The Manitowoc Company, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2013. Manitowoc reports Crane and Foodservice segments. Unless noted otherwise, financial amounts are in millions of dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,014.5 | $947.5 | $2,959.1 | $2,796.6 |
| Gross profit | $260.1 | $233.9 | $752.9 | $688.4 |
| Operating earnings | $99.8 | $69.5 | $253.6 | $207.9 |
| Net earnings attributable to Manitowoc | $52.9 | $22.2 | $120.9 | $67.2 |
| Diluted EPS attributable to Manitowoc | $0.39 | $0.17 | $0.89 | $0.51 |
| Operating cash flow, continuing operations | Not presented quarterly | Not presented quarterly | $55.9 | $(73.7) |
Q3 gross margin was approximately 25.6% versus 24.7%; operating margin was approximately 9.8% versus 7.3%. For the nine-month period, gross margin was approximately 25.4% versus 24.6%, and operating margin approximately 8.6% versus 7.4%.
- Segment results: Q3 Crane sales rose 10.4% to $612.6 and operating earnings increased to $55.7 from $26.5. Foodservice sales grew 2.4% to $401.9, while operating earnings declined to $69.5 from $71.6.
- Cash and investment: Cash and equivalents were $84.5 at September 30, up $11.1 from year-end. Nine-month capital expenditures were $73.3, compared with $50.2 a year earlier. Inventory increased to $854.9 from $707.6, a significant use of working capital.
- Debt and liquidity: Total debt was $1,803.2, down from $1,824.8 at December 31, 2012; long-term debt was $1,706.0. Reported total liquidity was $503.4, including $500.0 of revolver capacity, less $51.1 drawn and $32.7 of letters of credit. The company reported covenant compliance: senior secured leverage ratio 1.35 versus a 3.25 maximum, and interest coverage 3.51 versus a 2.50 minimum.
Changes versus prior comparable periods
- Q3 sales increased 7.1%; nine-month sales increased 5.8%. Crane drove most of the growth, supported by crawler crane demand in the Americas, pricing, and cost reductions. Foodservice growth reflected volume from new products and pricing.
- Crane backlog was $568.3 at September 30, down 21.7% from June 30 and 41.8% from September 30, 2012.
- Higher Crane gross profit helped lift consolidated operating earnings. Foodservice operating earnings fell in both the quarter and nine-month period as higher selling, administrative and strategic project costs offset gross-profit gains.
- Nine-month continuing-operations operating cash flow improved from a $73.7 use to $55.9 provided, primarily due to higher earnings and favorable receivables changes. Inventory growth remained a substantial cash use.
- Interest expense declined to $32.0 in Q3 from $34.4 and to $97.9 for nine months from $101.2, reflecting debt reduction efforts. Total debt fell modestly, despite higher revolver borrowings.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific numerical earnings or sales guidance. Management said liquidity and expected operating cash flows should cover working capital, capital expenditures, and ongoing operating needs, and expected to remain in compliance with debt covenants over the next 12 months.
- Shantui terminated an agreement to form a joint venture concerning Manitowoc Dong Yue’s truck crane business. Manitowoc has a 50% controlling interest and consolidates the business; it is considering alternatives that could dispose of its interest. Management said those alternatives would likely result in significant non-cash losses, primarily from potential deconsolidation.
- An IRS dispute concerns the deductibility of a $380.9 foreign-currency loss from 2008. The potential federal tax and cash exposure if the IRS prevails is approximately $134.0, plus possible interest and penalties. The IRS Appeals division tentatively resolved the issue in the company’s favor, subject to Joint Committee on Taxation review; the tentative resolution was not reflected in results.
- Warranty reserves were $101.8 and product-liability reserves were $26.5 at quarter-end. The company also disclosed residual-value guarantees and buyback commitments of $53.2. Management did not expect environmental, asbestos, product-liability, or other legal matters to have a material adverse effect, but estimates may change.
- Management cited cyclical construction demand, the sharp Crane backlog decline, customer financing access, commodity and foreign-exchange movements, execution of manufacturing and ERP initiatives, and high leverage among factors that could affect results. Goodwill was $1,210.6; the June 2013 annual impairment review indicated no impairment, but future market changes could prompt further testing.
- Subsequent events: Manitowoc acquired the remaining shares of Inducs, an induction-cooking technology company, for approximately $12.9 in October 2013. It declared a $0.08-per-share dividend, payable December 10, 2013.
Important facts for investors to verify
- Whether Crane backlog stabilizes or continues to contract, and how backlog converts to revenue and cash.
- Management’s chosen course for Manitowoc Dong Yue and the potential scale and timing of any deconsolidation loss.
- Final resolution of the IRS matter, including Joint Committee review and any resulting tax, cash, or reserve effects.
- Working-capital and inventory trends, capital spending, and whether operating cash generation is sufficient to support investment and debt reduction.
- Debt covenant headroom, refinancing and interest-rate exposure, and the continued availability of the receivables securitization program.