Business context and reporting period
The Manitowoc Company, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. Its reportable segments are Crane and Foodservice. Results are presented with the Jackson business, sold in January 2013, classified as discontinued operations.
Financial performance and position
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2012 periods.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $1,046.6 | $997.2 | $1,944.6 | $1,849.1 |
| Operating earnings | $101.6 | $92.0 | $153.8 | $138.4 |
| Operating margin | 9.7% | 9.2% | 7.9% | 7.5% |
| Earnings from continuing operations | $56.6 | $42.6 | $66.4 | $40.8 |
| Net earnings attributable to Manitowoc | $57.6 | $45.3 | $68.0 | $45.0 |
| Diluted EPS attributable to Manitowoc | $0.43 | $0.34 | $0.50 | $0.34 |
- Q2 gross profit was $272.8 (26.1% of sales), versus $251.2 (25.2%) a year earlier. Six-month gross profit was $492.8 (25.3%), versus $454.5 (24.6%).
- At June 30, cash and cash equivalents were $91.7; total debt was $1,897.1, including $138.3 drawn on the revolver. Debt increased from $1,824.8 at year-end 2012.
- Reported total liquidity was $423.4, versus $503.5 at December 31, 2012. The company reported compliance with debt covenants: secured leverage ratio 1.67 against a 3.25 maximum; interest coverage 3.22 against a 2.25 minimum.
- Six-month operating cash flow was a use of $62.5 overall, including $58.5 used by continuing operations. Inventory growth used $115.7 of cash. Capital expenditures were $46.9. Cash increased $18.3 to $91.7, supported in part by $89.8 of net financing cash flow and $39.2 in proceeds from the Jackson sale.
Material changes versus prior period
- Sales rose 5.0% in Q2 and 5.2% for the first half. Crane sales increased 7.6% and 7.7%, respectively; Foodservice sales increased 0.8% and 1.3%.
- Crane operating earnings improved to $65.0 in Q2 from $52.0, and to $96.3 for the first half from $73.4. Foodservice operating earnings declined to $63.0 from $66.1 in Q2 and to $112.1 from $117.1 for the first half.
- Management attributed Crane improvement mainly to higher volume, cost-reduction initiatives, and pricing. Foodservice performance faced rebates, manufacturing costs, facility-consolidation and new-facility expenses, and higher selling and administrative costs.
- Crane backlog was $726.2 at June 30, down 6.4% from March 31 and 23.0% year over year.
- Interest expense declined to $32.6 in Q2 from $33.8 and to $65.9 for the first half from $66.8, which the company attributed to debt-reduction efforts. Income tax expense for the first half fell to $17.8 from $26.9, reflecting jurisdictional earnings mix and discrete tax items.
- 2012 comparative statements were revised for previously identified accounting errors; the company said those errors were not material to prior filed statements. The revisions increased 2012 continuing-operations EPS by $0.02 for both Q2 and the first half.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management stated that available liquidity and expected operating cash flows should cover working capital, capital expenditures, and ongoing needs, and expected covenant compliance over the following 12 months.
- The company sold Jackson for approximately $38.5, with an additional $0.7 working-capital adjustment; the sale generated a $1.6 loss, primarily associated with $3.3 of tax expense. Discontinued operations also included a second-quarter product-liability settlement related to a previously disposed business.
- A material tax contingency remains: the IRS proposed disallowing a $380.9 foreign-currency loss deduction from 2008. If the IRS prevails, potential federal tax expense and cash outflow could be approximately $134.0, plus interest and penalties. An IRS Appeals conference took place July 18, 2013; the company said there is no assurance of a favorable outcome.
- Other exposures include product-liability claims, warranty obligations ($100.5 reserved), environmental matters, asbestos claims, and customer residual-value guarantees and buyback commitments ($54.2 outstanding). Management did not expect the disclosed legal and environmental matters to have a material adverse effect, but estimates may change.
- Key business risks include construction-market cyclicality and falling Crane backlog; customer demand and replacement cycles; competition and pricing; commodity, currency and interest-rate movements; execution of facility and ERP initiatives; customer financing availability; working-capital and cash generation; and leverage and tax uncertainties. The annual impairment review indicated no goodwill or indefinite-lived intangible impairment at June 30.
Important facts for investors to verify
- Whether Crane backlog weakness persists and how it affects future sales, margins, and cash conversion.
- Whether inventory investment unwinds as order activity progresses, given negative operating cash flow and higher capital spending.
- Debt, revolver usage, liquidity, covenant headroom, and the company’s ability to reduce leverage.
- Developments and potential financial consequences of the IRS dispute, including interest and penalties.
- Foodservice margin trends, including the effects of rebates, facility costs, and strategic investment.
- That year-over-year comparisons reflect the disclosed 2012 revisions and the Jackson discontinued-operations presentation.