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Columbus Mckinnon Corp (NASDAQ:CMCO)
Q4 2021 Earnings Call
May 26, 2021, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings. Welcome to Columbus McKinnon Corporation Fourth Quarter and Fiscal Year 2021 Financial Results Call. [Operator Instructions] Please note this conference is being recorded.
At this time, I'll now turn the conference over to Deborah Pawlowski, Investor Relations. Ms. Pawlowski, you may now begin.
Deborah K. Pawlowski -- Investor Relations
Thanks, Rob, and good morning everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Here with me are David Wilson, our President and CEO; and Greg Rustowicz, our Chief Financial Officer. You should have a copy of our fourth 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. David and Greg will be reviewing the results of the quarter, our strategy and outlook. Then after the formal presentation, we will open the lines to Q&A.
We kindly ask that you ask only one question with a follow-up question, and then, please get back in the queue to allow for a continuous flow and adequate time. If you'll return to slide 2 in the deck, I will first review the Safe Harbor statements. 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 by the company with 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. 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 table that accompany today's release and the slides for your information.
With that, if you'll turn to slide 3, I will turn it over to David to begin. David?
David J. Wilson -- President and Chief Executive Officer
Thanks Deb and good morning everyone. Fiscal 2021 was an unprecedented year and we were happy to end on a high note. We believe the excellent execution of our strategy by the team in the development and deployment of our enhanced Columbus McKinnon Business System or CMBS were crucial to our success. As markets have been recovering we have responded with agility to increasing customer demand. As a result sales grew 12% sequentially to $186 million which was at the higher end of our updated guidance. Our team worked hard to drive efficiencies against headwinds as well.
Fourth quarter adjusted operating margin was 10.1% compared with 10.7% last year. Our 80/20 tools continued to contribute to our earnings power. 80/20 provided approximately $2.9 million in operating income in the quarter to help offset the headwinds that both COVID and the supply chain presented. Despite the pandemic we were able to achieve a $11.8 million in contribution to operating income during fiscal 2021 while not as visible in the year because it offsets the operational headwinds associated with volume declines we expect our efforts to be rewarded as volume returns. We generated $27 million of cash from operations during the quarter and nearly $21 million in free cash flow. By year-end we had dropped our leverage ratio to nearly 0.6 times. In the wake of our recently successful debt refinancing which Greg will address in a moment our net debt leverage ratio is about 3.4 times.
We expect to get that back down to our target ratio of 2 times within two years excluding any additional acquisitions. A strong sequential increase in quarterly order flow drove backlog up 13% over the trailing fiscal third quarter and up 31% year-over-year. As you look at slide 4 our focus on 2.0 led us to identify and pursue the acquisition of Dorner Manufacturing, which we completed just following the end of the fiscal year. This acquisition created an additional platform from which we can expand our intelligent motion solutions and higher growth end markets. Specialty high precision conveying puts us at the high -- at the center of the industrial automation equation.
Backlog for Dorner at the end of April more than doubled over the same time last year to nearly $40 million. This is slightly ahead of our expectations when we closed the acquisition at the beginning of the month. Our organic efforts were successful as well and accelerated in contributions throughout the year. Despite the pandemic, new product revenue or N minus 3 revenue, which is revenue from products introduced in the recent three years was up 22%. This is the second year in a row we have exceeded 20% growth with our vitality index. I should point out that new product innovation is also key to Dorner's growth. We are prioritizing efforts to bring their ingenuity and precision conveying to a broader customer base, while continuing to introduce new conveying solutions to the market.
With that, let me turn it over to Greg for a review of our financials. Greg?
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Thank you, David. Good morning everyone. On slide 5 net sales in the fourth quarter were $186.2 million down 1.7% from a year ago. As David noted this sales level was at the upper end of our updated guidance for fourth quarter revenue of approximately $184 million to $187 million. We continue to see demand improved sequentially and our closing the gap to pre-COVID revenue levels. This fourth quarter felt more like a normal fourth quarter as we saw stocking orders begin to return in our short cycle businesses. Looking at our sales bridge sales volume was down only $11 million or 5.8%. We did realize positive pricing as we saw year-over-year pricing improvement by 1%.
Foreign currency remains a tailwind and increased sales by 3.1% or $6 million. Let me provide a little color on sales by region. For the fourth quarter we saw sales volume decline in the US by approximately 10%. This was partially offset by price increases of 80 basis points. Non-US sales volume was down approximately 1% which was more than offset by price increases of 1.2% and favorable foreign currency translation of 6.9%. By region sales volume was down 16% in Canada and down 19% in Latin America, but EMEA was down less than 1% and APAC saw volumes increased 19% albeit off of a small base.
We did push through normal price increases to start the fiscal year and we announced the second price increase last week to help offset inflationary pressures in commodities and labor costs. The second price increase will be effective at the end of June and will help preserve margins next quarter. We will continue to monitor inflationary pressures going forward and we'll take further actions if necessary. On slide 6, we saw gross margin improved sequentially to 34.4% which compares with 34.9% last year. Sales volume is still below last year by $11 million which affects our fixed cost absorption in our factories. We also face supply chain and logistics challenges which led to inefficiencies in our factories.
We are still benefiting from our 80/20 process which contributed approximately $2.9 million of incremental year-over-year gross profit expansion in the quarter through strategic pricing, indirect overhead reductions in factory closures. We are doubling down on product line simplification this year and are making good progress with SKU and component reductions. Unfortunately, this part of the process takes longer as you have to phase out existing products and utilize existing inventory to avoid write-offs and this effort will pay dividends over a longer horizon. Let's now review this quarter's gross profit bridge.
Fourth quarter gross profit of $64.1 million was down $2.1 million compared with the prior year. This was driven by two factors. First, we saw $3.6 million reduction in gross profit due to lower sales volumes compared to a year ago. We also experienced negative productivity net of other cost changes of $4.5 million largely due to supply chain issues and COVID related labor inefficiencies. In addition, freight carriers have also been impacted as we see higher costs and longer transit times. We did see gross profit expansion from pricing net of material cost inflation of $1.7 million which includes about $200,000 of material cost inflation in the quarter.
Foreign currency translation increased gross profit by $2.1 million. Factory closure costs and business realignment costs together were lower this quarter by $1.8 million. As shown on slide 7, our SG&A costs were $46.7 million in the quarter or 25.1% of sales. Included in this total were four million of Dorner acquisition deal costs which we have included as a pro forma item in our adjusted operating income adjusted EBITDA and adjusted EPS calculations. Excluding these costs our RSG&A costs were actually $3.5 million lower than the previous year despite $2.3 million of higher annual incentive costs and stock comp costs compared with the fourth quarter a year ago.
This improved level of RSG&A was due to several factors we had lower selling costs of $1.4 million resulting from cost saving measures including lower head count and limited travel. G&A costs were down $2.9 million compared with the prior year if you exclude the Dorner acquisition deal cost of $4 million that I just covered. We also continued to invest in R&D to drive organic growth so those costs were actually up $800,000. FX translation also added approximately $1.2 million to RSG&A cost which also makes this year-over-year performance that much more impressive. As we move into the new fiscal year we are increasing our Q1 estimate for RSG&A to approximately $50 million which includes the impact of the Dorner acquisition.
Dorner adds about $7 million quarterly to our legacy RSG&A base costs. As sales increased throughout the year variable sales costs will increase. In addition we plan to continue making investments in R&D and we'll implement merit increases in July to reward our employees. As a result we would expect RSG&A cost to increase modestly throughout the remainder of the fiscal year. Turning to slide 8, adjusted operating income was $18.9 million. Adjusted operating margin was 10.1% of sales only down 60 basis points from the prior year. We are close to returning to pre-COVID margin levels as we see volumes return.
We've also made structural changes to the business in the past year to improve profitability which are beginning to show up. Decremental adjusted operating leverage for the year was 13.5%, which is significantly better than what we saw during the Great Recession of 2009 when we experienced decremental operating leverage of 38%. I would like to point out that while we are still finalizing the purchase accounting for the Dorner acquisition, we expect total amortization expense to increase to $6.5 million per quarter as Dorner will approximately double the historical level of amortization expense we have had post the STAHL acquisition.
As you can see on slide 9, we recorded GAAP income per diluted share for the quarter of $0.39. Adjusted earnings per diluted share were $0.50, which were up substantially on a sequential basis, but down $0.08 per share from a year ago. We still believe that Dorner will be accretive to FY 2022 earnings per share by $0.05 to $0.10. We are still working through the impact of the FY 2022 GAAP effective tax rate, given the complexities of the Dorner acquisition and we'll provide our estimated tax rate in July when we report our Q1 earnings. In the meantime, we continue to use 22% as our normalized tax rate for computed adjusted earnings per share.
In addition, there have been substantial changes to the capital structure of the company. And I want to be sure that we are transparent with the impact that this will have on Q1. With the initial $650 million bridge financing outstanding for half a quarter, the debt pay down from the equity offering in the permanent $450 million term loan B financing outstanding for half a quarter, we expect interest expense in Q1 to be approximately $7.5 million. With the additional shares from the equity offering, our share count for average diluted shares outstanding in Q1 is expected to be 27.2 million shares. On slide 10, our adjusted EBITDA margin for fiscal year 2021 declined to 11.9% because of COVID-19.
Our return on invested capital of 6.6% was similarly impacted. We continue to target 19% EBITDA margins and expect our ROIC to be greater than our We continue to target 19% EBITDA margins and expect our ROIC to be greater than our WACC in fiscal year 2023. Dorner will help us achieve our 19% EBITDA margin one year earlier than we would've otherwise done. We remain highly confident that our strategy will enable us to drive profitable growth and achieve these objectives. Moving to slide 11 we generated $20.5 million of free cash for in this quarter in an impressive $86.6 million in the fiscal year 2021 despite the pandemic.
We took rapid actions to preserve and generate cash and utilized our strategy deployment process which is part of our business system to focus on working capital reductions. Our working capital as a percent of sales improved to 9.3% which was a significant contributor to our free cash flow improvement. We drove our day sale outstanding or DSO performance down to 51.5 days and improved our days payable outstanding to 58.7 days. Inventory turns also improved to 4.4 turns. We expect capex of $20 million to $25 million in fiscal year 2022. This includes capex for Dorner of approximately $3 million to $4 million. Turning to slide 12 we've been very busy refinancing the capital structure polestar or acquisition and I'm pleased to report that we even exceeded our own internal expectations.
We utilize the $650 million bridge loan to acquire Dorner paid down our previously existing term loan B and paid various fees and expenses associated with the acquisition. We then issued $207 million of stock in an upsized equity offering in which the underwriter also exercised the green shoot provision. This equity was issued at a price of $48 per share and resulted in net proceeds of $198.7 million all of which was utilized to pay down the initial bridge loan. Right after the equity price we refinanced the remaining initial bridge loan with $450 million Term Loan B at LIBOR plus 2.75% with a 50 basis point LIBOR floor in 99.75 price.
This was on the tight end of the price stock and gives us a low cost flexible capital structure that will serve us well for the coming years. With the completion of the equity offering and debt refinancing, we estimate that as of March 31 on a pro forma basis and excluding costs synergies, we would have been at a 3.4 times net leverage ratio using both ours and Dorner's 3/31 LTM adjusted EBITDA. Finally, our liquidity remains strong which includes our cash on hand and revolver availability and with approximate a $155 million at the end of April.
Please advance to slide 13 so I will turn it back over to David.
David J. Wilson -- President and Chief Executive Officer
Thanks Greg. As you can see on slide 13, orders continue to improve sequentially in Q4 and we're up 24% versus Q3. We have seen improvements continuing in many markets. Projects that were previously on hold are now being released and new projects are being quoted. This is all very encouraging. We also saw the beginnings of inventory restocking and our distribution channels for the first time in two years. I should point out that there is a degree of seasonality in our orders. We typically have stronger demand in the fiscal fourth quarter whereas orders in the fiscal first quarter tend to decline sequentially.
This reflects distributor purchasing behavior in advance of annual price increases. We know that year-over-year comparisons for the first quarter in fiscal 2022 will be favorable considering what was happening at this time last year. In fact, through last week, the average daily order rate for our lifting business was up over 50% compared with last year. Book to bill for the fiscal fourth quarter was greater than 1.2:1. Demand was strong in defense and government with a variety of projects including shipbuilding and material handling automation at supply depots among other projects. Demand from energy markets globally was encouraging.
Utilities were stocking up for summer grid work in advance of the hurricane season. We also had requests for solutions in nuclear and thermal power generation facilities. Demand for our fixed venue entertainment products has been improving. Enquiries in this market in general are picking up. We would expect to continue to see this trend improve and to start seeing this convert to orders for touring shows as we progressed through the year. Both short and long term backward log were up sequentially. Short-term which is expected to ship within the first quarter grew nearly 15% to $104 million while long-term backlog was up nearly 10%.
This does not include approximately $40 million of additional backlog from Dorner. We are entering fiscal 2022 in a solid position with the expansion of the markets we serve, our strong competitive position and the tailwinds of recovery. Please turn to slide 14. For the first quarter of fiscal 2022, we expect net sales to range between $212 million and $217 million. This of course includes the Dorner acquisition. The addition of the specialty conveying solutions platform diversified our markets into to those with enduring tailwinds. We are seeing strong demand from e-commerce, life sciences and food processing industries.
With this platform, we are accelerating our pivot to growth and improving our margin profile. As to the supply chain, we are actively addressing inflation, shortages and logistics constraints. We began implementing additional price increases this month and are working closely with our suppliers to get better purchasing and delivery performance. We have historically been able to cover material cost inflation and believe we are positioned to continue to do so. Looking beyond the next quarter, there is a lot that makes us excited about where we are headed.
We are driving progress with our strategy and employing new business tools to drive scalability. We expect to deliver growth through targeted organic initiatives including opportunities within our specialty conveying solutions platforms and while delivering our balance sheet and integrating Dorner our high priorities, we will continue to actively develop our M&A pipeline. Turning to slide 15, I'd like to remind you of our blueprint for Growth 2.0 strategy. CMBS provides the foundation and our core growth framework defines the potential that we have in front of us. We truly believe there is a lot to look forward to here at Columbus McKinnon.
With that Rob, we can open up the line for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Thank you. Our first question today comes from the line of Mike Shlisky with Colliers Securities. Please proceed with your question.
Mike Shlisky -- Colliers Securities -- Analyst
Hey, good morning. I want to ask quickly first about the backlog at Dorner. You mentioned it had more than doubled year-over-year I think in the quarter. Can you remind us last March to your knowledge if -- and was there a large dip at the very end of the quarter last year kind of like what you saw or is it vary apples-to-apples really pre-pandemic for them a our comparison?
David J. Wilson -- President and Chief Executive Officer
Yeah I think that the pandemic might be a -- good question of course. I mean as we look at that the quarter ending March for them in the prior year the pandemic was early in its cycle. I think their backlog was around $17 million at that time. And they saw the first quarter of our period last year so our first quarter their second -- I'm sorry their third quarter in their annual cycle was their worst if you will from the pandemic. So remember they have a year-end in September and so that would've been their fiscal third quarter which is equivalent to our first fiscal quarter of '21. And that was the period when they were impacted the most by COVID but their March ending balance or what we referred to as their April ending balance at $40 million is up about you know it's more than double I think it was $70 million at the time that we're referring back to.
Mike Shlisky -- Colliers Securities -- Analyst
Okay. And then my follow-up you had mentioned in the slide that you're still looking at 19% EBITDA margins of at fiscal 2023. Do you anticipate that being a full year type of scenario or just kind of scratching by the end of the year as an exit rate? Kind of sense us as to what does that 19% a target mean to you for the next fiscal year?
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Hey Mike its Greg. We're looking at that has being the average for the full year.
Mike Shlisky -- Colliers Securities -- Analyst
Average. Okay. Well guys that's great. That's great color. I appreciate it and I'll pass it along.
David J. Wilson -- President and Chief Executive Officer
Thanks Mike
Operator
Thank you. Our next question is from the line of Michael McGinn with Wells Fargo. Please proceed with your question.
Michael McGinn -- Wells Fargo -- Analyst
Hey, good morning, everybody.
David J. Wilson -- President and Chief Executive Officer
Hey, Mike. Good morning.
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Good morning.
Michael McGinn -- Wells Fargo -- Analyst
So, you walked through some SG&A numbers and I think the SG&A ramp you said was $7 million from with Dorner, and then amortization on top of that, does that $7 million include, is that fully burdened with R&D and everything?
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Yeah. So just to be clear amortization is not included in our SG&A costs. Legacy is $43 million, Dorner is $7 million and that gets to the $50 million of RSG&A. And as I mentioned, we do expect to ramp our spend for new product development, which falls into R&D.
David J. Wilson -- President and Chief Executive Officer
That $50 million includes the R&D.
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Yeah, for the quarter.
David J. Wilson -- President and Chief Executive Officer
And we're going to continue to make selected and targeted investments in growth throughout the year.
Michael McGinn -- Wells Fargo -- Analyst
Got it. You also alluded to some pricing, the second pricing increase and that your backlog is filling up a little quicker with the shorter cycle distribution products. Can you walk us through what the, the expectations are for price increases on the front end, shorter cycle products being delivered in the front half and then maybe projects picking up the back half, what your incremental margin estimates or assumptions would kind of be a scenario like that?
David J. Wilson -- President and Chief Executive Officer
Yeah. So Mike, we're working to make sure that we're out ahead of the inflationary pressures that are out there in the market. And so our second price increase is really targeted at ensuring that we stay positive as it relates to net price versus inflationary pressures. So, we're not seeing this as an action that expands margins specifically in the second price increase and it's more of a movement to make sure that we're out ahead of inflation. And the back half, as it relates to longer cycle projects, we obviously price them as an engineered-to-order project, off of an understanding of the market value of the project, the competitive landscape and then the pricing pressures on the cost base. And so, we'll be making sure that we have the appropriate adjustments in there to ensure that we're maintaining if not expanding margin.
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
And just to add on to that Mike. So, with engineered-to-order product, because it's a unique SKU, we don't count that as price. And so our price calculations are year-over-year by SKU, but the change in prices. So with engineered-to-order, every time you quote, you have the opportunity to adjust your input costs and our quoting software. So, when we talk price, it's really just on standard short-cycle product that was sold in the previous year, which is about half of the business. So, when we talk about 1% price realized in the quarter, you might think of it as really, it's 2% on what we're actually raising prices on standard product. But there is also pricing embedded in engineered-to-order products based on, how we're quoting it and how long and adjusting the input cost for that.
Michael McGinn -- Wells Fargo -- Analyst
Got it. And if I could sneak one more in on the capex number, is this sort of a catch up plus integration or is this the run rate to SKUs going forward for the combined business?
David J. Wilson -- President and Chief Executive Officer
Yeah. I'll take that. So, in general, this is probably a more normal level of capex at the $20 million to $25 million. We spent $12.3 million this past year. In other years, we've been as high as $20 million to $22 million. On just the legacy, Columbus McKinnon Dorner is typically in the $3 million to $4 million range and that should be plenty on a go-forward basis. So, I would think that this would be a good number going forward.
Michael McGinn -- Wells Fargo -- Analyst
Got it. Appreciate the time.
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Thanks, Mike.
Operator
The next question is coming from the line of Chris Howe with Barrington. Please just use your questions.
David J. Wilson -- President and Chief Executive Officer
Hi, Chris.
Chris Howe -- Barrington Research Associates, Inc. -- Analyst
Good morning everyone. Thanks for taking my questions. As far as the guidance that we've kind of discussed for the first fiscal quarter, can you talk in more detail as to how this may look for Dorner -- a Dorner sales expectation? And in the context of this fiscal year, can you remind me again, about Dorner seasonality and its comparisons over let's say your last fiscal year?
David J. Wilson -- President and Chief Executive Officer
Yes. But I'll.
Chris Howe -- Barrington Research Associates, Inc. -- Analyst
And that's too many questions on there, but the previous Dorner expectations laid out for their year ending September 30, are those still in line?
David J. Wilson -- President and Chief Executive Officer
Yeah Chris, let me jump in and then I'll ask Greg to help out. So, Dorner's performance is tracking consistent with our expectations at the acquisition timeframe and as I mentioned in my opening comments even slightly ahead of those expectations and so we feel really good about where the business is. Their order development has been really promising. From a cyclicality standpoint, on their build-to-order business, which is their base business, it's relatively I'd say stable. The Q3 Columbus McKinnon period tends to be their highest period at calendar year-end and then that goes into the Q4 period at a slightly lower level.
But Q1 and Q2, if there is any seasonality would tend to be a little bit lower on the build-to-order in a general cycle if you will. But that's exclusive of more macro drivers, which includes a lot of activity in the life sciences and e-commerce sectors. And so, we're seeing terrific development in terms of order pipeline there. On a year-over-year basis, their orders are up on a quarter-to-date basis materially. We had -- but that -- but again, first quarter last year was their worst quarter -- the first -- when I say first quarter, I'm referring to Columbus McKinnon's quarter. So yeah really good development there. And Greg, I don't know if you have anything you want to add to this context.
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Yeah. So just to add on, from a seasonality perspective, we don't really see seasonality in the business other than the number of working days. So when David talks about our December legacy quarter being less for them, it's really a function of the Thanksgiving holidays, Christmas holidays, but there isn't really that cycle. And given the growth trajectory that they've been on, they've been kind of blowing through any kind of concept of seasonality. Now we did give a couple of markers on revenue as part of the S-1 filings and 8-K filings where -- and when we announced the Dorner acquisition I think through December, the revenue was about $98 million and change $98 million and change.
David J. Wilson -- President and Chief Executive Officer
December period ending.
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Yeah. And then we said for their September timeframe, it was about $124.7 million is the number that I recall. And they -- which says that there's been -- there's a tremendous amount of growth that's happening in the second half of the year and that is just continuing. So we're very pleased with the first month and a couple of weeks that we've owned Dorner. It's a very profitable high-margin business with a really great double-digit growth trajectory.
David J. Wilson -- President and Chief Executive Officer
Yeah and a fantastic team.
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
So we really, really feel good about where we are and we're excited about how things are coming together right now and working really hard on all the things that we've committed to do to make sure that we exceed or we achieve and exceed our targets.
Chris Howe -- Barrington Research Associates, Inc. -- Analyst
That's great. And if I may squeeze another question. It won't be a series of questions. But as it relates to Dorner in some of your comments in the press release David you said strategic opportunities in a fragmented market. Can you perhaps expand on these thoughts? And perhaps, how it may relate to the different opportunities that you're seeing in your inorganic pipeline?
David J. Wilson -- President and Chief Executive Officer
Sure. So the market that Dorner serves is a global market that approximates $5 billion. They're obviously at the rates that Greg was just referring to a small piece of that total market. But there are two other major global players in addition to Dorner and then we see a long tail of fragmentation. And Dorner today has a very large percentage of their business. Approximately 85% of their business is in the US and the balance overseas. And so as we look at the competitive landscape and we look at the market there are a number of nice niche technology opportunities. There are also opportunities that will enable more global scale. And there is just a tremendous runway and a nice pipeline of opportunities that exist. And obviously, we're very focused on what's right in front of us and making sure that we execute to the plans that we've committed to, but the pipeline of opportunities are really nicely concentrated in areas that we think will be very attractive for Dorner.
Chris Howe -- Barrington Research Associates, Inc. -- Analyst
Very helpful. Thanks for taking my questions. I'll hop back in the queue.
David J. Wilson -- President and Chief Executive Officer
Great. Thanks Mike.
Operator
Our next question is from the line of Greg Palm with Craig-Hallum Capital. Please proceed with your question.
Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst
Hi. This is Danny Eggerichs on for Greg today. Thanks for taking the questions.
David J. Wilson -- President and Chief Executive Officer
Hey, Danny. Good morning.
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Hey, Danny.
Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst
Hey, I appreciate the color on -- it sounds like Dorner growth rates have been accelerating recently. I'm wondering if you could kind of dig into the drivers behind that? I know certainly with the labor constraints a lot of companies are putting more emphasis on warehouse automation. Just anything you're seeing from that perspective?
David J. Wilson -- President and Chief Executive Officer
Danny, I'm sorry, you broke up just a little bit there in the front end of the question. So you're asking about order rates in Dorner just to confirm?
Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst
Yep. Yep. So I mean just -- it seems like order rates have been accelerating recently. I was just kind of wondering what the drivers were behind that.
David J. Wilson -- President and Chief Executive Officer
Yeah.
Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst
I know with the labor constraints, it seems like companies are putting more of an emphasis on warehouse automation in their distribution centers. So I just wanted to understand?
David J. Wilson -- President and Chief Executive Officer
Sure. We're certainly seeing that as well. The two primary markets that we're seeing most of the significant activity and although all across the board markets are pretty favorable, but it would be life sciences. And that's primarily concentrated around pharmaceutical automation, if you will pharmaceutical distribution automation in the life sciences space and then e-commerce growth and that's in terms of warehousing and order fulfillment activities. So yes, a lot of demand generation coming from those areas. And the order pipeline continues to develop positively and we're starting to receive more and more commitments from customers for orders that will come in the future relative to that opportunity and we're pretty encouraged.
Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst
Got it. That's good. And just piggybacking off one of the last questions on. I think you were mentioning inorganic growth opportunities on a worldwide basis. What is the opportunity organically for Dorner for geographic expansion?
David J. Wilson -- President and Chief Executive Officer
Yeah, so Dorner has historically grown on a year-over-year basis organically at about 13% over the last five, seven years on a CAGR basis and so really attractive organic performance profile. Clearly, the work we're doing together is focused on driving incremental growth beyond that. We've got a nice set of opportunities that exist from a channel synergy standpoint and from a geographic expansion perspective, particularly as we look beyond the US into Europe. And so we've got reach that they don't necessarily have legal entities and the opportunity to plug resources in to help them scale.
And then as it relates to Columbus McKinnon product, that hasn't had access to some of the channel partners that Dorner enjoys, we have the opportunity to bring some of our actuation and other overhead workstation crane products through their channels for growth in the near-term. So there is some really interesting opportunities that are organic and synergistic in both directions on top of the already terrific performance that they've been delivering. And remember, they've been owned and operated under a private equity structure for the last seven years. They've been somewhat capital constrained and we're working with them to expand capacity and make sure that they can scale to accommodate the growth opportunities that are in front of them. So I think the organic growth opportunities will be material in addition to the acquisitive opportunities.
Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst
All right. That's really helpful. I'll leave it there. Thanks.
David J. Wilson -- President and Chief Executive Officer
Great. Thanks, Dan.
Operator
Our next question is from the line of Matt Summerville with D.A. Davidson. Please proceed with your questions.
Matt Summerville -- D. A. Davidson & Co. -- Analyst
Thanks. A couple of questions. First I was wondering if you could comment on where you think we are with respect to distributor inventory levels currently versus prior up cycles? And maybe what inning we're in with the restock process?
David J. Wilson -- President and Chief Executive Officer
Good morning, Matt. I guess I haven't lived through those historic cycles but I'm trying to get as smart as I can on it. I'll let Greg comment a little further after I highlight, but we saw channel partners lean in Q4 and start to place orders for the first time in a couple of years and lean in positively toward where the market was going. And since then we've seen that lean become more forward leaning if you will and become accelerated. And so we see our customers beginning to open up. I'd say we're in -- what we're reporting here in Q4 is the beginnings of that.
On a quarter-to-date basis, we're up about 70% short-cycle through -- in comparison to the prior year. So that's kind of May -- for the first three weeks of May. And our project business is up about 30% year-over-year in that same cycle. So when I commented that through the first three weeks of May, we see orders up year-over-year approximately 50%. That's the split. And what the short-cycle demand increase would indicate is that our channel partners are leaning in a little bit further on inventory and being bullish about it, but I'd say, we're in the early to mid innings in terms of restocking.
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Yeah. Just to add on Matt, I would -- having been here for a while. This is substantially less than what we would typically see and the stocking always would take place and the orders would come in the March timeframe with delivery either in March or in the first quarter of the next fiscal year. So while we did see stocking orders, still significantly below what we would normally see.
Matt Summerville -- D. A. Davidson & Co. -- Analyst
And then -- I apologize, if I missed it. To a prior question, given and then the moving pieces associated with how raw material costs are rolling through how your pricing schematic is going to play out this year, how should we be thinking about core incremental margins in the base business ex-Dorner, this year?
David J. Wilson -- President and Chief Executive Officer
Yeah. So with the pricing that we've implemented, we want to be sure we stay ahead of the inflationary pressures that we're going to see. We have inflationary pressures in raw materials, and freight, and labor costs. Not that they're unusual, but in the past year, we really did not provide increases to our associates. So there is going to be a bit of a catch-up here starting in July. But I think all in, we will expect that will cover inflation. And maybe have a little bit of upside to it like we always do. But this is really meant to cover the inflationary pressures that we are expecting.
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Yeah. So I think the net comment is we don't expect any erosion. And we're anticipating that we'll be able to lean in a little bit more.
David J. Wilson -- President and Chief Executive Officer
Yeah.
Matt Summerville -- D. A. Davidson & Co. -- Analyst
Got it. Thank you guys.
David J. Wilson -- President and Chief Executive Officer
Thanks Matt.
Operator
Thank you. Our next question is from the line of Jon Tanwanteng with CJS Securities. Please proceed with your questions.
Jon Tanwanteng -- CJS Securities -- Analyst
Hey. Good morning, guys. Thank you for taking my question. Maybe just to drill down the previous question, a little bit further, for the first quarter, do you expect any gross margin deterioration just in that quarter, because the price increases don't take place until June? And then, maybe end-up the year up, as those roll through, or is it more of a -- that you're still able to stay ahead based on the pricing increases, that you already did?
David J. Wilson -- President and Chief Executive Officer
Yeah. We would expect that we'll still be able to stay ahead, Jon. I mean, because, if you recall, we implemented our normal round of price increases that took effect, some in January, some April 1, some in the U.S. the third week of March. And so those are all in place. And we should not expect any erosion to margins, as a result of inflation in the first quarter. But once again, we're trying to get ahead of what we anticipate coming down the road.
Jon Tanwanteng -- CJS Securities -- Analyst
Okay, great. And then, since you've announced your next price increase, are you seeing another spike in demand from people who are trying to stock up ahead of that rolling through, kind of counter season what you usually see?
David J. Wilson -- President and Chief Executive Officer
No nothing material yet at this point. As Greg indicated, we announced last week, we've had a lot of positive discussions with our channel partners and customers. They're -- they understand. They're expecting it. And it's not a challenge, as it relates to implementation at this stage. And we haven't seen a lot of movement in terms of order rates in the short-term that we've been talking about it.
Jon Tanwanteng -- CJS Securities -- Analyst
Okay, great. And then, Greg just a great job on cash flow once again. Do you see that reversing out as you grow this year? And maybe building inventory like, some of your customers' maybe? And then it seems like, everybody's supply chain is trying to if they can.
David J. Wilson -- President and Chief Executive Officer
Yeah. No. That's exactly what we would expect to happen. As we look at free cash flow going forward, we're going to have higher interest expense, as a result of the refinancing that we've done. We're going to have higher capex. Working capital is going to be significantly higher. We did benefit in our accrued liabilities. Our working capital as a percent of sales was I think 9.3%, but that was -- that benefited from a, derivative that was classified as current. And so our more normal working capital as a percent of sales is going to be in the 14% to 15% area.
So we would expect, free cash flow isn't going to be as rich as it was this past year. And the bulk of it really coming from an increase in working capital, as we expect revenue to improve. And then, on top of that, we also have transaction costs and that refinancing fees that are going to get paid in the month of April, or have been paid in the month of April May. So for all those reasons, we will benefit from Dorner's, free cash flow, but net-net it's -- we're going to have less free cash flow in the coming year, than this past year.
Jon Tanwanteng -- CJS Securities -- Analyst
Okay, great. Thanks. Then, last small question. Did you have a breakout as to what Dorner was expected to contribute in the first quarter, within your guidance?
David J. Wilson -- President and Chief Executive Officer
We did not. I mean the revenue number that we've guided to includes both, legacy Columbus McKinnon and Dorner. We broke out the Dorner SG&A, at $7 million. We talked about, Dorner being roughly $3.2 billion $3.3 million of additional amortization, because we said that it's approximately double, what we had historically for amortization expense.
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Yeah. So we didn't break it out explicitly, in the full P&L. We had a few guides that we provided relative to Dorner performance.
Jon Tanwanteng -- CJS Securities -- Analyst
Okay. Fair enough. Thank you, guys.
David J. Wilson -- President and Chief Executive Officer
Thanks Jon.
Operator
Our next question is from the line of Steve Ferazani with Sidoti. Please state your question.
David J. Wilson -- President and Chief Executive Officer
Good morning, Steve.
Steve Ferazani -- Sidoti & Company, LLC -- Analyst
Follow-up from the last question, I know even if you're not breaking out Dorner, you can sort of ballpark it, which would say that, and I know you're coming off of typically your strongest quarter seasonally, but it seems like maybe there isn't in pre Dorner, Columbus McKinnon. Maybe you're not looking at much sequential growth certainly at the low end of your guidance. I'm just trying to figure out if the chip shortage in the automotive business is slowing sales to certain end markets like automotive, or if there are any labor issues, anything that hampering growth in Q1 that goes away?
David J. Wilson -- President and Chief Executive Officer
Yeah. I don't think there is anything specific from a market perspective that we see as negative as it relates to the sequential activity in the market. It's more simply sequential performance in the core business based on the cycle in the market. So we see a lot of demand that gets placed as we talked about given our year-end price increases, etc, are being placed in the last fiscal quarter of the year. That's not necessarily market development driven, it's more just get out ahead of price increases, behavior in the channel. And then as we head into Q1, we're anticipating a typical cyclical decline in the core business, but certainly with a tendency toward acceleration as we head into the second quarter.
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Yeah. The only thing I'd add is, one of the movers to our revenue line is our rail business, which can have some larger projects. And we had a very strong order in the fourth quarter from a rail business, and really just due to the timing of projects in our Q1, there is probably about a $5 million delta in revenue timing.
David J. Wilson -- President and Chief Executive Officer
Revenue timing. Yeah. Good point, Greg you made.
Steve Ferazani -- Sidoti & Company, LLC -- Analyst
And then in terms of leverage and certainly it's easy for us to model out, how you get net leverage under two times within two years given your strong cash flow. But you may have touched on this, what are you thinking about and what are you allowed to do in terms of actual debt repayments? And just in general how you're thinking about cash?
David J. Wilson -- President and Chief Executive Officer
Yeah. So from a debt repayment perspective, the Term Loan B requires an annual principal payment of 1% per year, which would be $4.5 million and divide that by $4 million, so $1.25 million a quarter starting in the next quarter. And then there are what's called an excess cash flow suite, which is 50% of in essence your free cash flow, that's due based on your annual free cash flow at the end of March, and it depends on your leverage ratio. I think once we're below three times that steps down to 25% and then it steps down again, but that's -- we filed our credit agreement so that's publicly out there. So we can chat about that later. And in terms of other cash requirements, pension contributions would be one that we would anticipate that pension contributions will be similar this year compared to -- when I say this year this new fiscal year versus what we did last year and probably the neighborhood of around $7 million.
Oh, and there are no prepayment penalties on debt. So what we have typically done in the past is we will use any excess cash we have to pay down debt, save the interest expense and delever quickly. Even though it's a net leverage ratio we will use excess cash to pay down debt. So there is no prepayment penalties and the financial covenant for those not familiar with the Term Loan B only kick in if we draw down off of the revolver. And if we don't draw off the revolver, the covenant isn't tested and we typically don't need our revolver for intra period of cash requirements given our strong cash flow profile.
Deborah K. Pawlowski -- Investor Relations
Steve, are you there. Rob?
Operator
Thank you. At this time, we've reached the end of our question-and-answer session. I'll hand the call over to David Wilson for closing remarks.
David J. Wilson -- President and Chief Executive Officer
Great. Thank you, Rob, and to everyone for joining us today. I'd like to take a moment to thank all of my Columbus McKinnon associates for the resilience and adaptability this last fiscal year. We truly appreciate your dedication to the company and to our customers. We're looking forward to working together to create the bright future that we believe lies ahead for Columbus McKinnon. I appreciate everyone's attention. I hope everyone has a great day. Thank you for your time today and goodbye.
Operator
[Operator Closing Remarks]
Duration: 50 minutes
Call participants:
Deborah K. Pawlowski -- Investor Relations
David J. Wilson -- President and Chief Executive Officer
Gregory P. Rustowicz -- Vice President Finance and Chief Financial Officer
Mike Shlisky -- Colliers Securities -- Analyst
Michael McGinn -- Wells Fargo -- Analyst
Chris Howe -- Barrington Research Associates, Inc. -- Analyst
Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst
Matt Summerville -- D. A. Davidson & Co. -- Analyst
Jon Tanwanteng -- CJS Securities -- Analyst
Steve Ferazani -- Sidoti & Company, LLC -- Analyst
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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Columbus Mckinnon Corp (CMCO) Q4 2021 Earnings Call Transcript - Motley Fool
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