Business context and reporting period
The Manitowoc Company, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2010. Its reportable segments are Crane and Foodservice. Comparisons below are with the corresponding 2009 periods unless otherwise noted; dollar amounts are in millions except per-share data.
Financial results and liquidity
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $876.5 | $1,034.8 | $1,598.5 | $2,062.3 |
| Operating earnings (loss) | $72.3 | $51.6 | $104.8 | $(591.6) |
| Net earnings (loss) attributable to Manitowoc | $14.1 | $(12.3) | $(9.1) | $(668.1) |
| Diluted earnings (loss) per share | $0.11 | $(0.09) | $(0.07) | $(5.13) |
- Q2 gross profit was $213.0 (24.3% of sales), versus $236.8 (22.9%). First-half gross profit was $385.1 (24.1%), versus $441.8 (21.4%). Lower Crane volumes weighed on gross profit; Foodservice improved.
- Q2 segment sales: Crane $451.6, down 30.8%; Foodservice $424.9, up 11.1%. First-half sales: Crane $818.5, down 38.2%; Foodservice $780.0, up 5.8%.
- Q2 operating margins were 8.2% for Crane and 11.4% for Foodservice; first-half margins were 4.9% and 11.3%, respectively. Crane’s first-half operating earnings declined to $39.8 from $103.0; Foodservice increased to $87.9 from $60.2.
- First-half cash provided by continuing operations was $13.6; total operating cash flow, including discontinued operations, was $12.9. Capital expenditures were $16.3. Cash and cash equivalents were $115.0 at June 30; including $2.6 of marketable securities, reported liquidity cash was $117.6.
- Total debt was $2,207.0, up from $2,172.4 at December 31, 2009; long-term debt was $2,062.8. Cash less total debt was approximately $(2,092.0). Current assets were $1,358.3 and current liabilities $1,160.0 (current ratio approximately 1.17).
- Available liquidity was reported as $481.9, including $400.0 of undrawn revolver capacity less $35.7 in letters of credit, and $117.6 of cash and equivalents. The filing states management expects liquidity and operating cash flows to cover working capital, capital spending and other ongoing needs.
Material changes versus prior comparable periods
- Revenue fell 15.3% in Q2 and 22.5% in the first half, driven by Crane weakness, partly offset by Foodservice growth.
- Operating earnings improved substantially year over year, but the first-half comparison is distorted by $700.0 of 2009 asset impairment charges. No impairment was indicated by the June 2010 annual review.
- ES&A expense declined to $129.4 in Q2 and $258.8 in the first half, reflecting cost reductions, integration synergies and, in Q2, collection of a previously reserved receivable.
- First-half operating cash flow improved from a $17.9 use in 2009 to $12.9 provided in 2010. Capital spending decreased from $44.3 to $16.3.
Outlook, commentary, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management cited stabilizing Crane order flow, but second-quarter orders did not exceed shipments. Crane backlog was $530.8 at June 30, down 41.0% year over year and 7.3% from year-end; a large order was removed because of customer financing concerns.
- Management attributed Foodservice growth to customer rollouts, new products, improving U.S. and Asian markets, and Enodis integration synergies. Crane results remained exposed to weak global markets and lower volumes.
- Debt covenants had been amended in 2009 and January 2010. At June 30 the company reported compliance, with total leverage of 6.80:1 versus a 7.80:1 maximum and interest coverage of 2.07:1 versus a 1.75:1 minimum. The filing says management expects covenant compliance for the next 12 months; thresholds tighten over time.
- The company issued $400.0 of 9.50% senior notes due 2018 in February and used $392.0 of net proceeds to reduce Term Loan A and B balances. The transaction resulted in a $15.7 debt-extinguishment loss. Total debt nevertheless increased from year-end, and the notes are unsecured and subordinate to existing secured debt.
- A June 30 amendment to the receivables securitization program enabled sale accounting. Receivables sold and serviced totaled $101.0; deferred purchase price notes of $72.5 remained recorded in accounts receivable.
- Other expense included currency losses, including a $2.5 reclassification of accumulated translation losses. First-half interest expense was $83.8, up from $81.4. Management cited currency volatility, customer financing availability, cyclicality, commodity costs and market conditions among relevant risks.
- Reserves included $26.6 for product liabilities and $102.8 for warranties. The company also disclosed environmental reserves and various product, asbestos and other legal matters; management did not expect these matters to have a material adverse effect, while acknowledging estimates may change.
- The 2009 comparative figures were revised for an identified deferred-financing-fee amortization error; the company stated the revisions were not material to previously filed quarterly statements. The 2010 first-half tax benefit was calculated using the discrete method due to the mix of domestic and foreign results.
Important facts for investors to verify
- Crane order trends, backlog quality and the customer financing concern behind the removed order.
- Progress against tightening leverage and interest-coverage covenants, refinancing needs, and the cost and priority of outstanding debt.
- Whether cash generation can fund operations and capital spending, particularly given first-half operating cash flow below capital expenditures.
- Foodservice sales growth and the durability of integration savings, new-product contributions and customer rollouts.
- Developments in warranty, product-liability and environmental reserves, as well as the accounting and liquidity effects of the receivables-sale program.