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MTW > SEC Filings for MTW > Form 10-Q on 7-May-2013All Recent SEC Filings

Show all filings for MANITOWOC CO INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MANITOWOC CO INC


7-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Results of Operations for the Three Months Ended March 31, 2013 and 2012
Analysis of Net Sales
The following table presents net sales by business segment:
                      Three Months Ended
                           March 31,
(in millions)           2013           2012
Net sales:
Crane             $    547.4         $ 507.9
Foodservice            350.6           344.0
Total net sales   $    898.0         $ 851.9

Consolidated net sales for the three months ended March 31, 2013 increased 5.4% to $898.0 million from $851.9 million for the same period in 2012. The increase in net sales was primarily driven by a 7.8% increase in the Crane segment for the three months ended March 31, 2013 compared to the same period in 2012. Foodservice segment net sales for the three months ended March 31, 2013 increased 1.9% compared to the prior year period.
Crane segment net sales increased 7.8% for the three months ended March 31, 2013 to $547.4 million versus $507.9 million for the same period in 2012. The increase in net sales was primarily driven by product mix predominantly in the Americas and Europe, Middle East and Africa regions, partially offset by sales decreases in the Greater Asia Pacific region as a result of volume reductions. Crane segment sales for the three months ended March 31, 2013 were unfavorably impacted by $0.3 million from the volatility of foreign currencies in relation to the U.S. Dollar.
As of March 31, 2013, total Crane segment backlog was $776.1 million, a 2.7% increase over the December 31, 2012 backlog of $755.8 million, and a 16.6% decrease over the March 31, 2012 backlog of $931.0 million.
Net sales from the Foodservice segment for the three months ended March 31, 2013 increased 1.9% to $350.6 million versus $344.0 million for the same time period in 2012. The increase in net sales was primarily driven by volume increases as a result of new product roll outs and pricing actions, partially offset by increases in rebates and discounts as a result of the volume increases. Foodservice segment sales for the three months ended March 31, 2013 were unfavorably impacted by $0.2 million from the volatility of foreign currencies in relation to the U.S. Dollar.
Analysis of Operating Earnings
The following table presents operating earnings by business segment. The results for the three months ended March 31, 2012 have been revised to reflect the correction of errors related to this period. See Note 1, "Accounting Policies" for further discussion of these revisions.

                               Three Months Ended
                                   March 31,
(in millions)                   2013          2012
Earnings from operations:
Crane                       $    31.3       $ 21.4
Foodservice                      49.1         51.0
Corporate expense               (18.5 )      (16.0 )
Amortization expense             (9.1 )       (9.3 )
Restructuring expense            (0.3 )       (0.7 )
Other                            (0.3 )          -
Total                       $    52.2       $ 46.4

Consolidated gross profit for the three months ended March 31, 2013 was $220.0 million, an increase of $16.7 million compared to the $203.3 million of consolidated gross profit for the same period in 2012. This increase in consolidated gross


profit was due to a 13.9% increase in Crane segment gross profit and a 3.6% increase in Foodservice segment gross profit compared to the prior year period. For the three months ended March 31, 2013 compared to the same period in 2012, the Crane segment gross profit increased by $12.6 million. Net sales increased as a result of favorable product mix coupled with pricing actions, which drove the increase in gross profit for the three months ended March 31, 2013 compared to the same period in 2012.
For the three months ended March 31, 2013, the Foodservice segment gross profit increased $4.1 million compared to the same period last year. Cost reduction initiatives, pricing actions, and increases in volumes primarily drove the increase in gross profit for the Foodservice segment, partially offset by increases in rebates and discounts, material, labor and other costs. For the three months ended March 31, 2013, engineering, selling and administrative (ES&A) expenses increased $11.2 million to $158.1 million versus $146.9 million for the three months ended March 31, 2012. The Foodservice segment ES&A increased $6.0 million for the three months ended March 31, 2013 compared to the prior year period primarily as a result of increased investment in strategic projects, differences in pension expenses, and an increase in headcount. The Crane segment ES&A increased $2.7 million for the three months ended March 31, 2013 compared to the prior year period primarily as a result of the recognition of reserves for a small number of discrete customer financing issues and increased levels of engineering and trade show expense, partially offset by a decrease in employee compensation costs. Corporate expenses were higher for the three months ended March 31, 2013 versus the prior year period due to higher employee benefit costs, partially offset by decreases in professional fees and stock award compensation costs.
For the three months ended March 31, 2013, Crane segment operating earnings were $31.3 million compared to $21.4 million for the three months ended March 31, 2012. Crane segment operating earnings increased in the three-month period due to the aforementioned increase in sales as a result of favorable product mix coupled with pricing actions, partially offset by the increase in ES&A described above.
For the three months ended March 31, 2013, Foodservice segment operating earnings were $49.1 million compared to $51.0 million for the three months ended March 31, 2012. Foodservice segment operating earnings decreased in the three months ended March 31, 2013 compared to the prior year due to increased ES&A expense primarily as a result of increased investment in strategic projects and an increase in headcount, partially offset by increases in gross profit described above.
For the three months ended March 31, 2013, corporate expenses were $18.5 million compared to $16.0 million for the three months ended March 31, 2012. Corporate expenses increased due to higher employee benefit costs, partially offset by decreases in professional fees and stock award compensation costs. Analysis of Non-Operating Income Statement Items The loss on debt extinguishment for the three months ended March 31, 2013 was $0.4 million. The loss relates to the accelerated pay downs on Term Loans A and B.
Interest expense for the three months ended March 31, 2013 was $33.3 million versus $33.0 million for the three months ended March 31, 2012. The increase in interest expense for the three months ended March 31, 2013 was a result of slightly higher weighted average interest rates, partially offset by the company's debt reduction efforts. Amortization expenses for deferred financing fees were $1.8 million for the three months ended March 31, 2013 compared to $2.0 million for the three months ended March 31, 2012. The decrease in expense for the three months ended March 31, 2013 was related to the lower balance of deferred financing fees as a result of the accelerated pay downs of Term Loans in 2012.
Other income (expense), net for the three months ended March 31, 2013 was income of $1.6 million compared to other expense of $1.8 million for the same period ended 2012. The increase in other income for the three months ended March 31, 2013 compared to the same period in 2012 was primarily due to foreign currency exchange gains for the three months ended March 31, 2013 compared to foreign currency exchange losses in the prior year period.
For the three months ended March 31, 2013, the company recorded an income tax expense of $8.5 million, compared to an income tax expense of $11.4 million for the three months ended March 31, 2012. The decrease in the company's tax expense for the three months ended March 31, 2013 relative to the prior year resulted primarily from the jurisdictional mix of pre-tax earnings and net discrete items, principally the effect of the American Tax Relief Act of 2012 signed into law on January 2, 2013. The effective tax rate varies from the U.S. federal statutory rate of 35% due to results of foreign operations that are subject to income taxes at different statutory rates and certain jurisdictions where the company cannot recognize tax benefits on current losses.


The company's unrecognized tax benefits, excluding interest and penalties, were $48.1 million as of March 31, 2013, and $56.7 million as of March 31, 2012. All of the company's unrecognized tax benefits as of March 31, 2013, if recognized, would impact the effective tax rate. During the next twelve months, it is reasonably possible that federal, state and foreign tax audit resolutions could reduce unrecognized tax benefits and income tax expense by up to $5.1 million, either because the company's tax positions are sustained on audit or settled or the applicable statute of limitations closes.
Among other regular and ongoing examinations by federal and state jurisdictions globally, the company is under examination by the Internal Revenue Service ("IRS") for the calendar years 2008 and 2009. In August 2012, the company received a Notice of Proposed Assessment ("NOPA") related to the disallowance of the deductibility of a $380.9 million foreign currency loss incurred in calendar year 2008. In September 2012, the company responded to the NOPA indicating its formal disagreement and subsequently received an Examination Report which includes the proposed disallowance. The largest potential adjustment for this matter could, if the IRS were to prevail, increase the company's potential federal tax expense and cash outflow by approximately $134.0 million plus interest and penalties, if any. The company filed a formal protest to the proposed adjustment during the fourth quarter of 2012. In January 2013, the company received a formal rebuttal from the IRS and notification of the assignment of this matter to its Appeals division. The time frame for the Appeals process has not yet been established. The company will continue to pursue all administrative and, if necessary, judicial remedies with respect to resolving this matter. However, there can be no assurance that this matter will be resolved in the company's favor. The IRS also examined and proposed adjustments to the research and development credit generated in 2009; the company also formally disagreed with these adjustments.
The company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. As of March 31, 2013, the company believes that it is more-likely-than-not that the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial position and the results of operations and cash flows. However, the final determination with respect to any tax audits, and any related litigation, could be materially different from the company's estimates and/or from its historical income tax provisions and accruals and could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.
As of March 31, 2013 there have been no significant developments in the quarter with respect to the company's other ongoing tax audits in various jurisdictions. Loss on sale of discontinued operations was $1.6 million for the three months ended March 31, 2013. The loss was primarily attributable to tax expense of $3.3 million on the sale of the Jackson business in January 2013. For more information regarding the sale of the Jackson business, see Note 2, "Discontinued Operations," of the condensed financial statements. Financial Condition
First Three Months of 2013
Cash and cash equivalents balance as of March 31, 2013 totaled $101.3 million, which was an increase of $27.9 million from the December 31, 2012 balance of $73.4 million. Cash flow used for operating activities of continuing operations for the first three months of 2013 was $106.0 million compared to cash used for continuing operations of $130.0 million for the first three months of 2012. During the first three months of 2013, cash flow used for continuing operations was primarily a result of working capital to support increased order activity. Inventory increases resulted in a use of cash of $102.3 million to support increased order activity primarily in the Crane segment.
Capital expenditures during the first three months of 2013 were $21.2 million versus $14.2 million during the first three months of 2012. The majority of the capital expenditures were related to equipment purchases for the Crane and Foodservice segments, continued investment in our facility in Brazil and the enterprise resource planning system implementation in the Crane segment. First Three Months of 2012
Cash and cash equivalents balance as of March 31, 2012 totaled $70.8 million, which was an increase of $2.2 million from the December 31, 2011 balance of $68.6 million. Cash flow used for operating activities of continuing operations for the first three months of 2012 was $130.0 million compared to cash used of continuing operations of $136.2 million for the first three months of 2011. During the first three months of 2012, cash flow from continuing operations was used primarily for working capital to support increased order activity in both segments. Inventory increases resulted in a use of cash of $99.7 million, partially offset


by increased payables of $6.6 million; while cash of $18.4 million was used for increased receivables due to the increased sales of both segments. Capital expenditures during the first three months of 2012 were $14.2 million versus $7.6 million during the first three months of 2011. The majority of the capital expenditures were related to our new facility in Brazil, and machinery and equipment purchases for the Crane and Foodservice segments. Liquidity and Capital Resources
Outstanding debt as of March 31, 2013 and December 31, 2012 is summarized as follows:

(in millions)                                     March 31, 2013     December 31, 2012
Revolving credit facility                        $        183.6     $            34.4
Term loan A                                               277.1                 297.5
Term loan B                                                75.4                  81.0
Senior notes due 2018                                     410.0                 410.5
Senior notes due 2020                                     620.5                 621.2
Senior notes due 2022                                     297.6                 298.9
Other                                                      88.5                  81.3
Total debt                                              1,952.7               1,824.8
Less current portion and short-term borrowings            (85.6 )               (92.8 )
Long-term debt                                   $      1,867.1     $         1,732.0

On May 13, 2011, the company amended and extended the maturities of its Senior Credit Facility by entering into a $1,250.0 million Second Amended and Restated Credit Agreement (the "Senior Credit Facility"). The company's Senior Credit Facility currently includes three different loan facilities. The first is a revolving facility in the amount of $500.0 million, with a term of five years. The second facility is an amortizing Term Loan A facility in the aggregate amount of $350.0 million with a term of five years. The third facility is an amortizing Term Loan B facility in the amount of $400.0 million with a term of 6.5 years. Including interest rate caps as of March 31, 2013, the weighted average interest rates for the Term Loan A and the Term Loan B loans were 3.00% and 4.25%, respectively. Excluding interest rate caps, Term Loan A and Term Loan B interest rates were also 3.00% and 4.25%, respectively, as of March 31, 2013. The weighted average interest rates for the term loans including and excluding the impact of interest rate caps were the same because the relevant one-month U.S. LIBOR rate was below the 3.00% cap level as of March 31, 2013. The company has the following three series of Senior Notes outstanding (collectively the "Senior Notes"):
5.875% Senior Notes due 2022 (the "2022 Notes"); original principal amount:
$300.0 million
8.50% Senior Notes due 2020 (the "2020 Notes"); original principal amount:
$600.0 million
9.50% Senior Notes due 2018 (the "2018 Notes"); original principal amount:
$400.0 million
Interest on the 2022 Notes is payable semiannually in April and October of each year; interest on the 2020 Notes is payable semiannually in May and November of each year; and, interest on the 2018 Notes is payable semiannually in February and August of each year.
See additional discussion of the Senior Credit Facility and Senior Notes in Note 8, "Debt," of the condensed consolidated financial statements. As of March 31, 2013, the company had outstanding $88.5 million of other indebtedness that has a weighted-average interest rate of approximately 6.6%. This debt includes outstanding line of credit balances and capital lease obligations in its Americas, Asia-Pacific and European regions.
As of March 31, 2013, the company had outstanding $225.0 million notional amount of 3.00% LIBOR caps related to the Term Loan portion of the Senior Credit Facility. The remaining unhedged portions of Term Loans A and B continue to bear interest according to the terms of the Senior Credit Facility. As of March 31, 2013, $100.0 million of the 2022 Notes were swapped to floating rate interest. Including the impact of these swaps, the 2022 Notes have an all-in interest rate of 5.35%.


As of March 31, 2013, the company was in compliance with all affirmative and negative covenants in its debt instruments inclusive of the financial covenants pertaining to the Senior Credit Facility, the 2018 Notes, 2020 Notes, and 2022 Notes. Based upon current plans and outlook, the company believes it will be able to comply with these covenants during the subsequent 12 months. As of March 31, 2013 the company's Consolidated Senior Secured Leverage Ratio was 1.84:1, while the maximum ratio is 3.50:1 and our Consolidated Interest Coverage Ratio was 3.11:1, above the minimum ratio of 2.25:1.
The company defines Adjusted EBITDA as earnings before interest, taxes, depreciation, and amortization, plus certain items such as pro-forma acquisition results and the addback of certain restructuring charges, that are adjustments per the credit agreement definition. The company's trailing twelve-month Adjusted EBITDA for covenant compliance purposes as of March 31, 2013 was $416.9 million. The company believes this measure is useful to the reader in order to understand the basis for the company's debt covenant calculations. The reconciliation of net earnings (loss) attributable to the Company to Adjusted EBITDA for the trailing twelve months ended March 31, 2013 was as follows:

                                                              Trailing Twelve
                                                                  Months,
(in millions)                                                 March 31, 2013
Net earnings attributable to Manitowoc                       $         112.4
Earnings from discontinued operations                                   (0.6 )
Loss on sale of discontinued operations                                  1.6
Depreciation and amortization                                          108.7
Interest expense and amortization of deferred financing fees           145.4
Costs due to early extinguishment of debt                                6.7
Restructuring charges                                                    9.1
Income taxes                                                            35.1
Other                                                                   (1.5 )
Adjusted EBITDA                                              $         416.9

The company maintains an accounts receivable securitization program with a commitment size of $150.0 million, whereby transactions under the program are accounted for as sales in accordance with ASC Topic 860, "Transfers and Servicing." Sales of trade receivables under the program are reflected as a reduction of accounts receivable in the accompanying Condensed Consolidated Balance Sheets and the proceeds received, including collections on the deferred purchase price notes, are included in cash flows from operating activities in the accompanying Condensed Consolidated Statements of Cash Flows. See Note 9, "Accounts Receivable Securitization," for further details of program. The company's liquidity position at March 31, 2013 and December 31, 2012 is summarized as follows:

(in millions)                          March 31, 2013     December 31, 2012
Cash and cash equivalents             $       104.0      $            76.1
Revolver borrowing capacity                   500.0                  500.0
Less: Borrowings on revolver                 (183.6 )                (34.4 )
Less: Outstanding letters of credit           (33.3 )                (38.2 )
Total liquidity                       $       387.1      $           503.5

The company believes its liquidity and expected cash flows from operations should be sufficient to meet expected working capital, capital expenditure and other general ongoing operational needs.
The revolving facility under the Senior Credit Facility has a maximum borrowing capacity of $500.0 million and expires in May 2016. As of March 31, 2013, the revolving facility had a balance of $183.6 million. During the first quarter the highest daily borrowing was $287.5 million and the average borrowing was $227.0 million, while the average interest rate was 3.50% per annum. The interest rate fluctuates based upon LIBOR or a Prime rate plus a spread which is based upon the Consolidated Total Leverage Ratio of the company. As of March 31, 2013, the spread for LIBOR and Prime borrowings is 2.75% and 1.75%, respectively, given the effective Consolidated Total Leverage Ratio for this period.
The company has not provided for additional U.S. income taxes on approximately $670.2 million of undistributed earnings of consolidated non-U.S. subsidiaries included in stockholders' equity. Such earnings could become taxable upon sale or


liquidation of these non-U.S. subsidiaries or upon dividend repatriation of cash balances. As of March 31, 2013, approximately $74.8 million of our total cash and cash equivalents were held by our foreign subsidiaries. This cash is associated with earnings that we have asserted are permanently reinvested. We have no current plans to repatriate cash or cash equivalents held by our foreign subsidiaries because we plan to reinvest such cash and cash equivalents to support our operations and continued growth plans outside the United States through funding of capital expenditures, acquisitions, research, operating expenses or other similar cash needs of these operations. Further, we do not currently forecast a need for these funds in the United States because the U.S. operations and debt service is supported by the cash generated by the U.S. operations. The company would only plan to repatriate foreign cash when it would attract a low tax cost.
Critical Accounting Policies
Our critical accounting policies have not materially changed since the 2012 Form 10-K was filed.
Cautionary Statements About Forward-Looking Information Statements in this report and in other company communications that are not historical facts are forward-looking statements, which are based upon our current expectations, within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements involve risks and uncertainties that could cause actual results to differ materially from what appears within this quarterly report.

Forward-looking statements include descriptions of plans and objectives for future operations, and the assumptions behind those plans. The words "anticipates," "believes," "intends," "estimates," "targets" and "expects," or similar expressions, usually identify forward-looking statements. Any and all projections of future performance are forward-looking statements.

In addition to the assumptions, uncertainties, and other information referred to specifically in the forward-looking statements, a number of factors relating to each business segment could cause actual results to be significantly different from what is presented in this quarterly report. Those factors include, without limitation, the following:

Crane-cyclicality of the construction industry; the effects of government spending on construction-related projects throughout the world, including as a result of U.S. government budget sequestration; unanticipated changes in global demand for high-capacity lifting equipment; changes in demand for lifting equipment in emerging economies; the replacement cycle of technologically obsolete cranes; and demand for used equipment.

Foodservice-weather; global expansion of customers; commercial ice-cube machine and other foodservice equipment replacement cycles in the United States and other mature markets; unanticipated issues associated with refresh/renovation plans by national restaurant accounts and global chains; growth in demand for foodservice equipment by customers in emerging markets; and demand for quick service restaurants (QSR) chains and kiosks.

Corporate (including factors that may affect both of our segments)-changes in laws and regulations, as well as their enforcement, throughout the world; the ability to finance, complete, successfully integrate, and/or transition, restructure and consolidate acquisitions, divestitures, strategic alliances and joint ventures; in connection with acquisitions, divestitures, strategic alliances and joint ventures, the finalization of the price and other terms, the realization of contingencies consistent with any established reserves, unanticipated issues associated with transitional services, realization of anticipated earnings enhancements, cost savings, strategic options and other synergies, and the anticipated timing to realize those savings, synergies, and options; the successful development of innovative products and market acceptance of new and innovative products; issues related to plant closings and/or consolidation of existing facilities; issues related to new plant start-ups; efficiencies and capacity utilization of facilities; competitive pricing; availability of certain raw materials; changes in raw materials and commodity prices; unexpected issues associated with the quality of materials and components sourced from third parties and resolution of those issues; issues associated with new product introductions; matters impacting the successful and timely implementation of ERP systems; changes in domestic and international economic and industry conditions, including steel industry conditions; changes in the markets we serve; unexpected issues associated with the availability of local suppliers and skilled labor; changes in the interest rate environment; risks associated with growth; foreign currency fluctuations and their impact on reported results and hedges in place; world-wide political risk; geographic . . .

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