The Manitowoc Company, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Dollar amounts are in millions unless otherwise noted. The company reported Crane and Foodservice segments and planned to separate them into independent public companies.
Business context and results
Third-quarter results weakened sharply, principally because of lower Crane sales and earnings amid depressed oil and gas markets. Foodservice sales were slightly higher and segment operating earnings improved.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $863.5 | $986.3 | $2,501.0 | $2,849.1 |
| Gross profit | $205.7 | $243.9 | $610.7 | $740.4 |
| Gross margin | 23.8% | 24.7% | 24.4% | 26.0% |
| Operating earnings | $42.2 | $81.3 | $115.3 | $230.3 |
| Net earnings attributable to Manitowoc | $4.8 | $73.1 | $19.7 | $110.9 |
| Diluted EPS | $0.03 | $0.53 | $0.14 | $0.81 |
Segment performance and material changes
- Crane: Q3 sales fell 23.0% to $438.2; nine-month sales declined 19.5% to $1,322.6. Segment operating earnings fell to $4.3 in Q3 from $41.6 and to $40.2 for nine months from $118.6. Management cited broad volume declines, especially rough-terrain and boom trucks in North and Latin America, reflecting depressed oil and gas markets. Currency reduced Crane sales by $37.4 in Q3 and $119.3 for nine months.
- Crane backlog was $631.0 at September 30, down 13.7% from June 30 and 11.8% year over year.
- Foodservice: Q3 sales rose 2.0% to $425.3 and operating earnings increased to $70.4 from $61.9. Nine-month sales declined 2.4% to $1,178.4 and operating earnings fell to $167.0 from $185.7. Currency reduced nine-month sales by $38.4. Management cited lower first-quarter chain spending and prior-year product launches, partly offset by Q3 strength in the Americas.
- Consolidated sales declined 12.5% in Q3 and 12.2% for nine months. Nine-month operating earnings were also affected by $19.8 of separation costs; Q3 separation expense was $10.0. Cost savings and lower selling, general and administrative expenses partly offset lower gross profit.
Cash flow, debt and liquidity
- Cash from continuing operations was a use of $74.0 for the first nine months, compared with a use of $132.2 in 2014. Investing activities used $32.6, including $41.5 of capital expenditures. Financing activities provided $117.1, primarily from revolving-credit borrowings. Cash increased $7.2 to $75.2.
- Operating cash use included working-capital outflows, including $111.1 from inventory and $43.5 from receivables. Net inventory increased to $717.9 from $644.5 at year-end.
- Total debt was $1,638.5, up from $1,523.5 at December 31, 2014; revolving borrowings were $169.0 versus none at year-end. Long-term debt was $1,575.3. Cash less total debt was approximately $1,563.3 of net debt.
- Reported total liquidity was $399.8, comprising $75.2 cash and remaining revolver availability after borrowings and letters of credit, down from $562.6 at year-end. The $500.0 revolving facility expires in January 2019.
- The company reported compliance with debt covenants. Its senior secured leverage ratio was 2.60 versus a 3.25 maximum; interest coverage was 3.65 versus a 2.75 minimum. Management said it expected to remain compliant over the following 12 months.
Outlook, risks and unusual items
- The company expected to complete a tax-free spin-off of Foodservice in the first quarter of 2016. Completion, associated costs and potential effects on operations were identified as risks; no quantitative earnings guidance was provided.
- Management said liquidity and expected operating cash flows should meet working-capital, capital-expenditure and ordinary operating needs. This outlook depends on cash generation, working-capital management and covenant compliance.
- In Q3 the board approved a plan to hold a non-material Foodservice subsidiary for sale; its assets and liabilities were classified as held for sale. The company reported $8.1 of current and $64.2 of long-term assets held for sale, with $20.2 current and $0.7 long-term liabilities.
- Tax expense was $24.6 for nine months, versus $3.7 in 2014. The comparison reflects a $25.6 tax benefit recorded in 2014 and one-time tax costs related to the planned spin-off. A $4.2 valuation allowance was recorded in 2015 for Brazilian crane-related deferred tax assets.
- Foreign-currency translation reduced nine-month comprehensive income by $72.7. Other identified exposures include construction and oil-market cyclicality, commodity and currency movements, warranty and product-liability claims, tax audits, and execution of the separation.
- Management reported no goodwill impairment indicated by its June 2015 annual review. A cash dividend of $0.08 per share was declared October 28, payable December 10, 2015.
Most important facts for investors to verify
- Whether Crane demand and backlog stabilized, particularly in oil- and gas-exposed product lines, and how margins respond to lower volumes.
- Cash conversion and working-capital trends, especially inventory, receivables and ongoing revolver usage.
- Debt covenant headroom and liquidity under weaker operating scenarios; assess covenant calculations using the company’s adjusted EBITDA definition.
- Progress, costs, tax treatment and timing of the Foodservice separation, including the planned held-for-sale disposal.
- Whether Foodservice’s Q3 improvement continued and whether currency, chain spending and KitchenCare costs affected subsequent results.
- Potential changes in tax reserves, warranty and product-liability estimates, and other contingencies; the filing does not quantify possible future changes clearly.