning and welcome to the Columbus McKinnon conference call to review the results of our fiscal 2009 second quarter. Earlier this morning, we issued a press release with the corresponding financials. On the call today is Karen Howard, our Chief Financial Officer, and Derwin Gilbreath, our Chief Operating Officer.

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

  • We have made a significant step forward in executing our strategic plan with the acquisition of Pfaff earlier this month. We have also have a very strong balance sheet with about $29 million in cash. This is after the Pfaff acquisition and an untapped revolver that is available to support us in the event of an economic downturn.

  • I will remained you we are considerably stronger today than we have ever been, especially when comparing us to the last economic downturn of '01 to '04. We have only long-term debt in place today with approximately $100 million of net pro forma with Pfaff acquisition, compared to 2000 when we had $400 million. I think many of you know that we have weathered significant storms in our 133-year history and we'll certainly weather this one as well; but this time, unlike the last downturn and others, from a position of strength. We will continue to be mindful of investments and we'll be tempered by these economic conditions.

  • As an overview here, Columbus McKinnon performed very well this quarter notwithstanding development of commodity and currency markets, as well as impact on our business and Gulf Coast area that was negatively affect by Hurricane Ike. Just as a reminder, the Pfaff acquisition that I just spoke about that we announced on October 1 does not affect the second quarter results. Our revenues outpaced the same quarter last year by almost 7% -- actually, 6.7%. However, we were unable to ship or deliver certain services or products for about one to two weeks in September as a result of Hurricane Ike. Our facilities were without power for a week or so, and our service technicians were unable to service our hoisting cranes for a similar period of time.

  • Additionally, we are unable to secure open top ocean going containers for certain international shipments. Theses effects negatively impacted our revenue in the quarter by about $2 million or 1.4%. Certainly we have recovered in October and many of those are up and running and doing fine just now.

  • Sales outside the United States grew to over $50 million, up nearly 11% over the same quarter last year, including about 5% of volume growth. For the quarter, international revenue represented a third of our total revenue. Looking forward, we believe the Pfaff acquisition will increase the percentage to about 40%. Our gross profit was up 9.5%, but down 170 basis points as conditions were negatively impact by that Hurricane Ike that I mentioned earlier, as well as an incredible spike in cost of raw materials. As we have done in the past, and for the last several years, as many of you know, we have expected and planned for an increase in raw material costs.

  • But in this quarter, we did not expect the rapid and significant rise in steel and other commodity prices, especially in the latter half of the quarter, in particular September. We now see commodity prices retreating to a lower and certainly much more manageable levels; in fact, levels that we have experienced early in the first part of the second quarter. As a result of the impact on gross margin, our income from operations was down about 4.5% this quarter. Once again, we were very pleased with the strength of the Company's liquidity in terms of cash availability. and an open revolver of $75 million which Karen will touch on in a moment.

  • However, having said that, you should know that we are actively preparing for potential and significant downturn and its impact on our company, given the current condition of credit markets and the corresponding impact on the global economy. We are planning for the worst and hoping for the best, but regardless of the severity of this downturn, we will be prepared. Bookings for our business remain solid in Q2 and overall, we're up again in the mid single-digit area over the same quarter last year. Backlog was up slightly as you can see from the first quarter, and as -- just as a reminder to you all, this backlog represents four to five weeks or so worth of shipments.

  • Cash from operations was strong in the quarter at $19 million, and funded debt to cash was down to $51 million at the end of the quarter. Please remembering again that when we acquired Pfaff, the European-based material handling company for $53 million in cash on October 1, our position has been decreased by about this amount since the beginning of the third quarter. At the end of the second quarter, we were about 30% of total debt to capitalization, and this did not materially change upon the acquisition of Pfaff. And with this, let me just turn it over to Karen for a little more details on our financials.

  • Karen Howard - CFO

  • Thank you, Tim, and good morning, everyone. I'm pleased to have the opportunity to review some of the financial highlights of Columbus McKinnon's fiscal 2009 second quarter and year-to-date that ended on September 28, 2008. As a reminder, all the numbers reported here reflect our former Univeyor business as a discontinued operation, divested on July 25, 2008. And accordingly, the reported numbers relate to ongoing operations, unless otherwise noted.

  • Consolidated sales increased by 6.7% to $154.7 million in the second quarter of this year, compared with last year's second quarter. The increase is driven by strong double-digit sales increases reported by our Columbus McKinnon Europe group and mid single-digit growth reported by the rest of the business. Overall volume contributed a 0.3% increase over last year with international volume growing by 4.7%, but US volume declining by 1.7%. Unfortunately volume was negatively impact by approximately $2 million due to Hurricane Ike that hit the U.S. Gulf Coast region in September and deferred that revenue to October. However, pricing and foreign currency translation favorably impacted the revenue growth by 5% and 1.4% respectively.

  • On a year-to-date basis, consolidated sales increased $19.4 million or 6.8% over last year. 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. The recent quarter has 63 shipping days, consistent with the year-ago quarter and the next quarter will have 60 shipping days. Included in the press release is a table showing the number of shipping days in each of the quarters of fiscal '09 and fiscal '08.

  • Overall second quarter consolidated gross profit increased $300,000, or 0.6%, with gross margin contracting 170 basis points to 29.5%. The contraction was primarily due to two factors, as follows. First, our material freight and utilities costs increased quickly and dramatically during the quarter, particularly in September. Despite proactive and successful surcharge and price increase activities, we weren't able to react sufficiently to recover the full extent of those cost increases; unfavorably impacting gross profit by approximately a million dollars. However, we are relieved to have visibility on certain decreasing costs in our third fiscal quarter.

  • Secondly, margins in our crane building and tire shredder operations were unfavorably impact by revenue that had to be deferred to our fiscal third quarter due to the effects of Hurricane Ike which hit the US Gulf Coast region in September and a lack of ocean going containers. This $2 million revenue shortfall impacted gross profit by approximately $600,000. On a year-to-date basis, consolidated gross profit is up $5.5 million with gross margin contracting 10 basis points to 30.8%. Consolidated selling expense as a percent of sales was 11.1% in the second quarter, down from 11.6% last year given the higher sales level this year and a reduction in spending as compared with the first quarter of fiscal '09. On a year-to-date basis, consolidated selling expenses were 11.6% of fiscal 2009 year-to-date sales, compared with 11.3% for fiscal 2008 year-to-date.

  • Consistent with our growth strategy, we continued to make investments to further grow global market share. Consolidated G&A expense was 6.1% of sales in the fiscal 2009 quarter, compared with fiscal 2008's 5.7%. Year-to-date G&A expenses followed a similar pattern at 6.3% at fiscal 2009 year-to-date sales, compared with 5.8% for fiscal 2008 year-to-date.

  • During fiscal 2009, SG&A is expected to approximate 17.5% to 18.5% of sales, reflecting a modest reduction from previous estimates. However, we are prepared to adjust our actual expenses accordingly in the event that we experience a sales level different from that currently experienced. Driven by the gross margin contraction described above, operating income decreased by $900,000 or 4.6% with operating margin contracting 150 basis points to 12.1% for this year's quarter, compared with last year's 13.6%.

  • On a year-to-date basis, operating margin contracted 90 basis points to 12.8%. The restructuring charges reported this year relate to closure of one of our crane manufacturing facilities whose operations were consolidated into another existing facility, stating $1.2 million of fixed costs going forward. Interest and debt expense is down $200,000, or 7% over the prior year's quarter, and $1million or 13.7% year to date due to lower debt levels.

  • We realized $100,000 of investment losses on our insurance company assets this year and $300,000 of income in last year's quarter. Further, we recognized $900,000 of other income in this year's quarter including interest on invested cash, gains on a property sale, and net of offsetting foreign currency losses. Last year's $400,000 of other income included interest on invested cash. In last year's quarter, we incurred bond redemption costs of $1.4 million, or $0.05 per diluted share upon calling our remaining $22.1 million of 10% notes which saved $2.2 million, or $0.07 per diluted share of annual interest costs.

  • Regarding income taxes, the effective tax rate for the fiscal 2009 and fiscal 2008 second quarter were 35.9% and 36.6% respectively. On a year-to-date basis, effective tax rates were 35.8% and 37.1% for fiscal '09 and fiscal '08 respectively. This year's improvement is primarily due to changes in rates in certain international jurisdictions and improved mix.

  • On a go forward basis, our expectations are for an effective tax rate in the 35% to 36% range. As a result of the tax treatment of the univeyor sale, we have a tax benefit available to be applied against US cash taxes that would otherwise be due during fiscal '09. The remaining benefit at the end of September was $6.6 million.

  • Earnings per diluted share from continuing operations for the second quarter of fiscal '09 were $0.54 versus $0.51 in the second quarter of fiscal '08, reflecting an increase of 5.9%. Including the discontinued operations, earnings per diluted share for the second quarter of fiscal '09 were $0.55 versus $0.59 -- excuse me, versus $0.49 in the second quarter of fiscal '08, an increase of 12.2%. Year-to-date diluted EPS of $1.06 reflects a 7.1% increase from last year's $0.99.

  • Depreciation was $2.3 million and $1.9 million for the fiscal '09 and fiscal '08 second quarters respectively. On a year-to-date basis, it was $4.5 million, compared with $4 million last year. Capital expenditures were $2.9 million and $2.4 million for fiscal '09 and '08's second quarters respectively.

  • Year-to-date CapEx was $5 million for each year. 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 expect capital expenditures for fiscal '09 to be in the $12 million to $14 million range.

  • Net cash provided by operating activities was $19.2 million in this year's quarter, or $1 per diluted share, compared with $14.2 million in last year's quarter or $0.74 per diluted share. On a year-to-date basis, net cash provided by operating activities was $29 million this year, or $1.51 per diluted share and $23.9 million last year, or $1.25 per diluted share, representing a 20.8% increase. This year earnings contributed $35.4 million while operating assets and liabilities used $4.1 million and discontinued operations used $2.2 million.

  • Within working capital, increases in inventories were the primary users of cash. Last year, earnings contributed $36.3 million while operating assets and liabilities used $8.8 million and discontinued operations used $3.6 million. We continue to focus attention on our working capital utilization.

  • At quarter's end, debt net of cash was $51.1 million and total gross debt was $133.1 million. To effect the Pfaff acquisition announced on October 2, 2008, we used $53 million of available cash subsequent to the end of the second quarter. Pro forma after the Pfaff acquisition, we would have had $31 million of available cash, providing sufficient liquidity for ongoing operations, especially in light of the current global credit crisis.

  • Additionally, at quarter end, availability on our $75 million revolver provided for under our senior credit agreement was $64.2 million, representing $10.8 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, and it doesn't expire until 2011. While our strategy emphasizes profitable sales growth with international expansion, it continues to focus on capital structure stability which is serving us well especially in light of the current global credit crisis.

  • Gross debt to total capitalization was 30.1% at the end of the quarter, down from 34.3% a year ago. Since we used cash to fund the Pfaff acquisition and employed only a modest amount of debt, debt metric will not change significantly on a pro forma basis. We've reached our 30% debt to total cap ratio goal, and we're ultimately targeting an investment grade rating to give us flexibility to support our growth strategy which will include strategic acquisitions regardless of the point in the economic cycle. With that, I thank you and turn it over to Derwin.

  • Derwin Gilbreath - COO

  • Thank you, Karen, and good morning to everyone. Both shipments and bookings continued to be solid throughout the second quarter, as the majority of product categories showed healthy gains compared to the same period one year ago. Overall shipments gained 6.7% versus the same quarter in FY '08.

  • We were particularly pleased with the US sales to the general distribution which increased 9.4%. This represents 65% of our US sales. A subset of general distribution is industrial distribution which was up 6.7%. Industrial distribution has been flat for several quarters, so this was a good show of performance on the part of our refocused sales force, which I will cover in a few minutes.

  • International sales were up 10.6% from the second quarter of fiscal '08, which included 4.4% currency translation. We had only one area of weakness, which was CES, our crane builder group. CES was down 17%.

  • One-third of this decline was due to the hurricane that shut down a major facility and several service locations in the CES group. This will be made up in October. The other two-thirds of the decline was related to major crane builder projects shipped in the comparable quarter last year, which made the comparison very difficult.

  • We continue to develop ways to aggressively target prime user markets while cultivating our relationships with our channel partners in order to increase business to our traditional markets. The most recent change in this area was the establishment of a single hoist group to handle all brands and products under a single executive director. This will allow us to develop cohesive strategies for developing high-growth markets while broadening the portfolio at the user level. We have seen increased demand in areas such as offshore production, mining, and construction, due to our ability to offer a broad array of lifting products.

  • The construction market continued to show results during the second quarter with sales growing 9.7% to the rigging channel, which is a supplier to the construction market. We have also organized our sales force around these rigging products. This channel typically carries everything that is needed to perform lifts in construction and the manufacturing markets. Additionally, our training programs, dedicated to safe rigging practices, have helped drive traffic to rigging shops as many of these programs are held in conjunction with a rigging channel partner.

  • While the second quarter was another solid one for Columbus McKinnon, we remain very cautious due to the ongoing global financial crisis. The effect of the crisis on our business is yet to be seen, but could be very disruptive to our business. Although there are forecasts concerning nonresidential construction slowing, due to the credit crisis, the October Reed Construction Data Report shows heavy engineering projects faring the best at a 6% increase for '09.

  • This plays well for us given our strength in oil, gas, and power as an example. The power segment of heavy engineering is forecast by Reed to grow by 12%, and we expect our windmill lifting business to increase as well. Yesterday, Reed Construction Data downgraded the economic outlook from the earlier October outlook. However, the heavy engineering segment continues to be well-positioned, compared to the other construction segments.

  • One of the strengths of Columbus McKinnon is their products are used virtually anywhere that something needs to be lifted or positioned. Given our strong installed base, we expect to continue even with a downturn in the economy to have a very solid stream of spare parts and replacement business in hoists. Lifting and positioning equipment is generally not an option for our customers who recognize the need for safety and productivity, regardless of the economic climate.

  • Now let me turn to operations. The volatility of the steel market continued to be a challenge during the quarter as we dealt with cost changes from suppliers, primarily due to escalating steel costs. To offset these cost changes, we have continued our surcharge program on items with high steel content such as chains, shackles, and hooks. We adjust these charges either up or down each month, based on the analysis of the steel market as well as an examination of our sales for each product category. Our goal is to remain margin neutral, while continuing to grow this segment of our business. In the case of our hoist products, we initiated a price increase that averaged 2.7% on August 4.

  • The price increase within the hoist group did stick. Despite all these activities, September steel prices from our suppliers peaked, and we did not recover all our costs which is unusual for Columbus McKinnon. Our net miss was around $1 million in gross profit.

  • The good news is that the steel market costs from our suppliers started to fall, and as soon as the inventory works through the system this quarter, our purchase costs will fall as well. We will also increase prices for hoist products to offset some of the material increases that we have seen recently. Hoist products will increase 3% to 5%. We will also raise prices on other products in different markets.

  • Our focus in operations continues to be toward the goal of superior customer satisfaction. This is supportive with detailed initiatives and operational excellence, people excellence, new products and services, as well as new markets and geographies to drive sales growth. Investments and operational team projects in all these areas are ongoing.

  • Lean manufacturing continues to be a focus for our company. We're seeing an accelerated rate of improvement in most of our facilities and are encouraged by the work and improvements made to-date. Our backlog continues to be strong at $63.8 million at the end of the quarter. This compares with $62.3 million and $57.7 million at the end of fiscal '08 second and fourth quarters respectively.

  • Despite all these positive activities, we are cognizant of our surroundings, especially driven by the global credit crisis and the potential impact on Columbus McKinnon Corporation. Accordingly, as a prudent step, we are prepared to react to the changing markets and manage our business in this volatile environment. Our lean processes will help us to be flexible to variable customer order activities, and we will manage our costs accordingly.

  • Further, we have positioned ourselves to participate in a more emerging market growth than ever, so as whole, we are helped by that diversity. Now let me turn it the over to Tim.

  • Tim Tevens - CEO

  • Thank you, Derwin. Christina, we'll take questions now.

  • Operator

  • Thank you. (OPERATOR INSTRUCTIONS.) Our first question comes from Ryan Jones from RBC.

  • Ryan Jones - Analyst

  • Good morning. I was wondering, with China slowing to high single-digit growth, and with emerging markets starting to rollover as well, what are your thoughts about international growth going forward?

  • Tim Tevens - CEO

  • Ryan, that's a great question. It seems to me that with this credit crisis that we're all facing, the global markets certainly are going to be affected long term. I think it's fair to say that we will not see the global growth that we have seen in the past. Things are indeed slowing. It's growing, but at a much slower rate than would we've seen. Our expectations are that it will indeed be slower, so we're planning for that level of growth.

  • Ryan Jones - Analyst

  • All right. And then on a second question, on steel and some other commodities that you have talked about. How far along are you in instituting the price increases with your customers, and what is their feedback been so far?

  • Tim Tevens - CEO

  • I think you heard us earlier talk about an August price increase, which we just had for hoist production. And we're instituting another one toward the end of the year, I think November (inaudible) is the date.

  • Derwin Gilbreath - COO

  • Yes. End of November.

  • Tim Tevens - CEO

  • The reaction from the distribution is, I think there's a recognition that there's certainly volatility in the commodity markets. We surcharge all of our steel-based products, whether that be chain or attachments, and we have been doing this now for a number of years. We actually move that price monthly.

  • But we have seen this past couple of months is just something we've never seen before in terms of the volatility -- the wild swings up and down now -- that we're seeing right now. We will adjust our surcharges accordingly. We also have been impacted -- the motors that we buy for example, have been impact by those commodities as well, both up and down. But we're also seeing higher utility prices, for example, coming at us. We're trying to react as quick as we can and be as fair as we can to all of our distribution channel partners. The reality is, it's so volatile right now, it's tough to call.

  • Ryan Jones - Analyst

  • But the price increases you think will stick?

  • Tim Tevens - CEO

  • Yes.

  • Ryan Jones - Analyst

  • All right. Thank you.

  • Tim Tevens - CEO

  • Thank you.

  • Operator

  • Our next question comes from Joe Giamichael from Rodman & Renshaw.

  • Joe Giamichael - Analyst

  • Good morning, everyone.

  • Karen Howard - CFO

  • Hi, Joe.

  • Joe Giamichael - Analyst

  • You have used very cautious language going forward in regards to the overall environment. Given the backlog, it would seem that things aren't that bad right now. Are you hedging yourself given the macro environment? Or have you started to see a more significant downturn than the backlog suggests?

  • Tim Tevens - CEO

  • No, Joe. You're right on. We're sitting here, probably like many other industrial companies, with a fairly good backlog, as you point out. Our bookings are fairly good today. We see a fair amount of activity in the markets we sell into. But the realities are we have to look beyond that and think about the long term impact that the slowing economy should occur -- given the credit debacle that's going on right now. We're very cautious for the future. If you talk to our business leaders today, they would say, what recession? What problem? They're still seeing prudent business activity.

  • Joe Giamichael - Analyst

  • Got it. And then just -- I've always thought of your business as less susceptible to the swings in the overall market, and more so now since you've done such a good job reducing the leverage the Company has relative to the last macro downturn that the Company faced. I realize that this is not a great quarterly conference call question, but could you walk us through why you think your business can continue to perform well or outperform relative to peers in this environment?

  • Tim Tevens - CEO

  • Couple areas that we look at. As you said earlier, we're a much more global company; going forward with about 40% of our revenue will come from markets outside the US. A bunch of that in emerging markets, which still are growing much faster than, let's say, more western markets are today. That would be the first thing that comes to my mind.

  • The second thing is, we won't be paying back banks or having much debt that we have to pay a lot of interest expense, so we would be able to keep most of that for our shareholders to reinvest back in our business. We also have the position to be much more global in nature and being able to be sold around the world, which is very positive. Albeit even with the price of oil in the $70 area, we still see some pretty good markets in the energy area which we've spent a lot of our time and energy in selling to, as well as nonres construction seems to be doing pretty well, as well.

  • I think as we look at it, it certainly may be slower. Tough to say how much slower in the future, but I think that we're pretty well-positioned to take advantage of those markets that will be growing at a much higher rate than the rest of the world or at a slower shrink rate than the rest of the world.

  • Joe Giamichael - Analyst

  • Okay. Just one last question. Given the current valuation of your stock and the free cash flow yields that you are projected to have, even if the business stays flat to turns down slightly, are you seeing opportunities out there that appear to better uses of cash than, say, redeploying cash in share buyback or dividend and increasing dividend? Any of those potential uses?

  • Tim Tevens - CEO

  • They certainly would be potential uses. I'd really like to see how this credit mess is going to fall out and what results will come from it. As we mentioned, we have around $30 million of cash after the Pfaff acquisition and plenty of room on our revolver. We have some dry gun powder that we can use going forward for some strategic acquisitions, like we've done in this Pfaff acquisition we just did on October 1.

  • However, there's a little more caution as we sit here today and look toward the future because these markets are just really crazy, and somewhat volatile in nature, and we're trying to figure out where the direction is. We do have multiple conversations with multiple parties. We'll continue to think about the acquisition to continue to execute our strategic plan, but we're a little more cautious, I would say, today. Having said all of that, our free cash flow -- our Board will certainly consider and has considered multiple options in terms of the use of our free cash flow going forward.

  • Joe Giamichael - Analyst

  • Is it just that the market is not rewarding you for making acquisitions such as Pfaff? Is it that you are more patient and cautious? Or is it that the opportunities haven't been as plentiful or as potentially accretive?

  • Tim Tevens - CEO

  • Neither one. We have plenty of opportunities. We're certainly disappointed that the market hasn't rewarded us for executing our strategic growth plans, that's for sure. But I would say that we're thinking about long-term impact on the tightening of the credit markets and the lack of currency flow around the world. That impact on our end user market, our industrial markets around the world, what does that really mean to us. How slow could it get or will it get? That's where the caution comes from really is a more longer term view of the end markets we sell to.

  • Joe Giamichael - Analyst

  • Got it. Thank you very much. I'll talk to you guys later.

  • Tim Tevens - CEO

  • Thanks, Joe.

  • Operator

  • Our next question comes from Ted Kundtz from Needham.

  • Ted Kundtz - Analyst

  • Couple questions for you. Could you talk a little bit about the Pfaff acquisition and how their business is doing? I know they did like $90 million of revenues or annualized when you bought them. Is that business growing or is that seeing some weakness? I would expect, because it's a little more European oriented, that it would, but maybe you can comment on that.

  • Tim Tevens - CEO

  • Sure. The Pfaff business is going along fine. It's actually on plan -- to the plan that what we bought them to, so we're pretty pleased with that. They have a potential for a couple of fairly large projects that they're still hoping to get by the end of the calendar year. And those are still open and they're working on.

  • I would say that it's growing, but it's not growing as fast as the other European business -- the old Columbus McKinnon European business that you know us as. That's growing actually a little better. I think that's because our older business there is much more pan-European and into the emerging markets than Pfaff is today. Pfaff is a little more western European, predominantly German centric so maybe that's why the growth isn't as high, but they're on plan. They're doing fine.

  • Ted Kundtz - Analyst

  • Okay. Tim, could you mention, do you think that we've bottomed out here in gross margins? Maybe you didn't really give us any kind of outlook, you talked about it. But do you think this is the bottom in the gross margin picture? Or do you think you have much room on the up side? Is it just going to be at this level for awhile?

  • Tim Tevens - CEO

  • Let's hope not. That's certainly not our plan. As we look to gross margins, this quarter was actually a little bit disappointing to us in this area, predominantly because of this incredible volatility that we didn't see coming in certain commodities, especially steel.

  • As we look to the future, I think that it's fair to say that we would expect gross margins to improve if we get decent revenue growth like we've been getting in this 5%, 6%, 7% area. Our expectations are that we would be able to control that a little bit better and improve that.

  • Ted Kundtz - Analyst

  • Okay. Terrific. Now, how about on the FX side? How is that going to impact you guys? You benefited from it in the past. It's turned around here. What kind of impact do you think that could have on your top line and bottom line?

  • Tim Tevens - CEO

  • Good point. I'll turn this over to Karen to talk about the translation effect, but we are actually -- we buy in different denominations as well so on a sourcing basis, it could improve. We also export some from the US market into Europe, so that could have a negative effect. But at the end of the day, Karen, I think it's fair to say that it's a translation effect that might have the biggest impact.

  • Karen Howard - CFO

  • Yes, and more on each of the lines, I will say. For example, in this quarter, you could see that foreign currency translation added about $2 million to the top line, about 1.4%. And it does impact each expense line as well. By the time you get down to operating income -- net income, the impact is negligible.

  • Ted Kundtz - Analyst

  • Okay. That could hurt you a bit on the turnaround by the same amount?

  • Karen Howard - CFO

  • On each of the lines, but not on a net basis.

  • Ted Kundtz - Analyst

  • But not on a net basis.

  • Karen Howard - CFO

  • Right.

  • Ted Kundtz - Analyst

  • Okay. It will maintain the margins. Okay. Any thoughts of a share buyback here?

  • Tim Tevens - CEO

  • Given where the stock has traded, I think it's fair to say that we would consider all options of using our free cash flow, including a share buyback. But at this point in time, we don't have Board approval. But, yes, that would be the case.

  • Ted Kundtz - Analyst

  • Okay. Tim, looking at the capacity utilization rates in the US, they are continuing to come down. The US outlook, it's fair -- you indicated from what I gathered, you thought it would be flattish here. Is that a fair assessment of what you see right now?

  • Tim Tevens - CEO

  • Yes. It feels like, Ted, it's somewhere in that 77% to 78% area. If the stays in that area, things will be fine in the US. Of course, if it continued to migrate south, then we have a different situation.

  • Ted Kundtz - Analyst

  • The manufacturing side seems to be migrating further down from that. That's my concern. September numbers were 74.5% on the manufacturing side, down from 77%. I'm just wondering if that's -- if you are starting to -- if that happens -- if that continues to happen, we would realistically expect somewhat of a decline in the US business. How do you avoid that?

  • Tim Tevens - CEO

  • Just as a reminder to you, we're much broader than just manufacturing. We look at all the -- other than high-tech and/or software.

  • Ted Kundtz - Analyst

  • No, you're in mining and oil. (multiple speakers)

  • Tim Tevens - CEO

  • Yes. Mining and oil exploration and things of that nature beyond manufacturing. Having said that, the 77% area seems good right now. Manufacturing dipping a little bit lower to 74%, as you indicate, and I haven't looked at those numbers as an individual market just yet, But certainly that would -- in that sector would have a negative impact on us. It usually lags by about a quarter or two.

  • Ted Kundtz - Analyst

  • Okay. Hopefully being more offset by -- And your stronger areas are still in the refinery business? Other than the storms hurting you -- but other than that, you think that business is still robust?

  • Tim Tevens - CEO

  • Yes. It's pretty good.

  • Ted Kundtz - Analyst

  • Terrific. Thanks very much.

  • Tim Tevens - CEO

  • Thanks, Ted.

  • Operator

  • Our next question comes from James Bank with Sidoti.

  • James Bank - Analyst

  • Hi. Good morning.

  • Karen Howard - CFO

  • Good morning, James.

  • James Bank - Analyst

  • I'm still a little confused on the margin pressure in the quarter, year-over-year, and especially sequentially. Given the divestiture of Univeyor, I'm a little confused how we're below 30% gross margin. I understand the costs and the hurricane, but steel really since July has completely rolled over here. It's back to the levels where it was in April. Is it a lag effect from when those prices go up than when you guys get your price increases, and then when it actually hits your line and then when your price increases finally come in? Is there just a tremendous lag there?

  • Tim Tevens - CEO

  • You're looking at different steel than we're looking at. I think that's the first thing to say. Our steel actually spiked dramatically in September, and -- which was up maybe 20%, 30% in one month.

  • Now, when we put our surcharges in we're always looking back a month, of course. We don't have that visibility going forward, and that's probably the biggest impact. I'll refer to Karen and Derwin if they want to comment further on that.

  • Derwin Gilbreath - COO

  • That's correct. There is a lag effect that impacts it. Tim's absolutely right about the steel that we're buying is quite a bit different for the most part. We have a lot of specialty steel and those did go up about 20% to 30% in the month of September.

  • Tim Tevens - CEO

  • But we have seen it come back down, I think it's fair to say, Derwin.

  • Derwin Gilbreath - COO

  • That's correct. It's coming down, but there is a little bit of a lag because people are buying scrap to put into their inventory. Of course, they're willing to pass that on and, of course, we go back and forth on that all the time. But we have contracts where what happens in the previous month rolls to the next month for us.

  • James Bank - Analyst

  • Okay. That, with the added effect from Pfaff, and the fact that Univeyor is gone; this incremental margin drop-off I saw in the September quarter, that shouldn't happen again for the rest of the year?

  • Tim Tevens - CEO

  • That did not affect the second quarter.

  • James Bank - Analyst

  • Tim, I'm sorry, could you say that again, please?

  • Tim Tevens - CEO

  • Yes. The Pfaff acquisition did not affect the second quarter, but if you look into the future it should have somewhat of a negative impact because their gross margins were below most of the Columbus McKinnon business.

  • James Bank - Analyst

  • But it is assumed to be accretive, right?

  • Tim Tevens - CEO

  • That's correct. You are talking gross margins, though. It's accretive to the bottom line. We will -- we have shipped already -- the shipments and the downtime that we lost in our Gulf Coast business, and our Sarasota tire shredder business. That's already recovered. Yes, we'll see in that October. The key is to stay on to this -- stay on top of this commodity cost increases and changes, so that we can remain margin neutral which, as you know, is our policy.

  • James Bank - Analyst

  • Right. At this point you guys are still committed to the 12% to 14% operating margin goal by the end of this fiscal year?

  • Tim Tevens - CEO

  • Yes, that's correct.

  • James Bank - Analyst

  • Great. That's all I have. Thank you.

  • Tim Tevens - CEO

  • Thank you, James.

  • Operator

  • Our next question comes from Arnold Ursaner, CJS Securities.

  • Unidentified Participant

  • Hi, this is Jason for Arnie. Besides price increases, what other plans do you have address costs and return gross margins to desirable level?

  • Tim Tevens - CEO

  • Good question. Did you say it was Arnie or James?

  • Unidentified Participant

  • Jason.

  • Tim Tevens - CEO

  • Jason, sorry. You might have heard us talk in the past on the cost side about lean manufacturing, and something we have been working on since 2001. That is what I will call our primary driver for cost reduction productivity improvement. And maybe, I'll just turn it over to Derwin. You can comment, Derwin, on some of the activities we have going on in this area.

  • Derwin Gilbreath - COO

  • Sure. Thank you, Tim. We have a large number of projects in every plant that focus on customer service, cost. Every plant has a lead coordinator, and these projects are moving at an ever increasing rate. We're very pleased with those activities. Some of them are giving us significant cost increases.

  • In addition to that, we're also focusing very intensively on purchasing. And what we're doing there is we're trying to find the lowest cost high quality supplier. We're going to more global sources. We're certainly dealing with the day-to-day pressure on price increases and making sure that we've got the right level of productivity. It's an everyday, every minute affair for us.

  • Unidentified Participant

  • Okay. You also spoke about seeing a slowdown in orders for October and the expectation that businesses can delay purchase decisions. With replacement dictated by OSHA, how much is it possible to really delay the purchases?

  • Tim Tevens - CEO

  • Normally -- let me see if I can take this one. Yes, OSHA doesn't dictate replacement. What OSHA dictates is an annual inspection, and that inspection typically drives either replacement and/or repair of units which drives then in turn, our unit volume and/or our parts volume. Ultimately, it comes back to us.

  • The key there -- the way we look at the business, at least, is industrial utilization. The more utilized the equipment is, the more this activity has to occur in terms of replacement or repair. Having said that, we would expect normally -- if there is a downturn coming which I'm not going to project, but I'm going to be cautious about, that we normally see our parts business grow and our unit volume come down because people have a tendency to repair more frequently. Then ultimately when things turn around, the unit volume comes back up.

  • Unidentified Participant

  • Thanks a lot.

  • Tim Tevens - CEO

  • Thank you.

  • Operator

  • Our next question comes from Bob Franklin from Prudential.

  • Bob Franklin - Analyst

  • Hi. Seems like every quarter you are asked about share repurchases and you say, yes, we think about that. But it seems like this time, you're a little bit more enthusiastic. I'm wondering where you would be with respect to repurchasing your bonds.

  • Tim Tevens - CEO

  • Well, Karen, why don't you touch on that one.

  • Karen Howard - CFO

  • Sure. Thanks, Tim. Bob, as you may have noticed in the earnings release, we did repurchase about $5 million of our bonds in early October. We used some of our excess available cash. But quite honestly, at this moment -- at the point in time, given the concerns about the global liquidity availability and the credit crisis, we are choosing to sit tight for the time being until things stabilize. Thereafter, we will consider repurchase of our bonds in the open market as a potential option for use of cash, as we have indicated in the past. But admittedly, right now, we're sitting tight.

  • Bob Franklin - Analyst

  • Okay. Would that then be true of share repurchases as well?

  • Karen Howard - CFO

  • That would need to be reevaluated as well.

  • Bob Franklin - Analyst

  • Okay. Thanks.

  • Operator

  • Our next question comes from Ted Kundtz from Needham.

  • Ted Kundtz - Analyst

  • Just wanted to follow up. Tim or Derwin, this would be for you. Going back to the cost reduction efforts that you have in place, it sounds like it's two-fold.

  • One is to focus on your existing plants. Do you have any plans for further shutdowns of plants? Or you feel you've got the number of plants you would like and now it's just focusing on this lean effort you've talked about? Secondly, the global sourcing effort. And combining those two, what would be your target cost reduction efforts? Do you have a number?

  • Tim Tevens - CEO

  • Let me see if I can touch on it, then turn it over to Derwin. You might have noticed in the press release, Ted, we did, in fact, close two smaller facilities this past quarter. The plant rationalization program is still going on and we'll continue to challenge our roof lines, if you will and our square footage around the word. Basically, we move production from those facilities to other existing plants.

  • We did get a pretty good bang, I think -- sold one building for $1.350 million, I believe it was; and the other building somewhat substantially lower than that. It's maybe $300,000 or $400,000 we're expecting from that. But the key, of course, is the fixed cost reduction. There continues to be a couple of opportunities for us to work on, and we are proceeding at pace with those in terms of plant consolidation. Nothing to announce just yet. We have not announced any targets, Ted. But rest assured, we will continue to do this kind of thing as we've done in the past. Relative to global sourcing, let me ask Derwin to comment on that activity.

  • Derwin Gilbreath - COO

  • Yes, on the global sourcing, we have a very aggressive plan to look at sourcing. In fact, we're working on gears right now which represent a substantial amount of dollars, around $15 million, $16 million, and we're looking at sourcing part of those out. We're looking at other products that make sense. As we do that, it creates more space in factories and gives us more flexibility to do the kinds of things that Tim referred to before. We actually have someone that works for our operations in the US who works in purchasing, but he lives in China. We have him focused on a lot of different projects for us right now.

  • Ted Kundtz - Analyst

  • Can you give us -- do you have a dollar amount targeted or can't you share that?

  • Tim Tevens - CEO

  • No, internally we do, but we have not discussed that.

  • Ted Kundtz - Analyst

  • Okay. And then just -- you mentioned the lower margins at Pfaff. Could you mention what they are, the gross margins there and how much that would impact overall margins?

  • Karen Howard - CFO

  • We have commented that their overall margins are lower than Columbus McKinnon's Corporate average, but we haven't yet given a specific range. Admittedly, we are still going through and realigning their financial statements with Columbus McKinnon's, because they categorize things a little differently. We are still working through that process. I think, though, when we announced the acquisition, we did indicate that the operating margin level -- that they are currently like in the high single digits.

  • Ted Kundtz - Analyst

  • Okay. Thank you.

  • Tim Tevens - CEO

  • Thank you, Ted.

  • Operator

  • Our next question comes from Peter Lisnic from Robert Baird.

  • Unidentified Participant

  • Good morning. It's actually John on for Pete. Could you guys -- taking down selling expense as a percentage of sales for the year, could you break that into how much of it is Pfaff? How much of it is you guys reducing the international growth initiatives you guys are doing? How much is you behind the scenes controlling costs given the environment?

  • Karen Howard - CFO

  • Yes, John. I'd say it's really what you described as behind the scenes activities to control costs given the environment.

  • Unidentified Participant

  • Okay.

  • Karen Howard - CFO

  • We've still been moving forward with our international growth expansion activities, so we have not scaled those back.

  • Unidentified Participant

  • Okay. That's really intact, despite all the uncertainty in the market right now?

  • Karen Howard - CFO

  • Yes, it is.

  • Unidentified Participant

  • Okay. Then just to clarify, the million dollars you guys pointed out - just given that it sounds like a lot of it was related to that steel surcharge. Just steel staying flat in October would mean that you guys would have that margin gap bridged in October -- or for the third quarter, right? Because your surcharge should be on that trailing month basis.

  • Derwin Gilbreath - COO

  • Yes. It's definitely on a trailing month basis. I think it will be flat in November and December, but there's some carry-over into October. It's not 100% taken care of in the month of October.

  • Unidentified Participant

  • But relative to the second quarter, you would have at least two months of coverage as opposed to --

  • Derwin Gilbreath - COO

  • Absolutely. We'll have the price increase going into effect in November, and then we've caught up on the surcharges. There's a very good possibility that that will be more than taken care of.

  • Unidentified Participant

  • Okay. Thank you.

  • Tim Tevens - CEO

  • Admittedly -- let me just add to that -- admittedly, the surcharges on the steel most likely, Derwin, will have to be adjusted at some point, not for just the future, because steel has come down in October.

  • Derwin Gilbreath - COO

  • Absolutely. That's correct.

  • Unidentified Participant

  • Okay. And then just one question on pricing. It looks like since you guys have started providing some of the breakout domestic versus international, the domestic pricing has been substantially stronger than the international pricing. Is that just because of your relative market shares? Or is the overseas environment just a little bit tougher to get price increases in?

  • Karen Howard - CFO

  • I'll take that one, John. I'd say it's really been the -- not that the overseas market has been tougher. But in the US market, it's been more driven by our mix of product. We sell more high steel content product in the US and do not in Europe, for example. Our surcharge program, which falls into this category of price, is US-based.

  • Unidentified Participant

  • Okay. Really, as international becomes a bigger percentage of sales, it doesn't reflect different dynamics other than just steel content?

  • Karen Howard - CFO

  • Yes. It really just reflects mix -- what product are selling where.

  • Unidentified Participant

  • Okay, thank you. I'll get back in queue.

  • Operator

  • At this time, sir, we have no further questions.

  • Tim Tevens - CEO

  • Thank you, Christina. Let me thank all of you for your time this morning, as well as your questions. We certainly appreciate the interest in our company. Certainly want to also thank all of the Columbus McKinnon associates around the world for their hard work, and their ultimate success in certainly helping this quarter be a success.

  • Just a couple announcements as well. You might have noticed we added two new directors this past weekend. Chris Ragot is the President and CEO of FreightCar America. Liam McCarthy, who is President and Chief Operating Officer of Molex. Both fellows have incredibly broad-based operation, sales and marketing background as well as international experience, and growing their various companies around the world. We welcome them to our company and hopefully you will do as well when you after chance.

  • As you can probably tell, we're fairly optimistic yet cautious at this point in time. We're going to he remain cautious until we find out where the global credit markets are headed. Please bear with us as we and probably the rest of industrial America tries to work its way through this debacle we're in. Thank you very much for your time, and we look forward to talking to you in the future. Take care.

  • Operator

  • Thank you for participating in today's conference call. You may disconnect at this time.