The Manitowoc Company, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Manitowoc reported two segments: Crane and Foodservice. Dollar amounts are in millions unless otherwise stated.
Financial results
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $949.8 | $819.3 | $1,682.0 | $1,503.7 |
| Gross profit | $224.6 | $206.2 | $405.0 | $372.6 |
| Operating earnings | $67.5 | $70.7 | $97.1 | $102.7 |
| Net earnings (loss) attributable to Manitowoc | $2.7 | $14.1 | $(49.7) | $(9.1) |
| EPS attributable to common shareholders | $0.02 | $0.11 | $(0.38) | $(0.07) |
| Operating cash flow | Not separately stated for the quarter | $(189.4) | $10.3 |
Sales increased 15.9% in Q2 and 11.9% in the first half. Gross margin was approximately 23.6% in Q2 versus 25.2% a year earlier, and 24.1% for the first half versus 24.8%. Operating margin was approximately 7.1% in Q2 versus 8.6%, and 5.8% for the first half versus 6.8%.
- Segments: Q2 Crane sales rose 22.9% to $554.8; Foodservice sales rose 7.4% to $395.0. Crane operating earnings fell to $27.8 from $36.8, while Foodservice operating earnings rose to $54.3 from $47.1.
- Cash and working capital: Cash and equivalents were $81.1 at June 30, versus $83.7 at year-end. Continuing operations used $170.9 of cash in the first half, primarily reflecting higher receivables and inventory; capital expenditures were $18.6.
- Debt and liquidity: Total debt was $2,081.3, up from $1,997.4 at year-end; long-term debt was $1,978.1. The company refinanced its senior credit facility in May, establishing a $500 revolving facility, $350 Term Loan A, and $400 Term Loan B. It reported $434.1 of total liquidity and $116.9 outstanding on the revolver.
Material changes and unusual items
- Q2 included a $24.2 loss on debt extinguishment; the first-half charge was $27.8, related to refinancing, deferred financing fee write-offs, and interest-rate swap costs.
- The first-half net loss included a $33.6 after-tax loss on the sale of Kysor/Warren, primarily due to $29.0 of tax expense. The business was sold in January for approximately $143 million; proceeds were used to reduce debt.
- Higher sales volumes lifted gross profit, but higher commodity and manufacturing costs, increased employee compensation and benefits, and higher engineering and administrative spending pressured operating results. The 2010 comparison also benefited from a $6.2 collection of previously reserved receivables.
- First-half continuing-operations interest expense decreased to $77.7 from $83.8. The first-half tax provision was $1.8, versus a $10.0 benefit in 2010; a $5.5 Wisconsin tax benefit was recorded, while valuation allowances on certain jurisdictional tax assets limited recognized benefits.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management said expected operating cash flows and liquidity should cover working capital, capital expenditures, and other ongoing needs, and expected covenant compliance for the following 12 months.
- Crane backlog was $838.8 at June 30, up 4.9% from March 31 and 58.0% from June 30, 2010. Management cited recovery in traditional markets and growth in emerging markets; Foodservice demand showed a slight recovery.
- At June 30, the senior secured leverage ratio was 3.29:1 against a maximum of 4.00:1; interest coverage was 1.98:1 against a minimum of 1.50:1. The new facility required additional fixed-rate protection; after quarter-end, the company entered into $450 of interest-rate caps.
- Risks include construction and foodservice demand, commodity costs, foreign exchange and interest rates, working-capital and cash generation, significant leverage and covenant requirements, and potential future goodwill or other asset impairments. The June annual impairment review indicated no impairment, but management warned further market deterioration could lead to a future charge.
- Contingencies include product-liability and warranty claims, environmental matters, asbestos-related and other lawsuits, and customer residual-value guarantees and buyback commitments. Management did not expect these matters to have a material adverse effect, but estimates may change.
Important facts for investors to verify
- Reconcile the liquidity table’s $83.7 cash figure with the balance sheet and cash-flow statement, both of which report $81.1 at June 30, 2011.
- Track working-capital conversion and operating cash flow as sales and backlog expand, particularly receivables and inventory.
- Review debt maturities, refinancing terms, interest-rate exposure, covenant headroom, and the effect of the new interest-rate caps.
- Assess the drivers of Crane margin and earnings pressure, including input costs, product mix, and higher operating expenses.
- Monitor tax assets and uncertain tax positions, as well as potential impairment exposure and the adequacy of warranty and product-liability reserves.