The results are the first to include the recent acquisition of Pfaff-silberblau. In the three months to 28 December 2008, net sales increased by 12.9% year-on-year to $165.1m. Gross margins declined to 27.1%, from 31.1%, due to lower US sales volumes, higher steel, a one time inventory valuation accounting charge relating to the acquisition, and margins at Pfaff that are currently lower than at CM.
The Pfaff acquisition boosted the contribution international revenues made to net sales by 50%, to $70.1m; international sales now make up 42% of the company’s net sales. Sales grew in Europe, South America and Asia, and even in some segments in the US. In an analysts’ conference call (transcribed by seekingalpha.com), president and CEO Timothy Tevens said, “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 US seems to be the first market to reveal a downturn, with Europe, Latin America and Asia still growing but at a less rapid pace. US 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.”
The company brought forward its regular annual North American prices increases, from January to November, and increased European prices on January 1. It has been passing steel surcharges on to customers since April, and the November increase rolled the surcharges into the base price. Tevens explained that the company uses three main types of steel: special alloy rod, used for lifting tools, coil stock, and components from steel service centers.
The special alloy rod, Tevens said, is a unique type of steel from a single primary supplier. While hot-rolled steel prices have gone down, the type of alloy CM buys has gone up ‘quite a bit’. The coil stock the company uses is more closely tied to general steel prices. The final type, from service centres, correlates most closely to general steel prices.
“In the last trough, which I think was fiscal ‘03 or ‘04, something like that,” Tevens said, “[Operating margins were] in the 6% area. It will be our goal to be a pretty good measure above that. We don’t give guidance, but 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 [margins].”
The company said it had reduced its workforce by 200 people, which Tevens said accounted for 6% or 7% of its total workforce. He added that the staffing cuts, “could easily double, but we don’t have the final numbers yet. That will be forthcoming shortly.” Tevens said, “There are more structural changes we could take, including some additional plant closures. We have identified several candidates at this point, but we have nothing to announce.” Tevens predicted the company could make annual savings of $10m, at a cost of $2m or $3m.
