COLUMBUS MCKINNON CORP Q3 2026 earnings call

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 in regards to 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 to 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, Kristi, 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 pre-announced 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, and 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. As David shared, Columbus McKinnon delivered strong results in the third quarter, with double-digit growth in sales, orders, backlog, and adjusted EPS. We delivered net sales of $258.7 million, up 10.5% from the prior year, driven by higher volume, pricing, and favorable currency translation. We saw particular strength in lifting, linear motion, and automation. Growth was strongest in North America, driven by stabilization of demand in the U.S., and we saw a modest organic growth in EMEA against a weaker economic backdrop. Pricing impacts continued to accelerate, and we expect pricing to continue to ramp over the next several quarters as we work through our backlog. Short cycle sales increased 13%, with outperformance in the U.S. benefiting from both pricing and volume growth. Project-related sales increased 8% as we converted backlog to revenue globally.

Gross profit of $89.2 million increased $7.1 million, or 8.6%, versus the prior year on a GAAP basis, reflecting higher sales volume, price increases, and favorable FX rates. We also had lower factory consolidation and startup costs in the quarter compared to a year ago, which was partially offset by negative tariff-related impacts. On a GAAP basis, our gross margin was 34.5%, and on an adjusted basis, our gross margin was 35.1%. Adjusted gross margin contracted 170 basis points year-over-year due to unfavorable product mix and the impact of tariffs. Product mix this quarter was unfavorably impacted by the timing of sales for our higher-margin precision conveyance platform, as well as a less favorable product mix in our U.S. lifting business.

We also had more rail project shipments globally and less linear motion sales, which negatively affected margins. Our SG&A expenses this quarter included $6.3 million of acquisition-related costs for the Kito Crosby transaction, as well as our pending divestiture. Excluding these items, adjusted RSG&A as a percent of sales was unchanged from the prior year, even with the lapping of a favorable incentive compensation accrual release. As a result, we generated operating income of $16.2 million in the quarter on a GAAP basis and adjusted operating income of $24.5 million. Adjusted operating margin was 9.5% in the quarter. This resulted in adjusted EBITDA of $39.8 million in the third quarter, with an adjusted EBITDA margin of 15.4%.

Please note, the calculation of adjusted EBITDA and margin now includes an add-back for stock compensation expense to be more consistent with our credit agreement definition. GAAP income per diluted share for the quarter was $0.21, up $0.07 or 50% from the prior year. Adjusted earnings per share was $0.62, up $0.06 or 11% year-over-year, due to higher net income resulting from higher sales volume and pricing, as well as lower foreign exchange losses in the current year compared to the prior year. Free cash flow in the quarter was $16.5 million, reflecting higher earnings, favorable working capital, increases in customer deposits, and lower cash taxes, partially offset by $6.7 million of transaction-related cash payments. As David previously mentioned, we're pleased to have announced the closing of the Kito Crosby acquisition.

Now that we've closed the transaction, we have begun integration activities, including executing against our $70 million net run rate cost synergy target. In connection with the acquisition, we completed our permanent financing to fund the transaction, which included a new $1.65 billion Term Loan B, based on three months SOFR plus 350 basis points, which was funded at 99% of face value. $900 million of senior secured notes with a coupon of 7 1/8, funded at par, $800 million of perpetual convertible preferred stock, along with a new $500 million revolving credit facility, which significantly increases the company's liquidity. We are pleased that our financing rates came in below our initial estimate of approximately 8%, accelerating our ability to pay down debt and delever the balance sheet.

Additionally, we increased the amount of our Term Loan B in the capital structure, which is prepayable without penalty. With significant cash flow generation expected, we have the flexibility to pay down debt ahead of scheduled amortization, which will further reduce interest expense. Additionally, we intend to use the proceeds of our pending divestiture of our U.S. power chain, hoist, and chain operations, net of taxes and transaction fees of approximately $160 million to pay down the Term Loan B. We expect that transaction to close later this quarter. Going forward, the company's primary capital allocation priority will be debt repayment. We expect that our significant combined free cash flow will enable us to reduce our net leverage ratio to below 4x by the end of fiscal 2028.

Given the recently completed acquisition of Kito Crosby and the uncertainty around the timing of our pending divestiture, we are withdrawing our prior Columbus McKinnon standalone guidance for fiscal year 2026. As usual, we will provide guidance for fiscal 2027 on our earnings conference call in May 2026, when we report our fiscal year 2026 fourth quarter results. Certain transaction-related expenses, purchase accounting adjustments, and early integration costs are expected to be recorded in the fiscal fourth quarter of 2026. The impact of these costs, along with higher interest expense, is expected to be dilutive to GAAP earnings per share in the fourth quarter and for the full fiscal year of 2026. We also expect significant transaction and other deal-related costs in the quarter, which will negatively impact free cash flow, both of which have been anticipated.

We are enthusiastic about the recently completed acquisition of Kito Crosby and our ability to achieve our stated long-term objectives. Our operational and commercial teams remain focused on business continuity and delivering on our operational and customer service initiatives. In addition, our Integration Management Office has a dedicated team of cross-functional leaders to advance our progress on cost synergy realization and drive revenue synergy upside. While the acquisition closing process has gone on almost a year, we have used our time wisely to advance our integration and synergy plans. I want to add that we are excited to welcome the Kito Crosby team to the Columbus McKinnon family, and going forward, we are one team with a common shared vision of the future. Operator, we are now ready to take questions.