Business context and reporting period
The Manitowoc Company, Inc. reported unaudited results for the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Its reportable segments are Crane and Foodservice. Dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net sales | $898.0 | $851.9; up 5.4% |
| Gross profit / margin | $220.0 / 24.5% | $203.3 / 23.9% |
| Operating earnings / margin | $52.2 / 5.8% | $46.4 / 5.4% |
| Continuing-operations earnings attributable to Manitowoc common shareholders | $12.1 | $0.1 |
| Net earnings attributable to Manitowoc | $10.4; $0.08 per diluted share | Loss of $0.3; reported EPS rounded to $0.00 |
| Cash used in operating activities | $107.9, including $106.0 from continuing operations | $129.9, including $130.0 from continuing operations |
| Capital expenditures | $21.2 | $14.2 |
| Cash and cash equivalents at quarter-end | $101.3 | $73.4 at Dec. 31, 2012 |
| Total debt at quarter-end | $1,952.7 | $1,824.8 at Dec. 31, 2012 |
| Reported total liquidity | $387.1 | $503.5 at Dec. 31, 2012 |
Q1 operating cash use reflected working-capital needs, notably a $102.3 inventory-related cash outflow. Inventory increased to $802.0 from $707.6 at year-end. The company reported $416.9 of trailing-12-month Adjusted EBITDA for debt-covenant purposes.
Material changes versus the prior comparable period
- Crane sales rose 7.8% to $547.4; Foodservice sales rose 1.9% to $350.6. Crane operating earnings increased to $31.3 from $21.4, while Foodservice operating earnings declined to $49.1 from $51.0.
- Crane sales benefited from product mix, particularly in the Americas and EMEA, and pricing; Asia-Pacific volume declined. Foodservice sales benefited from new product rollouts and pricing, partly offset by higher rebates and discounts.
- Consolidated gross profit improved by $16.7. Engineering, selling and administrative expenses increased $11.2 to $158.1, reflecting strategic-project investment, higher headcount, customer-financing reserves and other costs.
- Continuing-operations pretax earnings increased to $18.3 from $9.6. Interest expense was nearly unchanged at $33.3. Income tax expense fell to $8.5 from $11.4, mainly reflecting jurisdictional earnings mix and discrete items, including the American Taxpayer Relief Act of 2012.
- Crane backlog was $776.1 at March 31, up 2.7% from Dec. 31, 2012, but down 16.6% year over year.
- In January, the company sold its Jackson warewashing business for approximately $38.5; a final $0.7 working-capital payment followed. The sale generated a $1.6 after-tax loss, including $3.3 of tax expense, and Jackson was presented as discontinued operations.
Outlook, risks and unusual items
- No specific revenue, earnings or cash-flow guidance is provided. Management said expected operating cash flows and liquidity should be sufficient for working capital, capital expenditures and ongoing needs, and expected covenant compliance over the subsequent 12 months.
- At March 31, the senior secured leverage ratio was 1.84:1 versus a 3.50:1 maximum; interest coverage was 3.11:1 versus a 2.25:1 minimum. The company stated it was in compliance with debt covenants.
- Total debt rose during the quarter, including revolving-credit borrowings of $183.6 versus $34.4 at year-end. Available revolver capacity was reduced by borrowings and letters of credit; reported total liquidity was $387.1.
- A significant tax contingency remains: the IRS proposed disallowing a $380.9 foreign-currency loss deduction for 2008. If the IRS prevails, the company estimates potential federal tax expense and cash outflow of approximately $134.0, plus interest and penalties. The matter was assigned to IRS Appeals; outcome and timing are uncertain. The company also disputed proposed adjustments to a 2009 research and development credit.
- Other exposures include product-liability and warranty claims, customer residual-value guarantees and buyback commitments ($56.8 outstanding), foreign-exchange, interest-rate and commodity risks, and potential future non-cash impairment charges. Management did not expect currently identified environmental or other legal matters to have a material adverse effect, while noting estimates may change.
- Management disclosed prior-period accounting errors related to acquisition deferred taxes, goodwill and pension-related classification, and a previously corrected inventory error. The company said it revised affected financial statements and did not consider the errors material to previously filed periods.
Important facts for investors to verify
- Progress on the IRS tax dispute and potential exposure of approximately $134.0 plus interest and penalties.
- Whether the Crane backlog decline year over year translates into future sales and margins.
- Inventory growth, working-capital conversion and operating cash flow in subsequent quarters.
- Debt and revolver utilization, liquidity, and headroom under financial covenants.
- Updates to product-liability, warranty and customer-guarantee reserves and exposures.