Business context and reporting period
The Manitowoc Company, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2012. The company reports two segments: Crane and Foodservice. Results cover the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $955.7 million | $935.4 million | $2,821.7 million | $2,617.4 million |
| Gross profit / margin | $236.0 million / 24.7% | $223.1 million / 23.8% | $694.8 million / 24.6% | $627.1 million / 24.0% |
| Operating earnings / margin | $69.9 million / 7.3% | $68.8 million / 7.4% | $209.1 million / 7.4% | $164.9 million / 6.3% |
| Net earnings (loss) attributable to Manitowoc | $22.2 million | $23.7 million | $67.2 million | $(26.1) million |
| Diluted EPS attributable to common shareholders | $0.17 | $0.18 | $0.51 | $(0.20) |
Q3 interest expense was $34.4 million versus $34.0 million; nine-month interest expense was $101.2 million versus $111.7 million. The 2011 nine-month comparison included a $27.8 million debt-extinguishment loss and a $33.6 million after-tax loss on sale of discontinued operations.
For the first nine months of 2012, operating cash flow was a use of $70.9 million, including $70.5 million used by continuing operations, versus a $182.3 million use in 2011. Working capital absorbed cash, notably $200.9 million for inventories and $42.1 million for receivables. Capital expenditures were $50.3 million, up from $32.3 million. Cash and cash equivalents were $68.3 million at September 30, 2012, compared with $68.6 million at year-end 2011.
At September 30, total debt was $2,029.6 million, versus $1,890.0 million at December 31, 2011; this included $124.0 million drawn on the revolver. Long-term debt was $1,915.6 million. The company reported total liquidity of $412.7 million, including $71.0 million of cash and marketable securities, $500.0 million of revolver capacity, and deductions for borrowings and letters of credit. Current assets were $1,500.5 million and current liabilities $1,153.4 million.
Material changes versus prior comparable periods
- Nine-month sales rose 7.8%; Crane sales increased 13.3%, while Foodservice sales increased 0.7%. Q3 sales rose 2.2%, with Crane up 4.9% and Foodservice down 1.3%.
- Nine-month operating earnings increased to $209.1 million from $164.9 million. Crane earnings rose to $95.2 million from $64.5 million and Foodservice earnings to $166.6 million from $147.2 million; higher corporate expense partly offset the improvement.
- Management attributed gross-profit improvement to sales growth, pricing, lower Crane warranty expense, and Foodservice pricing and cost reductions. Higher ES&A expenses reflected customer financing reserves, employee benefit costs, engineering investment, and ERP implementation costs.
- Inventories increased to $866.4 million from $665.8 million at year-end, reflecting support for increased Crane orders. Debt increased by $139.6 million over the same period.
- The company revised presented prior-period statements for errors involving deferred tax liabilities and goodwill, as well as a previously identified inventory error. Management said the errors were not material to previously filed periods; the filing provides revised comparative figures.
Outlook, commentary, risks and unusual items
- Crane backlog was $975.8 million at September 30, up 3.4% from June 30 and 26.0% from September 2011. Management cited robust North and Latin American orders, supported by demand in energy and infrastructure. No specific full-year revenue or earnings guidance is provided.
- Management said liquidity and expected operating cash flows should cover working capital, capital expenditures, and ongoing needs. It reported compliance with debt covenants at quarter-end: senior secured leverage was 2.83x against a 3.50x maximum, and interest coverage was 2.85x against a 2.00x minimum. The company expected to remain compliant over the next 12 months.
- On October 19, 2012, after quarter-end, the company issued $300 million of 5.875% senior notes due 2022. Proceeds were used to redeem $150 million of 2013 notes, repay $36 million of Term Loan B, and reduce revolver borrowings. The transaction changes the debt profile from the September 30 balance sheet.
- The company amended its receivables securitization facility in September, increasing capacity from $125 million to $150 million, extending it three years, and setting funding at LIBOR plus 1.45%. Receivables sold to the purchaser were $146.9 million at September 30.
- A significant tax contingency remains: the IRS proposed disallowing a $380.9 million foreign-currency loss deduction for 2008. If the IRS prevails, the company estimated potential federal tax expense and cash outflow of approximately $134 million plus interest and penalties. The company disputed the proposed adjustment and planned to protest; it stated there is no assurance of a favorable outcome. Unrecognized tax benefits were $55.6 million.
- Other disclosed risks include cyclical and regional demand, currency and commodity volatility, customer financing availability, execution of ERP and facility projects, debt and covenant obligations, and potential goodwill or other asset impairment. The company reported that its June 2012 annual impairment review indicated no further impairment.
- After quarter-end, the board declared a $0.08-per-share cash dividend payable December 10, 2012. No dividends were paid in the periods presented.
Important facts for investors to verify
- Whether Crane backlog converts to revenue and cash, and whether order strength persists beyond the reported quarter.
- Working-capital requirements, especially inventory growth, and the resulting cash generation and borrowing needs.
- The outcome and potential financial impact of the IRS examination, including interest and penalties.
- Terms and effects of the October 2022 notes issuance, redemption of 2013 notes, and subsequent changes in debt and revolver usage.
- Debt-covenant headroom, future refinancing needs, and the company’s ability to maintain compliance as covenant thresholds tighten.
- The impact of the reported financial-statement revisions and whether further adjustments or impairment reviews are needed.