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MTW > SEC Filings for MTW > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for MANITOWOC CO INC

Form 10-Q for MANITOWOC CO INC


1-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Results of Operations for the Three and Six Months Ended June 30, 2014 and 2013 The results for the three and six months ended June 30, 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         Six Months Ended
                          June 30,                  June 30,
(in millions)        2014          2013         2014         2013
Net sales:
Crane             $    606.1    $   647.4    $ 1,072.8    $ 1,191.4
Foodservice            406.7        389.7        790.0        740.3
Total net sales   $  1,012.8    $ 1,037.1    $ 1,862.8    $ 1,931.7

Consolidated net sales for the three months ended June 30, 2014 decreased 2.3% to $1,012.8 million from $1,037.1 million for the same period in 2013. Consolidated net sales for the six months ended June 30, 2014 decreased 3.6% to $1,862.8 million from $1,931.7 million for the same period in 2013. The decreases in net sales were primarily driven by 6.4% and 10.0% decreases in Crane segment net sales for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. Foodservice segment net sales for the three and six months ended June 30, 2014 increased by 4.4% and 6.7%, respectively, compared to the prior year periods.
Crane segment net sales decreased 6.4% for the three months ended June 30, 2014 to $606.1 million versus $647.4 million for the same period in 2013. Crane segment net sales decreased 10.0% for the six months ended June 30, 2014 to $1,072.8 million versus $1,191.4 million for the same period in 2013. The decreases in net sales for the three and six months ended June 30, 2014 were primarily due to volume decreases across almost all product lines with the exception of tower cranes, partially offset by sales increases as a result of pricing actions. Crane segment sales for the three and six months ended June 30, 2014 were favorably impacted by $14.2 million and $22.2 million, respectively, from the volatility of foreign currencies in relation to the U.S. Dollar. As of June 30, 2014, total Crane segment backlog was $727.6 million, a 13.5% decrease from the March 31, 2014 backlog of $841.6 million, and a 0.2% increase from the June 30, 2013 backlog of $726.2 million.
Net sales from the Foodservice segment for the three months ended June 30, 2014 increased 4.4% to $406.7 million versus $389.7 million for the comparable period in 2013. Net sales for the Foodservice segment for the six months ended June 30, 2014 increased 6.7% to $790.0 million versus $740.3 million for the comparable period in 2013. The increases in net sales were primarily driven by volume increases as a result of new product roll outs and growth in the Americas and EMEA regions. Foodservice segment sales for the three and six months ended June 30, 2014 were favorably impacted by $4.1 million and $6.1 million, respectively, 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         Six Months Ended
                                    June 30,                  June 30,
(in millions)                   2014         2013         2014        2013
Earnings from operations:
Crane                       $    54.4      $  70.0     $   77.0     $ 104.9
Foodservice                      65.9         63.0        123.8       112.1
Corporate expense               (15.0 )      (16.5 )      (31.1 )     (35.0 )
Amortization expense             (8.8 )       (8.9 )      (17.6 )     (17.9 )
Restructuring expense            (1.0 )       (0.9 )       (3.0 )      (1.2 )
Other                            (0.1 )          -         (0.1 )      (0.3 )
Total                       $    95.4      $ 106.7     $  149.0     $ 162.6

Consolidated gross profit for the three months ended June 30, 2014 was $272.3 million, a decrease of $3.7 million compared to the $276.0 million of consolidated gross profit for the same period in 2013. Consolidated gross profit for the six months ended June 30, 2014 was $499.4 million, an increase of $1.3 million compared to the $498.1 million of consolidated gross profit for the same period in 2013. The decrease in consolidated gross profit for the three months ended June 30, 2014 compared to the prior year period was driven by a 5.7% decrease in Crane segment gross profit, partially offset by a 3.6% increase in Foodservice segment gross profit. The increase in consolidated gross profit for the six months ended June 30, 2014 compared to the prior year period was driven by a 7.5% increase in Foodservice segment gross profit, partially offset by a 6.8% decrease in Crane segment gross profit.
For the three months ended June 30, 2014 compared to the same period in 2013, the Crane segment gross profit decreased $8.3 million. For the six months ended June 30, 2014, compared to the same period in 2013, the Crane segment gross profit decreased $17.1 million. These decreases were primarily the result of the sales decrease noted previously coupled with increased labor costs, partially offset by manufacturing and purchasing cost reduction initiatives and pricing actions.
For the three months ended June 30, 2014, the Foodservice segment gross profit increased $4.6 million compared to the same period last year. This increase was primarily due to manufacturing cost reduction initiatives along with pricing actions, and partially offset by an increase in warranty expense and increased sales discounts. For the six months ended June 30, 2014, the Foodservice segment gross profit increased $18.4 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, and was partially offset by an increase in warranty expense, increased rebates as a result of higher sales through certain market channels and increased sales discounts. For the three months ended June 30, 2014, engineering, selling and administrative (ES&A) expenses increased $7.5 million to $167.0 million versus $159.5 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, ES&A increased $13.6 million to $329.7 million versus $316.1 million for the six months ended June 30, 2013. Crane segment ES&A increased $7.3 million and $10.8 million for the three and six months ended June 30, 2014, respectively, compared to the prior year periods. The increases in Crane segment ES&A were primarily the result of increased levels of engineering and product development costs and an increase in trade show and legal expenses, partially offset by decreased levels of discretionary spending. Foodservice segment ES&A increased $1.7 million and $6.7 million for the three and six months ended June 30, 2014, respectively, compared to the prior year periods primarily as a result of an increase in employee compensation expenses and product development costs, partially offset by decreased levels of discretionary spending.
For the three months ended June 30, 2014, Crane segment operating earnings were $54.4 million compared to $70.0 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, Crane segment operating earnings were $77.0 million compared to $104.9 million for the prior year period. The decreases in operating earnings were the result of the decreases in gross profit coupled with the ES&A increases described above.
For the three months ended June 30, 2014, Foodservice segment operating earnings were $65.9 million compared to $63.0 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, Foodservice segment operating earnings were $123.8 million compared to $112.1 million for the prior year period. The increases in operating earnings were a result of the gross profit increases, partially offset by the ES&A increases described above.


For the three months ended June 30, 2014 corporate expenses were $15.0 million compared to $16.5 million for the prior year period. For the six months ended June 30, 2014 corporate expenses were $31.1 million compared to $35.0 million for the prior year period. The decreases were primarily due to lower employee benefit costs and stock-based compensation expense, partially offset by an increase in professional fees.
Analysis of Non-Operating Income Statement Items The loss on debt extinguishment for the six months ended June 30, 2014 was $25.3 million, of which $23.3 million related to the February 2014 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 six months ended June 30, 2013 was $0.4 million, which was related to the accelerated pay downs on Term Loans A and B. There was not any loss on debt extinguishment for the three months ended June 30, 2014 and 2013.
Interest expense for the three months ended June 30, 2014 was $25.1 million versus $32.2 million for the three months ended June 30, 2013. Interest expense for the six months ended June 30, 2014 was $44.4 million versus $65.2 million for the six months ended June 30, 2013. The decrease in interest expense for the three and six months ended June 30, 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 redemption of the 2018 Notes. Amortization expense for deferred financing fees was $1.1 million for the three months ended June 30, 2014 compared to $1.7 million for the three months ended June 30, 2013. Amortization expense for deferred financing fees was $2.3 million for the six months ended June 30, 2014 compared to $3.5 million for the six months ended June 30, 2013. The decrease in amortization expense for the three and six months ended June 30, 2014 was related to the lower balance of deferred financing fees as a result of the redemption of the 2018 Notes and the company's debt reduction efforts.
Other expense, net for the three months ended June 30, 2014 was $3.1 million compared to $1.4 million for the same period in 2013. Other expense, net for the six months ended June 30, 2014 was $2.3 million compared to $0.2 million of other income, net for the same period in 2013. The increase in other expense, net for the three and six months ended June 30, 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 six months ended June 30, 2014, the company recorded income tax expense of $21.8 million, compared to income tax expense of $17.8 million for the six months ended June 30, 2013. The increase in the company's tax expense for the six months ended June 30, 2014 relative to the prior year resulted primarily from favorable audit resolutions in the prior year. The company's 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.
As of each reporting date, the company's management considers new evidence, both positive and negative, that could impact management's view with regard to future realization of deferred tax assets. As of June 30, 2014, in part because in the current quarter the company's crane operations achieved three years of cumulative pre-tax income in the China tax jurisdiction, management determined that sufficient positive evidence exists to conclude that it is more likely than not that additional deferred taxes of $9.0 million are realizable, and therefore, reduced the valuation allowance accordingly.
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 $34.2 million as of June 30, 2014, and $35.9 million as of December 31, 2013. All of the company's unrecognized tax benefits as of June 30, 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 $10.9 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 related to the disallowance of the deductibility of a $380.9 million foreign currency loss incurred in calendar year 2008 and proposed adjustments to the research and development credit generated in 2009. The company subsequently filed a formal protest to the proposed adjustments. Following an Appeals conference in September


2013, the Appeals division advised the company that these issues had been tentatively resolved in the company's favor; however, this tentative resolution was subject to review by the Joint Committee on Taxation. In July 2014, the company was notified that its case had been reviewed by the Joint Committee on Taxation and they agreed with the favorable resolution reached by the Appeals division.
The company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. As of June 30, 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 June 30, 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 June 30, 2014 was $0.3 million compared to $7.6 million for the same period ended 2013. Loss from discontinued operations for the six months ended June 30, 2014 was $1.3 million compared to $11.7 million for the same period ended 2013. The decrease in loss from discontinued operations for the three and six months ended June 30, 2014 compared to the same period in 2013 was primarily due to the disposal of Manitowoc Dong Yue in January 2014.
Loss on sale of discontinued operations was $9.9 million for the six months ended June 30, 2014 related to the sale of Manitowoc Dong Yue. Loss on sale of discontinued operations was $1.6 million for the six months ended June 30, 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 Six Months of 2014
Cash and cash equivalents balance as of June 30, 2014 totaled $103.5 million, an increase of $48.6 million from the December 31, 2013 balance of $54.9 million. Cash flow used for operating activities of continuing operations for the first six months of 2014 was $192.1 million compared to cash used for continuing operations of $54.9 million for the first six months of 2013. During the first six 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 payments on accrued expenses, and other miscellaneous unfavorable working capital changes.
Cash flows used for investing activities of $46.1 million for the first six months of 2014 primarily consisted of capital expenditures of $35.0 million, with the majority of the capital expenditures related to equipment purchases for the Crane and Foodservice segments and the continued enterprise resource planning ("ERP") system implementation in the Crane segment.
Cash flows provided by financing activities of $294.2 million for the first six months of 2014 consisted primarily of proceeds from the revolving credit facility.
First Six Months of 2013
Cash and cash equivalents balance as of June 30, 2013 totaled $91.6 million, an increase of $18.4 million from the December 31, 2012 balance of $73.2 million. Cash flow used for operating activities of continuing operations for the first six months of 2013 was $54.9 million compared to cash used for continuing operations of $115.5 million for the first six months of 2012. During the first six 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 $120.9 million to support increased order activity primarily in the Crane segment.
Cash flows used by investing activities of $7.0 million for the first six months of 2013 primarily consisted of proceeds of $39.2 million related to the sale of the Jackson business, offset by capital expenditures $46.5 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 $89.8 million for the first six months of 2013 consisted primarily of proceeds from the revolving credit facility.
Liquidity and Capital Resources
Outstanding debt as of June 30, 2014 and December 31, 2013 is summarized as follows:

(in millions)                                     June 30, 2014      December 31, 2013
Revolving credit facility                        $        268.0     $               -
Term loan A                                               345.6                 162.5
Term loan B                                               199.5                     -
Senior notes due 2018                                         -                 408.4
Senior notes due 2020                                     615.4                 614.8
Senior notes due 2022                                     294.3                 289.1
Other                                                      98.9                  52.0
Total debt                                              1,821.7               1,526.8
Less current portion and short-term borrowings            (74.7 )               (22.7 )
Long-term debt                                   $      1,747.0     $         1,504.1

On January 3, 2014, the company entered into a $1,050.0 million Third Amended and Restated Credit Agreement (as amended, the "New Senior Credit Facility") with JPMorgan Chase Bank, N.A., as Administrative Agent, Deutsche Bank Securities Inc., Bank of America, N.A., Wells Fargo Bank, National Association, and SunTrust Bank as Syndication Agents, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., BMO Harris Bank N.A., and Rabobank Nederland, New York Branch as Documentation Agents. The New Senior Credit Facility, which replaced the Prior Senior Credit Facility (as defined below), 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. Including interest rate swaps at June 30, 2014, the weighted average interest rates for the Term Loan A and the Term Loan B loans were 2.99% and 3.25%, respectively. Excluding interest rate swaps, the interest rates on Term Loan A and Term Loan B were 2.25% and 3.25% respectively, at June 30, 2014. The weighted average interest rates for the term loans at June 30, 2014 were not impacted by the interest rate caps because the relevant one-month U.S. LIBOR rate was below the 3.00% cap level.
Entry into 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; interest on the 2020 Notes is payable semiannually in May and November of each year.
On February 18, 2014 the Company redeemed its 9.50% Senior Notes due 2018 (the "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 June 30, 2014, the company had outstanding $98.9 million of other indebtedness that has a weighted-average interest rate of approximately 6.0%. This debt includes outstanding line of credit balances and capital lease obligations in its Americas, Asia-Pacific and European regions.
As of June 30, 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, and $175.0 million notional amount of float-to-fixed interest rate swaps related to Term Loan A of the New Senior Credit Facility. The interest rate swaps fix the interest related to $175.0 million notional amount of Term Loan A at a rate of 1.635%, plus the applicable spread based on the Consolidated Total Leverage Ratio of the company as defined under 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 June 30, 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 June 30, 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 June 30, 2014 the company's Consolidated Senior Secured Leverage Ratio was 2.35:1, while the maximum ratio is 3.50:1, and the Consolidated Interest Coverage Ratio was 4.37:1, above the minimum ratio of 2.50:1.
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 June 30, 2014 was $449.5 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 June 30, 2014 was as follows:

                                                              Trailing Twelve
                                                                  Months,
(in millions)                                                  June 30, 2014
Net earnings attributable to Manitowoc                       $         111.6
Loss from discontinued operations                                        4.3
Loss on sale of discontinued operations                                 11.0
Depreciation and amortization                                           98.9
Interest expense and amortization of deferred financing fees           113.4
Costs due to early extinguishment of debt                               27.9
Restructuring charges                                                    6.6
Income taxes                                                            40.1
Forgiveness of Loan to Manitowoc Dong Yue                               39.9
Other                                                                   (4.2 )
Adjusted EBITDA                                              $         449.5

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 . . .

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