Columbus McKinnon Corporation (CMCO) Q3 2012 Earnings Report, Transcript and Summary

Welcome and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host, Mr. Tim Tevens.

Thank you, Sherry. Good morning, everyone. Welcome to the Columbus McKinnon's conference call to review our results for our fiscal '12 third quarter. With me here today is Greg Rustowicz, our Vice President of Finance and CFO. Please take a note that we have once again included some summary slides for your help -- to help understand the quarter for your review. They can be found at our website at www.cmworks.com/investors. Hopefully, that will be helpful to you as we walk through some of our scripted materials today and if need be, we can certainly reference those slides as well. We do want to remind you that the press release, accompanying slides and this conference call may contain some forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. These statements contain known and unknown risks and other factors that could cause the actual results to vary. You should, in fact, read the periodic reports that Columbus McKinnon files with the SEC to be sure you understand these risks. So if you have the slides in front of you, please go to Slide 3, if you would, and let me give you a couple of comments around that. Revenue growth continued a nice positive trend, up 10.9% in the quarter. The United States is beginning to gain some momentum, whereas Europe is still growing but just as at a slower pace. China and Latin America are small and growing more rapidly for us. Our bookings in the quarter also continued a very nice positive trend and are up double-digit range over last year. Our backlog is up to $110 million, or up about $31 million over last year. And sales outside the United States are now at about 48% of our total revenue. We continue to see increase in global economic activity. The United States industrial capacity utilization is up to 76.4% in December, and in the Eurozone, industrialization decreased slightly but still around the 80% area, which is fairly positive. As you may know, our bookings and normally our revenues track the industrial utilization figures, and as the utilization rates increase, so does our revenue. Based upon discussions that we have with our channel partners and end users alike, we do believe that our -- the industrial economies that we serve remain pointed in a very positive direction. As you all know, many times, we get the question if we're seeing some signs of a looming recession, and at this point, we are not. Our biggest issue does indeed remain keeping up with this demand. Slide #4. Our operating profit increased almost 307% to $12 million. Operating margin, excluding the gain on the sale of a facility in Iowa, is at 7.4%. And the operating leverage is at 54% for the quarter, which is a fairly robust number. With this strong operating leverage in the quarter, we do now expect the operating leverage to range between 30% and 40% for the entire year. Our long-term goal remains to achieve a 12% to 14% operating margin once our revenue fully recovers and our Forging business is completely on track. The earnings per share for the quarter was at $0.44, and if you exclude a couple of extraordinary items that Greg will review with you momentarily, that number would look like $0.33. We had very nice cash flows from operations in the quarter at $9 million and $13.5 million year-to-date. Our cumulative savings on our consolidations are about $6.4 million, with our hoist and chain consolidations exceeding our expectations at $13 million. Our savings for the quarter is about $1.2 million, and our Forging business has improved very nicely to the point where it's contributed $1.9 million to grow some profit this quarter. We are not yet at the full benefit, but we certainly have improved dramatically into the point we are now contributing to profits, which is a positive sign. And let me just turn it over to Greg now who will move us to more details on the results of the quarter.

Thank you, Tim, and good morning, everyone. I'm pleased to have the opportunity to review with you the financial highlights of Columbus McKinnon's fiscal 2012 third quarter that ended on December 31, 2011. Turning to Slide 5, consolidated sales were $142.8 million, up 10.9% over the prior year period. We continue to see solid volume growth, with overall volume growth of 7.8%. For the quarter, U.S. volume was up 10.5% and non-U.S. volume was up 4.8% over the prior year despite one less shipping day. Pricing added an additional 2.8% to revenue, and foreign currency translation had a 0.4% favorable impact this quarter. We typically have our strongest sales performance in our fiscal fourth quarter and the weakest in our fiscal third quarter. We will have 7 more shipping days in the upcoming quarter. A table showing the number of shipping days in each of the quarters of fiscal 2012 and fiscal 2011 is included at the end of the earnings release. Moving to Slide 6. Our second quarter consolidated gross profit dollars increased by 31.5%, and our gross profit margin improved 420 basis points to 27%. Our gross profit benefited by $5.8 million from the increased sales volume previously mentioned. Our Forging operations positively impacted gross profit by $1.9 million or 133 basis points. In addition, we experienced lower product liability cost this quarter, which favorably impacted gross margin by $1.3 million. On a sequential basis, we expect continued improvement in our Forging profitability but expect lower year-over-year improvement as the prior year fourth quarter at higher sales in this segment that we are -- than we are currently anticipating. Turning to Slide 7. On Slide 7, consolidated selling expense modestly increased from the prior year in dollar terms and decreased to 11.2% of sales this year compared to 12.1% last year. The increase in selling cost is primarily related to the overall increase in sales. Currency translation was insignificant this quarter. Consolidated G&A expense increased $1.3 million compared with the prior year, representing 8.1% of sales versus 8% in the prior year. The increases are related to our investments in Asia and Latin America and higher variable compensation expense. Turning to Slide 8. Operating income increased by $9 million to 8.4% of sales, compared to 2.3% of sales in the previous year. Included on operating income was a gain on the sale of a previously closed facility that Tim mentioned. Excluding this onetime gain, operating margin was 7.4%, and operating leverage in the quarter was 54%. This improvement in operating income has been driven by the sales volume increases previously discussed, as well as the benefits of our hoist consolidation. In addition, operating income benefited by $1.9 million from improved performance of our Forging operations when compared to the prior year. As you can see on Slide 9, income per diluted share for the third quarter of fiscal 2012 was $0.44, reflecting a $2.52 increase from the prior year period, which -- where we had a loss of $2.08 per share. Positively impacting the third quarter was the previously mentioned gain on the sale of the closed facility, as well as an $850,000 gain on the remeasurement of an investment related to our recent South African acquisition. Excluding these unusual items, diluted earnings per share would have been $0.33 per share. The third quarter of fiscal 2011 included a noncash tax provision of $2.8 per share related to a full valuation allowance against our deferred tax assets. The effective tax rate in the quarter was 16.4% and year-to-date is at 25.1%. Our expected effective tax rate for fiscal 2012 has been reduced to 20% to 25%, resulting from the geographic mix of earnings that we anticipate. On Slide 10, we have compared our year-to-date performance for several key metrics. Year-to-date revenue was up 13.8%, largely driven by volume and price increases, as well as favorable currency. Year-to-date operating income is up 239% and includes both the gain on the sale of the closed facility, as well as the pension curtailment cost that was incurred in our fiscal first quarter. Year-to-date earnings per share is at $0.92 versus a loss of $2.02 in the previous year. On Slide 11, you can see we generated $13.5 million of cash provided by operating activities through the first 9 months of the fiscal year. Capital expenditures were $10.5 million for the first 9 months of fiscal 2012 versus $8.9 million in the previous-year period. This increase is being driven by our global ERP system implementation, where we have spent $4.7 million year-to-date on this project. We expect capital expenditures for fiscal 2012 to be in the $13 million to $15 million range. Finally, on Slide 12, you can see that as of December 31, 2011, debt net of cash was $72 million and total gross debt was $154 million. Net debt to total capital was at 28.9%, which is in line with our 30% debt to total capital ratio goal. In addition to having $82 million of cash in our balance sheet at September 30, we have an additional $70 million available under our $85 million senior credit facility, net of $15 million of outstanding letters of credit. With our new subordinated notes in place, or available cash, and with nothing drawn against our revolver, we continue to demonstrate significant liquidity to support our strategic growth plan, which includes strategic acquisitions in emerging markets. With that, I will turn it back over to Tim.

Thanks, Greg. Okay, Sherry, let's open it up to questions if you would.

[Operator Instructions] Our first question comes from Jason Ursaner from CJS securities.

On the Forging first, the $1.9 million year-over-year improvement in the quarter, what's the full year? How much of that is still down relative to fiscal year '11?

We actually are positive now. If you remembered our first quarter, we reported a $900,000 negative. In the second quarter, we reported a $400,000 negative. So with this $1.9 million, if my math is right, I think we're $600,000 ahead, all through the first 9 months.

And last year, it was still about $7 million down from fiscal year '10?

That's correct. Yes, I want to say it's like $6.7 million.

Generally, what's the revenue base on that business?

It's about 8% of our sales.

Okay. And then, Tim, you mentioned the U.S. gaining momentum. Are you actually continuing to see bookings accelerate there with utilization picking up?

Yes. It's fairly robust right now. As you know, Jason, we felt like the U.S. was lagging. A year ago, this conversation was, where is the recovery. It seems to be slow, especially after a very deep recession. But now it seems to be gaining some momentum in a variety of areas. And as we look at the market, certainly, general manufacturing, certainly heavy OEM equipment, mining are some -- our entertainment businesses continues to be up dramatically. So right now, the bookings momentum seems to be accelerating in the U.S.

Still sort of double-digit range, low double digits?

That's right.

Okay. And in Europe, you mentioned a slower pace. Is it just the euro that's really impacting it? Or are you seeing volume come in at a bit of a slower pace?

Volume is a bit of a slower pace. So it's -- that's more like mid-single-digit growth as opposed to double-digit growth, which we've seen there for many, many, many months. It is indeed slowing.

Okay. And in the emerging markets, you said you're seeing strength there as well. Is it -- how do you break down whether the overall market is still strong or whether some of these investments might be offsetting a cooling pace there?

Yes. You probably can guess, given the relatively modest position we have in those markets, it's really difficult for us to get our arms around especially with incredibly limited reporting in our industry in those regions, kind of how we stack up against -- is it just economic gain or is it truly market share gain? So it's really impossible for me to give you anything other than color, and it feels like it's both right now because the numbers are just so small.

Yes. And then just a little bit more, could you talk about the acquisition strategy, what you're seeing out there and how things are going for you?

Well you've probably read that we did acquire a very small business in South Africa that service the mines down there. This was actually a partner of ours that we had invested in 10 years ago or longer.

1997.

Yes, so there you go, 14 years ago or so. And basically, it was a fellow who had great mines, the mines, there's 7 or 8 of them down there that we have great relationships with, and he was the agent that sold our hoisting products and then serviced them in the mines. And the service is a big aspect of the mines. They really expect you to be on site and make the equipment work and basically don't have it go down for all intents and purposes. The business flourished in this time period. The gentleman, our partner there -- we owned 20% of it from Day 1. He owned 80%. He wanted to retire and move on, and then we just bought out his 80%. And that is a good example of a relatively small bolt-on acquisition that makes a lot of sense for us to support our strategy in terms of servicing a very important sector for us, which in this case is the mines. There's other activity that we're in the midst of around the world, nothing to report just yet other than to say that there is a significant amount of interest in our part, as well as other partners' -- potential partners' parts that could flourish here. They're relatively small, maybe bigger than this one, the South African one, but still modest in size at this point in time.

Our next question comes from Schon Williams of BB&T.

First just a housekeeping question. You didn't -- it looks like you had one less day this quarter versus last year. I'm assuming that was about a 160-basis-point drag on the year-over-year growth. Is that right?

I want to say it was $2.1 million, roughly, of the one less day.

Okay. Is that -- so does that mean that the volume number that you -- the 7.8% that you called out in the press release, does that number really need to be adjusted higher for the days adjusted? Or what is the...

Yes, what we did was -- for internal purposes, we track it the way you do. But for external reporting purposes, we'd lump that one last shipping day into the volume number.

Okay. And then can you call out the U.S. volumes versus international volumes?

Yes, we did. I want to say the U.S. volume was up 10.5% and the non-U.S. volume was up 4.8%.

Okay. And any color around how either Europe specific or just kind of international volumes, how they progress through the quarter? I mean, were you seeing deceleration throughout the quarter? Or was it lumpy? Any color you could add there would be helpful.

Yes, it's growing. I don't recall anything unique, Schon, about lumpiness or anything out of the ordinary that we saw anything come through. I think it's just -- in the U.S. in particular, it's -- given our strong position, it's really the economic activity is leading that. We did launch a new product, a brand-new Lodestar this past quarter, but basically, that's replacing a 50-year-old design unit. So there was some acceleration around that, but that was actually the prior quarter when we launched in the entertainment world in Europe. It really seemed to take off on that product line. But nothing out of the ordinary, I would say.

Okay. And the new Lodestar introduction, is that -- can you about that, the acceptance in general? And then is that accelerating pricing, because it looks like pricing actually picked up nicely here in the quarter? I wouldn't have expected pricing to really accelerate until maybe more in the spring. We normally -- you guys are doing kind of increases in kind of February, March, if I'm recalling correctly. Can you just talk about any color, any effect on pricing and then kind of what you see coming over the next quarter or 2?

Yes, we've always averaged in this 1% to 2%. So you're right, the 2.8% does seem a little bit high, although last quarter was 2.5%. We did -- as you know, it's kind of a rolling thing. So when we implement price changes in the spring, you get that full effect throughout the year. Sometimes with different contracts and agreements, it takes a little while to get it, but eventually, over time, you do get it. And I think this is nothing more than our normal price increase that has averaged around the world somewhere between 2% and 3%. And we're -- we seem to be getting most of it come through in our volume numbers here. But on average, if you think about us over a cycle, it probably averages between 1% and 2%.

And what about -- I mean, as we move into fiscal Q4 and fiscal Q1, I mean, should I -- there's no reason why that should accelerate there, right? I mean, that should start to -- okay.

You're right. It should be in that 2% area. That's right.

And then just quickly on Forging, did I hear that you expect the year-over-year gain to actually be, I guess, lower in Q4 versus what you put up in Q3, and that's because of just some lower volume activity?

Yes, we expect sequential quarter-over-quarter performance. So our Q4 in Forgings is going to be better than our Q3 in Forgings. It's just that when you compare to the prior year's quarters, we had an extremely strong sales quarter in the Forging segment. Don't ask me why, but it was very, very strong. And as a result, we're going to put out less of a year-over-year improvement than what we showed in the third quarter.

What we did last year fourth quarter, Schon, just to give you a little more color on that, is we really accelerated our production in the quarter to get some of the backlog out of the way. You may recall, we talked about backlog was our primary problem a year ago. It's not today, by the way. But a year ago, it was. And we really accelerated production to get as much backlog out of the way as possible to service our customers. And that's what created a large fourth quarter last year in terms of revenue.

And I guess, well, help me think about in terms of the delta in next fiscal year versus fiscal 2012. I mean, could we be -- if we're slightly ahead of breakeven year-to-date, we'll get a little bit more in Q4. I mean, should we be talking about a $5 million kind of year-over-year as we move into next fiscal year, $10 million year-over-year, assuming that volumes hold or pick up from these levels?

As you know, it's tough for us to give you specific color on this because that's not what we do. We don't give guidance in this area. But let's just talk about the Forging business and maybe the color will help you get some area of relief in your mind. We have been showing improvement. It's been a very solid trend line over the last couple of years. As you know, we had a mess and we're working our way out of the mess to the point now where it is a positive contributor. And we've always said this is a very solid business and one that should produce decent margins, let's say around the company average margins going forward. Right now, it's nowhere near that, but it's certainly working its way toward that. And I would say that we would get that margin back sometime in next fiscal year if our trend line continues. So if you think about what we'd lost year-over-year in fiscal '11, it was about $6.8 million. Our first quarter fiscal '12, we lost $0.9 million. Second quarter was $0.4 million negative. And now, the third quarter is $1.9 million. We would expect to see that continue to trend in a positive way, put the fourth quarter aside for a moment that we just talked about, the extra volume that we had last year. We still should be making more money, and we will be making more money, pushing our way towards the corporate average through fiscal '13.

That was very helpful. And then just last question here, can you just give us an -- I guess, an update on where we are with the ERP rollout?

Sure. That's a great point. Thanks for the question, Schon, because I forgot to actually cover that. We started our global ERP implementation about maybe a year ago now, and we selected SAP to go to our facilities. We've put together a global implementation plan. And our first site was due to go live this past November, November of 2011. And I'm happy to say we did go live. So effective December 1, we went live on that global ERP system that we've designed and are putting in place at our Duff-Norton facility. Now the reason we took this approach is because Duff-Norton is a relatively modest sized small business. It's about $30 million in revenue or so, and we could easily get our arms around it and use it kind of as a -- think of it as a training ground for our people to help roll this out globally now. We had success, certainly not without a bump in the road here or there, not without the issues that we had to wrestle to the ground. But I'm pleased to say that our team did a great job of executing, and it's running and the business is actually back up better -- at run rate of what it normally would do. So it's -- that's good news. And now, it's just we're onto the second location, which most likely would be a location in Europe, and that will coming online sometime next summer. So well underway, a lot of learning going on, and we feel good about the position we're in, in terms of getting that going. And eventually, over the next couple of years or so, we'll be having our entire business on one system, which would be wonderful from an efficiency and information sharing perspective.

Our next question comes from Gary Farber of CLK.

Just 2 questions, I don't know if you touched on this yet on the competitive environment, if some of your markets are accelerating, some are sort of slowing, can you talk about what you're seeing from your competitors in markets that you think are accelerating, are people raising prices in markets that are slowing? Is there any price dynamic going on there? And then also discuss your trends in raw materials.

Yes, I think the competitors are acting rational. No one is doing anything crazy. It's kind of a normal recovery, as I would phrase it. Having lived through a couple of these, our competitors are doing what they normally would do, what we'd expect them to do, which is be competitive, raise prices and in some cases, follow our lead. Some cases, we follow their lead depending on the product line. So for all intents and purposes in the U.S., let's call it business as usual given the strong recovery, and finally now a strong recovery. In Europe, it's a little different in that the product lines that we sell there might be slightly different, a little less power hoist, a little more manual hoist, a little more rigging tools. And we think we're taking a little bit of share there because some of our competitors -- most of Europe gets imports from China on these product lines, and they've had incredible supply disruptions. We have had some as well, too, but not as bad. And we think as we look to how we perform there compared to what the market has done that we've actually taken a little bit of share in Europe. And given the growth in the Latin American countries, as well as the Asia-Pacific region, strong competitors in all of those regions, some very local, some global competitors, and they, too, are acting in a normal way. We just have such a smaller position that it's hard for us to get our arms around sometimes why we win or why we lose, but we're working hard at that. The good news is both are growing at a rapid pace.

Right, okay. And then I think the raw materials?

Oh, I'm sorry. Supply chain, yes. I would say that we're in more of a moderating price environment there for the most part. Steel does have a tendency to bounce around a bit, but it's not hugely up or hugely down. We buy a lot of motors. We saw a huge spike, an increase about a year ago given the price of copper. That seems to be moderating now as well. So inbound materials seem to be not a huge drag, although we are seeing some levels of inflation, especially in China where labor is going up dramatically, energy costs are up dramatically. But we're also seeing that the whole market is pricing along with those cost increases as well. In Latin America, I think Mexico is not seeing increases. They're seeing -- the volume is about flat there right now given the U.S. hasn't really recovered as much as to affect Mexico just yet. And Brazil is, I'd say, business as usual in terms of supply chain as well. We're not seeing any huge, huge spikes there just yet either.

And then just one last one, just on your customer base. I mean, if you associated the demand to report, but just any sort of thing anecdotally you want to pass along sort of geographically, as the surveys come out, ISM, month to month, sometimes people are confident, sometimes they're not confident. I guess, what's -- is there anything anecdotal to pass on with what you're hearing from their customers by geography?

I think it's positive around the globe. A lot more caution in Europe, as you might imagine. We're not seeing -- we're seeing growth but it's a lot slower growth, so were cautious. We're cautious and it seems like everybody else is cautious, not knowing where this whole sovereign debt debacle is going to end up maybe just yet. So that's probably the most cautious part of the world. Everybody else, so China is growing at 8%. It's been at 9%. It's still an incredible growth. We're seeing good growth in Latin America as well. And the U.S. seems to be the one that has, in the last couple of quarters at least, really accelerated in terms of demand and our channel partners' demand of us to supply them. We're also seeing some heavy OEM guys like Deere and Cat just invest incredibly heavily around the world, which we're pleased with as well as you might imagine given our ability to participate with that, too.

Our next question comes from Joe Mondillo from Sidoti & Company.

First question, just sort of have to -- sort of jump on that last question in terms of your non-U.S. businesses. It seems like just compared to your U.S. business, obviously, weaker than U.S. in terms of the growth. First off, are you sort of surprised at that just given the GDP growth that we're seeing stronger growth within Latin America and Asia? And also in terms of that 4% growth in volume, is Europe the one region that -- in terms of the average 4%, is Europe the one region that you're seeing under that 4%? Or is there anywhere else that you're seeing sort of weaker than the average 4%?

Yes, okay. So the bulk of our revenue outside of the United States is indeed Europe. So if you look at the components of it, I think it's the lion's share at this point in time of ours. So it's heavily weighted towards a slower growing environment. So our non-U.S. sales have expanded heavily -- much more heavily weighted by Europe, which has slower growth than, let's say, Latin America or Asia-Pacific, which are smaller components but growing much more rapidly. So it feels about right to me in terms of what you'd expect, I guess.

So are you seeing negative volume in some places in Europe? If the average is 4% volume and you're seeing pretty good growth elsewhere, are you seeing any negative contraction in volume anywhere in Europe?

Yes, there is some negative growth in -- keep in mind the bulk of our European business is Germanic based, the northern part of Europe. That's still growing very nicely. U.K. is up. France is flat. Spain is down. We don't do much in Greece. Italy is very small for us today but -- and that's still reasonably of small growth but still growth. So I would think that Spain would be the primary contractor. Poland is up. Eastern Bloc of Europe, Hungary and Russia are up, but we have a small presence there. So it's hard to say whether that's economic or whether that's us just doing a better job in an area we've been investing in. So the only one I can point to is negative in Spain, and it's a small component of our total European business as well. The German piece is very good and very positive. But as you might know, 30% or 40% goes out of the country in terms of export, and they export around the world.

Great, okay. So you guys say that Europe, Middle East and Africa make up about what, like 1/3 of your business?

Yes, exactly.

About right, yes.

And of that third, Europe makes up how much?

Europe, okay, the bulk of it.

30%

30% of the 33%.

Yes.

30% of the 33%, okay.

I'm pulling that one out off the top of my head, but it feels about right.

Okay. And then in terms of sort of your Latin America presence, what kind of growth are you seeing there? Are you seeing high single digit or double-digit still or...

Double digit. Double-digit growth.

Okay. I guess the next question, just in terms of pricing, any changing in pricing, anywhere in the world? Or how is that looking?

As you know, we typically put price increases through annually, and when things get really hot, maybe even more than annually. But we had our normal price increase. It seems to be rolling through around the world. We seem to be achieving what we targeted. So really nothing out of the ordinary around price.

So you usually increase pricing or change pricing, one at the -- in your June quarter or...

It's usually April, the month of April.

Yes, the negotiations have already begun.

For the beginning of this coming -- I guess it really comes out with the fiscal year.

Yes.

Okay. And then one of your sort of primary international expansion goals was in China. Just given sort of the slowing growth that we're sort of hearing over there, has that tempered or changed your sort of thinking? And if not, sort of where are we within that sort of goal?

Yes, we're probably halfway up the investment curve, I would say at ballpark. It has not tempered our point of view. We do think that China's -- the industrial portion of China, the mines, the power plants, general manufacturing, are going to continue to grow robustly. It certainly has slowed economically. I read the same numbers as you do, but that's not from our perspective because we're so new to the market. We just started investing 2 years ago. We're up to over 30 salesmen, about a dozen engineers, we're in 8 offices scattered across the country and really making a presence. That investment is making a difference for us there in terms of just seeing additional sales, setting up distribution, making contacts with the OEM users, end users, doing training on our products. So we still feel very good about it and plenty of room to grow in that market.

On an absolute basis, where are we in terms of how much sales are coming from China at this point?

I think it's 3% or 4%.

3%.

3% of our total revenue is in that area.

So the growth has been incredible, very high growth rates, but it's coming off a small basis. And we've essentially kind of stepped it so that from a cash flow perspective, in essence, we're at a breakeven level within the region despite adding these investments, because the sales are growing at such a rapid pace.

Okay. And given sort of your investment timeline, where do you think this can be as a percent of your total business within a year or 2?

It will still be relatively modest. I would expect that the same growth rates to occur there as we invest and continue to invest. So you could see the high growth rates out of the small 3% base over the next year or 2. But long term, which is our vision, strategically, this part of the world should be 15%, 20% of our total revenue as we look down the road much further than 1 to 2 years.

Okay. And then just lastly just given the sort of concern and ominous feeling of the economy, what sort of contingency plans do you guys sort of look at, just in a just-in-case type of scenario?

Sure. Well, first in our list is EMEA, the European piece. We have downside scenario planning underway that has been done actually that says that if it drops 5%, we would execute acts in terms of cost control, and if it drops 10%, et cetera. And so we have these different models that point us toward what actions we would take. And we would have to see a contraction for us to do that, so we have -- we know when to pull the trigger, so to speak, when to start to implement that. But it would be painful if we do it too soon and disrupt our channel partners and our end-user customers with slow products for any reason. That would be first. We do have these other scenario plannings -- plans around the world. But in the emerging markets, probably they're not done as robustly only because of the investments that we're looking at there is much more strategic investment. In the U.S., it's fairly complete as well in terms of any kind of downturn. But, Joe, that's not what we're anticipating or seeing as you might imagine. But we're growing, sure.

I'm just wondering, just in case. You said you implemented some sort of downsizing in Europe? Or did I hear you wrong?

No, not yet. No, no, not yet. Be careful about when we pull that trigger because the demand is still growing, right? So we still have customers to serve and people who need our products. So we had to be cautious about when to pull that trigger. And really, we don't pull it until we see our business starts to contract and go negative.

Yes, what Tim mentioned was that we have contingency plans in place.

Right. I thought I heard in his first remarks that he implemented something, but I heard you wrong so -- all right, I think that's all I got then.

[Operator Instructions] Our next question comes from Matthew Dodson, Edmunds White Partners.

A quick question for you guys. Is the pick-up in demand in the U.S., is that going to fully offset any weakness you might be seeing in Europe?

I would certainly think so. We saw Europe actually recover much more quickly than the U.S. about 1.5 years ago. Europe came out of the blocks, gang busters for us, predominantly driven by Germany. And the U.S. was somewhat reticent, somewhat delayed in their recovery until just this year. Now we're seeing the U.S. being robust and Europe being slow. But still, 53% of our revenue comes from the United States so -- and only 30% comes from Europe. I would expect that to be the case, that it would more than offset any downturn.

But we are now growing in Europe. So it's slow in growth, but there is still growth. And the U.S. is obviously growing much stronger as the U.S. economy gets stronger.

Got you. And next, with your Forging business coming back so nice, is there any reason that we wouldn't see operating margins get to the low end of your target next year?

We're in the process of putting our budgets together for next year. So it's fairly early.

It's not clear just yet. Yes, but to your point, we do target 12% to 14% operating margins when we have a revenue base that's consistent in the -- well above $600 million but low $600 million, and the Forging business does recover. And we would expect that to happen well. It's hard to say exactly when, sometime next year.

It's sort of immature.

Sometime in the next year or 2, I would guess.

But those -- I think Tim hit on the 2 -- to 2 key points to get to that 12% to 14% are additional volume and the operating leverage on that volume and then continuing to improve in Chattanooga. And doing those 2 things are going to have -- get us back to that 12% to 14% margin, with volume being the primary one.

Right.

At this time, I have no questions in queue.

All right. Thank you, Sherry. Well thanks, everyone, for your time today. Just to summarize for you all, I think -- we all think here at the company we're well positioned to continue to execute our strategic plan to profitably grow our business. Our operating leverage is improving nicely and you saw that at 54% this quarter, and we have $82 million in cash to help us execute our growth plans. We also continue to make strategic investments in emerging markets such as China and Brazil, and invest in new products and services as well. To demonstrate the execution of the plan, we did acquire that Yale South Africa business that we mentioned to you, albeit small, very strategic in our sense in terms of leveraging our knowledge in the region, as well as in the mines. I also want to thank all of our associates around the world for their help and dedication to actually execute this quarter very nicely and make our company stronger and well-positioned organization to continue that growth. And as always, we appreciate your time today. Thanks, and have a good day.

This concludes today's conference. Thank you for participating. You may disconnect at this time.