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MTW > SEC Filings for MTW > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for MANITOWOC CO INC

Form 10-Q for MANITOWOC CO INC


6-May-2014

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, 2014 and 2013 The results for the three months ended March 31, 2013 have been revised to reflect reclassifications due to discontinued operations. See Note 2, "Discontinued Operations," of the condensed consolidated financial statements for further discussion.
Analysis of Net Sales
The following table presents net sales by business segment:
Three Months Ended
                           March 31,
(in millions)           2014           2013
Net sales:
Crane             $    466.7         $ 544.0
Foodservice            383.3           350.6
Total net sales   $    850.0         $ 894.6

Consolidated net sales for the three months ended March 31, 2014 decreased 5.0% to $850.0 million from $894.6 million for the same period in 2013. The decrease in net sales was primarily driven by a 14.2% decrease in Crane segment net sales for the three months ended March 31, 2014 compared to the same period in 2013. Foodservice segment net sales for the three months ended March 31, 2014 increased by 9.3% compared to the prior year period.
Crane segment net sales decreased 14.2% for the three months ended March 31, 2014 to $466.7 million versus $544.0 million for the same period in 2013. The decrease in net sales for the three months ended March 31, 2014 was primarily due to volume decreases across almost all product lines and regions, partially offset by sales increases as a result of pricing actions. Crane segment sales for the three months ended March 31, 2014 were favorably impacted by $8.0 million from the volatility of foreign currencies in relation to the U.S. Dollar.
As of March 31, 2014, total Crane segment backlog was $841.6 million, a 46.6% increase from the December 31, 2013 backlog of $574.2 million, and a 8.4% increase from the March 31, 2013 backlog of $776.1 million.
Net sales from the Foodservice segment for the three months ended March 31, 2014 increased 9.3% to $383.3 million versus $350.6 million for the comparable period in 2013. The increase in net sales was primarily driven by volume increases as a result of new product roll outs. Foodservice segment sales for the three months ended March 31, 2014 were favorably impacted by $1.9 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.
                               Three Months Ended
                                   March 31,
(in millions)                   2014          2013
Earnings from operations:
Crane                       $    22.6       $ 34.9
Foodservice                      57.9         49.1
Corporate expense               (16.1 )      (18.5 )
Amortization expense             (8.8 )       (9.0 )
Restructuring expense            (2.0 )       (0.3 )
Other                               -         (0.3 )
Total                       $    53.6       $ 55.9

Consolidated gross profit for the three months ended March 31, 2014 was $227.1 million, an increase of $5.0 million compared to the $222.1 million of consolidated gross profit for the same period in 2013. The increase in consolidated gross profit for the three months ended March 31, 2014 compared to the prior year period was driven by an 11.8% increase in Foodservice segment gross profit, partially offset by an 8.3% decrease in Crane segment gross profit.
For the three months ended March 31, 2014 compared to the same period in 2013, the Crane segment gross profit decreased $8.8 million. This decrease was primarily the result of the sales decrease noted previously, partially offset by manufacturing cost reduction initiatives and pricing actions.
For the three months ended March 31, 2014, the Foodservice segment gross profit increased $13.8 million compared to the same period last year. This increase was primarily due to sales volume increases along with manufacturing cost reduction initiatives and pricing actions. This was partially offset by an increase in warranty expense.
For the three months ended March 31, 2014, engineering, selling and administrative (ES&A) expenses increased $6.1 million to $162.7 million versus $156.6 million for the three months ended March 31, 2013. Crane segment ES&A increased $3.5 million for the three months ended March 31, 2014 compared to the prior year period. The increase in Crane segment ES&A was primarily the result of an increase in trade show and legal expenses, partially offset by decreased levels of discretionary spending. Foodservice segment ES&A increased $5.0 million for the three months ended March 31, 2014 compared to the prior year period primarily as a result of an increase in headcount and increased sales-related and product liability expenses.
For the three months ended March 31, 2014, Crane segment operating earnings were $22.6 million compared to $34.9 million for the three months ended March 31, 2013. The decrease in operating earnings was a result of the decrease in gross profit coupled with the ES&A increase described above.
For the three months ended March 31, 2014, Foodservice segment operating earnings were $57.9 million compared to $49.1 million for the three months ended March 31, 2013. The increase in operating earnings was a result of the gross profit increase, partially offset by the ES&A increase described above. For the three months ended March 31, 2014 corporate expenses were $16.1 million compared to $18.5 million for the prior year period. The decrease was primarily due to lower employee benefit costs, partially offset by an increase in professional fees.
Analysis of Non-Operating Income Statement Items The loss on debt extinguishment for the three months ended March 31, 2014 was $25.3 million of which $23.3 million related to redemption of the 2018 Notes, which consisted of $19.0 million related to the redemption premium and $4.3 million related to the write-off of deferred financing fees. The remaining $2.0 million loss related to the write-off of deferred financing fees as a result of the January 2014 credit facility refinancing. The loss on debt extinguishment for the three months ended March 31, 2013 was $0.4 million, which was related to the accelerated pay downs on Term Loans A and B.
Interest expense for the three months ended March 31, 2014 was $19.3 million versus $33.0 million for the three months ended March 31, 2013. The decrease in interest expense for the three months ended March 31, 2014 was a result of the company's debt reduction efforts and the remaining monetization balance of $8.3 million that was amortized as a reduction to interest


expense during the first quarter of 2014 as a result of the 2018 Notes redemption. Amortization expenses for deferred financing fees were $1.2 million for the three months ended March 31, 2014 compared to $1.8 million for the three months ended March 31, 2013. The decrease in amortization expense for the three months ended March 31, 2014 was related to the lower balance of deferred financing fees as a result of the 2018 Notes redemption and the company's debt reduction efforts.
Other income, net for the three months ended March 31, 2014 was income of $0.8 million compared to other income of $1.6 million for the same period in 2013. The decrease in other income for the three months ended March 31, 2014 compared to the same period in 2013 was primarily due to foreign currency losses in 2014 compared to foreign currency gains in 2013.
For the three months ended March 31, 2014, the company recorded income tax expense of $2.6 million, compared to income tax expense of $8.5 million for the three months ended March 31, 2013. The decrease in the company's tax expense for the three months ended March 31, 2014 relative to the prior year resulted primarily from a lower level of income and a more favorable jurisdictional mix of pre-tax earnings. 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 will continue to periodically evaluate its valuation allowance requirements in light of changing facts and circumstances, and may adjust its deferred tax asset valuation allowances accordingly. It is reasonably possible that the company will either add to, or reverse a portion of its existing deferred tax asset valuation allowances in the future. Such changes in the deferred tax asset valuation allowances will be reflected in the current operations through the company's income tax provision, and could have a material effect on operating results.
The company's unrecognized tax benefits, excluding interest and penalties, were $36.2 million as of March 31, 2014, and $35.9 million as of December 31, 2013. All of the company's unrecognized tax benefits as of March 31, 2014, if recognized, would impact its 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 by up to $14.5 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 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 Appeals division advised the company 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 March 31, 2014, 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, 2014 there have been no significant developments in the quarter with respect to the company's other ongoing tax audits in various jurisdictions. Loss from discontinued operations for the three months ended March 31, 2014 was $1.0 million compared to $4.1 million for the same period ended 2013. The decrease in loss from discontinued operations for the three months ended March 31, 2014 compared to the same period in 2013 was primarily due to the disposal of Manitowoc Dong Yue in January of 2014.


Loss on sale of discontinued operations was $9.9 million for the three months ended March 31, 2014 related to the sale of Manitowoc Dong Yue. Loss on sale of discontinued operations was $1.6 million for the three months ended March 31, 2013 related to the sale of the Jackson business and was primarily attributable to tax expense of $3.3 million. For more information regarding the sale of Manitowoc Dong Yue and the Jackson business, see Note 2, "Discontinued Operations," of the condensed consolidated financial statements. Financial Condition
First Three Months of 2014
Cash and cash equivalents balance as of March 31, 2014 totaled $78.8 million, an increase of $23.9 million from the December 31, 2013 balance of $54.9 million. Cash flow used for operating activities of continuing operations for the first three months of 2014 was $264.6 million compared to cash used for continuing operations of $102.9 million for the first three months of 2013. During the first three months of 2014, the increase in cash flows used for continuing operations was primarily due to an increase in income taxes paid, unfavorable changes in the timing of accounts payable payments, and other miscellaneous unfavorable working capital changes.
Cash flows used for investing activities of $28.9 million for the first three months of 2014 primarily consisted of capital expenditures of $16.7 million, with the majority of the capital expenditures related to equipment purchases for the Crane and Foodservice segments and the enterprise resource planning ("ERP") system implementation in the Crane segment.
Cash flows provided by financing activities of $324.5 million for the first three months of 2014 consisted primarily of proceeds from the revolving credit facility.
First Three Months of 2013
Cash and cash equivalents balance as of March 31, 2013 totaled $101.0 million, an increase of $27.8 million from the December 31, 2012 balance of $73.2 million. Cash flow used for operating activities of continuing operations for the first three months of 2013 was $102.9 million compared to cash used for continuing operations of $126.0 million for the first three months of 2012. During the first three months of 2013, cash flows from continuing operations were used primarily for working capital to support increased order activity. Inventory increases resulted in a use of cash of $102.2 million to support increased order activity in the Crane segment.
Cash flows provided by investing activities of $18.1 million for the first three months of 2013 primarily consisted of proceeds of $39.2 million related to the sale of the Jackson business, partially offset by capital expenditures $20.9 million. The majority of the capital expenditures were related to equipment purchases for the Crane and Foodservice segments, continued investment in the company's facility in Brazil and the ERP system implementation in the Crane segment.
Cash flows provided by financing activities of $117.7 million for the first three months of 2013 consisted primarily of proceeds from the revolving credit facility.
Liquidity and Capital Resources
Outstanding debt as of March 31, 2014 and December 31, 2013 is summarized as follows:

(in millions)                                     March 31, 2014     December 31, 2013
Revolving credit facility                        $        314.0     $               -
Term loan A                                               350.0                 162.5
Term loan B                                               200.0                     -
Senior notes due 2018                                         -                 408.4
Senior notes due 2020                                     614.9                 614.8
Senior notes due 2022                                     291.7                 289.1
Other                                                      74.9                  52.0
Total debt                                              1,845.5               1,526.8
Less current portion and short-term borrowings            (65.8 )               (22.7 )
Long-term debt                                   $      1,779.7     $         1,504.1


On January 3, 2014, the company entered into a $1,050.0 million Third Amended and Restated Credit Agreement (the "New Senior Credit Facility") with JPMorgan Chase Bank, N.A., as Administrative Agent, Deutsche Bank Securities Inc., Bank of America, N.A., and Wells Fargo Bank, National Association, as Syndication Agents, and SunTrust Bank, as Documentation Agent. The New Senior Credit Facility 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 a Term Loan A in the aggregate amount of $350.0 million, with a term of five years. The third facility is a Term Loan B in the amount of $200.0 million, with a term of seven years.
The New Senior Credit Facility resulted in a loss on debt extinguishment of $2.0 million related to the write-off of deferred financing fees.
The New Senior Credit Facility, replaced the company's prior $1,250.0 million Second Amended and Restated Credit Agreement (the "Prior Senior Credit Facility"), which was entered on May 13, 2011. The Prior Senior Credit Facility included three different loan facilities. The first was a revolving facility in the amount of $500.0 million, with a term of five years. The second facility was an amortizing Term Loan A facility in the aggregate amount of $350.0 million with a term of five years. The third facility was an amortizing Term Loan B facility in the amount of $400.0 million with a term of 6.5 years. The company has the following two 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
Interest on the 2022 Notes is payable semiannually in April and October of each year; and interest on the 2020 Notes is payable semiannually in May and November of each year.
On February 18, 2014 the Company redeemed its 2018 Notes for $419.0 million or 104.750%, expressed as a percentage of the principal amount. The redemption resulted in a loss on debt extinguishment of $23.3 million during the first quarter of 2014 and consisted of $19.0 million related to the redemption premium and $4.3 million related to the write-off of deferred financing fees. Previously monetized derivative assets related to fixed-to-float interest rate swaps were treated as an increase to the debt balance of the 2018 Notes and were being amortized to interest expense over the life of the original swap. As a result of the redemption, the remaining monetization balance of $8.3 million as of February 18, 2014 was amortized as a reduction to interest expense during the first quarter of 2014.
See additional discussion of the New Senior Credit Facility and the Senior Notes in Note 8, "Debt," of the condensed consolidated financial statements. As of March 31, 2014, the company had outstanding $74.9 million of other indebtedness that has a weighted-average interest rate of approximately 6.4%. This debt includes outstanding line of credit balances and capital lease obligations in its Americas, Asia-Pacific and European regions.
As of March 31, 2014, the company had outstanding $100.0 million notional amount of 3.00% LIBOR caps related to the Term Loan portion of the New Senior Credit Facility. The unhedged portions of Term Loans A and B continue to bear interest according to the terms of the New Senior Credit Facility. As of March 31, 2014, $75.0 million and $125.0 million of the 2020 Notes and 2022 Notes were swapped to floating rate interest. Including the impact of these swaps, the 2020 Notes and 2022 Notes have an all-in interest rate of 8.31% and 5.18%, respectively. As of March 31, 2014, the company was in compliance with all affirmative and negative covenants in its debt instruments inclusive of the financial covenants pertaining to the New Senior Credit Facility, 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, 2014 the company's Consolidated Senior Secured Leverage Ratio was 2.32:1, while the maximum ratio is 3.50:1, and our Consolidated Interest Coverage Ratio was 4.21:1, 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, 2014 was $461.5 million. The company believes this non-GAAP measure is useful to the reader in order to understand the basis for the company's debt covenant calculations. The reconciliation of net earnings attributable to the company to Adjusted EBITDA for the trailing twelve months ended March 31, 2014 was as follows:


                                                              Trailing Twelve
                                                                  Months,
(in millions)                                                 March 31, 2014
Net earnings attributable to Manitowoc                       $         122.6
Loss from discontinued operations                                        8.8
Loss on sale of discontinued operations                                 11.0
Depreciation and amortization                                           98.2
Interest expense and amortization of deferred financing fees           121.1
Costs due to early extinguishment of debt                               27.9
Restructuring charges                                                    6.5
Income taxes                                                            30.2
Forgiveness of Loan to Manitowoc Dong Yue                               39.9
Other                                                                   (4.7 )
Adjusted EBITDA                                              $         461.5

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," of the condensed consolidated financial statements for further details regarding the program.
The company's liquidity position at March 31, 2014 and December 31, 2013 is summarized as follows:

(in millions)                          March 31, 2014     December 31, 2013
Cash and cash equivalents             $        78.8      $            54.9
Revolver borrowing capacity                   500.0                  500.0
Less: Borrowings on revolver                 (314.0 )                    -
Less: Outstanding letters of credit            (3.7 )                (30.6 )
Total liquidity                       $       261.1      $           524.3

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 New Senior Credit Facility has a maximum borrowing capacity of $500.0 million and expires in January 2019. As of March 31, 2014, the revolving facility had a balance of $314.0 million. During the quarter the highest daily borrowing was $431.0 million and the average borrowing was $283.2 million, while the average interest rate was 3.15% 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, 2014, the spreads for LIBOR and Prime borrowings were both 2.00% given the effective Consolidated Total Leverage Ratio for this period.
The company has not provided for additional U.S. income taxes on approximately $752.8 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. It is not practicable to estimate the amount of the unrecognized tax liability on such earnings. At March 31, 2014, approximately $43.0 million of the company's total cash and cash equivalents were held by its foreign subsidiaries. This cash is associated with earnings that the company has asserted are permanently reinvested. The company has no current plans to repatriate cash or cash equivalents held by its foreign subsidiaries because it plans to reinvest such cash and cash equivalents to support its operations and continued growth plans outside the United States through the funding of capital expenditures, acquisitions, research, operating expenses or other similar cash needs of these operations. Further, the company does not currently forecast a need for these funds in the U.S. because its U.S. operations and debt service are supported by the cash generated by its 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 2013 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. . . .

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