Description
Executive Summary
The Columbus McKinnon Corporation was successfully LBOed by management in 1986, reintroduced in 1996 on Nasdaq under the ticker CMCO. Management used the proceeds of the IPO to reduce debt and make further acquisitions in the Company’s core business, hoists and chains.
In 1998, the consolidation process came to an end, as CMCO controls more than 50% of the hoists market in the USA. Operating margins are good (around 15%), and ROCE excellent, as this industry is not capital intensive.
Faced with considerable free cash flow in a mature industry, management made the mistake of diworsification, by using the free cash flow to purchase ASI, a manufacturer of conveyor systems for car manufacturers, for 155 MM. This turned out to be a disaster. The unit today has 175 MM of sales, 0% EBIT margins and is up for sale. I estimate that they will get 36 MM for it (EBIT margins peaked at 9% in 1998 for ASI, and have oscillated between 0 and 9%). 160 of sales* 4.5% margins x 5 EBIT multiple = 36 – obviously a fire sale, but it’s a crappy business with 4 customers…
The core business of hoists and chains is in the process of being restructured (closing and integrating some 14 of the 40+ facilities they currently have in the US). At the trough, this division has 13% margins. At the peak, they claim that after the current restructuring, margins would be north of 20%. Historically, margins have been fairly stable at 15% after the consolidation. 15%* normalized sales of 450 MM * 8.5 EBIT multiple (a multiple that I feel an LBO buyer may be willing to pay) = 574 MM – Taking the margins further up is all upside…
Finally, a small division called “industrial” makes scissor lifts, tire shredders and other industrial goods and has 60 MM in sales. Margins range from 12% when times are good to 0% now, with margins in the 8% range most of the time. I value the division at:
60 MM in sales x 7% normalized margins x 7 EBIT multiple = 29
Total : 36+574+29 = 639 – Debt as of March 02 (fiscal year end) will be around 325 MM. This gives equity value of: 314 ie 21/share (15 MM shares out, fully diluted)….The shares currently (year end 2001) trade at 8.75 – nice margin of safety! - a nice doubling your money in say, 18 months (when the economy is back on track and the normalized EBIT is achievable).
The cheapness of these shares is masked on a PE basis by huge amortization of goodwill of more than 1/share.
There are also 200 MM in 8.5% 2008 bonds outstanding trading at 95% of par for a yield to maturity of 9.5% - some people may be interested in that.
For those who want to read more, here a few notes on each division:
3 segments: the “Products” segment accounts for 90% of the EV. Then the industrial and Automotive segments account for roughly 5% each.
“Products” ie Hoists and Chains – 65% of sales, 90% of EV.
This division is the jewel of Columbus McKinnon. Through acquisitions, the Company has been able to build a very strong number 1 position in the US. Hoists go in all kinds of manufacturing facilities, but the largest industry segments are energy, petrochemical and steel. 72% of sales in that division comes from products where CMCO is the n1 supplier. CMCO has more overhead hoists in use in the US than all competitors combined.
The market is mature in the US. Outside the US, the Company has a much lower market share and is currently trying to expand sales in Europe, Latin America (presence in Brazil and Mexico) and Asia (3 manufacturing facilites in China).
No single product is more than 1% of total company sales. 34% of total company sales are hoists, 9% cranes, 9% chains, 7% forged products. Conveyor systems account for 32%. After the sale of ASI, I would expect conveyor systems to account for 6% of sales.
52.9% of the Products division sales are hoists, 24.7% chain and forged attachement, 14.4% overhead cranes (CraneMart, a hoist attached to some steel structure), 8% industrial components (Duff-Norton, a division of Yale, and Gautier, a French acquisition).
Distribution of “Products” (ie of 65% of sales):
37% through 10 000 distributors, 27% international sales, 11% catalog distributors (WW Grainger, MSC Industrial), crane end users 13%, OEM/government 3%, service/after market 7%, consumer 4%.
No customer is over 5% of sales. The largest customer is WW Grainger.
In some segments (concerts for instance, hoists used to lift speakers and spots), the market share of CMCO is 90%.
Competitors for Hoists include Mannesman Dematic, Ingersoll Rand, KCI Konecranes, Morris Material Handling, Kito Harrington, R. Stahl.
Competitors in Chains : Campbell, Peerless Chain Co, American Chain and Cable Co.
Steel is the main raw material used by the Company.
Industrial segment: 8% of sales, less than 5% of EV
Manufactures and sells scissor lifts (17.4%), manipulators (21.4%), tire shredders (9.6%), conveyor systems (51.6%). Margins range from 0to 10% over a cycle, with 50 to 70 MM in sales. This small division accounts for 5% of EV. Bought Univeyor in 1998 for an estimated 20 MM.
Customers include Fedex, UPS, Lego, Chivas Regal, Cummins, Deere, DuPont, 3M, Steelcase, Boeing, GE, Saturn, Waste Management,…
Competitors are Rapistan Systems, KCI Konecranes, Jervis Webb.
Automotive: 28% of sales, 5% of EV
This segment was added as the result of a disastrous acquisition in 1998. CMCO paid 155 MM ie 1x sales for Lico, a Company based in Kansas, selling mainly to 2 clients, GM and Ford…The acquired operation was renamed ASI. Margins went from 9% when acquired to 0% today. Currently trying to sell that business, I estimate they will get between 30 and 50 MM for it. Tangible book is around 50 MM, sales 170 MM, goodwill 100 MM. GM and Ford account for75% of this segment, followed by Deere, Case and Griffin Wheel (foundry).
Competitors are Rapistan, Jervis Webb, Dearborn Mid-west, Allied UniKing, Fata Automation Spa, and Daifuku.
History:
The Company was established in 1875. In 1933, CMCO invented a new chain made of a new alloy, more resistant and lighter than previous chains. The breakthrough was in fact in the machinery designed by CMCO and used to make these chains. The largest application for chains is hoists. Management led LBO in 1986. Acquisitions of Lift in 1995 for USD 63 MM cash, Yale in 1996 for USD 270 MM cash give CMCO a leading share in hoists. IPO in 1996, management still owns 22%. 1998, acquisition of ASI for 155 MM. Proxy fight to sell the Company in 1998 led by Jeffrey Schwartz and Metropolitan Capital. CMCO retained Bear Stearns as advisor. After a few months, the process was nixed in favor of a disposal of ASI (troubled automobile division just acquired) and a restructuring of manufacturing facilities in the Products segment.
Manufacturing:
Own a forge in Cedar Rapids, Iowa, where they manufacture “chain attachments” ie hooks.
Currently building their third plant in China (the first 2 were acquired with the Yale acquisition), also have a manufacturing presence in Mexico, France, Germany, Netherlands, UK, Denmark. Way too many plants in the US (45), room for substantial consolidation of these plants. CMCO is taking advantage of the downturn to consolidate some of these plants. Management claims that costs have been reduced by a very substantial margin that would allow them to reach margins close to 20% in the next upturn… (versus 15.5 % previously).
12 plants were identified for closure in the US, 4 complete, 4 in process, 4 to come. Total costs will be 16 MM, 20 MM expected in savings. 20% of savings will show in FY 02, 80% of savings will show in 03. 50% of the cash cost of restructuring in FY 02, 50% in FY 03.
Outlook :
Sale of ASI expected by fiscal year end (March 02).
Largest opportunity for growth is outside the US. In FY 95 (march 95), international sales were 13%. In the 12 months to September 01, 24%. Are currently pushing hard, with 4 new sales offices in Europe, 2 in South America, 1 in the Far East (Thailand, opened in 1997).
Free cash flow will be assigned to debt repayment, potentially acquisitions if really attractive..
CraneMart: launched in 1999, now 49 companies in the network covering 89 cities.
Debt and covenants:
The Company has roughly 200 MM of bank debt and 200 MM of 8 ½% bonds outstanding, due April 2008, callable in 03, selling at 95 for a YTM of 9.5%.
It is likely that CMCO will breach covenants on its bank debt at the beginning of calendar 2002. The Company recently suspended its dividend (which was tiny anyway, 4 MM cash outflow each year). The Company is engaged in negotiations with Fleet to renegotiate its credit line.
Acquisitions:
CMCO bought 14 companies in 6 years.
The Company reached critical mass with the acquisitions of Lift Tech in 95 and Yale in 96. At that point, the market share in hoists went over 50%, and acquisitions in the core business became more difficult, if not impossible.
1998: disastrous acquisition in a new line of business puts cash to work: bought Lico (renamed ASI) and gained access to the automobile handling business: systems that carry the car on the assembly line. Essentially only one customer, GM. Paid roughly 1x sales or 150 MM – are now trying to sell that division, will get between USD 30 and 50 million. 9% EBIT margins when acquired, 0 currently.
Catalyst
Sale of Automotive division and renegotiation of debt covenants.