The Manitowoc Company, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Manitowoc manufactures cranes and related products (59% of 2011 sales) and commercial foodservice equipment (41%). The figures below are generally in millions of dollars unless stated otherwise. The filing’s quarterly data identify fourth-quarter sales of $1,034.5 million and net earnings attributable to Manitowoc of $15.5 million.
Financial results and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $3,651.9 | $3,141.7 |
| Gross profit / gross margin | $838.0 / 22.9% | $766.1 / 24.4% |
| Operating earnings from continuing operations | $221.9 | $207.2 |
| Earnings (loss) from continuing operations | $21.5 | $(74.6) |
| Net earnings (loss) attributable to Manitowoc | $(10.5) | $(79.5) |
| Diluted EPS attributable to common shareholders | $(0.08) | $(0.61) |
| Cash provided by operating activities | $15.6 | $209.3 |
| Capital expenditures | $64.9 | $36.1 |
| Total debt | $1,890.0 | $1,997.4 |
- Revenue increased year over year in both segments. The reported table values imply sales growth of approximately 16.2% overall. Crane sales rose to $2,164.6 million from $1,748.6 million; Foodservice sales rose to $1,487.3 million from $1,393.1 million.
- Segment operating earnings were $106.8 million for Crane (4.9% margin), versus $89.8 million (5.1%); and $216.0 million for Foodservice (14.5% margin), versus $203.0 million (14.6%). Higher volume was offset by material, labor, warranty and other manufacturing cost increases.
- Operating cash flow fell sharply, primarily as higher sales required more working capital: accounts receivable increased $98.4 million and inventory increased $114.4 million, partly offset by a $97.9 million increase in accounts payable.
- Year-end balance-sheet cash and cash equivalents were $68.6 million, versus $83.7 million. Current assets were $1,239.8 million and current liabilities $1,104.6 million. A separate MD&A liquidity table reports cash of $71.3 million and total liquidity of $536.8 million, including $500 million of undrawn revolver capacity less $34.5 million of letters of credit.
- Debt declined from $1,997.4 million to $1,890.0 million. The company reported covenant-defined trailing Adjusted EBITDA of $349.2 million. It was compliant with debt covenants at year-end: senior secured leverage ratio 2.62:1 versus a 3.875:1 maximum, and interest coverage 2.45:1 versus a 1.625:1 minimum.
Material changes and unusual items
- Crane backlog increased to $760.5 million at year-end from $571.7 million, with improving order trends. Foodservice backlog was not significant because orders generally ship shortly after receipt.
- Interest expense declined to $146.7 million from $175.0 million, reflecting the May 2011 refinancing and debt reduction. The refinancing also contributed to a $29.7 million loss on debt extinguishment; the comparable 2010 loss was $44.0 million.
- Operating cash flow included a large working-capital outflow despite higher revenue. Investing cash flow was positive $98.4 million, including $143.6 million of proceeds from the Kysor/Warren sale, partly offset by capital spending. Financing activities used $125.9 million, including debt payments and dividends.
- The Kysor/Warren businesses were sold in January 2011; net proceeds were used to reduce debt. Manitowoc recorded a $34.6 million after-tax loss on sale, primarily reflecting $29.9 million of tax expense. Discontinued operations also recorded a $3.9 million loss for the year.
- The company revised certain previously reported financial information to correct errors it described as immaterial to prior-period statements. The revisions included a $28.5 million error affecting tax payable, goodwill and the 2009 goodwill impairment charge, and other smaller errors. Comparative figures in this filing are revised.
- Management reported a 66-day work stoppage after a crane union contract expired in October 2011; a new agreement was ratified in January 2012 and runs through January 2016.
Outlook, commentary and risks
Management expected growth in both segments during 2012, while acknowledging a challenging and uncertain operating environment. Its stated expectations were Crane revenue growth of 10%–15%; Foodservice revenue growth in the high-single-digit range; Foodservice operating margins increasing 10%–15%; and Crane operating margins improving 30%–40%, each versus 2011. It also targeted approximately $80 million of capital expenditures, $120 million of depreciation and amortization, $150 million–$200 million of debt reduction, and a $25 million–$30 million reduction in interest expense. These are management expectations, not guarantees.
- Key risks include construction and foodservice market cyclicality, customer access to financing, intense competition, commodity and labor cost inflation, foreign-exchange exposure, international operating risks, warranty and product-liability claims, and environmental obligations.
- High leverage creates interest, refinancing and covenant risks. Management stated it expected available cash, revolving capacity and future operating cash generation to fund foreseeable needs, but results and covenant compliance depend partly on conditions outside its control.
- Management identified Crane ERP implementation as a potential operational and financial-reporting risk; further rollouts were scheduled for 2012. Other risks include supplier disruption, execution of restructuring and manufacturing improvements, and possible future impairment charges.
- Outstanding buyback and residual-value guarantees totaled $89.5 million at year-end, before any recovery from repossession and resale. Unrecognized tax liabilities were $56.3 million, excluding related interest and penalties; timing of resolution was not estimable. Management did not expect disclosed environmental, asbestos or other legal matters to have a material adverse effect based on information then available.
Important facts for investors to verify
- Reconcile reported sales growth: MD&A states consolidated growth of 19.4%, while the reported sales figures imply approximately 16.2%. Crane growth is also stated as both 23.8% and 29.4% in different passages; the segment sales figures imply approximately 23.8%.
- Reconcile the liquidity disclosure: the balance sheet reports $68.6 million of cash and cash equivalents, whereas the MD&A liquidity table reports $71.3 million.
- Review the nature, accounting treatment and cash consequences of the prior-period revisions and the Kysor/Warren sale loss, particularly its tax component.
- Assess working-capital conversion and cash generation against management’s growth and debt-reduction targets, along with the debt maturity schedule and covenant headroom.
- Track Crane backlog conversion, margin recovery, ERP implementation, commodity and labor costs, and the exposure from guarantees, warranty reserves and tax contingencies.