The Manitowoc Company, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are noted below. Manitowoc manufactures cranes and commercial foodservice equipment. In January 2011, it completed the sale of Kysor/Warren, with net proceeds used to reduce debt.
Financial performance
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales from continuing operations | $3,141.7 million | $3,619.8 million |
| Gross profit / margin | $765.4 million / 24.4% | $797.6 million / 22.0% |
| Operating earnings (loss) from continuing operations | $206.5 million | $(512.4) million |
| Net earnings (loss) attributable to Manitowoc | $(73.4) million | $(704.2) million |
| Diluted loss per share | $(0.56) | $(5.41) |
| Cash from operating activities | $209.3 million | $339.5 million |
| Capital expenditures | $36.1 million | $69.2 million |
| Total debt | $1,997.4 million | $2,172.4 million |
Sales fell 13.2%, mainly reflecting weak Crane demand and foreign-exchange effects. Gross margin improved, but operating earnings remained pressured by Crane volume and factory under-absorption. Interest expense was $175.0 million; a further $44.0 million loss on debt extinguishment contributed to the continuing-operations loss. The 2010 loss also includes tax expense despite a pretax loss.
Segments: Crane sales were $1,748.6 million, down 23.5%; operating earnings fell to $89.8 million from $145.0 million and margin declined to 5.1% from 6.4%. Foodservice sales rose 4.4% to $1,393.1 million; operating earnings increased to $202.3 million from $167.2 million and margin improved to 14.5% from 12.5%, supported by product introductions, market-share gains, cost reductions and Enodis synergies.
Fourth quarter: Sales were $830.9 million and gross profit was $192.6 million. Continuing-operations loss was $25.1 million; net loss attributable to Manitowoc was $65.8 million, or $0.50 per share. The quarterly loss included a $50.8 million valuation allowance for deferred tax assets in France and Wisconsin.
Liquidity, debt and balance sheet
- Year-end cash and cash equivalents were $83.7 million on the consolidated balance sheet. Management’s liquidity table reports $86.4 million as cash and cash equivalents; the filing does not clearly reconcile the difference. It reports total liquidity of $427.6 million, including available revolver capacity after borrowings and letters of credit.
- Debt declined by $175.0 million year over year. The company issued $400 million of 9.5% notes due 2018 and $600 million of 8.5% notes due 2020, using net proceeds primarily to repay term loans. Scheduled debt maturities include $515.1 million in 2013 and $331.8 million in 2014.
- At year-end, the company reported compliance with debt covenants: senior secured leverage ratio of 2.97x versus a 4.50x maximum, and interest coverage of 1.99x versus a 1.50x minimum. Covenant thresholds tighten over time.
- Working-capital movements supported operating cash flow, including a $46.6 million increase in accounts payable; cash from operations was down from 2009. The filing does not present a single defined free-cash-flow figure.
Changes, outlook and material items
- Crane backlog at year-end was approximately $571.8 million, essentially flat year over year but up 27.8% from September 2010. Management described improving order trends, particularly in emerging markets, while remaining cautious about the recovery.
- For 2011, management expected low-double-digit Crane revenue growth and improved Crane margins from 2010 trough levels. Foodservice revenue and operating margins were expected to improve modestly, described as “in the high single digit range.” Planned capital expenditures were approximately $70 million, depreciation and amortization approximately $125 million, and targeted debt reduction $200 million.
- The Kysor/Warren sale closed January 14, 2011 for approximately $145 million; net proceeds of approximately $124 million were used to repay term loans. Its 2010 discontinued-operations results included a $9.8 million after-tax impairment charge.
- In 2010 the company recorded a $55.2 million increase in deferred-tax valuation allowances, including a full allowance on the French net operating loss deferred tax asset. It also corrected a prior-period tax provision error, increasing 2010 tax benefit and earnings by $6.6 million ($0.05 per share); management considered the error immaterial to both 2009 and 2010. A separate $5.8 million purchase-accounting correction reduced deferred tax assets and increased goodwill.
- For comparison, 2009 included noncash goodwill and intangible-asset impairments of $548.8 million and $146.4 million, respectively, largely explaining the prior-year operating loss. Those charges did not directly affect cash flow or debt covenants.
Risks, contingencies and controls
Principal risks include the cyclical construction and crane markets, customers’ access to financing, high leverage and covenant requirements, competition, raw-material costs, foreign-exchange exposure, integration and realization of Enodis synergies, and execution of the Crane ERP implementation. The company also identifies product-liability and warranty exposure, environmental obligations, labor negotiations and potential future impairment charges. Management reported $79.2 million of outstanding crane buyback commitments and residual-value guarantees, before any recovery from repossession and resale.
Management stated that environmental and asbestos matters were not expected to have a material adverse effect, while noting uncertainty in ultimate costs. Product-liability reserves were $27.8 million and warranty reserves were $99.9 million at year-end. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements and internal controls.
Investor verification priorities
- Reconcile the $83.7 million balance-sheet cash figure with the $86.4 million amount used in management’s liquidity table, and confirm the components of reported $427.6 million liquidity.
- Assess covenant headroom and the impact of tightening leverage and interest-coverage tests, debt maturities and high-cost notes.
- Track whether 2011 segment growth, margin improvement, and the $200 million debt-reduction target were achieved.
- Review the tax valuation allowances, uncertain tax positions ($45.2 million of unrecognized tax benefits), and assumptions supporting deferred tax assets.
- Monitor Crane backlog conversion, customer financing conditions, guarantee exposure, and potential warranty or product-liability reserve changes.