MANITOWOC CO INC — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless stated otherwise. Manitowoc reported two segments: Crane and Foodservice. The company announced a plan to separate them into independent public companies, expecting a tax-free Foodservice spin-off in Q1 2016.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $752.1 million | $850.0 million |
| Gross profit / gross margin | $182.5 million / 24.3% | $225.7 million / 26.6% |
| Operating earnings / margin | $12.7 million / 1.7% | $53.6 million / 6.3% |
| Net loss attributable to Manitowoc | $8.4 million; $0.06 per diluted share | $8.8 million; $0.06 per diluted share |
| Cash used in operating activities | $135.7 million | $271.4 million |
- Crane sales were $406.7 million, down 12.9%; segment operating earnings were $9.7 million versus $22.6 million. Crane backlog was $770.0 million, up 4.3% from December 2014 but down 8.6% year over year.
- Foodservice sales were $345.4 million, down 9.9%; segment operating earnings were $33.0 million versus $57.9 million.
- Cash and cash equivalents were $68.2 million at quarter-end. Total debt was $1.674 billion, up from $1.524 billion at year-end 2014. Reported liquidity was $388.0 million, including cash, undrawn revolver capacity and excluding $5.2 million of letters of credit.
- Current assets were $1.251 billion and current liabilities $934.4 million. Capital expenditures were $11.7 million. Financing activities provided $151.0 million, primarily from $175.0 million of revolver borrowings.
Material changes and management commentary
- Revenue declined 11.5%. Management attributed Crane weakness mainly to lower volumes, particularly in rough-terrain and boom-truck markets in North and Latin America; currency movements reduced Crane sales by $38.2 million. Foodservice weakness reflected lower spending by large restaurant chains and the absence of prior-year product-rollout benefits; currency reduced sales by $16.1 million.
- Gross profit fell $43.2 million. Lower sales and production absorption weighed on both segments; KitchenCare start-up costs also affected Foodservice. Cost-reduction savings partly offset the declines.
- Operating cash use improved from $264.6 million for continuing operations in Q1 2014 to $135.6 million in Q1 2015. Management cited payment timing, lower income taxes paid and improved working capital, particularly Crane inventory. Cash use remained substantial.
- Interest expense increased to $23.6 million from $19.3 million. The prior-year period benefited from an $8.3 million amortization reduction following redemption of the 2018 notes. The prior-year results also included a $25.3 million debt-extinguishment loss and a $9.9 million loss on sale of discontinued operations.
- Management stated that liquidity and expected operating cash flows should cover working capital, capital expenditures and general operating needs. It reported compliance with debt covenants: secured leverage ratio of 2.30:1 against a 3.25:1 maximum, and interest coverage of 4.17:1 against a 2.75:1 minimum.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management expected the separation to be completed in Q1 2016; Q1 2015 included $1.5 million of separation costs. Retention awards were issued in April 2015.
- Key cited risks include construction and foodservice demand, customer capital spending, commodity and foreign-exchange volatility, leverage and covenant compliance, KitchenCare execution, ERP implementation, and costs or disruption related to the planned separation.
- Product warranty reserves were $85.1 million and product-liability reserves were $25.9 million at March 31, 2015. The company also had $69.3 million of residual-value guarantees and buyback commitments outstanding, plus $28.5 million of guaranteed customer notes. Manitowoc guaranteed approximately $17.3 million of debt of the divested Manitowoc Dong Yue joint venture, repayable through 2017.
- Management did not expect pending environmental, product-liability, asbestos-related or other legal matters to have a material adverse effect, while noting estimates could change. Goodwill was $1.183 billion; the filing warns future impairment charges could materially affect results and financial position.
Investor verification priorities
- Track whether weaker sales, lower margins and Crane backlog stabilize, including the effects of currency and market demand.
- Assess the drivers of continuing operating cash outflows, seasonal working-capital needs and reliance on revolver borrowings.
- Monitor debt, interest costs, available liquidity and covenant headroom; verify execution against management’s stated cash-flow and compliance expectations.
- Confirm the separation timetable, costs, tax-free treatment and potential operational or financial effects.
- Review warranty, product-liability and guarantee exposures, as well as goodwill impairment assumptions and tax-reserve developments.