The Manitowoc Company, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2011, compared with the same 2010 periods. Manitowoc reported Crane and Foodservice segments; the Kysor/Warren business is presented as discontinued operations.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $935.4 million | $807.1 million | $2,617.4 million | $2,310.8 million |
| Operating earnings | $69.2 million | $53.9 million | $166.3 million | $156.5 million |
| Continuing-operations earnings (loss) | $21.7 million | ($1.4) million | $6.6 million | ($12.2) million |
| Net earnings (loss) attributable to Manitowoc | $23.7 million | $1.4 million | ($26.0) million | ($7.6) million |
| EPS attributable to common shareholders | $0.18 | $0.01 | ($0.20) | ($0.06) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | ($184.9) million | $52.2 million |
Q3 gross profit was $223.5 million, or approximately 23.9% of sales, versus $200.2 million, or 24.8%, a year earlier. Operating margin was approximately 7.4%, compared with 6.7%. For the nine months, gross profit was $628.5 million (approximately 24.0% of sales) and operating margin was approximately 6.4%, versus 24.8% and 6.8%, respectively, in 2010.
Segments. Q3 Crane sales rose 20.7% to $529.4 million and operating earnings increased to $23.7 million from $14.6 million. Foodservice sales rose 10.2% to $406.0 million and operating earnings increased to $59.4 million from $53.4 million. Nine-month sales increased 17.5% in Crane and 8.2% in Foodservice; segment operating earnings were $62.4 million and $146.8 million, respectively.
Financial position, liquidity, and debt
- At September 30, 2011, cash and cash equivalents were $90.1 million; total reported liquidity was $439.7 million, including cash and marketable securities, remaining revolver capacity, and net of letters of credit.
- Total debt was $2,100.4 million, up from $1,997.4 million at December 31, 2010. Long-term debt was $1,997.5 million. The company reported $118.4 million drawn on its $500 million revolving facility.
- Current assets were $1,451.6 million and current liabilities were $1,186.9 million. Inventory rose to $816.7 million from $557.0 million at year-end; accounts receivable increased to $329.9 million from $255.1 million.
- Cash used in continuing operations was $166.2 million for the first nine months, mainly reflecting increased receivables and inventory, partly offset by higher accounts payable. Capital expenditures were $32.3 million. Investing cash flow included $143.6 million of proceeds from the Kysor/Warren sale.
- At quarter-end, the reported senior secured leverage ratio was 3.18:1 against a maximum of 4.00:1; interest coverage was 2.22:1 against a minimum of 1.575:1. The company said it was compliant with debt and securitization covenants.
Material changes and unusual items
- Revenue grew 15.9% in Q3 and 13.3% for the first nine months. Crane growth reflected higher sales across regions and Crane Care; Foodservice growth reflected new products, market penetration, and demand. Favorable currency effects contributed to sales in both segments.
- Despite higher revenue, nine-month operating earnings increased more slowly than sales. Management cited higher manufacturing, engineering, employee-benefit, and other expenses; nine-month segment margins were slightly below 2010 levels.
- The May 2011 amended credit agreement extended and revised the company’s senior credit facilities. Nine-month interest expense fell to $111.7 million from $130.0 million, while a $27.8 million debt-extinguishment loss reflected financing-fee write-offs and unwinding interest-rate swaps.
- The nine-month net loss included a $33.6 million after-tax loss on sale of discontinued operations, primarily associated with Kysor/Warren. The company completed that sale in January 2011 and used the proceeds to reduce debt; the final working-capital adjustment was paid in July.
- Operating cash flow reversed from positive $52.2 million in the first nine months of 2010 to negative $184.9 million in 2011, including discontinued operations. Working-capital investment was the principal stated driver.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management believed available liquidity and expected operating cash flows would cover working capital, capital expenditures, and ordinary operating needs, and expected to remain covenant-compliant over the following 12 months. Crane backlog was $774.6 million at September 30, down 7.7% from June 30 but up 72.9% year over year; Q3 Crane orders were 35% above Q3 2010. Management attributed the sequential backlog decline to shipments exceeding orders in a seasonally softer quarter.
Key risks include cyclicality and global demand for cranes, foodservice-equipment demand and customer refresh plans, raw-material and commodity costs, foreign-exchange and interest-rate movements, customer financing, working-capital demands, debt and covenant compliance, and potential future goodwill or other asset impairments. The June 2011 annual goodwill review found no impairment; management warned that deteriorating markets or performance could lead to future non-cash impairment charges.
Recorded exposures include $97.8 million of warranty reserves and $28.2 million of product-liability reserves. Environmental accruals included $0.7 million for the Lemberger site and approximately $1.1 million for Enodis locations. The company also reported $69.0 million of residual-value guarantees and buyback commitments outstanding. Management did not expect the disclosed environmental, product-liability, asbestos, or other ordinary-course legal matters to have a material adverse effect, but noted estimates may change.
Other notable items include $48.7 million of unrecognized tax benefits, with possible settlements within 12 months not expected to have a material effect; a $5.5 million Wisconsin tax benefit recorded in Q2; and $761.3 million of undistributed foreign earnings considered permanently reinvested. The filing identifies no material change in risk factors or internal control over financial reporting.
Investor verification points
- Assess whether the substantial working-capital use and inventory build convert into cash as sales and backlog develop.
- Review debt maturities, facility availability, covenant headroom, interest-rate exposure, and the effect of the amended credit agreement.
- Separate continuing-operations performance from the discontinued-operation sale loss when evaluating nine-month earnings.
- Monitor Crane orders and backlog conversion, segment margins, input costs, and foreign-currency effects.
- Evaluate the assumptions supporting goodwill valuations, warranty and product-liability reserves, tax assets, and disclosed guarantees.