Business context and reporting period
The Manitowoc Company, Inc. filed this Form 10-Q for the quarter ended June 30, 2014. The company reports two segments: Crane and Foodservice. Prior-year figures have been reclassified for discontinued operations.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $1,012.8M | $1,037.1M | $1,862.8M | $1,931.7M |
| Gross profit / margin | $272.3M / 26.9% | $276.0M / 26.6% | $499.4M / 26.8% | $498.1M / 25.8% |
| Operating earnings / margin | $95.4M / 9.4% | $106.7M / 10.3% | $149.0M / 8.0% | $162.6M / 8.4% |
| Earnings from continuing operations | $46.9M | $62.1M | $52.9M | $75.9M |
| Net earnings attributable to Manitowoc | $46.6M | $57.6M | $37.8M | $68.0M |
| Diluted earnings per share | $0.34 | $0.43 | $0.28 | $0.50 |
For the six months, operating cash flow was negative $199.2M, including negative $192.1M from continuing operations; capital expenditures were $35.0M. Cash and cash equivalents were $103.5M at June 30, up from $54.9M at year-end 2013. Total debt was $1,821.7M, versus $1,526.8M at year-end; cash plus available revolver capacity, net of borrowings and letters of credit, totaled $331.3M versus $524.3M.
Current assets were $1,492.1M and current liabilities $1,047.3M. The company reported $830.9M of inventory. It was in compliance with debt covenants at quarter-end: senior secured leverage ratio 2.35:1 against a 3.50:1 maximum; interest coverage 4.37:1 against a 2.50:1 minimum.
Material changes versus prior comparable periods
- Q2 sales fell 2.3%; first-half sales fell 3.6%. Crane sales declined 6.4% in Q2 and 10.0% in the first half, mainly from lower volumes across most product lines. Foodservice sales rose 4.4% and 6.7%, respectively, supported by new products and growth in the Americas and EMEA.
- Crane operating earnings declined to $54.4M in Q2 from $70.0M and to $77.0M for the first half from $104.9M. Foodservice operating earnings rose to $65.9M from $63.0M in Q2 and to $123.8M from $112.1M for the first half.
- Interest expense declined to $25.1M in Q2 from $32.2M and to $44.4M for the first half from $65.2M. First-half earnings also included a $25.3M debt-extinguishment loss, primarily from redeeming the 9.50% notes due 2018.
- Operating cash use from continuing operations increased from $54.9M in the first half of 2013 to $192.1M in 2014, reflecting higher income taxes paid, timing of accrued-expense payments and other unfavorable working-capital movements.
Outlook, commentary, risks and unusual items
Management did not provide numerical earnings or revenue guidance in the supplied filing text. It said liquidity and expected operating cash flows should meet working-capital, capital-expenditure and other ongoing needs, and expects covenant compliance for the subsequent 12 months. Crane backlog was $727.6M at June 30, down 13.5% from March 31 and up 0.2% year over year.
- The company redeemed its 2018 notes for $419.0M in February and refinanced its credit facility in January. It had $268.0M drawn on a $500.0M revolving facility at quarter-end.
- The sale of the Manitowoc Dong Yue joint venture closed in January 2014, generating a $9.9M first-half loss on sale. Manitowoc also paid $7.2M toward the venture’s third-party debt and fully guaranteed approximately $17.3M of remaining debt, secured by the venture’s assets and inventory.
- Management identified cyclical construction and crane demand, order-to-sales conversion, commodity and foreign-exchange movements, interest rates, customer financing, working-capital and cash generation, and execution of ERP and operational initiatives among relevant risks.
- Product liability reserves were $26.1M; warranty reserves were $96.5M. The company also disclosed residual-value guarantees and buyback commitments totaling $59.2M. Management did not expect environmental, asbestos or other legal matters to have a material adverse effect, while noting estimates could change.
- The company reduced its deferred-tax valuation allowance by $9.0M after three years of cumulative pretax income in China. In July 2014, the Joint Committee on Taxation agreed with a favorable IRS Appeals resolution concerning proposed adjustments tied to a 2008 foreign-currency loss and 2009 research credit.
- The annual goodwill and indefinite-lived intangible impairment review indicated no impairment. Future impairment charges remain possible if assumptions or market conditions change.
Investor verification priorities
- Review the causes and expected duration of the substantial first-half operating cash outflow and inventory build.
- Track Crane volumes, segment profitability and backlog, alongside continued Foodservice growth and warranty/rebate costs.
- Verify debt, revolver availability, refinancing effects, covenant headroom and management’s ability to sustain covenant compliance.
- Assess the remaining Manitowoc Dong Yue guarantee and repayment risk, plus product-liability, warranty and customer-financing exposures.
- Monitor tax-reserve and valuation-allowance changes, and any future goodwill or intangible impairment indicators.