Business context and reporting period
The Manitowoc Company, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. Its reportable segments are Crane and Foodservice. Comparisons are with the corresponding 2009 periods; balance-sheet comparisons are with December 31, 2009.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $877.8 million | $881.5 million | $2,476.2 million | $2,943.8 million |
| Operating earnings (loss) | $56.2 million | $47.6 million | $161.0 million | $(544.0) million |
| Net earnings (loss) attributable to Manitowoc | $1.4 million | $(12.6) million | $(7.6) million | $(680.8) million |
| Diluted earnings (loss) per share | $0.01 | $(0.10) | $(0.06) | $(5.23) |
| Cash flow from operations | Not stated for quarter | Not stated for quarter | $52.2 million | $179.9 million |
Q3 gross profit was $208.3 million, or approximately 23.7% of sales, versus $201.5 million, or 22.9%. Nine-month gross profit was $593.3 million, approximately 24.0% of sales, versus $643.4 million, or 21.9%. Operating margin was approximately 6.4% for Q3 2010 versus 5.4%; for the nine-month period it was approximately 6.5%, compared with a loss from operations in 2009 that included a $700.0 million impairment charge.
At September 30, cash and cash equivalents were $113.2 million; total current assets were $1,366.7 million and current liabilities $1,177.0 million. Total debt was $2,168.0 million, including $162.5 million of short-term borrowings; long-term debt was $2,005.5 million. The company reported total liquidity of $481.1 million, comprising $115.9 million of cash and cash equivalents plus available revolver capacity of $400.0 million less $34.8 million of outstanding letters of credit. The revolving facility had no balance at quarter-end.
For the first nine months, operating cash flow from continuing operations was $53.0 million, down from $201.1 million. Capital expenditures were $24.8 million versus $63.5 million. Cash increased by $7.4 million from year-end. The filing attributes weaker cash generation mainly to increased receivables and inventories, partially offset by higher accounts payable.
Material changes versus prior comparable periods
- Q3 sales were nearly flat, but nine-month sales declined 15.6%. Crane revenue fell 8.5% in Q3 and 30.3% year to date; Foodservice revenue rose 9.2% and 7.0%, respectively.
- Crane operating earnings fell to $14.7 million in Q3 from $19.1 million and to $54.5 million for nine months from $122.1 million. Crane margins declined to 3.4% in Q3 from 4.0%, and to 4.3% year to date from 6.8%.
- Foodservice operating earnings improved to $55.7 million in Q3 from $52.1 million and to $143.7 million for nine months from $112.3 million. Management cited higher sales, new products and Enodis integration synergies.
- The 2009 nine-month results included $700.0 million of asset impairments, $38.7 million of restructuring expense and $3.5 million of integration expense. These items explain much of the year-over-year improvement in reported operating earnings.
- Crane backlog was $448.1 million at September 30, down 32.7% year over year and 21.8% from December 31, 2009. Management said third-quarter orders did not exceed shipments and noted removal of a large order because of customer financing concerns.
Outlook, commentary, risks and unusual items
- No quantified full-year earnings or revenue guidance is provided. Management said liquidity and expected operating cash flows should be sufficient for working capital, capital expenditures and ongoing needs, and expected covenant compliance over the following 12 months.
- At September 30, the company reported a total leverage ratio of 6.75:1 against a maximum of 7.25:1 and interest coverage of 2.00:1 against a minimum of 1.80:1. On October 7, after quarter-end, it amended its credit agreement, including deleting the maximum total leverage covenant and revising secured-leverage and interest-coverage limits.
- On October 18, the company issued $600 million of 8.50% senior notes due 2020 at 99.165% of principal, with an effective yield of 8.625%. Proceeds were used to pay down credit-facility borrowings; the company estimated an $18.9 million early-extinguishment charge in Q4.
- Reported Q3 earnings benefited from a $6.6 million tax adjustment correcting an error relating to the 2009 tax provision; management said the error was not material to the relevant prior statements. The adjustment increased Q3 net earnings and EPS by $6.6 million and $0.05, respectively. Without it, reported earnings attributable to Manitowoc would have been approximately a $5.2 million loss.
- Other unusual items included a $16.8 million nine-month loss on debt extinguishment from accelerated financing-fee amortization and a $2.0 million Q3 loss on property disposition. The company also disclosed a separate $5.8 million deferred-tax purchase-accounting correction that increased goodwill.
- Management cited weak global crane markets, foreign-exchange volatility, customer access to financing, commodity and material costs, and execution of product launches and Enodis integration as risks. A further downturn could prompt future impairment charges; the June 2010 annual impairment review indicated no additional impairment.
- Contingencies include product-liability reserves of $28.3 million, warranty reserves of $101.8 million, environmental reserves, asbestos-related claims, and customer residual-value guarantees and buyback commitments totaling $73.3 million. Management did not expect the identified legal or environmental matters to have a material adverse effect, while noting estimates could change.
- The company declared an annual dividend of $0.08 per share on October 25, payable December 13, 2010. No dividends were paid during the first nine months of 2010.
Important facts for investors to verify
- Assess Crane demand and backlog trends, including customer financing concerns and order intake relative to shipments.
- Review debt maturities, interest expense, the October 2010 refinancing, its estimated extinguishment charge, and the amended covenant thresholds.
- Evaluate cash conversion and working-capital needs, especially the increases in receivables and inventories and the year-over-year decline in operating cash flow.
- Separate recurring operating performance from the $6.6 million tax correction and other debt, restructuring and disposition items.
- Monitor Foodservice growth and whether new-product performance and Enodis synergies offset higher materials costs and launch inefficiencies.
- Check the assumptions behind impairment testing and the adequacy of warranty, product-liability and other contingency reserves.