US manufacturers Morris Material Handling and Columbus McKinnon look to be on the verge of new ownership. Mannesmann Dematic of Germany saw sales of cranes and handling equipment go down for the first nine months of 1999 (no breakdown was published for year-end). Finland’s KCI Konecranes’ profits were down by a third in 1999. What is going on in this business? Why is the financial news from major manufacturers in the overhead crane industry so grim at the moment? Part of the answer is the continuing difficult trading conditions in the previously rapidly industrialising Asian economies. That certainly was KCI’s explanation. Its crane sales in Asia fell 42% and it sees no prospects for a quick recovery in that market. “At the moment no return to the levels in Asia Pacific sales that we had two years ago is in sight,” said KCI chief executive Stig Gustavsson. KCI was also hit by restructuring costs in France and the UK and sluggish sales in its special cranes division.
However, Gustavsson firmly rejects any suggestion that his company is affected by any kind of industry-wide malaise. Profits may have been down in 1999, but only from an exceptional 1998 level. “Our return on capital employed in 1998 was sky high – well over 30%,” he says. “It was still 22% in 1999, and there are precious few engineering companies that can come close to that.” There was also the additional cost in 1999 of gearing up for production of the new CXT hoist range – “which of course cost us some money,” he says.
If Asia caused KCI Konecranes some problems, it was trading conditions closer to home that hit Columbus McKinnon when it reported a drop in net income of nearly 50% for the three months to 2 January. The oil and gas and pulp and paper markets have proved ‘soft’ recently, the company said.
But the real problem at Columbus McKinnon dates back to its March 1998 acquisition of Lico Inc. for $155m. This automotive materials handling solutions business, now called Automatic Systems Inc., or ASI, seemed like a good idea at the time, diversifying from simple lifting products such as chains and hoists into a more engineering-related field with far greater potential for added value.
Subsequent events conspired against it: a strike at General Motors meant a delay to assembly line investments, projects overran in Mexico and China, and then General Motors abandoned a move towards a modular assembly system on which ASI was rather depending.
Chief executive Timothy Tevens has said: “We think we have the right strategy. We may have the wrong partner.” The reported comment from chief financial officer Robert Montgomery was: “Almost perfectly coinciding with the ASI purchase in March 1998, the flow of orders dropped off.” There remains little prospect of Columbus McKinnon ever getting a return on that particular investment. In January the company announced that it had appointed advisors Bear Stearns to determine its options, including preparing the company for a possible sale or merger.
Another manufacturer with its bankers’ crisis squad crawling over the business is Morris Material Handling. Morris has engaged Donaldson, Lufkin & Jenrette Securities Corp. to explore how the business can be turned around or whether it should be sold. We will know the chosen outcome by the end of April. As reported on the Roundup pages of this magazine, the options are either a debt to equity conversion for the bondholders, or an outright sale of the business.
Drastic measures were called for after the company announced a net loss of $98m for the year to 31 October 1999 on net sales down 7% to $294m. Demand and prices achievable are both depressed, the company said. Morris remains the largest seller of double girder cranes in the USA, and its market share remains unscarred. The trouble is that the US market for double girder cranes fell 30% in 1999 as large projects got deleted or delayed.
Morris’s president and chief executive officer Jack Stinnett attributes the state of the market, at least in part, to flat or depressed prices of commodities such as steel and copper, thus deflating the level of production activity in those industries and in turn suppressing demand for replacement parts and repair services.
The underlying scene looks problematic for Morris: the 7% fall in sales, while not in itself drastic, follows a 10% fall in the previous year.
Operating income at Morris collapsed to $8.4m, compared with $26.7m in the year to 31 October 1998 and $35m in 1997. Orders received in the final quarter of 1999 were down nearly 40%.
All this would, however, would be just about bearable for Morris were it not for the additional problem of a crippling debt burden taken on by its owners Chartwell Investments when it bought the company from Harnischfeger Industries in April 1998. It is now apparent that the $340m that Chartwell paid for its 80% of Morris was too much. The struggle with the debt burden, and the need to safeguard margins, accounts for the dramatic 40% fall in order intake in the fourth quarter.
Last year’s net loss included $1.3m of one-off charges as Morris tried to turn itself around, shedding staff in the USA and the UK. Morris also suffers from the strength of the pound sterling which hampers the ability of its hoist factory in the UK to export.
Possible takeover candidates
Fundamentally, however, neither Columbus McKinnon nor Morris have suddenly become bad businesses. Their core products are successful and market-leading; they are just lumbered with their respective albatrosses – a duff acquisition and an historic debt burden. There are bound to be companies lining up to take over one or both of them; the only question is whether buyers and sellers can agree on prices.
Mannesmann Dematic of Germany, KCI Konecranes, Ingersoll-Rand of the USA and FKI of the UK have all been touted as potential bidders for Columbus McKinnon. Doubtless there are many other interested parties too, but of the aforementioned, FKI makes a deal of sense, as it has a complementary range of subsidiaries including Certex, Crosby and Bridon. It would, though, be quite a large bite for FKI.
Ingersoll-Rand is clearly in acquisition mode and has already taken over two construction equipment manufacturers this year: Sambron of France and Neal Manufacturing of the USA. Ingersoll-Rand is in materials handling as well as construction equipment. Columbus McKinnon could be a good fit there too.
As for Morris, talks have been held with several parties, though we can only speculate who these might be. KCI Konecranes and Mannesmann Dematic must be prime candidates; both are direct competitors of Morris which have taken over rivals in recent years. Dematic will be in a better position to make a bid once parent company Mannesmann AG (now owned by telecommunications company Vodafone AirTouch) has floated off its Engineering & Automotive division (now called Atecs Mannesmann) of which Dematic is a constituent. This is scheduled to happen in June. Atecs may prefer a period of consolidation before it is ready to start buccaneering into such an acquisition. On the other hand, what better way to announce your intentions as a newly re-structured enterprise? Stig Gustavsson of KCI Konecranes is one of engineering’s top international buccaneers and would certainly not be shy of such a move. However, KCI’s growth strategy, particularly in the USA, is focused on its service business, building a customer base of cranes under maintenance contracts. Acquiring a company the size of Morris could prove an unwarranted diversion as it attempts to bolster its 4% net profit margin.
Then again, the prospect of owning Morris may be irresistible to Gustavsson. He was certainly interested the last time it was up for sale in 1998, but his valuation of the company differed markedly from that of Chartwell. This time around, the vendors may be a little less ambitious in theri asking price. After all, in 1998 P&H (as it then was) had just announced record sales of $353m for 1997.
Just a cycle, not a crisis
But it would be wrong to think that the sale/restructuring of either Morris – the second in three years – or Columbus McKinnon constitute a crisis in materials handling. The crane market is highly cyclical and the downturn in sales and profit figures is attributable merely to an inevitable, and relatively mild, trough after what has been quite a high peak.
At worst, the two companies sporting ‘for sale’ signs are victims of adjustment. The North American market, on which both Morris and Columbus McKinnon predominantly depend, remains a strong market, albeit a cyclical one. The figures suggest that the market hit a high in mid-1995, when it was growing 30% year-on-year, a low at the end of 1996 when it was falling 2% year-on-year, and a high again about 12 months later when it was growing 20% year-on-year. Since the middle of 1998 the market for cranes, hoists and monorails has been falling towards a cyclical low in October 1999 when it was falling at a rate of around 10% to 12% year-on-year. It now appears to have turned around again and sales in 2000 are forecasted to be 3% up on 1999 in North America. The ever-pressing need for industry to improve its productivity is sure to maintain a healthy demand for innovative and efficient materials handling and lifting technology for the foreseeable future.
The market for big, engineered cranes is particularly susceptible to peaks and troughs and, after three strong years, has recently slowed. But the standard lifting market remains strong, at least according to KCI Konecranes, which reports its only problems in North America to be those associated with a growth market – finding and retaining skilled labour.
So strip out the debt problems and start afresh, hopefully with one’s technical and professional reputations intact, and any apparent crisis can soon be a thing of the past.
