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Columbus Mckinnon Corp (CMCO -0.20%)
Q2Â 2021 Earnings Call
Oct 29, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to the Columbus McKinnon Corporation Second Quarter Fiscal Year 2021 Financial Results. [Operator Instructions]. [Operator Instructions].
It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Columbus McKinnon. Thank you. You may begin.
Deborah Pawlowski -- Investor Relations
Thanks, Darryl, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Joining me here are David Wilson, our President and CEO; and Greg Rustowicz, our Chief Financial Officer. You should have a copy of the second quarter fiscal 2021 financial results, which we released this morning before the market. If not, you can access the release as well as the slides that will accompany our conversation today at our website, columbusmckinnon.com. After our formal presentation, we will be opening the line for Q&A. We kindly ask that you ask one question with a follow-up question and then get back in queue to allow for continuous flow and adequate time. If you'll turn to slide two in the deck, I will first review the safe harbor statement. You should be aware that we may make some forward-looking statements during the formal discussions as well as during the Q&A session.
These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed with the Securities and Exchange Commission. These documents can be found on our website or at sec.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. You should not consider the presentation of additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and the slides for your information.
So with that, if you will turn to slide three, I will turn it over to David to begin. David?
David Wilson -- President and Chief Executive Officer
Thanks, Deb, and good morning, everyone. We built momentum on many fronts in the quarter. Sales came in at about $158 million, which was at the upper end of our expected range. Sequentially, we had a strong adjusted gross margin of 34.4%, which expanded 60 basis points; and adjusted operating margin of 8.9%, which expanded 530 basis points. While the noncash pension settlement charge of approximately $16 million impacted our GAAP earnings, on an adjusted basis, we had earnings per share of $0.34. Most notably, we had free cash flow of $36 million in the quarter. And we have reduced our net debt leverage ratio below one times trailing 12-month adjusted EBITDA. Importantly, we ended the quarter with substantial liquidity of approximately $245 million. We believe that our ability to deliver these improved results was driven by our improving organizational agility and performance-focused culture.
We are making excellent progress identifying areas in which we can strengthen our business system, and we are developing plans that will evolve our strategy to the next level. On slide four, you can see the results of the quarter compared with the trailing first quarter of fiscal 2021. Sales grew 13.5% sequentially, driven by a recovery in our short-cycle business, which was up 22%. As you will likely recall, our short-cycle business, which comprises about 50% of our total revenue, was severely impacted in our first quarter as governments globally responded to contain the COVID-19 virus. Our project business saw sales increase 5.5% sequentially. This growth rate was dampened by the timing related to project acceptance in our rail business due to travel restrictions. Also, you will remember that from a comparative perspective, project activity was not as heavily impacted in the first quarter of this year as our short-cycle business was.
We had very strong adjusted operating leverage of 48% sequentially on higher sales volume and our 80/20 tools continue to create value for CMCO, contributing $1.3 million of operating income in the period. Adjusted EBITDA margin expanded 470 basis points sequentially, achieving 13.4% adjusted EBITDA margin on this level of sales, reflects the decisive actions we took to reduce our cost structure during these unprecedented times and validates the strengthening Columbus McKinnon business system.
With that, let me turn it over to Greg.
Gregory Rustowicz -- Vice President Finance and Chief Financial Officer
Thank you, David. Good morning, everyone. On slide five, net sales in the second quarter were $157.8 million or down 24% from a year ago. As David noted, this sales level was at the upper end of our prior guidance for second quarter fiscal 2021 revenue of approximately $150 million to $160 million. Demand was impacted by the COVID-19-induced recession and sales volume declined measurably compared with the previous year. Looking at our sales bridge. Sales volume was impacted by approximately $54 million or 26.2%. While volume was down, we did realize positive pricing as we saw year-over-year pricing improved by 1.1% as a result of price increases instituted earlier in the year, about 40% of which was 80/20 related. Foreign currency became a tailwind and increased sales by 1.1% or $2.2 million. Let me provide a little color on sales by region. For the second quarter, we saw sales volume decline in the U.S. by 26.4%. This was partially offset by price increases of 1.1%.
Outside of the U.S., sales volume was down 25.8%, which was partially offset by price increases of 1.2% and favorable foreign currency translation of 2.3%. By region, sales volume was down 28% in Canada, 31% in Latin America, 28% in APAC and 24% in EMEA. On slide six, given market conditions, our gross margin was a notable 35.5% in the quarter. On an adjusted basis, eliminating the effects of a gain on the sale of a building in China and factory closure costs, we achieved an adjusted gross margin for the quarter of 34.4%. We believe that this is a significant gross margin level when compared with the prior year, especially given the 24% reduction in revenue we experienced. We have clearly improved our mix of businesses and have benefited from our 80/20 Process and operational excellence initiatives. The 80/20 Process contributed approximately $3.4 million of incremental year-over-year gross profit expansion in the quarter through strategic pricing, indirect overhead reductions and factory closures. Let's now review the quarter's gross profit bridge.
Second quarter gross profit of $56 million was down $17.5 million compared with the prior year. This was driven by a $19.4 million reduction in gross profit due to lower sales volumes. We did see gross profit expansion from pricing as previously mentioned, and we experienced no material cost inflation in the quarter. Included in gross profit is a $2.2 million gain on the sale of a building in China. Foreign currency translation increased gross profit by $800,000, tariffs were lower than the prior year as we imported less Chinese product. We incurred $300,000 of incremental onetime cost for factory closures. Productivity, net of other cost changes, was negative $3.8 million, largely due to unabsorbed fixed costs in our factories. As shown on slide seven, RSG&A costs were $37 million in the quarter or 23.5% of sales. RSG&A costs were $8 million lower than the previous year. The reduction in RSG&A was due to several factors. We lowered our RSG&A cost by $7.2 million as a result of cost-saving measures, including lower head count, limited travel and no incentive compensation bonus accruals.
We also recorded $900,000 less bad debt expense this quarter compared with a year ago when we had a large customer go bankrupt in Europe. Foreign currency translation added approximately $500,000 to our RSG&A costs. With the current COVID-19 pandemic, we took quick and decisive actions to reduce our RSG&A costs as evidenced again this quarter. With demand improving, we will be increasing our RSG&A level in the second half of the year due to second half incentive compensation accruals, growth investments in R&D and our digital experience and the costs related to returning to work, including bringing back certain employees from short workweeks in Europe and additional travel. Taking all of this into account, including the structural cost changes implemented in the first half of the fiscal year, we are estimating Q3 fiscal 2021 RSG&A costs of approximately $43 million. Turning to slide eight. Adjusted operating income was $14 million. Adjusted operating margin was 8.9% of sales, a 380 basis point decline from the prior year.
The driver of this decline was the impact that COVID-19 had on our sales volume. Decremental adjusted operating leverage in the quarter was 25%, which is significantly better than what we saw during the Great Recession of 2009 when we experienced decremental operating leverage of 38%. Our Blueprint for Growth strategy and specifically our 80/20 tools and operational excellence initiatives have improved our business model and better enable us to execute at higher levels of performance in all economic scenarios. As you can see on slide nine, we recorded a GAAP loss per diluted share for the quarter of $0.17. This was the result of a $16.3 million pension settlement expense related to the termination of one of our U.S. pension plans, which we spoke about on last quarter's call. GAAP earnings per share was also impacted by the gain on the sale of the factory in China of $2.6 million and factory closure costs and insurance recovery legal costs that together totaled $800,000. Adjusted earnings per diluted share were $0.34 compared with $0.74 in the previous year, a decrease of $0.40 per share.
We expect fiscal 2021's full year tax rate to be approximately 10% to 12%, which is lower than the previous guidance, primarily due to the pension settlement expense related to the termination of one of our U.S. pension plans, which created a pre-tax loss in the U.S. On slide 10, our adjusted EBITDA margin on a trailing 12-month basis declined to 13.3% as a result of COVID-19. Our return on invested capital also declined to 7.1%. We are continuing to target 19% EBITDA margins and ROIC in the mid-teens, but the timing for the achievement of these objectives has been negatively impacted by COVID-19. Moving to slide 11. We generated $35.7 million of free cash flow for the quarter and $44.2 million year-to-date. We took rapid actions to preserve and generate cash and utilized our business system to focus on working capital reductions. Our working capital as a percent of sales improved to 14.1%, which was a significant contributor to our free cash flow improvement.
We achieved our first half inventory targets and overdelivered on our days sales outstanding, or DSO, performance. capex spend will ramp in the second half of the year as we have several projects under way to improve productivity in our factories. We expect capex of approximately $14 million to $15 million for the full year. Turning to slide 12. Our total debt at the end of the quarter was approximately $275 million, and our net debt was approximately $89 million. Our net debt to net total capitalization is now approximately 16%. We repaid the minimum required principal payments on our term loan in Q2 of $1.1 million and plan to pay the same amount quarterly for the remainder of fiscal 2021. We have made excellent progress delevering and have achieved a net debt to adjusted EBITDA leverage ratio of less than one times, which provides us sufficient financial flexibility to weather the current pandemic. We have a flexible capital structure which is covenant light.
This means our financial covenant is only tested if we have outstanding borrowings against our revolver. After quarter end, we repaid the $25 million of outstanding borrowings on our revolver that we initially drew in April. So the covenant won't be tested at December 31, assuming no borrowings are outstanding. We also extended the maturity date of our revolver to August of 2023, which gives us a stable capital structure for almost the next three years. Finally, our liquidity, which includes our cash on hand and revolver availability, remained strong and had increased to approximately $245 million.
Please turn to slide 13, and I will turn it back over to David.
David Wilson -- President and Chief Executive Officer
Thanks, Greg. If you would turn to slide 13, you'll see our trend in order rates and backlog. Overall, we saw order rates improve approximately 26% compared with the fiscal first quarter. The most significant sequential increase came in July. And thereafter, orders held at about the same level through August and September. Our short-cycle business, which primarily sells through distribution, saw order rates increased throughout the quarter and finished up 41% following the low levels in the trailing first quarter. In our short-cycle business, our government, which includes defense, utility, chemical processing and infrastructure markets, remain active. Entertainment is off its low, but it is still very slow. Our project business, which has a longer sales cycle and a lumpy order pattern, had a strong July and then softened in August and September. While COVID continues to present unknown market risks, channel partners are increasingly more optimistic for improved project activity in 2021. In fact, some delayed projects are coming back to life and are being planned for early 2021.
Our recent quote activity reflects this. We did have a number of encouraging project wins during the quarter. This included an order to supply actuation technology for a customer that is providing material handling systems to Amazon. We also had a win to provide an actuator stabilizing system for a truck manufacturer in Israel. We had solid bookings in rail with a total of $5 million in orders in the quarter and current quote activity for rail remains strong. We are winning in the defense industry as well with an order to provide the complete control system for shipyard cranes used in the construction of the Columbia class submarine. Our short-cycle business also had a win in defense with a large order that will ship over the next six to nine months to support the U.S. Coast Guard. Backlog was up 2% year-over-year and improved 12% or $16 million sequentially. At about $147 million, total backlog is back to pre-COVID levels. Short-term backlog increased by $8 million, ending at approximately $86 million.
Long-term backlog increased $8 million as well to approximately $61 million, including some project wins that will not ship until fiscal year 2022. As you look at slide 14, we had a number of configurator upgrades and product launches in the quarter. Tandem hoists are now available on our Compass configurator, closing a competitive gap for Columbus McKinnon. While we have always supplied tandem hoists, the ease of configuration and instant quote generation for tandem hoists in Compass is powerful for our crane builder customers. Tandem hoists safely lift larger, more complex or lengthy loads. With tandem hoists, our customers can move these loads much more efficiently while protecting both the load and their people. We've improved and simplified the configuration process for this very complex crane system and now provide detailed drawings of tandem hoists and crane components so you can see the product as it's being designed.
We also added the Intelli-Lift auto detection capability to our Intelli series of crane solutions in the quarter. The controls for this product will alert the operator to a misaligned or imbalanced load or a snag condition. Using sensors and a status control enclosure, the system activates lights and an optional warning horn if a side pull or an off-center pick is detected. It can then be corrected manually or if preferred, can be automatically adjusted with the automated system option. Finally, we're setting the competition on their heels with the advanced engineering design of our utility lever hoists. This includes the YaleERGO 360 used in Europe and the improved Little Mule hot stick lever hoist for the U.S. market. These tools have advanced safety features and improved ergonomics. Importantly, the incorporation of the hot stick for the upgraded Little Mule is a feature frequently required by utilities in the U.S. for the safety of alignment.
Our new product development priorities are focused on improving our customers' experience and helping end users of our products to increase safety in their operations and enhance productivity. If you'll turn to slide 15. Looking forward, we're encouraged with the improved stability in our markets while recognizing that there is still risk associated with increasing infection rates during the winter months. It's also worth noting that our fiscal third quarter has approximately three fewer shipping days than our second quarter. Given these factors, we are expecting that sales in the fiscal third quarter will be at similar levels that we had in the second quarter. At the midpoint of our range, this implies about a 3% increase in average sales per shipping day over what we had in the second quarter. Typically, our third quarter declines sequentially versus the second quarter and is our weakest quarter of the year. From a longer-term perspective, our leadership team invested heavily over the last quarter to evolve our Blueprint for Growth strategy. This resulted in clarity that we will strengthen and expand our business system with a broader set of core competencies that will establish a stronger foundation and develop a Columbus McKinnon way for enabling growth and creating scalability.
The strategic framework for CMBS, which you will see on this slide, is underpinned by the key principles of being market-led, customer-centric and operationally excellent with people and values at its center. Another outcome of our strategic planning process is our emerging core growth framework, which defines parallel paths for growth and clear organic and strategic initiatives focused on strengthening our core, growing our core, expanding our core and reimagining our core. The foundation of CMBS in combination with our developing core growth framework will enable Columbus McKinnon to realize attractive, organic and acquisitive growth. Given our strong cash generation, we expect to put our capital to work efficiently with the advancement of our strategy. We consistently prioritize organic growth while expecting to evolve to a more programmatic acquisition process. We plan to inform you more fully with details of the advancement of our strategy during our fiscal fourth quarter. As we maneuver through these still unprecedented times, we know that our people are at the core of our success and their health and safety are our priorities. We are excited about our future and expect a stronger Columbus McKinnon to emerge.
Darryl, we can now open the line for questions.
Questions and Answers:
Operator
Thank you. We will now be conducting a question and answer session. [Operator Instructions] Our first questions come from the line of Greg Palm with Craig-Hallum. Please proceed with your question.
Greg Palm -- Craig-Hallum -- Analyst
Thanks. Good morning, everyone. Maybe I missed it, but just a little bit more color on the cadence of orders or overall demand activity, maybe kind of what you're seeing in October as well? And then any maybe end markets that surprised you to the upside or even downside?
David Wilson -- President and Chief Executive Officer
Hey. Good morning. Thanks for the question. So we saw order rates improve in the quarter, obviously, we highlighted that in the prepared remarks. We saw them increase 26%. They were up in July materially and then leveled off in August and September. And obviously, compared to the first quarter, we saw a pretty material increase. Order rates improved sequentially 41% in our short-cycle business and 12% in our project business. And then really, through Friday, October 23, orders are down 2.3% through those first 17 days compared with the September levels. So that's an overall level of 2.3%. And project business is up 1.3%, but our short-cycle business is down about 5%.
Greg Palm -- Craig-Hallum -- Analyst
Okay. So -- I mean I just -- I was going to try to reconcile the guidance for the December quarter versus the order commentary, the backlog levels in September. So is it maybe more of a function of what you're seeing in October and maybe some assumptions around what happens in the next two months versus sort of what you saw on the backlog levels that you ended with from the September quarter per se?
David Wilson -- President and Chief Executive Officer
Yes. I think it all ties together. So as we exited the quarter, our backlog was up $16 million. But $8 million of that was long term, which means it shifts beyond the quarter, and then $8 million of that was short cycle. So we entered the quarter up $8 million in backlog. But we have three lower -- three less shipping days in the period. And so that, as a percentage, is about 5% less shipping days. And that ends up with about the equivalent level of sales impact, if you will, in terms of our ability to turn that around. That, coupled with the rates that we see running through the first few weeks in October, really lead us to a point where we feel like the guide is consistent with what we should expect. But in reality, if you look at our history, sequentially, from Q2 to Q3, we typically see a decrease in sales. We've seen it over the last several years. It's a cyclicality in the business. And so what we're saying is that we're really seeing improvements over our legacy performance. We're seeing quarter two to quarter three stability, and we're guiding to a consistent level with Q2.
And so we really have to ship about 3% more per day in the average rates going from Q2 to Q3, given the three less shipping days to be able to achieve the targets that we've given you for Q3. So I think we feel good about this. We think that the markets, we expect them to be stable as we continue through Q3. But we feel like with what we entered the quarter with in terms of backlog and how we see things progressing at the moment, we're in a position to deliver a performance that's consistent with our Q2 levels in the $150 million to $160 million range and then execute at those levels, which would be an improvement over prior year trends.
Gregory Rustowicz -- Vice President Finance and Chief Financial Officer
And Greg, just to add on -- so as David said, our fiscal third quarter is historically our weakest. But what we feel really good about is we're probably about 55% booked for the quarter. So we still have a significant book and bill set of orders that do need to come in, in the quarter and -- but the 55% at the midpoint is actually a pretty good level for us.
Greg Palm -- Craig-Hallum -- Analyst
Okay. Make sense. I'll back in queue. Best of luck on fourth. Thanks.
Gregory Rustowicz -- Vice President Finance and Chief Financial Officer
Thanks, Greg.
Operator
Thank you. Our next questions come from the line of Jon Tanwanteng of CJS Securities. Please proceed with your question.
Jon Tanwanteng -- CJS Securities -- Analyst
Hi. Good morning, everyone. Thank you for taking my question. David, congrats on a first full quarter out of the gate, too.
David Wilson -- President and Chief Executive Officer
Thank you.
Jon Tanwanteng -- CJS Securities -- Analyst
My first one, is there any reason to think gross margins might go down in Q3 at all? Or should you continue improving them sequentially, given all the initiatives you have going on under the hood?
David Wilson -- President and Chief Executive Officer
So Jon, typically, what we see in the third quarter is we do see lower gross margins, largely because of less shipping days, our factories operating less, but also our customers tend to shut down for longer periods of time. So our fixed cost absorption is at its lowest level in the December quarter. But having said that, we've made tremendous improvement in driving gross margin. We've got positive price. We would expect that to continue. And we've -- with the factory consolidations and the 80/20 Process, we feel good about the gross margin levels that we're currently at. But having said that, we would typically expect a small degradation in gross margins in the third quarter for the Q2 level.
Jon Tanwanteng -- CJS Securities -- Analyst
Do you expect -- you do expect a degradation from Q2 at this point, a small one?
David Wilson -- President and Chief Executive Officer
That would be historically what we would see.
Jon Tanwanteng -- CJS Securities -- Analyst
Okay. But with the improvements, you may not?
David Wilson -- President and Chief Executive Officer
I would say, Jon, that especially given the current situation with COVID in Europe, that it's going to -- fixed cost absorption is still going to be a challenge for us in the fiscal third quarter.
Jon Tanwanteng -- CJS Securities -- Analyst
Okay. Understood. And also a similar question on cash flow. You did a great job on the working capital improvement. Do those hold? Or do you expect to give some back at some point?
David Wilson -- President and Chief Executive Officer
As volume returns, we would expect our working capital needs to go up. We did a fantastic job managing our DSOs or days sales outstanding. We're going to continue to work hard to maintain levels current to where they are. On the inventory front, as volume improves in the second half of the year, we would expect that we're going to have to make incremental investments in inventory.
Jon Tanwanteng -- CJS Securities -- Analyst
Understood. Thank you. And then finally, just one quick one, if I could. The opex step-up I get in Q3, does that come back down in Q4 as accruals renormalize? Is that the expectation at this point?
David Wilson -- President and Chief Executive Officer
We would expect that the Q3 level is going to -- our Q4 level is going to be similar with the Q3 level, as people return to work, and we will have the management incentive accrual in for the entire second half --
Jon Tanwanteng -- CJS Securities -- Analyst
Understood--
David Wilson -- President and Chief Executive Officer
As well as the growth investments will continue.
Operator
Thank you. Our next questions come from the line of Mike Shlisky of Colliers Securities. Please proceed with your question.
Mike Shlisky -- Colliers Securities -- Analyst
Good morning, everybody. Maybe I will start off with just a quick follow-up on the last question. Can you quantify for us if you have higher RSG&A this coming quarter here? Can you give any sense as to how much of that increase is going to be from growth investments and how much is from some of the more mundane RSG&A coming back from people coming back to work?
Gregory Rustowicz -- Vice President Finance and Chief Financial Officer
Sure. So in broad strokes, Mike, it's about $2 million for incentive comp. It's $2 million for growth investments, and it's $2 million related to return to work.
David Wilson -- President and Chief Executive Officer
So it's really in three buckets, and it's about those numbers. Yes.
Mike Shlisky -- Colliers Securities -- Analyst
Okay. Great. And then secondly, I want to get a little more clarity on one of the orders that you had noted in the quarter here, and that was the Amazon-related order. Could you maybe give us a little bit more color or maybe explain that order again? And I'm curious, when you work with Amazon, when you send one item to Amazon, sometimes there's a very large order that comes after that when you have -- they say, we need this for another 55, 85 locations around the world. Is there any possibility of getting a large order after this first order from Amazon?
David Wilson -- President and Chief Executive Officer
Right. Yes, we do feel good about that order. It's being sold through a customer that is providing the solution to Amazon. But we do have visibility into further demand for that solution. And we feel like we're in a good position as that demand evolves. But yes, it's exciting to be participating in that supply chain to Amazon. And it is a noteworthy order for us at a level that gives us confidence that we could do some more. And our team is actively working on those opportunities.
Mike Shlisky -- Colliers Securities -- Analyst
Can you just maybe -- just maybe explain a little further like what it was that was ordered? Or is that...
David Wilson -- President and Chief Executive Officer
These are actuators that we're selling to the partner that are being configured into the solutions for Amazon's warehousing solutions.
Mike Shlisky -- Colliers Securities -- Analyst
Okay. So it's being put into Amazon warehouses, not Amazon's customer's warehouses? It's not for sale on Amazon. It's things that the company, Amazon, is using for their own operation?
David Wilson -- President and Chief Executive Officer
Correct.
Mike Shlisky -- Colliers Securities -- Analyst
Okay. Great. Thanks so much.
Operator
Thank you. Our next question comes from the line of Chris Howe with Barrington Research. Please proceed with your question.
Chris Howe -- Barrington Research -- Analyst
Good morning, David.
David Wilson -- President and Chief Executive Officer
Good morning, Chris.
Chris Howe -- Barrington Research -- Analyst
Good morning. So net debt turns is about 0.97 times. This environment seems to change as we turn on the news each day. But can you talk about capital allocation priorities as we move forward through this uncertain environment, understanding that there may be opportunities in the backlog of Phase III? But if there were to be something to happen to the downside, those would obviously be pushed out. And does this in any way change your acceleration of the growth engine, providing a time to pause and invest in some of these product development opportunities that you've mentioned in the slide deck?
David Wilson -- President and Chief Executive Officer
Yes. Thanks, Chris. Let me start and ask Greg to pick up where I leave off. And what I would say is that our capital allocation methodology, we have a nice framework for capital allocation that we've defined and we're not deviating from. And so Greg can talk a little bit more about the specifics of that framework, but we expect to maintain a consistent set of priorities as we advance. Clearly, we have liquidity and we have the ability to invest in growth initiatives, and we are investing in organic and we plan to be investing in strategic growth options. And so we're excited about the position that we're in. We feel like the improvements in operating performance the team has delivered have positioned us to be able to make investments that we'd like to make as we go forward. And we have a capital allocation methodology that will allow for that. So we feel good about it, and I'll let Greg comment a little further.
Gregory Rustowicz -- Vice President Finance and Chief Financial Officer
Yes. I think, Chris, what you're also asking is about the fact that we are -- our leverage ratio is below our target of two times, sitting at under one. So in a pandemic, that's actually a pretty good place to be relative to the alternative. And we do think that we have ample dry powder and lots of flexibility with our capital structure to fund our growth initiatives, whether it's in new product development, whether it's in productivity capex and another part of our capital allocation strategy is returning cash to shareholders. And with our dividend, we look at it every March, and our policy is to have a consistent ever-growing dividend. So in March, we'll kind of get a sense of where we expect the next fiscal year to end and make any adjustments as required. But we're in a really good spot with over $245 million of liquidity. And as we look at inorganic growth, we're in, once again, a great position to move forward.
Chris Howe -- Barrington Research -- Analyst
Great. And one follow-up question. We talked about the trends that we're seeing in October, how that combined with some other factors like the shipping days, leads us conservatively to $150 million to $160 million for the upcoming quarter. But perhaps in line with some of David's initial comments about this quarter relating to 80/20 and also some of the pricing improvements, what sort of opportunities or pockets that are in place to exceed your expectations, knowing that gross margins will come down slightly, but just some opportunities that you're working on that could come to fruition or could potentially push into the following quarter?
David Wilson -- President and Chief Executive Officer
Yes. Thanks, Chris. Good question. And as we look out into the quarter, we obviously always have an assessment of risks and opportunities. And I would say that we have a healthy backlog. As we mentioned, that backlog is up $16 million. $8 million of that is anticipated to contribute to the quarter in the short-cycle areas. That amount that is above historic levels that is pushed out into the period beyond the quarter is an area we're looking at where there might be opportunities to potentially drive a higher level of execution. So we're looking at that healthy backlog. Also, if order rates do improve, that could certainly help us to execute at a higher level.
We're constantly looking at opportunities to improve the business. The team is very performance-oriented and moving with a level of agility that I think has improved over past levels. And so we're coordinated. We're looking for opportunities. We've clarified our strategic focus areas as we go forward. And the team is really working on making sure that we're executing well in this period to tee us up over the long term. And so we're making some investments, as you heard, as it relates to some SG&A spend. And we're making sure that we're positioning ourselves to get out and get the growth that we're targeting, but we feel good about where we are. And we think that opportunities would primarily be volume-oriented.
Chris Howe -- Barrington Research -- Analyst
Okay. Thanks.
David Wilson -- President and Chief Executive Officer
Thank you.
Operator
As a reminder. [Operator Instructions] Our next questions come from the line of Matt Summerville with D.A. Davidson. Please proceed with your question.
Austin -- D.A. Davidson -- Analyst
Hi. This is Austin [Phonetic] on for Matt.
David Wilson -- President and Chief Executive Officer
Hi, Austin. Good morning.
Austin -- D.A. Davidson -- Analyst
I had a few questions, the first being could you comment or elaborate a bit on trends you're seeing in input costs?
David Wilson -- President and Chief Executive Officer
Sorry, we missed the last part, trends in what?
Austin -- D.A. Davidson -- Analyst
Input costs.
David Wilson -- President and Chief Executive Officer
Input costs, raw materials. Yes. I guess what I would say is that we've had a pretty good performance in our supply chain, both in terms of delivery and making sure that we're getting the kind of prioritization that we require in this environment from our vendors. And so we've been able to have relatively stable performance, no material interruptions in supply. And we've been able to execute in a way that has driven the supply chain savings that we've been targeting. And so consistent with our -- the operating excellence focus that we have as a company and the emphasis on supply chain improvements that outpace supply chain inflation and/or material inflation in the supply chain, we've been performing at a level that has been achieving our targets.
And so we've seen input costs remain consistent with the way that we've been modeling the business, which has really been to drive and deliver a year-over-year improvement that nets to our bottom line. In recent times, we were obviously seeing an increased rate of infection in certain parts of the world, but we haven't seen any impacts on our supply chain from yet and don't know how that's going to evolve. But at this point, I'd say input costs remain consistent with what we'd be expecting. And the trend overall is driving an improvement in those input costs.
Gregory Rustowicz -- Vice President Finance and Chief Financial Officer
Yes. And so year-over-year, cost in -- we have seen zero inflation from a raw material perspective on a net basis. And that's in our gross margin bridge.
Austin -- D.A. Davidson -- Analyst
Okay. Thank you for the caller. And just a quick follow-up. If you could elaborate on -- you talked about 80/20 savings and I was curious if you could provide maybe an update on your SKU rationalization process and how that's playing out. Is there any regional dynamic to that given recent developments in light of COVID, etc?
David Wilson -- President and Chief Executive Officer
Sure. That's a good question, Austin. So we -- this is a big priority for us. It's a part of our strategic deployment process and something we're heavily focused on as an organization. We're, I'd say, in the very early innings of the rationalization and product line simplification initiative. We've highlighted this as an opportunity for the company. And the early work is really around developing the appropriate product line road maps for the product offerings, making sure that we're looking at this from a comprehensive lens or through a comprehensive lens of understanding our customers, their needs, our product portfolio, how it meets those needs and the future development opportunities that we're pursuing to rationalize and kind of replatform products.
But we've done the early work around the product line road maps, and we're preparing to accelerate those efforts to drive improvement. We see that as a lever for future 80/20 savings and cost improvement as well as an improvement in the product offering that we have to meet our customers' needs. So there is a lot of opportunity there. It is a heavy focus for us. From a regional perspective, one of our challenges as it relates to the global footprint that we have is our ability to travel, as it's impacted by COVID, and get resources into factories around the world to help drive improvements or to provide support for the improvements that the teams locally are already driving and bringing those to an accelerated level.
But the work that we're doing around PLS, product line simplification, is something that is not, I don't think, being materially impacted by that inability to travel at this point. I think we're working in a coordinated way with our teams around the world. We're identifying the appropriate next steps, and we're moving in the early innings of implementing change there. And I think that we'll see those benefits over time.
Austin -- D.A. Davidson -- Analyst
Great. Thank you so much.
David Wilson -- President and Chief Executive Officer
Thank you, Austin.
Operator
There are no further questions at this time. I would like to turn the floor back over to David for closing comments.
David Wilson -- President and Chief Executive Officer
Great. Thank you, Darryl. Thanks for joining us today. We're pleased with our performance in the quarter, reporting strong sequential improvements in orders, sales, margin and cash, resulting in a strengthened financial position and improved liquidity. More importantly, we're gaining momentum as an organization. I hope you're as excited as I am about the future potential of Columbus McKinnon, as we execute on our plan to drive growth with strengthened earnings power. Have a nice day.
Operator
[Operator Closing Remarks].
Duration: 45 minutes
Call participants:
Deborah Pawlowski -- Investor Relations
David Wilson -- President and Chief Executive Officer
Gregory Rustowicz -- Vice President Finance and Chief Financial Officer
Greg Palm -- Craig-Hallum -- Analyst
Jon Tanwanteng -- CJS Securities -- Analyst
Mike Shlisky -- Colliers Securities -- Analyst
Chris Howe -- Barrington Research -- Analyst
Austin -- D.A. Davidson -- Analyst
