Prepared remarks
Good afternoon, and welcome to Columbus McKinnon's Third Quarter Fiscal 2026 Earnings Conference Call. My name is Constantine and I will be your conference operator today. As a reminder, this call is being recorded. And I would now like to turn the conference over to Kristy Moser, Vice President of Investor Relations and Treasurer.
Thank you, and welcome, everyone, to our call. On today's call, we will be covering our third quarter fiscal 2026 financial and operational results. On the call with me today are David Wilson, our President and Chief Executive Officer; and Greg Rustowicz, our Chief Financial Officer. In a moment, David and Greg will walk you through our financial and operational performance for the quarter. The earnings release and presentation to supplement today's call are available for download on our Investor Relations website at investors.cmco.com. Before we begin our remarks, please let me remind you that we have our safe harbor statement on Slide 2. During the course of this call, management may make forward-looking statements regarding our current plans, beliefs, and expectations. These statements are not guarantees of future performance and are subject to a number of risks and uncertainties and other factors that can cause actual results and events to differ materially from the results and events contemplated by these forward-looking statements. I'd also like to remind you that management may refer to certain non-GAAP financial measures. You can find reconciliations of the most directly comparable GAAP financial measures on the company's Investor Relations website and in its filings with the Securities and Exchange Commission. Please see our earnings release and our filings with the Securities and Exchange Commission for more information. Today's prepared remarks will be followed by a question-and-answer session. We respectfully ask that you limit yourself to one question and one follow-up question. With that, I'll turn the call over to David.
Thank you, Kristy, and good afternoon, everyone. Last week, we were very pleased to announce that we closed the Kito Crosby acquisition. We have been working diligently over the past few quarters towards closing this transformational acquisition and are excited to now get to work on delivering the benefits associated with bringing these two innovative companies with industry-leading technical expertise, customer-centric cultures, and a shared vision for operational excellence together. We are welcoming the Kito Crosby team to Columbus McKinnon as we combine the best of our collective talent and capabilities to deliver an enhanced value proposition for our customers. Additionally, we expect to close the previously announced divestiture of our U.S. power chain hoist and chain operations by the end of this quarter. This will be the final step in aligning the combined company towards our next phase of growth. Let me now shift to our quarterly results. As part of our permanent financing, which was recently completed at attractive interest rates, we preannounced key metrics for the third quarter and are happy to share that we came in at the high end of those ranges. We delivered double-digit growth in sales, orders, EPS, and backlog year-over-year as we saw continued stabilization in U.S. short-cycle order activity and capitalized on our strong project backlog. We continue to see an attractive global funnel of opportunities, and our backlog remains at healthy levels, positioning us well for the future. Adjusted EBITDA was $40 million with an adjusted EBITDA margin of 15.4%. This margin was flat to the prior quarter as our tariff mitigation actions offset normal seasonality. Adjusted EPS improved 11% from the prior year to $0.62. Additionally, we made meaningful progress on operational improvement, tariff mitigation, and integration preparedness initiatives. While it's becoming increasingly difficult to estimate tariff costs as vendor price increases begin to replace tariff-specific surcharges, we believe that we came in slightly ahead of our $10 million net tariff impact in the first three quarters of fiscal 2026. We continue to expect that we will achieve tariff cost neutrality by the end of the year and margin neutrality in fiscal 2027. I'd like to thank the entire Columbus McKinnon team for their unwavering commitment to our customers and strong execution in the quarter. The team successfully managed through a complex set of strategic objectives and an evolving market landscape while delivering ahead of our initial expectations for the quarter. Orders were up 11% to $247 million. The U.S. grew 15%, driven by strength in lifting, automation, and precision conveyance, and EMEA grew 3% despite the continuation of a weaker economic landscape that is causing slower order conversion. Globally, growth was balanced across both short-cycle and project orders, reflecting stabilization of short-cycle demand, traction on our commercial initiatives, and implementation of tariff-related price increases. Our pipeline of quotation activity remains encouraging, and we continue to see a strong funnel of new business opportunities. We expect U.S. demand to remain healthy, driven by lower interest rates, favorable CapEx deduction rules as part of the new tax legislation, and benefits from onshoring, all of which will serve as tailwinds for our business. As mentioned previously, in EMEA, we expect choppiness to persist given the forecast for a challenging demand environment in the near term. While the pipeline for new business continues to build, order conversion is expected to continue to be slower than typical. We are focusing our efforts on vertical end markets with tailwinds like metal processing, government and defense, heavy equipment, as well as end markets where we've been building a leadership position like battery production, e-commerce, food and beverage, and aerospace. Our backlog is strong, up 15% versus the prior year to $342 million with an increase across all platforms in both our short-cycle and project businesses as we've continued to deliver on our commercial initiatives and capitalize on U.S. market stabilization. I'll now turn the call over to Greg to share the details of our third quarter financial results.
Thank you, David. Columbus McKinnon had a successful third quarter, showing substantial growth in sales, orders, backlog, and adjusted EPS. Our net sales reached $258.7 million, up 10.5% from last year, thanks to higher volume, pricing, and favorable currency exchange rates. We experienced significant strength in our lifting, linear motion, and automation sectors. North America was our strongest market, benefiting from stabilized demand in the U.S., while we observed modest organic growth in EMEA despite challenging economic conditions. Pricing pressures continue to rise, and we anticipate further pricing increases in the upcoming quarters as we address our backlog. Short-cycle sales grew by 13%, with the U.S. market experiencing benefits from both pricing and volume growth. Project-related sales rose by 8% as we converted backlog into revenue worldwide. Our gross profit stood at $89.2 million, reflecting an $7.1 million or 8.6% year-over-year increase on a GAAP basis, driven by higher sales volume, price increases, and favorable foreign exchange rates. We also incurred lower costs associated with factory consolidation and start-up compared to the previous year, although these were somewhat offset by negative tariff impacts. On a GAAP basis, our gross margin was 34.5%, while adjusted gross margin was 35.1%. The adjusted gross margin experienced a decline of 170 basis points year-over-year due to a less favorable product mix and the impact of tariffs. This quarter's product mix was negatively affected by the timing of sales for our higher-margin precision conveyance platform and a less favorable mix in our U.S. lifting business. We also had more rail project shipments globally and fewer linear motion sales, which adversely impacted margins. RSG&A expenses this quarter included $6.3 million related to the Kito Crosby acquisition as well as our pending divestiture. When excluding these items, adjusted RSG&A as a percentage of sales remained stable compared to last year, despite the previous year's favorable incentive compensation accrual release. Consequently, we achieved operating income of $16.2 million on a GAAP basis and adjusted operating income of $24.5 million, with an adjusted operating margin of 9.5%. This led to adjusted EBITDA of $39.8 million for the third quarter, resulting in an adjusted EBITDA margin of 15.4%. It's important to note that the calculation of adjusted EBITDA now includes an add-back for stock compensation expense to align with our credit agreement definition. GAAP income per diluted share for the quarter was $0.21, a 50% increase from last year. Adjusted earnings per share increased to $0.62, an 11% rise year-over-year driven by higher net income from increased sales volume and pricing, coupled with reduced foreign exchange losses compared to the prior year. Our free cash flow for the quarter was $16.5 million, supported by higher earnings, improved working capital, increases in customer deposits, and lower cash taxes, partially offset by $6.7 million in transaction-related cash payments. We are pleased to announce the closing of the Kito Crosby acquisition, and have initiated integration activities aimed at achieving our $70 million net run-rate cost synergy target. Following the acquisition, we secured permanent financing, which includes a new $1.65 billion Term Loan B, $900 million in senior secured notes, $800 million of perpetual convertible preferred stock, and a new $500 million revolving credit facility that enhances our liquidity. Our financing rates were better than initially estimated, which allows us to expedite debt repayment and reduce our balance sheet leverage. Furthermore, we have increased the amount in our Term Loan B, which is prepayable without penalties. Anticipating substantial cash flow generation, we will have the flexibility to pay down debt ahead of scheduled payments, further lowering interest expenses. We plan to use the proceeds from the pending divestiture of our U.S. power chain hoist and chain operations, estimated at $160 million after taxes and transaction fees, to pay down the Term Loan B. We expect this transaction to close later this quarter. Looking ahead, our primary capital allocation focus will be on debt repayment, aiming to lower our net leverage ratio to below 4x by the end of fiscal 2028. Due to the recent acquisition of Kito Crosby and uncertain timing surrounding our pending divestiture, we are withdrawing our previous Columbus McKinnon stand-alone guidance for fiscal year 2026. We will offer guidance for fiscal '27 during our earnings conference call in May 2026 when we report fiscal year '26 fourth-quarter results. We expect to incur certain transaction-related expenses, purchase accounting adjustments, and early integration costs in the fiscal fourth quarter of 2026, which alongside increased interest expenses are expected to be dilutive to GAAP earnings per share. We also anticipate significant transaction and deal-related costs in the quarter that would negatively affect free cash flow, and we have accounted for these factors. We are enthusiastic about the Kito Crosby acquisition and our capacity to meet our long-term goals. Our operational and commercial teams are dedicated to maintaining business continuity and achieving our operational and customer service objectives. Additionally, our integration management office comprises a committed team of cross-functional leaders focused on realizing cost synergy and driving revenue synergies. Although the acquisition process has been lengthy, we have strategically progressed our integration and synergy plans during this time. We are excited to integrate the Kito Crosby team into the Columbus McKinnon family, working together towards a shared vision for the future.
Questions and answers
A couple of questions. First, can you remind us a bit on the seasonality in the Kito Crosby business, kind of compare and contrast versus that of the core business? And also talk about the timing in which this $70 million in cost-related synergies is realized, meaning how much is sort of in year one versus year two versus year three? Any kind of help you can give there? And then I have a follow-up.
Sure. Thanks, Matt. So as you know, Columbus McKinnon as a stand-alone business has its strongest quarter in the fiscal fourth quarter, which is the quarter that we're in, ending in March. Kito Crosby year-end is a December year-end, and they also typically have their strongest quarter seasonally in the fourth quarter for them, so our fiscal third quarter. And then nothing beyond typical trends in the industry that would be driving normal activity in the business, which in our business, as we compete in the same markets, we tend to see a first half that's more or less equivalent to the second half and a bit of a stronger second quarter and a stronger fourth quarter. So I think we expect to see something similar with their business profile. And then from a $70 million of synergies perspective, we expect roughly 20% in year one, and that number going up to 60% realized in year two and then the full 100% of the $70 million realized in year three.
Got it. I assume the EBITDA cadence for Kito would follow a similar pattern. If I'm mistaken, please correct me. I was hoping you could provide a deeper analysis of your major end markets in addition to your prepared remarks. Perhaps you could also include some geographic insights as you do this.
Well, Matt, regarding your first question, we expect Kito Crosby to maintain an EBITDA margin in the range of 22% to 23% based on their sales levels, which is typical. Additionally, Mark, in terms of markets, we benefit from diversified exposure to various end markets, similar to Kito Crosby. In the last quarter, we observed strength in the general industrial sector and increased investment in automation, with notable demand in the automation space. There was also a strong demand for e-commerce orders, which are starting to rebound. Other positive areas included construction, aerospace, government, heavy machinery, and food and beverage. On the downside, we noticed some slow demand from general stocking distributors managing their inventory as the year ended, as well as in the energy and utilities sector, although this is influenced by project timing, and we anticipate improvement. Geographically, orders in the U.S. increased by 15%, while orders in Europe rose by 3%, largely due to foreign exchange effects. Demand in Europe, however, remains slower than expected. As mentioned in the prepared remarks, we foresee this slower decision-making process continuing into the next quarter.
Congratulations on completing the acquisition. While I understand you're not providing guidance for the next quarter or the upcoming fiscal year, can you share how both businesses are performing now that the deal is finalized, in relation to the original assumptions made when the deal was announced a year ago?
Sure. And what I would say is that we provided in our January 14 press release when we announced the divestiture, a pro forma fiscal year '26 guidance range assuming that we would own Kito Crosby for the full year as well as that we divested the chain and electric chain hoist business at the beginning of the year. So kind of a pure pro forma view, inclusive of $70 million worth of net run rate synergies. And in that set of assumptions, we were running somewhere between $2 billion and roughly $2.1 billion in terms of revenue. And then we had EBITDA that was in the $440 million to $460 million range in the combined business. Now you'd have to get to a base business without the synergies, you'd want to back off $70 million from that on the assumed benefit over the three years. And then we could add back in the 20% for year one if you were thinking about the business from a go-forward basis. And that would be the TTM performance from March 31 backwards from a range perspective. I hope that helps, James.
Got you. It does. I was speaking more in terms of the macro background. Obviously, a really strong start to the calendar year. ISM data was strong. Short-cycle is up 13% last quarter or the quarter you just reported. Is that sustainable? Or do you think that is somewhat of a recovery from a slowdown last year? And maybe just more color into the sectors driving that order pipeline.
The short-cycle business is performing well. We experienced a 10% year-over-year increase in short-cycle orders last quarter. Seasonally, we typically see a decrease compared to the second quarter as stocking distributors reduce inventory. However, as we move into the first quarter of this year, we observe a slight increase in orders compared to the same period last year through January. We expect that demand for short-cycle products will remain strong, particularly in the United States. Our demand funnel is healthy, reflecting global activity, including in EMEA, where decision-making is slower due to the economic landscape, particularly the IFO index for Germany, which we monitor. We see positive trends in the U.S. and are optimistic about the demand outlook, expecting it to continue through at least the first half of this year. Regarding Kito Crosby's results, we pre-announced projected figures for December 31. A year ago, during the announcement of the deal, we estimated around $1.1 billion in revenue and $263 million in adjusted EBITDA. Based on the 8-K released on January 14, we anticipate sales between $1.140 billion and $1.150 billion, an increase of approximately 3% to 4%, with adjusted EBITDA forecasted to be between $273 million and $283 million, which reflects a significant improvement.
I wanted to discuss the margins and tariff offsets briefly. I'm looking to understand the year-over-year margin squeeze for this quarter. How much of it is attributed to tariffs and how much is due to the mix? You mentioned that there were more lower-margin rail deliveries this quarter. What actions are needed to achieve tariff margin neutrality by fiscal '27, and how confident are you in reaching that goal?
Yes. Thanks, Steve. And I would say just at a high level, the biggest impact was backed was mix, followed by tariffs. And really, we had a mix issue related to more unit sales in lifting equipment versus parts sales. And that obviously bodes well for future aftermarket opportunities with a bigger installed base, but that consumed a bunch of our capacity in the quarter and reduced the opportunity to produce and sell parts. We also had a lower revenue number for precision conveyance product. And that was just based on the timing and delivery. Orders in that business in the U.S. are up considerably. And we have a significant backlog still related to the PowerCo orders that we received previously from montratec. But based on phasing delivery in the quarter was lower on a relative basis, and therefore, those two factors really led to a reduction in margins. As you know, rail shipments do have an impact on overall margin and the mix of rail versus actuation or screw jack sales into the OEM space or the machine builders market is a mix challenge for us that we're navigating as the markets in Europe are still growing or picking back up in the wake of a slowdown in machine building activity.
And then, the confidence level and ability to reach margin neutrality. Is it in terms of tariff?
Yes, absolutely. We still expect that as we finish this year, we will achieve cost neutrality regarding the tariff impacts, and we aim for margin neutrality next year as we implement our planned initiatives.
Okay. Given the prolonged nature to get the Kito Crosby deal closed, I know you've been working on integration ahead of our planning your ability to capture that your confidence level to capture those 20% of the $70 million of synergies in year one. Any chance you're going to beat that? And is that going to be bad? Are you thinking that's back half weighted?
Yes. We're working our tails off to deliver on that and to hopefully overdeliver that, certainly what we're striving to be able to do but our commitment is to get to the 20% in the year. And that's the way that we're targeting those savings and communicating about those savings. But as you know, we have a full and robust list of opportunities. We've been working since October with a fully staffed integration management office, taking advantage of the time between signing and close to get ready for day one and to position ourselves with actions that allow us to certainly meet and hopefully exceed those targets, and that's what we're striving to be able to do. And I would anticipate in the natural course of those savings building that they would be naturally back-end loaded.
Congrats on closing the deal. My first one is, did you benefit or were you impacted by any pull-ins or pushouts in the quarter? And the reason I'm asking is just because that's been an item in the last several quarters. And I'm wondering if that was a factor in this one, too.
Yes, Jon, nothing that we would state as material. Certainly, last quarter, we did reference that. But in this quarter, no, nothing that was too material.
Okay. Great. And then second, could you talk about how much of the strength in the quarter and the orders that you're seeing is from the U.S. chain hoist business just because that's going to be divested in the near future. And I'm just wondering what that looks like if that may not have been there.
Yes. There was nothing material in the chain hoist orders or in the chain production orders that would have kind of in any outsized way influenced the order number out of what would be typical. And so when we think about the performance in the quarter on a relative basis, I would say that orders were more or less in line for that piece of the business relative to prior periods. And so I don't think there's anything to specifically call out as it relates to demand that would go away and that business specifically being a big influencer of the order rate that we had in the third quarter.
Okay. Great. That's helpful. If I could squeeze one last one in there. I mean you did a bit better in the quarter. It looks like Kito is doing well as well, but you did pull the guidance, I understand due to timing, but it seems like the underlying trends are stronger compared to when you last guided. Is that fair to say?
Yes. I mean I think the business in the U.S. is robust, and we feel confident about the performance in that region. I think in Europe, we continue to see some softness as it relates to demand and timing of orders related to the overall macros. And on an overall execution basis within our business, we have a strong backlog. It's up materially year-over-year. And we demonstrated in the last couple of quarters our ability to execute on that backlog. The challenge has been a bit of mix and how that mix is translating into revenue. And I would expect that to continue as we execute through this fourth quarter. But in general, trends are robust and the combined businesses will be, I think, delivering into markets that are going to receive the combination well. and we're targeting the execution of synergies. And so I think this is a terrific opportunity to bring these businesses together. Over the course of this year and the coming two years, we will really deliver a lot of value for our shareholders. Thank you, operator. Before we close, I want to take a moment to reiterate the Columbus McKinnon investment thesis, having now closed the Kito Crosby acquisition. We believe this acquisition will be transformative, and I'm excited about our collective future. On a combined basis, we will be doubling our revenue base as we become a scaled global provider of Intelligent Motion solutions for material handling. This will better position us to deliver solutions for our customers, which meet both their routine needs and their most complex intralogistics challenges. We will also have improved leverage from scale across our global geographies and product portfolios. Geographically, both companies have strong positions that we will leverage and grow in North America. Additionally, we will benefit from our complementary positions in EMEA and Asia Pacific, and we have significant room to grow together in Latin America. Our combined product portfolio will allow us to assemble a holistic offering for our customers across all geographies and simplify the customer experience over time. We will also focus on delivering a one-stop experience for our customers, finding their buying and servicing processes. Our greater scale and combined free cash flow will enable investment in digital customer experiences that ensure we are at the forefront of the industry in terms of ease of doing business. Our operations will benefit from leverage across our combined material spend and the combined benefits of the Columbus McKinnon Business System, including 80/20 and Kito's expertise in lean manufacturing and process tools. In addition, we have plans to improve the financial profile of the company while delivering the $70 million of identified net annualized cost synergies that we expect to achieve. Finally, our substantial cash flow generation potential is expected to rapidly delever the balance sheet to less than 4x net leverage by the end of our fiscal year '28. I firmly believe our best days are ahead of us. While I acknowledge the work that lies ahead, I am thrilled to be in this position. We have the right plan and team in place to ramp our integration efforts. Our newly combined teams are already partnering to enable synergized commercial initiatives and customer success. In tandem, our integration management office is laser-focused on delivering our cost synergy objectives and integrating these two great companies. I believe this combination will drive meaningful value for all of our stakeholders and usher in the next phase of growth for Columbus McKinnon. Thank you for your time and continued interest. As always, please reach out to Kristy with any questions.
This concludes today's conference call. You may now disconnect.