The Manitowoc Company, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Manitowoc reports Crane and Foodservice segments. Amounts are in millions of dollars except per-share data.
Financial performance
- Q2 revenue: $1,005.9, up 5.9% year over year. Crane revenue rose 10.1% to $610.7; Foodservice revenue was essentially flat at $395.2.
- Q2 earnings: Operating earnings were $88.8, versus $67.9; operating margin increased to about 8.8% from 7.1%. Gross profit was $249.7, with gross margin of about 24.8%, versus $225.0 and 23.7% a year earlier. Net earnings attributable to Manitowoc were $42.5, or $0.32 diluted per share, versus $3.0, or $0.02.
- First-half revenue: $1,866.0, up 10.9%. Crane revenue increased 18.0% to $1,118.6; Foodservice rose 1.8% to $747.4.
- First-half earnings: Operating earnings were $136.3, versus $97.6; operating margin was about 7.3% versus 5.8%. Net earnings attributable to Manitowoc were $42.6, or $0.32 diluted per share, compared with a $49.4 loss, or $0.38 loss per share, in 2011. The prior-year result included a $33.6 after-tax loss on the sale of discontinued operations.
- Cash flow: First-half cash used by continuing operations was $121.3, improved from $168.8 used in 2011. Total operating cash use was $121.8. Capital expenditures were $34.8, versus $18.6; continuing-operations operating cash flow less capital expenditures was approximately negative $156.1. Working capital absorbed cash, including $153.0 from inventory and $34.7 from receivables.
- Liquidity and debt: Cash and cash equivalents were $56.8 at June 30, down from $68.6 at year-end. Total debt was $2,062.8, up from $1,890.0; revolver borrowings were $146.6, compared with none at year-end. The company reported covenant compliance, with a 2.69:1 senior secured leverage ratio against a 3.50:1 maximum, and 2.88:1 interest coverage against a 1.875:1 minimum.
- Margins and costs: Segment operating earnings increased in both Crane and Foodservice. Higher sales, pricing and lower warranty expense supported Crane; pricing and cost-improvement initiatives supported Foodservice. Higher employee-benefit costs and engineering investment raised selling, engineering and administrative expense.
Material changes and notable items
- Crane backlog was $943.6 at June 30, up 12.5% year over year and 1.4% from March 31. Management attributed the increase mainly to North American and Latin American orders, supported by energy and infrastructure demand.
- Foreign exchange reduced Crane sales by $31.5 in Q2 and $37.4 in the first half; Foodservice sales were reduced by $5.1 and $7.0, respectively.
- Q2 benefited from settlements of a Crane supplier warranty claim and a Foodservice patent infringement lawsuit; the filing does not quantify their individual earnings effects.
- The company recorded a $4.0 inventory-related prior-period correction in Q2: inventory had been overstated and cost of goods sold understated by $2.9 for 2011 and $1.1 for Q1 2012. Management said the error was not material to those periods.
- Interest expense declined year over year, reflecting debt reduction and the 2011 refinancing. The company reported no debt-extinguishment loss in 2012; 2011 included a $27.8 first-half loss.
- Annual goodwill and indefinite-lived intangible impairment testing at June 30 indicated no impairment. Goodwill was $1,157.9; the filing notes a prior $520.3 goodwill impairment recorded in 2011.
Outlook, risks and contingencies
- 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 to remain in compliance with debt covenants over the next 12 months.
- Key disclosed risks include construction and crane-market cyclicality, customer demand and financing, foreign exchange, commodity and raw-material costs, interest rates, working-capital and cash-generation needs, and maintaining debt-covenant compliance. Management also identified potential future impairment charges if markets or results deteriorate.
- Debt totaled $2,062.8, including $150.0 of 7.125% notes due 2013. The $500.0 revolver matures in May 2016. Debt covenants, secured borrowing and substantial interest obligations remain important liquidity considerations.
- Product-liability reserves were $27.0 and warranty reserves were $102.1. Environmental reserves for Enodis locations were $0.9. The company also disclosed product, asbestos-related and other legal matters, but did not expect their resolution to materially adversely affect its financial condition, results or cash flows.
- Residual-value guarantees and buyback commitments outstanding were $74.9, expiring through 2016. Unrecognized tax benefits were $55.8; audit resolutions could reduce these benefits and tax expense by up to $16.0 over the next 12 months.
- Foreign subsidiaries held $32.9 of cash, which the company said it intended to reinvest abroad. The filing also reports approximately $593.7 of undistributed foreign earnings for which no additional U.S. income tax had been provided.
Important facts for investors to verify
- Reconcile the liquidity disclosure: the filing’s table shows “Total liquidity” as “$(375.7),” while cash, $500.0 revolver capacity, $146.6 of revolver borrowings and $34.5 of letters of credit imply approximately $375.7 of available liquidity. Confirm the intended presentation and borrowing availability.
- Reconcile the cash figures: the balance sheet reports $68.6 at December 31, 2011, while the liquidity table reports $71.3 for that date.
- Track working-capital requirements, especially the first-half inventory build, and whether operating cash flow improves as order activity converts to shipments and collections.
- Monitor revolver usage, the 2013 notes maturity, covenant headroom and the effect of interest-rate exposure and hedges on debt service.
- Assess whether Crane backlog and regional demand translate into sustained sales and margins, and whether Foodservice growth offsets currency effects and lower customer rollouts.
- Evaluate the recurrence and materiality of Q2 settlement benefits, and the adequacy of warranty, product-liability and tax reserves.