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MTW > SEC Filings for MTW > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for MANITOWOC CO INC

Form 10-K for MANITOWOC CO INC


21-Feb-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes appearing in Part II, Item 8 of the Annual Report on Form 10-K.
Overview The Manitowoc Company, Inc. is a multi-industry, capital goods manufacturer in two principal markets: Cranes and Related Products (Crane) and Foodservice Equipment (Foodservice). Crane is recognized as one of the world's leading providers of lifting equipment for the global construction industry, including lattice-boom cranes, tower cranes, mobile telescopic cranes, and boom trucks. Foodservice is one of the world's leading innovators and manufacturers of commercial foodservice equipment serving the ice, beverage, refrigeration, food preparation, and cooking needs of restaurants, convenience stores, hotels, healthcare, and institutional applications.
During the fourth quarter of 2013, the company agreed to sell its 50% interest in Manitowoc Dong Yue Heavy Machinery Co., Ltd. ("Manitowoc Dong Yue" or the "joint venture"), which produces mobile and truck-mounted hydraulic cranes in China, to its joint venture partner, Tai'an Taishan Heavy Industry Investment Co., Ltd., for a nominal amount. Consequently, the joint venture has been classified as discontinued operations in the company's financial statements. The transaction subsequently closed on January 21, 2014. See Note 4, "Discontinued Operations," for further details of this transaction.
During the fourth quarter of 2012, the company decided to divest its warewashing equipment business, which operated under the brand name Jackson, and classified this business as discontinued operations in the company's financial statements. Jackson designs, manufactures and sells warewashing equipment, offering a full range of undercounter dishwashers, door-type dishwashers, conveyor, pot washing, and flight-type dishwashers. On January 28, 2013, the company sold the Jackson warewashing equipment business to Hoshizaki USA Holdings, Inc. for approximately $38.5 million. Net proceeds were used to reduce ratably the then-outstanding balances of Term Loans A and B.
On December 15, 2010, the company reached a definitive agreement to divest its Kysor/Warren and Kysor/Warren de Mexico (collectively "Kysor/Warren") businesses, which manufactured frozen, medium temperature and heated display merchandisers, mechanical refrigeration systems and remote mechanical and electrical houses to Lennox International for approximately $145 million, including a preliminary working capital adjustment. The transaction subsequently closed on January 14, 2011 and the net proceeds were used to pay down outstanding debt. On July 1, 2011, the company made a payment to Lennox International of $2.4 million as the final working capital adjustment under the sale agreement. The results of these operations have been classified as discontinued operations.
The following discussion and analysis covers key drivers behind our results for 2011 through 2013 and is broken down into three major sections. First, we provide an overview of our results of operations for the years 2011 through 2013 on a consolidated basis and by business segment. Next we discuss our market conditions, liquidity and capital resources, off-balance sheet arrangements, and obligations and commitments. Finally, we provide a discussion of risk management techniques, contingent liability issues, critical accounting policies, impacts of future accounting changes, and cautionary statements. All dollar amounts, except per share amounts, are in millions of dollars throughout the tables included in this Management's Discussion and Analysis of Financial Conditions and Results of Operations unless otherwise indicated. For all periods presented the results have been revised to reflect Manitowoc Dong Yue as a discontinued operation. See Note 4, "Discontinued Operations" for further discussion.


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Results of Consolidated Operations
Millions of dollars                                  2013           2012           2011
Operations
Net sales                                        $  4,048.1     $  3,913.3     $  3,589.3
Cost of sales                                       3,026.3        2,970.3        2,756.4
Gross Profit                                        1,021.8          943.0          832.9
Operating expenses:
Engineering, selling and administrative expenses      617.6          597.6          561.0
Amortization expense                                   35.3           36.5           37.4
Restructuring expense                                   4.8            9.5            5.5
Other expenses (income)                                (0.3 )          2.5           (0.5 )
Total operating expenses                              657.4          646.1          603.4
Operating earnings from continuing operations         364.4          296.9          229.5
Other income (expenses):
Interest expense                                     (128.4 )       (135.6 )       (145.4 )
Amortization of deferred financing fees                (7.0 )         (8.2 )        (10.4 )
Loss on debt extinguishment                            (3.0 )         (6.3 )        (29.7 )
Other income (expense)-net                             (0.8 )          0.1            2.3
Total other expenses                                 (139.2 )       (150.0 )       (183.2 )
Earnings from continuing operations before taxes
on earnings                                           225.2          146.9           46.3
Provision for taxes on earnings                        36.1           38.0           13.6
Earnings from continuing operations                   189.1          108.9           32.7
Discontinued operations:
Loss from discontinued operations, net of income
taxes                                                 (18.8 )        (16.3 )        (15.8 )
Loss on sale of discontinued operations, net of
income taxes                                           (2.7 )            -          (34.6 )
Net earnings (loss)                                   167.6           92.6          (17.7 )
Less: Net earnings (loss) attributable to
noncontrolling interest, net of tax                    25.8           (9.1 )         (6.5 )
Net earnings (loss) attributable to Manitowoc    $    141.8     $    101.7     $    (11.2 )
Amounts attributable to the Manitowoc common
shareholders:
Earnings from continuing operations              $    154.8     $    109.7     $     33.0
Loss from discontinued operations, net of income
taxes                                                 (10.3 )         (8.0 )         (9.6 )
Loss on sale of discontinued operations, net of
income taxes                                           (2.7 )            -          (34.6 )
Net earnings (loss) attributable to Manitowoc    $    141.8     $    101.7     $    (11.2 )

Year Ended December 31, 2013 Compared to 2012

Net Sales
(in millions)      2013         2012      Change
 Net Sales      $ 4,048.1    $ 3,913.3      3.4 %

Consolidated net sales increased 3.4% in 2013 to $4.0 billion from $3.9 billion in 2012. The increase was driven by modest year-over-year increases in both the Crane and Foodservice segments. Crane segment sales increased 3.3% for the year ended December 31, 2013 compared to 2012. The overall increase in the Crane segment was primarily due to higher demand in the Americas region and in certain emerging markets driven by energy and infrastructure projects as well as steady growth in the product aftermarket support business. Foodservice sales increased 3.7% for the year ended December 31, 2013 compared to 2012. Foodservice sales increased in the Americas and Europe, Middle East and Africa (EMEA) region from the prior year due to volume increases primarily driven by new product roll outs. Consolidated net sales were favorably impacted by approximately $26.5 million, or 0.7%, from foreign currency volatility in relation to the U.S. Dollar for the year ended December 31, 2013 compared with the year ended December 31, 2012. Further analysis of the changes in sales by segment is presented in the "Sales and Operating Earnings by Segment" section below.


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Gross Profit
(in millions)      2013         2012      Change
Gross Profit    $ 1,021.8     $ 943.0       8.4 %
Gross Margin         25.2 %      24.1 %

Gross profit for the year ended December 31, 2013 increased to $1,021.8 million compared to $943.0 million for the year ended December 31, 2012, an increase of 8.4%. Crane segment gross profit increases were primarily attributable to manufacturing cost reduction initiatives and pricing actions, partially offset by less favorable product mix. The increase in gross profit for the Foodservice segment was primarily attributable to sales volume increases coupled with pricing actions and manufacturing cost reduction initiatives, partially offset by increases in rebates and sales discounts. Gross margin increased in 2013 to 25.2% from 24.1% in 2012. The increase in gross margin was primarily due to pricing actions and manufacturing cost reduction initiatives.

Engineering, Selling and Administrative Expenses
(in millions)                                        2013       2012     Change
Engineering, selling and administrative expenses   $ 617.6    $ 597.6      3.3 %

Engineering, selling and administrative (ES&A) expenses for the year ended December 31, 2013 increased $20.0 million to $617.6 million compared to $597.6 million for the year ended December 31, 2012. Crane segment ES&A increased $7.6 million, or 2.7%, for the year ended December 31, 2013 compared to the same period in 2012. This increase was driven by increased levels of engineering and product development costs, higher legal expenses and an increase of enterprise resource planning system implementation costs. Foodservice ES&A increased $11.2 million, or 4.4%, for the year ended December 31, 2013 compared to the same period in 2012. This increase was primarily driven by an increase in headcount, increased investments in strategic projects, and an increase in sales related costs.

Amortization Expense
(in millions)           2013      2012     Change
Amortization expense   $ 35.3    $ 36.5    (3.3 )%

Amortization expense for the year ended December 31, 2013 was $35.3 million compared to $36.5 million for 2012. See further detail related to intangible assets at Note 9, "Goodwill and Other Intangible Assets."

Restructuring Expense
(in millions)            2013     2012    Change
Restructuring expense   $ 4.8    $ 9.5         *

* Measure not meaningful Restructuring expenses for the year ended December 31, 2013 totaled $4.8 million compared to $9.5 million in 2012. Crane segment restructuring expenses totaled $1.9 million and Foodservice restructuring expenses totaled $2.9 million. These expenses primarily related to workforce reductions in Europe. Crane segment restructuring expenses totaled $7.2 million for the year ended December 31, 2012. These expenses primarily related to workforce reductions at our France operations. Foodservice segment restructuring expenses totaled $2.3 million for the year ended December 31, 2012. These expenses primarily related to plant consolidation efforts in the Americas region and workforce reductions in Europe. See further detail at Note 19, "Restructuring." Interest Expense & Amortization of Deferred Financing Fees

(in millions)                               2013       2012      Change
Interest expense                          $ 128.4    $ 135.6     (5.3 )%
Amortization of deferred financing fees   $   7.0    $   8.2    (14.6 )%

Interest expense for the year ended December 31, 2013 totaled $128.4 million versus $135.6 million for the year ended December 31, 2012. The decrease in interest expense of $7.2 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 was due to debt reduction in 2013 and 2012. Amortization expense for deferred financing fees was $7.0 million for the year ended December 31, 2013 as compared to $8.2 million in 2012. The decrease in amortization


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expense for deferred financing fees of $1.2 million was attributable to the write-off of a portion of the deferred financing fees associated with the debt reductions at the end of 2012, partially offset by the amortization of new fees associated with the issuance of the Senior Notes due 2022. See further detail

at Note 11, "Debt."
Loss on Debt Extinguishment
(in millions)                  2013     2012    Change
Loss on debt extinguishment   $ 3.0    $ 6.3         *

* Measure not meaningful Loss on debt extinguishment for the year ended December 31, 2013 totaled $3.0 million, compared to $6.3 million in 2012. The loss on debt extinguishment in 2013 was attributable to the accelerated paydown of Term Loans A and B associated with our Senior Credit Facility. The loss on debt extinguishment in 2012 was attributable to accelerated paydown of Term Loans A and B associated with our Senior Credit Facility and the redemption of our 7.125% Senior Notes due 2013.

Other Income (Expense) - Net
(in millions)                    2013      2012    Change
Other income (expense) - net   $ (0.8 )   $ 0.1         *

* Measure not meaningful Other income (expense), net for the year ended December 31, 2013 was expense of $0.8 million versus income of $0.1 million for the prior year.

Income Taxes
(in millions)                       2013       2012     Change
Effective annual tax rate           16.0 %     25.9 %
Provision for taxes on earnings   $ 36.1     $ 38.0     (5.0 )%

The effective tax rate for the year ended December 31, 2013 was 16.0% compared to 25.9% for the year ended December 31, 2012. The effective tax rates in 2013 and 2012 were favorably impacted by the release of reserves of $9.4 million and $11.6 million, respectively resulting from favorable audit outcomes and other settlements. The 2013 and 2012 effective tax rates were also favorably impacted by income earned in jurisdictions where the statutory rate was less than 35%. Tax expense for the year ended December 31, 2013 was favorably impacted by valuation allowance adjustments on deferred tax assets totaling $2.3 million compared to an unfavorable impact of $13.5 million in 2012. The company recorded valuation allowance adjustments related to current year earnings and income tax rate changes in jurisdictions with valuation allowances established in prior years. See further detail at Note 13, "Income Taxes." 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 through 2011. 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. Subsequent to an Appeals conference in September 2013, the company was advised by the Appeals division that the issue has been tentatively resolved in the company's favor. However, this tentative resolution is subject to review by the Joint Committee on Taxation and there can be no assurance that this matter will be ultimately resolved in the company's favor. The company will continue to pursue all administrative and, if necessary, judicial remedies with respect to resolving this matter. The IRS also examined and proposed adjustments to the research and development credit generated in 2009. The company has tentatively resolved this issue; however, this tentative resolution is also subject to review by the Joint Committee on Taxation. Given the uncertainty, neither of the resolutions have been reflected in the current year results; however, should the resolutions be accepted by the Joint Committee on Taxation, the potential adjustments are not expected to have a material impact on the financial statements.
The company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. As of December 31, 2013, the company believes that it is more-likely-than-not that the tax positions it has


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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.

Loss from Discontinued Operations
(in millions)                        2013      2012     Change
Loss from discontinued operations   $ 18.8    $ 16.3     15.3 %

The results from discontinued operations were losses of $18.8 million and $16.3 million, net of income taxes, for the years ended December 31, 2013 and 2012, respectively. The loss from discontinued operations relates primarily to the Manitowoc Dong Yue business, which was classified as discontinued operations in the fourth quarter of 2013. See additional discussion at Note 4, "Discontinued

Operations."
Loss on Sale of Discontinued Operations
(in millions)                              2013     2012    Change
Loss on sale of discontinued operations   $ 2.7    $   -       N/A

Loss on sale of discontinued operations was $2.7 million for the year ended December 31, 2013. The loss was primarily attributable to tax expense of $4.4 million on the sale of the Jackson business in January 2013. See additional discussion at Note 4, "Discontinued Operations." Net Earnings (Loss) Attributable to Noncontrolling Interest (in millions) 2013 2012 Change Net earnings (loss) attributable to noncontrolling interest $ 25.8 $ (9.1 ) *

* Measure not meaningful For the year ended December 31, 2013, net earnings attributable to a noncontrolling interest of $25.8 million was recorded in relation to the minority partners' portion of the full year income from our former Chinese affiliate joint venture, Manitowoc Dong Yue. This was primarily due to loan forgiveness resulting in income of $35.6 million by the joint venture partner shown as part of net earnings attributable to noncontrolling interest, net of income taxes, which effectively reduced net earnings attributable to Manitowoc shareholders. See Note 4, "Discontinued Operations," for further details on this transaction. There was a net loss of $9.1 million attributable to the minority partner in connection with Manitowoc Dong Yue for 2012. Year Ended December 31, 2012 Compared to 2011

Net Sales
(in millions)      2012         2011      Change
 Net Sales      $ 3,913.3    $ 3,589.3      9.0 %

Consolidated net sales increased 9.0% in 2012 to $3.9 billion from $3.6 billion in 2011. The increase was primarily the result of the year-over-year increase in the Crane segment along with a modest increase in the Foodservice segment. Crane segment sales increased 13.7% for the year ended December 31, 2012 compared to 2011. Crane segment sales increased in all regions except China, which decreased as a result of volume reductions. The overall increase in the Crane segment was primarily driven by the Americas region due to economic recoveries and higher demand in certain emerging markets. Foodservice sales increased 2.2% for the year ended December 31, 2012 compared to 2011. Foodservice sales increased in the Americas and Asia Pacific (APAC) regions from the prior year due to volume increases. Consolidated net sales were unfavorably impacted by approximately $73.5 million, or 2.0%, from foreign currency volatility in relation to the U.S. Dollar for the year ended December 31, 2012 compared with the year ended December 31, 2011. Further analysis of the changes in sales by segment is presented in the "Sales and Operating Earnings by Segment" section below.


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Gross Profit
(in millions)     2012        2011      Change
Gross Profit    $ 943.0     $ 832.9      13.2 %
Gross Margin       24.1 %      23.2 %

Gross profit for the year ended December 31, 2012 increased to $943.0 million compared to $832.9 million for the year ended December 31, 2011, an increase of 13.2%. The increase in consolidated gross profit was attributable to sales volume increases in both the Crane and Foodservice segments in the regions noted above and pricing actions. Crane segment gross profit increases were partially offset by increases in manufacturing costs. Gross margin increased in 2012 to 24.1% from 23.2% in 2011. The increase in gross margin was primarily due to pricing actions, cost reduction and lean actions slightly offset by investment in optimizing global footprint.

Engineering, Selling and Administrative Expenses
(in millions)                                        2012       2011     Change
Engineering, selling and administrative expenses   $ 597.6    $ 561.0      6.5 %

Engineering, selling and administrative (ES&A) expenses for the year ended December 31, 2012 increased $36.6 million to $597.6 million compared to $561.0 million for the year ended December 31, 2011. Crane segment ES&A increased $36.8 million, or 15.0%, for the year ended December 31, 2012 compared to the same period in 2011. This increase was driven by increased employee compensation and benefit costs, increased levels of engineering expenses, recognition of reserves for a small number of discrete customer financing issues and enterprise resource planning system implementation costs. Foodservice ES&A decreased $2.8 million, or 1.1%, for the year ended December 31, 2012 compared to the same period in 2011. This decrease was driven by reduction in sales related costs, favorable foreign exchange impact, and reduced employee costs.

Amortization Expense
(in millions)           2012      2011     Change
Amortization expense   $ 36.5    $ 37.4    (2.4 )%

Amortization expense for the year ended December 31, 2012 was $36.5 million compared to $37.4 million for 2011. See further detail related to intangible assets at Note 9, "Goodwill and Other Intangible Assets."

Restructuring Expense
(in millions)            2012     2011    Change
Restructuring expense   $ 9.5    $ 5.5         *

* Measure not meaningful Restructuring expenses for the year ended December 31, 2012 totaled $9.5 million compared to $5.5 million in 2011. Crane segment restructuring expenses totaled $7.2 million for the year ended December 31, 2012. These expenses primarily related to workforce reductions at our France operations. Foodservice segment restructuring expenses totaled $2.3 million for the year ended December 31, 2012. These expenses primarily related to plant consolidation efforts in the Americas region and workforce reductions in Europe. See further detail at Note 19, "Restructuring." Interest Expense & Amortization of Deferred Financing Fees

(in millions)                               2012       2011      Change
Interest expense                          $ 135.6    $ 145.4     (6.7 )%
Amortization of deferred financing fees   $   8.2    $  10.4    (21.2 )%

Interest expense for the year ended December 31, 2012 totaled $135.6 million versus $145.4 million for the year ended December 31, 2011. The decrease in interest expense of $9.8 million for the year ended December 31, 2012 compared to the year ended December 31, 2011 was due to the amendment of our Senior Credit Facility during the second quarter of 2011, which lowered the associated interest rates along with debt reduction in 2012 and 2011. Amortization expense for deferred financing fees was $8.2 million for the year ended December 31, 2012 as compared to $10.4 million in 2011. The decrease in amortization expense for deferred financing fees of $2.2 million was attributable to the write-off of a portion of the deferred


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financing fees associated with the amendment in the second quarter of 2011, partially offset by the amortization of new fees associated with the Senior Credit Facility and the issuance of the Senior Notes due 2022. See further

detail at Note 11, "Debt."
Loss on Debt Extinguishment
(in millions)                  2012     2011     Change
Loss on debt extinguishment   $ 6.3    $ 29.7         *

* Measure not meaningful Loss on debt extinguishment for the year ended December 31, 2012 totaled $6.3 million, compared to $29.7 million in 2011. The loss on debt extinguishment in 2012 was attributable to the accelerated paydown of Term Loans A and B associated with our Senior Credit Facility and the redemption of our 7.125% Senior Notes due 2013. The loss on debt extinguishment in 2011 was attributable to the write-off of a portion of the deferred financing fees associated with the amendment to the Senior Credit Facility in the second quarter of 2011. Other Income (Expense) - Net
(in millions) 2012 2011 Change Other income - net $ 0.1 $ 2.3 *

* Measure not meaningful Other income, net for the year ended December 31, 2012 was $0.1 million versus $2.3 million for the prior year. The decrease of $2.2 million in other income for the year ended December 31, 2012 compared to the year ended December 31, 2011 was primarily due to reductions in interest income and gains from asset . . .

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