The Manitowoc Company, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three months ended March 31, 2014; comparisons are with the three months ended March 31, 2013, with prior-year results reclassified for discontinued operations. Manitowoc reports two segments: Crane and Foodservice. Unless otherwise noted, financial amounts below are in millions of dollars.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Net sales | $850.0 | $894.6 |
| Gross profit and gross margin | $227.1; 26.7% | $222.1; 24.8% |
| Operating earnings and operating margin | $53.6; 6.3% | $55.9; 6.3% |
| Continuing-operations earnings | $6.0 consolidated; $1.7 attributable to common shareholders | $13.8 consolidated; $14.1 attributable to common shareholders |
| Net earnings (loss) attributable to Manitowoc | $(8.8) | $10.4 |
| Basic / diluted EPS attributable to common shareholders | $(0.07) / $(0.06) | $0.08 / $0.08 |
| Cash used for operating activities of continuing operations | $(264.6) | $(102.9) |
| Cash and cash equivalents at period end | $78.8 | $54.9 at Dec. 31, 2013 |
| Total debt | $1,845.5 | $1,526.8 at Dec. 31, 2013 |
| Total liquidity, as defined by the company | $261.1 | $524.3 at Dec. 31, 2013 |
Gross and operating margins are calculated from the reported figures. The company reported total operating cash use, including discontinued operations, of $271.4. Capital expenditures were $16.7. Current assets were $1,436.3 and current liabilities were $984.0 at March 31, 2014.
Material changes versus the prior comparable period
- Consolidated sales declined 5.0%. Crane sales fell 14.2% to $466.7, primarily due to lower volumes across most product lines and regions; pricing actions partly offset the decline. Foodservice sales rose 9.3% to $383.3, driven primarily by new-product volume.
- Crane operating earnings decreased to $22.6 from $34.9, while Foodservice operating earnings increased to $57.9 from $49.1. Consolidated gross profit increased $5.0, as Foodservice gains more than offset lower Crane gross profit.
- Interest expense fell to $19.3 from $33.0, but this was more than offset below operating earnings by a $25.3 loss on debt extinguishment. The loss included a $19.0 redemption premium and financing-fee write-offs related to redemption of the 2018 notes and refinancing.
- Net results included a $9.9 loss on sale of Manitowoc Dong Yue, classified as discontinued operations. Its sale closed January 21, 2014. Prior-year discontinued results included the Jackson business, sold in January 2013.
- Operating cash use from continuing operations increased to $264.6 from $102.9, mainly reflecting higher income taxes paid, payment timing for accounts payable, and other unfavorable working-capital changes.
Debt, liquidity, outlook, and risks
- In January, the company replaced its credit agreement with a $1,050.0 million facility: a $500.0 million revolver, $350.0 million Term Loan A, and $200.0 million Term Loan B. The 2018 senior notes were redeemed in February. Revolver borrowings were $314.0 at quarter-end; reported unused revolver capacity was reduced by $3.7 of letters of credit.
- Management reported compliance with debt and receivables-securitization covenants and expected to remain compliant over the subsequent 12 months. The senior secured leverage ratio was 2.32:1 against a 3.50:1 maximum; interest coverage was 4.21:1 against a 2.25:1 minimum. Management said liquidity and expected operating cash flows should be sufficient for working capital, capital expenditures, and ongoing needs.
- Crane backlog was $841.6 at March 31, up 46.6% from December 31, 2013 and 8.4% from March 31, 2013. This is an indicator of orders, not a guarantee of future sales. The filing provides no specific company-wide revenue or earnings guidance.
- Following the Dong Yue sale, Manitowoc paid $7.2 toward the joint venture’s third-party debt and guaranteed approximately $17.3 of remaining debt, secured by the venture’s fixed assets and finished-goods inventory. The company also forgave additional loans and accrued interest; the resulting $4.3 benefit to the joint venture partner was reflected in noncontrolling interest and reduced earnings attributable to Manitowoc.
- A pending IRS dispute over a 2008 foreign-currency loss could, if resolved against the company, increase federal tax expense and cash outflow by approximately $134.0 plus interest and penalties. The IRS Appeals division had tentatively advised in the company’s favor, subject to Joint Committee on Taxation review; the tentative resolution was not reflected in results.
- Other risks include cyclicality and demand changes in construction and foodservice markets, raw-material costs, foreign-exchange and interest-rate exposure, execution of manufacturing and ERP initiatives, product liability and warranty claims, and compliance with debt covenants. Management stated that existing environmental, product-liability, warranty, asbestos, and other legal matters were not expected to have a material adverse effect, while noting estimates may change.
Most important facts for investors to verify
- Whether Crane orders and the higher reported backlog convert into sales, and whether the segment’s volume and operating-earnings trends improve.
- Whether Foodservice can sustain sales and profit growth while managing higher selling, administrative, product-liability, and warranty costs.
- Cash generation and working-capital needs after the substantial Q1 operating cash outflow, alongside the reduced reported liquidity and increased debt.
- Debt-service capacity and covenant headroom, including the effects of floating-rate exposure and refinancing terms.
- Final resolution of the IRS matter, the Dong Yue debt guarantee, and any changes in warranty, product-liability, or other contingency reserves.