Columbus McKinnon Corp (CMCO) 2009 Q3 法說會逐字稿

Welcome to the Columbus McKinnon quarterly conference call.

At this time, all participants have been placed on a listen-only mode until the question-and-answer session.

(Operator Instructions).

Today's call is being recorded.

If you have any objections, you may disconnect at this time.

I would now like to introduce Mr.

Tim Tevens.

Good morning, everyone, and welcome to the Columbus McKinnon conference call to review the results of our fiscal 2009 third quarter.

Earlier this morning, we issued a press release with corresponding financials and, hopefully, you have that.

With me here today in our headquarters is Karen Howard, our Vice President of Finance and Chief Financial Officer.

We do want to remind you that the press release and conference call may contain some forward-looking statements within the meaning of the Private Securities 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 we file with the SEC to make sure you understand these risks.

Our revenue outpaced the same quarter last year by $18.9 million, almost 13% up, and was clearly positively affected by Pfaff in this quarter.

About $26.8 million of revenue came from Pfaff, as well as increases in other European, Asian, and Latin American markets.

This increase was offset by currency translation and weaknesses in many U.S.

markets.

Revenues outside the United States grew to 42% of our total revenue in the quarter.

This is a continuation of the execution of our strategic plan to grow in geographies dispersed around the world.

Clearly, we are beginning to see slowing in these global industrial markets, most notably in the United States.

The U.S.

seems to be the first market to reveal a downturn, with Europe, Latin America, and Asia still growing but at a less rapid pace.

This is a reminder to you that U.S.

industrial capacity utilization is an important figure for our company, and in December, it was 70%, or down 900 basis points since January 2008.

This is the lowest since 1982.

A little commentary about our channels of distribution.

Industrial distribution, which is the bulk of our business, as well as large industrial distributors, you may know them as the large catalog houses, are down in the quarter mid to high single digits.

With crane builders, another important channel for our company, up high single digits, and material handling partners, up a low single digit, about 1%, in fact.

The rigging channel, which provides tools for heavy lifting to manufacture and construction markets, is down in the low double-digit area.

You know we have an entertainment business -- these are hoists that help people lift speakers and lighting systems in concerts and live theater -- is up a considerable amount from last year, actually almost double.

The good news is that our company today, as compared to the last several recessions, our revenue is much more geographically dispersed and very broad across the entire economy.

Europe continues to grow for us, with Germany being the only country to report a decline year over year.

And, by the way, this was in the mid single digit area.

We have now seen a year-on-year decline in industrial production in the [Euro] zone for the fourth quarter of calendar 2008, and obviously, this is going to impact our business on a go-forward basis.

Reports from the ProMat show in Chicago were mixed.

ProMat is the largest material handling show in North America.

We observed lower activity level, but there seemed to be real interest from what I call real buyers, not just tire kickers.

So we were impressed with the quality of the commentary coming from the show.

The integration of Pfaff and Columbus McKinnon is proceeding apace, and we are on target to actually exceed our expectations.

Our companies are working well together and executing the integration plan with over 40 dedicated associates on 12 different implementation teams.

We have now identified more synergies than originally planned, and our outlook remains very positive for this acquisition to produce failure for our shareholders.

In fact, Pfaff just received and fulfilled an order in the quarter from the Chinese government for a high-speed lifting system.

This was about $4 million -- EUR4 million, excuse me, in revenue.

The transaction for lifting tech -- was for lifting technology, and they are now preparing to bid on the manufacturing of the system.

From an earnings perspective, there was a number of different items that occurred in the quarter which impacted our results.

Pfaff clearly produced positive results for us in the quarter.

From an operating perspective, we continued to see high prices of raw materials, such as steel, which impacted us negatively in the quarter by about $0.05.

These prices are now moderating in our fourth quarter and are in the process of returning to a more normal level.

We also had some onetime adjustments associated with the Pfaff acquisition, which impacted negatively our EPS by $0.04, and we had a restructuring charge in the quarter of $0.03.

As previously mentioned, we are prepared for a downturn, and have implemented some measure to offset our lower demand.

Our net income from continuing operations was negatively affected by a loss on our Columbus McKinnon captive insurance company, CMIC.

These assets were negatively impacted as a result of a downturn in the market to the tune of $0.12 in the quarter and a currency translation loss of $0.06 associated with an intercompany loan for the Pfaff acquisition.

In total, these extraordinary items amounted to about $0.30 of earnings -- negative impact on our profit in the quarter.

Gross profit was down slightly, impacted by the previously described steel prices and onetime inventory evaluation accounting charge related to the Pfaff acquisition, and offset by positive results at Pfaff.

Bookings in the quarter were down mid to high single digits.

As you might imagine, we're very concerned over this lower booking activity and are monitoring it very closely.

We, as a management team, have managed through this difficult economic times before and we'll do it again.

Downturns, in my opinion, are a great opportunity to improve the structural costs from our businesses, and dramatically improve the overall activity and productivity in our business.

During the last recession, as an example, we were able to remove 1 million square feet of manufacturing space and a significant amount of fixed costs.

Although we may not have the same size opportunity, there are clearly significant opportunities to attack these structural costs, and we have begun them.

Backlog for our business is up 79 -- to $79 million, or up about $15 million, driven primarily by Pfaff.

As a reminder, this backlog still represents about four to five weeks of our total shipments.

We announced in December a restructuring plan that eliminated the position of the Chief Operating Officer.

As a result, Derwin Gilbreath has left the company at the end of the quarter.

You should know that he made a very positive impact in our Company in the almost four years he was with us, and we wish him well in his new endeavors.

As a result of this reorganization, Gene Buer will run our hoist America group, Chuck Giesige, our rigging America's group, Wolfgang Wegener, Columbus McKinnon Europe, and Joe Owen, the global supply chain, and they will all now directly report to me.

Now let me turn it over to Karen, who will lead us through more details and results of the quarter.

Good morning, everyone.

I'm pleased to have the opportunity to review some of the financial highlights of Columbus McKinnon's fiscal 2009 third quarter and year to date that ended on December 28, 2008.

As a reminder, this is the first quarter that includes our new German-based Pfaff-silberblau business that we acquired on October 1, 2008.

Further, all of the numbers reported here reflect our former Univeyor business as a discontinued operation, divested on July 25, 2008, and accordingly, the prior year reported numbers relate to ongoing operations unless otherwise noted.

Consolidated sales increased by 9% to $165.1 million in the third quarter of this year, compared with last year's third quarter.

The Pfaff business added $26.8 million and we realized expansion in our existing European, South American, and Asian markets, offsetting declines in our U.S.

and Canadian markets.

Excluding Pfaff, overall volume decreased 6.2% from last year, with international volume growing by 0.7% but U.S.

volume declining by 9.5%.

Further, given the volatility of the currency markets during this timeframe, foreign currency translation negatively impacted revenue by 3.2%, compared with the prior year's quarter.

However, pricing favorably impacted the revenue growth by 4.0%.

On a year-to-date basis, consolidated sales increased $38.3 million, or 8.9% over last year, of which $26.8 million, or 6.2%, of the increase was attributable to the newly acquired Pfaff business.

The Company's quarterly sales pattern, assuming a period of consistent economic conditions, which we're not currently seeing, obviously, typically shows sales strongest in the fourth quarter and weakest in the third quarter.

The recent quarter has 60 shipping days, consistent with the year-ago quarter, and the next quarter will have 65 shipping days.

Included in the press release is a table showing the number of shipping days in each of the quarters of fiscal 2009 and fiscal '08, and we have also added the upcoming year, fiscal 2010.

Overall, third-quarter consolidated gross profit decreased $700,000, or 1.5%, with gross margin contracting 400 hundred basis points, to 27.1%.

The contraction is primarily due to four factors, as follows.

First, we recorded $1.3 million of purchase accounting charges relating to inventory valuation for the Pfaff acquisition, in accordance with US GAAP, which impacted this December quarter only.

Second, as carried over from the September quarter, our material costs, particularly steel, continue to be higher than we could recover.

Despite our proactive and successful surcharge and price increase activities, we weren't able to recover the full extent of those cost increases, unfavorably impacting gross profit by approximately $1.4 million.

For example, during the December quarter, our cost for steel wire, which is used for chain, at the end of the quarter came down 44% compared with the beginning of the quarter.

However, our cost for forging bar, which is used for hooks and shackles and things, went up 22% compared with costs in September, representing a 69% increase over costs a year ago.

The good news is that our cost for forging bar came back down 33% in January.

Third, as previously disclosed, margins of the Pfaff business are currently lower than Columbus McKinnon's historical corporate average, pressuring the now-consolidated average margin.

We believe we have opportunity to improve Pfaff's margins over time through the integration activities that have begun and then as to follow in future periods.

The final factor, which is pressured goods' margins during this quarter, is the lower volume in our U.S.

businesses.

Rest assure that many activities have been undertaken and will follow to effectively manage costs during the second [out of] downturn.

On a year-to-date basis, consolidated gross profit is up $4.8 million, with gross margin contracting 150 basis points to 29.5%.

Consolidated selling expense as a percent of sales was 12% in the third quarter, up from 11.8% last year, due to the addition of the Pfaff business offsetting a reduction in spending for the historical business, as compared with the first and second quarters of fiscal '09.

On a year-to-date basis, consolidated selling expenses were 11.7% of fiscal 2009 year-to-date sales, compared with 11.5% for fiscal 2008 year-to-date.

Consistent with our growth strategy, we continue to make investments to further grow global market share, but reduce base costs, given the economic climate.

Consolidated G&A expense is 5.2% of sales in the fiscal 2009 quarter, compared with fiscal 2008's 5.9%.

The fiscal 2009 quarter benefited from the Pfaff business having lower G&A relative to revenue, as well as cost reductions in light of the current economic climate.

Year-to-date G&A expenses were 5.9% of fiscal 2009 year-to-date sales, compared with 5.8% for fiscal 2008 year-to-date.

During fiscal '09, SG&A is expected to approximate 17.5% to 18.5% of sales.

We are taking action to adjust our actual expenses to be in alignment with the lower sales level, while continuing to invest in accordance with our growth strategy.

During December, we adjusted staffing and reorganized our global leadership responsibilities, incurring approximately $1 million of restructuring charges, for which we anticipate beginning to recognize approximately $4 million of annualized cost saving beginning in our fiscal 2009 fourth quarter.

Driven by the gross margin contraction and restructuring charges described above, as well as a currently-lower operating margin profile of the Pfaff business, operating income decreased by $4.5 million, or 23.2%, with operating margin contracting 430 basis points to 9.0% for this year's quarter, compared with last year's 13.3%.

On a year-to-date basis, operating margin contracted 200 basis points to 11.5%.

Interest and debt expenses up $500,000, or 14.5%, over the prior year's quarter, but down $0.5 million dollars, or 5.2%, year to date.

The increase in the quarter is due to the assumption of some previously existing Pfaff debt.

Given the reduction in valuations of the marketable securities that were captive insurance company investments, we recorded a $3.3 million unrealized other-than-temporary loss on those assets in this year's third quarter, compared with $300,000 of income in last year's quarter.

Further, we recognized $1.8 million of foreign currency exchange losses in this year's quarter, relating to intercompany loans impacted by significant volatility of the currency market.

In last year's year-to-date period, we incurred bond reduction costs of $1.6 million, or $0.05 per diluted share, upon calling our remaining $22.1 million of 10% notes and some of our 8-7/8 notes, which saved $2.5 million, or $0.08 per diluted share of annual interest costs.

Regarding income taxes, the effective tax rates for the fiscal 2009 and fiscal 2008 third quarters were 35.3% and 40.3%, respectively.

On a year-to-date basis, effective tax rates were 35.7% and 38.2% 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 U.S.

cash taxes that would otherwise be due during fiscal 2009.

The remaining benefit at the end of December was $4.4 million.

Earnings per diluted share from continuing operations for the third quarter of fiscal '09 were $0.24, versus $0.53 in the third quarter of fiscal '08.

Including the discontinued operations, earnings per diluted share for the third quarter of fiscal '09 were $0.20, versus $0.52 in the third quarter of fiscal '08.

Year to date, diluted EPS of $1.26 reflects a 16.6% decrease from last year's $1.51.

We've included tables in the earnings release delineating the significant items impacting comparisons between the two years, as I have previously described.

Depreciation was $2.6 million and $1.9 million for the fiscal '09 and '08 third quarters, respectively.

On a year-to-date basis, it was $7 million compared with $5.9 million last year.

Capital expenditures were $3.5 million and $2.4 million for the fiscal '09 and '08 third quarters, respectively.

Year-to-date CapEx was $8.5 million and $7.4 million for fiscal 2009 and '08, respectively.

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 $11 million to $12 million range, reflecting a reduction in our expectations from the end of the fiscal second quarter.

Net cash provided by operating activity from continuing operations was $13.1 million in this year's quarter, or $0.69 per diluted share, compared with $10.7 million in last year's quarter, or $0.56 per diluted share.

On a year-to-date basis, net cash provided by operating activities from continuing operations was $44.4 million this year, or $2.32 per diluted share, and $38.2 million last year, or $2.00 even per diluted share, representing a 16% increase.

This year, earnings contributed $47.1 million while operating assets and liabilities used $2.7 million.

Last year, earnings contributed $53.5 million while operating assets and liabilities used $15.3 million.

We continue to focus attention on our working capital utilization.

At quarter's end, debt net of cash was $113.1 million, and total gross debt was $135.1 million.

To effect the Pfaff acquisition, we used $53 million of excess cash this quarter, and we continue to have excess cash.

Additionally, at quarter end, availability on the $75 million revolver, provided for under our senior credit agreement, was $63.4 million, representing $11.6 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, which does not expire until 2011.

Gross debt to total capitalization was 30.4% at the end of the quarter, down from 32.8% a year ago, and in line with our 30% debt to total capitalization ratio goal.

We're ultimately targeting an investment-grade rating to give us flexibility to support our growth strategy, which will include strategic bolt-on acquisitions regardless of the point in the economic cycle.

With that, I thank you and turn it back to Tim.

Okay, we would be open for any questions that people might have.

(Operator Instructions).

Jason Ursaner, CJS Securities Inc..

This is Jason for Arnie.

Komatsu and Manitowoc both had very cautious views for their end market demand going forward.

I realize it's not a direct comparison for Columbus McKinnon, but do you expect to see further volume declines from your end markets in the U.S.

and possibly a switch to declining volume from slower growth in Europe, as you catch up utilization?

I think we would have the same view from the end markets.

As you know, we follow industrial capacity utilization, which is a number that's published here in the States.

And that number did hit 70%.

We lag it -- in December, it hit 70%.

We lag it by a quarter or two.

Actually, I think it's a little tighter than two quarters, probably closer to one quarter, given the lack of inventory in the channel, generally speaking.

So -- but I would say that our channel partners are feeling it and directly, very shortly thereafter, we feel it, and given the lack of activity and the bookings that we're seeing right now, that's a fair statement, that it's probably going to get weaker.

I also think that Europe will get weaker, especially given a negative industrial production number that we've just seen in December.

Although we saw some good growth in some -- most of the European economies, they're clearly slowing.

When you acquired Pfaff at the end of Q2, you spoke to a $90 million annual revenue number.

Effective $26.8 million in Q3, even with currency as a headwind and Germany, I think you said was the only country in Europe to actually already see volume declines.

So is their unusual seasonality in Pfaff, or should we be extrapolating this number out?

Yes.

I mentioned a Chinese order that they received in the fourth quarter.

This is for an actuator lifting system that lifts high-speed trains for maintenance purposes.

They got that order and they fulfilled the order, because it was basically a transfer of technology drawings and other things, in the quarter, which was -- call that abnormal.

That was EUR4 million, or so.

So $6 million, five point something million U.S.

dollars.

So we're still going to be most likely, on a go-forward basis, in the $90 million area.

However, their overall business in Germany is slowing, as well as the old Columbus McKinnon business is slowing.

I would expect that to be a touch less than the $90 million we originally thought it would be for the fiscal year -- for the full fiscal year of '09.

You also spoke about the measurable cost-cutting reductions.

Is there any way to quantify it, or can you outline the additional action management is prepared to implement?

Sure.

As we have been saying, we have been preparing for the last several months to restructure the Company and to take the costs out in anticipation of a slower demand, which we're now beginning to see.

I think it is fair to say that, from a headcount reduction standpoint, we're in the so far 200-person headcount area, which is a cost of -- savings -- a savings of about $10 million or so.

And that cost is probably around $2 million or $3 million to get to that level.

That's what I consider to be an initial cut.

If we continue to see further sliding of our volume and our bookings being softer, there are more structural changes that we would take, including some additional plant closures.

We have identified several that are candidates at this point.

We have nothing to announce in that regard just yet.

We still have some planning to do around how we would migrate the equipment and change products, etc..

But there clearly would be more cuts, including things like wage freezes, hiring freezes, and we would look clearly at some of the benefits that we all get at the Company, including health care and 401(k) matches, etc.

Thanks a lot.

I'll jump back in the queue.

Ted Kundtz, Needham & Company.

Hello, Tim and Karen.

A question for you.

Could you go back to the gross profit issue in the fourth quarter?

What would it have been -- in the third quarter -- what would have been X the extraordinary items?

I'll take that.

If you isolate the onetime accounting adjustment, which was associated with inventory valuation for U.S.

GAAP purposes for Pfaff, that amounted to about $1.3 million.

And we quantified the steel costs that we weren't able to recover through pricing to pass us through the channel.

(multiple speakers) $1.4 million?

Yes, that amounted to about $1.4 million.

So that would get you back to close to the 29%.

Yes, those are the two that we cited.

And then, of course, we commented on the Pfaff business having lower margins than the historical Columbus McKinnon business.

We have not disclosed separate margins for that business, but know that they are lower than the Columbus McKinnon historical average.

But that doesn't seem like it impacted you that much.

The mix issue.

It certainly did.

It did?

So margins would have been above 29%.

I think that's fair to say.

If you remove Pfaff.

If you remove Pfaff, right.

Yes.

Okay.

So with -- going forward, you could assume the margins -- the 29% target is actually what we have going forward, is a good target, at least near-term.

Unless you've got a lot more contraction on the volume side, which could negatively affect margins.

Yes.

I was going to say, certainly the topline level will impact the margins because, while we've got a lot of work underway to control the costs, there is certainly some level of negative operating leverage with sales coming down.

And we did feel some of that in the U.S.

operations this winter.

Right, okay.

So we could expect a little bit of that going forward, too.

Okay.

And how about -- the G&A expenses were nicely lower.

And I guess some of that reflects getting rid of -- what's the operation (multiple speakers)

Oh, Univeyor?

Univeyor, right.

You got -- so I guess that reflects that.

Is this a level that you could probably sustain?

First of all, let me just clarify.

The comparison numbers, the prior-year numbers that we've reflected in the release, remove (multiple speakers)

Remove that, I know.

I'm looking at my old numbers, but your numbers are basically the same.

Just to clarify that for you.

And that's pretty good with Pfaff coming in.

The Pfaff G&A as a percent of revenues is lower than the historical Columbus McKinnon, but their selling is a little higher.

So, as we had indicated, their current margin profile, their margins are lower than the current Columbus McKinnon.

We see opportunity to get them up to Columbus McKinnon's average, but it takes some time.

Okay, great.

Thank you.

James Bank, Sidoti & Company.

I'm just trying to get back into all the adjustments that were made in the quarter.

The mark to market adjustment on your self-insurance portfolio -- I'm not familiar with that.

Is that a onetime, or can we reasonably assume that's onetime?

I hope so, but what it is is -- it's not fair to say it's a onetime.

I'd like to think that the extent of it in this quarter was quite unusual.

What happens is that you have to take these investments and mark them to market each month or each quarter.

But when it's a significant loss, and significant is not clearly defined by the SEC, when it's a loss of some magnitude that you don't necessarily see recover -- recovery, at least have visibility of it, that charge gets reported in the income statement, which is what happened in this quarter.

Let me assure you, I guess, from a mix standpoint, those investments -- the majority of that is fixed income.

It's like 80% fixed income and 20% equities.

So the good news is there is limited exposure to the equities market.

What would be a normal charge?

You barely see it.

(multiple speakers)

So not even a penny to the -- okay.

So that, we could probably reasonably add back --

It was quite unusual, obviously, for this quarter.

So the adjustment with Pfaff, the restructuring charges, the self-insurance mark to market, and I guess the discontinued operations, so it looks like it was an adjusted --

$0.43?

It amounted to -- the market -- we added a table to the press release.

I hope that it might help you out.

We quantified the mark to market adjustments (multiple speakers)

Right, no, I do understand that, I guess.

But material costs, clearly that's just normal operations.

I don't think that's reasonably added back.

I'm just trying to get through here -- on a floor.

So it looks like you did about $0.43 adjusted, is that fair?

I guess I'm not exactly sure.

I think it's a little better than that.

I guess -- I think the mark to market adjustments, obviously, are significant, and (multiple speakers) unfortunately don't happen every quarter.

Similarly, the currency translation losses, I'd throw into that category as well.

Restructuring charges, I think I would isolate from normal ongoing operations.

They're certainly part of the business, but then, we'll get the future benefit of them.

And those onetime accounting adjustments for the inventory valuation on Pfaff, that's just per GAAP accounting.

And those go away.

What about the -- you want to talk about the currency translation?

Sure.

We can touch on the currency translation adjustment.

That was about $0.06.

Given the volatility, again, in the currency markets, particularly at the beginning of the quarter, it really is when the -- this really occurred, as a result of transferring funds from -- basically from the U.S.

to Germany to fund the Pfaff acquisition, and the timing was such that we weren't able to hedge it quickly enough, given the movement in the market.

That is now hedged, so our expectation going forward is that fluctuations associated with that would be minimized.

So it's sort of a net neutral translation going forward.

There's potentially some modest impact, if we revalue the hedges.

But we cannot anticipate anything to this magnitude, to be honest with you.

Okay.

So I can understand -- we quantified for you the unrecovered material costs, just so (multiple speakers) but if you'd call that normal, ongoing operations stuff, certainly it happens.

But if you adjust for all the other things, and our actual EPS was $0.20, instead of adding back 34, if you only add back 29, that gets you to $0.49.

Okay, very helpful.

Thank you.

For Pfaff, is this going to be -- are the employees at Pfaff going to be paid on a commission base, similar to what Univeyor used to be?

Because that was something, when Univeyor actually had an excellent quarter, you saw a huge uptick in the G&A.

I'm just trying to gather if that's going to be sort of a similar type -- model.

It's nothing like the Univeyor business.

I think we don't quite understand the question, and I think it's just simply because the Pfaff business is nothing like the Univeyor business.

The Pfaff business is more like the traditional Columbus McKinnon business.

So product to order, no engineer to order type?

There is some engineer to order, but it's relatively modest.

And when they say engineer to order, we're really talking about using fairly standard product and configuring them uniquely to the order, which is very similar to what we do for hoists.

Fair enough.

And if there is -- there are certainly sales commissions that are variable to sales, so if there is a large order, the selling expense could be higher related to that order, for example.

But it's nothing like the Univeyor business.

I'm sorry, what month was Pfaff acquired in?

It was acquired October 1, so the very beginning of this quarter.

(multiple speakers)

So it's a full quarter.

Okay, great.

And then lastly, the further cost-cutting measures you mentioned -- seemed like they were about a handful.

If you did have to go down that road, how quickly would that affect your P&Ls, to benefit you?

Our thinking would be is that we would be evaluating as the quarter goes on, but as soon as we pull the trigger to implement them, it would be pretty close to immediate.

Okay, so no reason to go ahead and -- precautionary go ahead and take those measures now until, I guess, you'd assume that there are further declines.

That's right.

Okay.

Terrific.

That's all I have.

Thank you.

Peter Lisnic, Robert W.

Baird & Co..

Good morning, everyone.

The first question, I guess, I had, Tim, the restructuring that you talked about and the things that you have accomplished in the past.

If you could give us a sense as to -- as we kind of look and make our own volume assumptions going forward, could you give us a sense as to what you think the decremental margins might look like going forward?

Relative to previous downturns?

I think -- and you've probably heard me say this before -- is that our operating margin should be higher than the last downturn operating margin.

The last trough, which I think was fiscal '03 or '04, something like that.

And it was -- the trough last time was in the 6% area.

It will be our goal to be a pretty good measure above that.

And we don't give guidance, as you know, but think about the fact that we don't have the 10 manufacturing plants that we had back then, and structurally, we've moved a lot of that to fixed costs.

We have opportunity to do that again, maybe not to the same degree in this downturn, but -- it would be my expectation that we would be more toward the higher end of the single-digit area.

That helps, because it's hard to decipher some of those numbers in the past.

It looks like incrementals, or decrementals, are in the 20% to 30% range.

I'm guessing that's a reasonable figure to use going forward.

That would be reasonable.

Fair enough.

If you could just maybe give us an update on Pfaff, and the potential to reach Columbus level gross margins, kind of what -- any change in what your thinking there is, or a potential timeline, to where we could see some more significant margin improvement in that business?

We have been at it for three months now, in terms of the integration of the two companies.

And in my opinion, it's going very well.

I think -- culturally, we fit pretty well, as well as people are really working hard together to accomplish the targets that we set out.

It will take us one to two years to fully recognize the synergies that we identified early on doing our due diligence.

So I would say that -- and, by the way, we weren't planning on an economic downturn maybe to the degree that we're going to see here shortly, when we did the due diligence, of course.

So that would negatively impact our synergies and we may not get them as high as we would like to because the business would have been softer or down more.

But I suspect it's still going to be in that couple year area, and then I would think the margins would be reasonably close to, what you know us as, the normal Columbus McKinnon margins that are in the 12% to 13% area, which we're not seeing today because of the downturn.

Fair enough.

I guess, Karen, I hate to harp on this one, but on the mark to market write-down that you took in the quarter, I just want to make sure I understand this correctly.

I understand the third quarter impact, but leading up to that, I'm assuming that there was either income or loss recorded every quarter as a result of -- or derived from those investments.

Is that the right way to think about this?

Yes.

Absolutely.

There is realized income or loss relating to those investments every quarter, and of course, there's also unrealized.

And generally, unrealized fluctuations, as they get mark to market, get recorded in other comprehensive income and equity, unless they are more significant losses that are deemed other than temporary.

So it's not considered permanent, but other than temporary, from the standpoint that they are more significant and you don't have visibility that you'll see them come back anytime soon.

So, given the current market environment, these valuations were, in fact, deemed other than temporary, and in that instance, the charge, instead of getting recorded against equity and other comprehensive income, it gets recorded in the income statement.

But in theory, you could also -- if the market totally turned around on those securities, in theory you could book income in the next quarter, if that actually did happen.

That's absolutely right.

All right.

That is all I had.

Thank you very much for your time.

Joe Giamichael, Rodman & Renshaw.

A lot of the questions have been answered already, but just to touch upon a couple simple things.

As it relates to steel, can you remind us the specific types of steel that you buy?

I know it's relatively varied, but just to give us a better sense so we understand the pricing lag.

And then, with that, how many suppliers do you have?

And going forward, if you do see this continuation of your raw materials' prices continuing to soften, would you consider committing some capital to build the raw material inventories?

Good question.

Let me see if I can take that and ask Karen to add on if I miss something.

There is three primary types of steel we buy.

Forging bar, which is rod for all intents and purposes, and it is a special alloy rod.

The bulk of our purchases, at least, are special alloy rod.

When we make lifting tools out of these forging bars, they have to have certain tensile strength to accomplish a certain working load limit for lifting.

So it's kind of a unique alloy that we actually use, which makes it a little more problematic to explain to someone, because when you see hotrolled going down 30%, it doesn't correlate very well to Columbus McKinnon because that's not what we're buying.

That's a big number, and that's the one that's been actually up quite a bit.

There is one primary supplier for that product.

The second category is coil stock and this is typically either alloy or carbon steel.

It's actually rod that's rolled in a coil.

Smaller diameter typically, anywhere from quarter-inch up to three-quarters of an inch in diameter.

And that one might vary a little more closely with some of the numbers that you might see.

By the way, both of these two categories are based upon scrap steel prices to a large degree.

They're linked to that metric.

And the rod -- the coil stock that we buy today typically comes from one primary supplier as well.

There's a couple others that we use globally, but there is one that seems to be doing the best job for us and the right price.

And the last one is -- really comes from service centers, steel service centers, people like Jorgensen and Ryerson.

And it's a mixed bag of structurals and flats, and framework for hoists that sometimes we need for our larger hoists, and that's actually the lowest commodity.

And that one would probably correlate mostly to some of the metrics that you might see in steel.

To be perfectly honest with you, relative to your inventory question, we have indeed bought in advance when we anticipate rises in prices.

For the forging bar, for example, we get a one-month notification of a price increase.

And typically, we will buy two to three months of product in advance.

And that's true with all of them.

We do get a little bit of advance notice and we try to prebuy.

Great, thanks.

And then, just a two-part question focused on the gross margins.

Just -- you've just now began to see the decline in steel costs.

Would you -- I am assuming you're anticipating these costs continue to soften, given the macroenvironment we're in.

You mentioned the November and the January price increases have been passed through.

Can we assume that that pricing should remain sticky even as volumes soften?

It's tough to say, at this point, given the softer volumes.

We are working hard to keep the price, as you well know.

But the reality is we also want to get orders, and we have -- certainly have competition that wants them as well, so we're fighting for that.

It's probably not as sticky as it normally is, in a normal economic environment.

Would be my feel for it.

The other thing is we are seeing some significant decline in some of our raw material steel, which would be helpful.

The forging bar, as Karen mentioned, is down 33% from last quarter to this quarter, so that's going to be helpful going forward.

But the other two categories of steel we just talked about are actually up in the mid single digit area.

If you are to get pushback on prices, given the fact you do sell almost all of your products through distributors, is it sort of a delayed process where customers push back on the distributors, who then come back to you to try and gain back some pricing?

Typically.

That's exactly what happens.

Last -- just a bookkeeping question.

I saw that the fully diluted count -- share count declined, while the basic share count increased a bit.

Can you just give us an explanation as to what occurred?

Were there some option expiration, or --

It's really due to the valuation of the options, given the stock price.

Great, thanks.

Congratulations on the quarter.

The operating numbers were very good, given the world that we're living in.

Holden Lewis, BB&T Capital Markets.

I may have misheard this, but I thought that when you were talking about the restructuring actions before, you were talking about a $4 million savings.

But then, when you went into the personnel cuts, I thought you talked about $3 million or $4 million in cost to implement and then, $10 million in annual savings.

What did I miss?

Let me clarify.

Great question.

It did get a little confusing there.

I apologize for that.

In the quarter, the past quarter, we have implemented already savings that represent $4 million, and the cost was $1 million to get that savings.

And on a go-forward basis now, looking down the road through the fourth quarter, we would expect to have additional costs over and above the $1 million.

Another couple or three or so of restructuring costs that would get us another $6 million of benefit.

So in the quarter, you're now at a $4 million run rate [egged] in the quarter, in terms of annual savings, and that cost you $1 million.

And then you'll add another $2 million in costs and another $6 million in savings -- over what period of time?

We would plan to implement it this quarter, which is our fourth quarter.

And we would get that savings, obviously, over the next year.

It starts immediately but you don't get the ramp until the -- for the full year.

So in fiscal Q4, we're going to see another $2 million in restructuring expenses?

I don't want to give you the exact number because we're not done putting pen to paper just yet.

But it is going to be in the $2 million to $3 million area, probably.

And this is all just a function of cutting heads?

And that 200 heads, was that in Q3 or was that through the entire reduction program?

No, that's in Q3.

And it is severance cost, which is, I would say, is the bulk of the cost.

But we are looking at plant consolidation as well, so there's other structural costs that we need -- to move things around, move equipment around, which is part of the restructuring, which is the smaller part of the cost.

But if you were to do that, then we'd be talking about additional annual benefits and additional quarterly costs.

That's correct.

The balance of the restructuring -- of the 200 that you have identified so far, ultimately how many -- how much are you reducing the headcount?

Hard to say at this point.

But we're still working on that right now.

But -- 200 is about 6% or 7% of our total workforce.

It could easily double.

But we don't have the final numbers just yet.

Actually, that will be forthcoming here shortly.

And then, just touching, I guess, on Pfaff, what was the impact at the bottom line, the EPS line?

And I guess if you strip out that onetime accounting adjustment that's not going to be ongoing, if you strip that out, what was the bottom-line impact to your earnings?

I'll take that one.

I don't think it's fair because we don't disclose the contribution of separate businesses.

But I think it's fair to say that it was accretive and in line with our expectations.

We had previously disclosed our operating margins were in the mid to high single digits area, and they performed consistent with that.

Fair enough.

I think, also, when you look at -- your debt really didn't change, but your interest expense went up.

If I understand correctly, that's because you, I guess, took on higher-cost Pfaff debt and retired debt that was somewhat lower cost, relative.

So the mix kind of was a higher cost of capital.

Are you going to refinance the Pfaff debt?

Is that something which goes on and on, or is there some way we could sort of move the cost of debt down?

We are addressing the Pfaff debt, and really the whole picture, to get some efficiencies on a global basis.

Okay.

So you will be trying to sort of move that cost of debt down?

Does that seem like something which is reasonably near-term and possible to do?

Yes.

Okay.

And then, talk a little bit more about pricing, if we could, only because I think you put in the October November price increase.

I guess it was late November.

The -- at least sequentially, the contribution from price is 400 basis points versus 500 basis points last quarter, so it seemed like it stepped down a bit, even though I would've thought that we would be seeing a little bit of contribution begin to leak in for November and December.

Are we losing something somewhere else, or is it a timing issue, and can you give any color?

I know there's not a lot of long-term color, but even for the March quarter, can you give us some color on what you expect the pricing to come in at?

The price increase last quarter was effective November 24, I believe the date was.

So it was two months into the quarter.

In essence.

And basically, we accelerated our January -- our normal January 1 increase into November.

And then, the -- there is another increase in the fourth quarter that happened at the beginning of January for our European business.

And that's in the tune of 3% to 4%, somewhere around there.

And when was that, I'm sorry?

January 1.

Okay.

So -- but again, just getting to the sequential change in pricing, quarter to quarter, did something anniversary, did we lose some that we haven't recaptured in the new price increases yet, or is it just noise?

I think maybe what you're seeing is the fluctuation due to surcharges.

Because we had been surcharge -- we started surcharging in April of '08 for our high steel content product in the U.S..

So our chain and our forged attachments, we would adjust the surcharges on that we would pass through the channel on a monthly basis.

So there's certainly some fluctuation, quarter to quarter, relating to that.

I wouldn't read too much into that, though.

But otherwise, so you did -- you feel that that November increase went into place, that has stuck, and you put in an increase in both Europe as well as North America here in early January, which so far you also believe is sticking.

Is that the way to (multiple speakers)

The January increase was just Europe.

Because we did the November increase in the States instead of the normal January increase, so it's just the November increase in the States.

That was 300, 400 basis points?

Yes.

And then, the late November was just the U.S., and how much was that again?

About 3%.

So when you look at it, would you expect -- given the surcharges are in there and some costs are coming down, so the surcharge is probably coming down, are you expecting that pricing of -- call it 400 to 500 basis points -- to remain stable in the fiscal Q3?

Or is there some stuff anniversarying, or do we see an increase because of the new price increase?

Directionally, what should we be looking for in the near term?

I think this area of 3% or 4% is what you might see in the -- going-forward basis.

But having said that, I think it is somewhat of a crazy time out there, and there may be pricing pressure, given the demand environment.

So I just want to caution you -- with that dynamic.

But you're not seeing it now.

I think it's probably fair to say we are beginning to see it, but --

I think it's early to say.

The fact that you go through distribution channels, [my fair] to distribution is that pricing and distribution channels tend to be much more stable than if you are selling direct to OEMs.

Yes.

Correct.

So, I mean, the fact that you're selling to distribution, isn't that -- are you having the likes of Grainger and those guys coming back to you and demanding price concessions?

When steel prices come down, they will want our surcharges lifted.

And that's, to a degree, less price.

Right, but the surcharges are supposedly neutral, right?

I mean, price is actually a benefit, and surcharges are set to be able to rapidly react to increases that are anticipated to neutralize.

So as long as the surcharges are moving with raw materials, that going up and down shouldn't matter that much, right?

It's really the base price that's key.

Yes, and that is what we're talking about here.

We rolled the surcharges into the actual price for the chain or the forging product at the end of November.

That was part of the whole price increase.

And I think it's fair to say, while it's early in the cycle in terms of its impact on us, that we are cautious about whether the full extent of the price increases will stick.

And then, lastly, can you just comment, first, on any pension risks going forward, and then, secondly, the inventories on the balance sheet.

It looks like they were up a bit.

I don't know if that was a function of prebuying, but if you can just sort of address that as well.

Sure, so pension and inventories.

With respect to pension, we do have defined benefit pension plans, and like everyone, we have seen downward pressure -- or downward valuation of the assets in the plan, that we have been working closely with our actuaries in terms of assessing that impact.

There is potentially an increase -- a near-term increase in costs associated with that, just the way the accounting works for those, until the asset valuations come back.

With respect to the inventory, certainly the addition of Pfaff has resulted in an increase in the inventory balances, as you know.

And with respect to the non-Pfaff businesses, we did see a modest increase in the inventory balances compared to the end of September, primarily due to some projects that were in process that weren't complete at the end of the quarter at some of our larger businesses, including our tire shredder operation and our crane businesses.

So that will go away pretty quickly.

Yes.

It's kind of -- (multiple speakers).

It's a little lumpy.

Back to the pension, do you have a sense of what sort of the EPS impact would be on maybe fiscal '10 as you look through all that?

No, we don't yet.

We are working through that with our actuary because we are planning for that year.

And as the markets continue to move.

All right, thanks.

Jason Ursaner, CJS Securities.

I just had a follow-up.

When you acquired Pfaff, you had talked about having challenging -- you had trouble getting the Duff Norton actuators into Europe.

I was just wondering if you've seen any success in cross-selling the Duff Norton actuators.

Yes, actually, that's going pretty well.

The Duff Norton business and the Pfaff business have combined their actuator sales and marketing teams, and it actually looks very promising.

We haven't seen sales just yet, but the rollout is going well and we would expect to hit some pretty good numbers in that regard.

Thanks a lot.

That was it.

Holden Lewis, BB&T Capital Markets.

Thank you, again.

You also, to this point, have been making significant investments in people and offices outside of North America, building up the European presence, Asian presence, etc..

Have you continued running forward with all of those.

Have you slowed those down in light of what you're seeing or maybe in light of the Pfaff acquisition?

I guess I'm just curious about whether or not we're still spending into a downturn or whether that's kind of gone away.

It has not gone away, but it's being measured more directly.

I would say that we need to continue to make investments in products and markets to execute our strategic plan long term, but we're doing it in a much more cautious way and much more measured way, prioritizing the markets that will really give us some short-term demand immediately, and then maybe delaying some entry into markets where it might be a more longer-term venture.

So, if I use the word cautious, I think you'll understand.

And so, can you talk about what would have been a typical sort of investment spending nut in prior quarters, and maybe where that's going to?

Is that a discussion you're able to have?

No, not at that level of detail.

All right, thank you.

At this time, I show no further questions.

Let me summarize by saying we have made a significant step forward, executing our strategic plan with the acquisition of Pfaff in the quarter and the clear indication of a successful integration, which is well under way.

Even after the acquisition, we remain well capitalized with $22 million in cash and a $75 million untapped revolver that matures in 2011.

The remaining $124 million of subordinated notes mature in November of '13.

We are considerably stronger today than we have ever been, especially when comparing us to the last economic downturn of '01 to '04.

This management team has weathered significant storms before, especially the last recession, and I am happy to say that we are in a much better position to weather this economic downturn than we were in the last one.

We will attack waste in all forms and position our company to be much stronger as we emerge from this current economic malaise.

I do want to thank all of the Columbus McKinnon associates around the world for their hard work and ultimate success in making this quarter a good one.

And as always, we appreciated all of your time today.

Have a good day.

This concludes today's conference.

Thank you for participating.

You may disconnect at this time.