XNYS:MTW Manitowoc Co Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2012

 

or

 

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from               to               

 

Commission File Number

1-11978

 

The Manitowoc Company, Inc.

(Exact name of registrant as specified in its charter)

 

Wisconsin

 

39-0448110

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification Number)

 

2400 South 44th Street,

 

 

Manitowoc, Wisconsin

 

54221-0066

(Address of principal executive offices)

 

(Zip Code)

 

(920) 684-4410

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

The number of shares outstanding of the Registrant’s common stock, $.01 par value, as of March 31, 2012, the most recent practicable date, was 132,226,732.

 

 

 



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

THE MANITOWOC COMPANY, INC.

Consolidated Statements of Operations

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

(In millions, except per-share and average shares data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Net sales

 

$

860.1

 

$

732.2

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Cost of sales

 

653.9

 

551.7

 

Engineering, selling and administrative expenses

 

148.4

 

140.2

 

Restructuring expense

 

0.6

 

0.8

 

Amortization expense

 

9.6

 

9.7

 

Other

 

 

0.1

 

Total operating costs and expenses

 

812.5

 

702.5

 

 

 

 

 

 

 

Earnings (loss) from operations

 

47.6

 

29.7

 

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

Amortization of deferred financing fees

 

(2.0

)

(3.4

)

Interest expense

 

(33.0

)

(39.4

)

Loss on debt extinguishment

 

 

(3.6

)

Other income (expense), net

 

(1.7

)

0.9

 

Total other income (expenses)

 

(36.7

)

(45.5

)

 

 

 

 

 

 

Earnings (loss) from continuing operations before taxes on income

 

10.9

 

(15.8

)

Provision (benefit) for taxes on income

 

12.4

 

1.4

 

Earnings (loss) from continuing operations

 

(1.5

)

(17.2

)

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

Earnings (loss) from discontinued operations, net of income taxes of ($0.1) and ($1.7), respectively

 

(0.3

)

(2.7

)

Gain (loss) on sale of discontinued operations, net of income taxes of $0.0 and $29.7, respectively

 

 

(33.4

)

Net earnings (loss)

 

(1.8

)

(53.3

)

Less: Net loss attributable to noncontrolling interest, net of income taxes

 

(1.9

)

(0.9

)

Net earnings (loss) attributable to Manitowoc

 

$

0.1

 

$

(52.4

)

 

 

 

 

 

 

Amounts attributable to the Manitowoc common shareholders:

 

 

 

 

 

Earnings (loss) from continuing operations

 

$

0.4

 

$

(16.3

)

Earnings (loss) from discontinued operations, net of income taxes

 

(0.3

)

(2.7

)

Loss on sale of discontinued operations, net of income taxes

 

 

(33.4

)

Net earnings (loss) attributable to Manitowoc

 

$

0.1

 

$

(52.4

)

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

Earnings (loss) from continuing operations attributable to Manitowoc common shareholders

 

$

0.00

 

$

(0.12

)

Earnings (loss) from discontinued operations attributable to Manitowoc common shareholders

 

(0.00

)

(0.02

)

Loss on sale of discontinued operations, net of income taxes

 

 

(0.26

)

Earnings (loss) per share attributable to Manitowoc common shareholders

 

$

0.00

 

$

(0.40

)

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

Earnings (loss) from continuing operations attributable to Manitowoc common shareholders

 

$

0.00

 

$

(0.12

)

Earnings (loss) from discontinued operations attributable to Manitowoc common shareholders

 

(0.00

)

(0.02

)

Loss on sale of discontinued operations, net of income taxes

 

 

(0.26

)

Earnings (loss) per share attributable to Manitowoc common shareholders

 

$

0.00

 

$

(0.40

)

 

 

 

 

 

 

Weighted average shares outstanding — basic

 

130,550,681

 

130,448,118

 

Weighted average shares outstanding — diluted

 

133,681,776

 

130,448,118

 

 

The accompanying notes are an integral part of these financial statements.

 

2



 

THE MANITOWOC COMPANY, INC.

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

(In millions)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Net earnings (loss)

 

$

(1.8

)

$

(53.3

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

Derivative instrument fair market value adjustment, net of income taxes of $1.4 and $1.6, respectively

 

3.1

 

4.9

 

Foreign currency translation adjustments

 

16.5

 

33.5

 

 

 

 

 

 

 

Total other comprehensive income (loss), net of tax

 

19.6

 

38.4

 

 

 

 

 

 

 

Comprehensive income (loss)

 

17.8

 

(14.9

)

 

 

 

 

 

 

Comprehensive income (loss) attributable to noncontrolling interest

 

(1.9

)

(0.9

)

 

 

 

 

 

 

Comprehensive income (loss) attributable to Manitowoc

 

$

19.7

 

$

(14.0

)

 

The accompanying notes are an integral part of these financial statements.

 

3



 

THE MANITOWOC COMPANY, INC.

Consolidated Balance Sheets

As of March 31, 2012 and December 31, 2011

(Unaudited)

(In millions, except share data)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

70.8

 

$

68.6

 

Marketable securities

 

2.7

 

2.7

 

Restricted cash

 

7.1

 

7.2

 

Accounts receivable, less allowances of $14.3 and $12.8, respectively

 

319.2

 

297.0

 

Inventories — net

 

777.1

 

668.7

 

Deferred income taxes

 

119.3

 

117.8

 

Other current assets

 

98.4

 

77.8

 

Total current assets

 

1,394.6

 

1,239.8

 

 

 

 

 

 

 

Property, plant and equipment — net

 

562.9

 

568.2

 

Goodwill

 

1,168.8

 

1,164.8

 

Other intangible assets — net

 

846.4

 

851.8

 

Other non-current assets

 

143.0

 

140.6

 

Total assets

 

$

4,115.7

 

$

3,965.2

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

850.5

 

$

869.8

 

Current portion of long-term debt and short-term borrowings

 

99.2

 

79.1

 

Product warranties

 

94.4

 

93.8

 

Customer advances

 

27.1

 

35.1

 

Product liabilities

 

27.9

 

26.8

 

Total current liabilities

 

1,099.1

 

1,104.6

 

Non-Current Liabilities:

 

 

 

 

 

Long-term debt

 

1,944.2

 

1,810.9

 

Deferred income taxes

 

215.9

 

215.8

 

Pension obligations

 

89.7

 

90.6

 

Postretirement health and other benefit obligations

 

60.4

 

59.8

 

Long-term deferred revenue

 

32.8

 

34.2

 

Other non-current liabilities

 

175.8

 

175.8

 

Total non-current liabilities

 

2,518.8

 

2,387.1

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

Total Equity:

 

 

 

 

 

Common stock (300,000,000 shares authorized, 163,175,928 shares issued, 132,226,732 and 131,884,765 shares outstanding, respectively)

 

1.4

 

1.4

 

Additional paid-in capital

 

476.5

 

470.8

 

Accumulated other comprehensive income (loss)

 

5.0

 

(15.0

)

Retained earnings

 

113.7

 

113.6

 

Treasury stock, at cost (30,949,196 and 31,291,163 shares, respectively)

 

(87.0

)

(87.4

)

Total Manitowoc stockholders’ equity

 

509.6

 

483.4

 

Noncontrolling interest

 

(11.8

)

(9.9

)

Total equity

 

497.8

 

473.5

 

Total liabilities and equity

 

$

4,115.7

 

$

3,965.2

 

 

The accompanying notes are an integral part of these financial statements.

 

4



 

THE MANITOWOC COMPANY, INC.

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

(In millions)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Cash Flows from Operations:

 

 

 

 

 

Net earnings (loss)

 

$

(1.8

)

$

(53.3

)

Adjustments to reconcile net earnings (loss) to cash provided by (used for) operating activities of continuing operations:

 

 

 

 

Discontinued operations, net of income taxes

 

0.3

 

2.7

 

Depreciation

 

17.9

 

22.3

 

Amortization of intangible assets

 

9.6

 

9.7

 

Deferred income taxes

 

(1.6

)

(3.3

)

Loss (gain) on sale of property, plant and equipment

 

0.4

 

(0.1

)

Restructuring expense

 

0.6

 

0.8

 

Amortization of deferred financing fees

 

2.0

 

3.4

 

Loss on debt extinguishment

 

 

3.6

 

Loss on sale of discontinued operations

 

 

33.4

 

Other

 

5.0

 

3.5

 

Changes in operating assets and liabilities, excluding effects of business acquisitions and divestitures:

 

 

 

 

 

Accounts receivable

 

(18.6

)

(63.1

)

Inventories

 

(100.6

)

(108.8

)

Other assets

 

(20.6

)

15.9

 

Accounts payable

 

6.9

 

53.2

 

Accrued expenses and other liabilities

 

(29.1

)

(56.0

)

Net cash provided by (used for) operating activities of continuing operations

 

(129.6

)

(136.1

)

Net cash provided by (used for) operating activities of discontinued operations

 

(0.3

)

(18.2

)

Net cash provided by (used for) operating activities

 

(129.9

)

(154.3

)

 

 

 

 

 

 

Cash Flows from Investing:

 

 

 

 

 

Capital expenditures

 

(14.2

)

(7.6

)

Restricted cash

 

0.1

 

(0.4

)

Proceeds from sale of business

 

 

143.6

 

Proceeds from sale of property, plant and equipment

 

 

0.8

 

Net cash provided by (used for) investing activities

 

(14.1

)

136.4

 

 

 

 

 

 

 

Cash Flows from Financing:

 

 

 

 

 

Proceeds from revolving credit facility

 

147.9

 

112.0

 

(Payments on) long-term debt

 

(26.7

)

(135.7

)

Proceeds from long-term debt

 

34.2

 

29.7

 

(Payments on) notes financing

 

(11.5

)

(0.7

)

Debt issuance costs

 

(0.1

)

 

Exercises of stock options, including windfall tax benefits

 

1.2

 

0.7

 

Net cash provided by (used for) financing activities of continuing operations

 

145.0

 

6.0

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

1.2

 

0.6

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

2.2

 

(11.3

)

Balance at beginning of period

 

68.6

 

83.7

 

Balance at end of period

 

$

70.8

 

$

72.4

 

 

The accompanying notes are an integral part of these financial statements.

 

5



 

THE MANITOWOC COMPANY, INC.

Notes to Unaudited Consolidated Financial Statements

For the Three Months Ended March 31, 2012 and 2011

 

1.  Accounting Policies

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair statement of the results of operations and comprehensive income for the three months ended March 31, 2012 and 2011, the cash flows for the same three-month periods, and the financial position at March 31, 2012, and except as otherwise discussed such adjustments consist of only those of a normal recurring nature.  The interim results are not necessarily indicative of results for a full year and do not contain information included in the company’s annual consolidated financial statements and notes for the year ended December 31, 2011.  The consolidated balance sheet as of December 31, 2011 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the company’s latest annual report on Form 10-K.

 

All dollar amounts, except share and per share amounts, are in millions of dollars throughout the tables included in these notes unless otherwise indicated.

 

Certain prior period amounts have been reclassified to conform to current presentation.

 

2. Discontinued Operations

 

On December 15, 2010, the company announced that a definitive agreement had been reached to divest its Kysor/Warren and Kysor/Warren de Mexico (collectively “Kysor/Warren”) businesses, which manufacture 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, resulting in a $34.6 million loss on sale, primarily consisting of $29.9 million of income tax expense, 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 selected financial data of the Kysor/Warren businesses, primarily consisting of administrative costs, for the three months ended March 31, 2012 and 2011 is presented for informational purposes only and does not necessarily reflect what the results of operations would have been had the businesses operated as a stand-alone entity.  There was no general corporate expense or interest expense allocated to discontinued operations for this business during the periods presented.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in millions)

 

2012

 

2011

 

Net sales

 

$

 

$

3.3

 

 

 

 

 

 

 

Pretax earnings (loss) from discontinued operation

 

$

(0.1

)

$

(4.0

)

Provision (benefit) for taxes on earnings

 

 

(1.6

)

Net earnings (loss) from discontinued operation

 

$

(0.1

)

$

(2.4

)

 

The following selected financial data of various other businesses disposed of prior to 2012, primarily consisting of administrative costs, for the three months ended March 31, 2012 and 2011 is presented for informational purposes only and does not necessarily reflect what the results of operations would have been had the businesses operated as a stand-alone entity.  There was no general corporate expense or interest expense allocated to discontinued operations for these businesses during the periods presented.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in millions)

 

2012

 

2011

 

Net sales

 

$

 

$

 

 

 

 

 

 

 

Pretax earnings (loss) from discontinued operation

 

$

(0.3

)

$

(0.4

)

Provision (benefit) for taxes on earnings

 

(0.1

)

(0.1

)

Net earnings (loss) from discontinued operation

 

$

(0.2

)

$

(0.3

)

 

6



 

3. Fair Value of Financial Instruments

 

The following tables set forth the company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

 

Fair Value as of March 31, 2012

 

(in millions)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

 

$

1.6

 

$

 

$

1.6

 

Marketable securities

 

2.7

 

 

 

2.7

 

Total current assets at fair value

 

$

2.7

 

$

1.6

 

$

 

$

4.3

 

 

 

 

 

 

 

 

 

 

 

Non-Current Assets:

 

 

 

 

 

 

 

 

 

Interest rate cap contracts

 

$

 

$

0.1

 

$

 

$

0.1

 

Total non-current assets at fair value

 

$

 

$

0.1

 

$

 

$

0.1

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

 

$

3.4

 

$

 

$

3.4

 

Forward commodity contracts

 

 

1.6

 

 

1.6

 

Interest rate swap contracts

 

 

7.2

 

 

7.2

 

Total current liabilities at fair value

 

$

 

$

12.2

 

$

 

$

12.2

 

 

 

 

 

 

 

 

 

 

 

Non-current Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

 

$

3.2

 

$

 

$

3.2

 

Total non-current liabilities at fair value

 

$

 

$

3.2

 

$

 

$

3.2

 

 

 

 

Fair Value as of December 31, 2011

 

(in millions)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

 

$

0.8

 

$

 

$

0.8

 

Marketable securities

 

2.7

 

 

 

2.7

 

Total current assets at fair value

 

$

2.7

 

$

0.8

 

$

 

$

3.5

 

 

 

 

 

 

 

 

 

 

 

Non-current Assets:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

 

$

0.5

 

$

 

$

0.5

 

Interest rate cap contracts

 

 

0.3

 

 

0.3

 

Total non-current assets at fair value

 

$

 

$

0.8

 

$

 

$

0.8

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

 

$

6.7

 

$

 

$

6.7

 

Forward commodity contracts

 

 

2.4

 

 

2.4

 

Total current liabilities at fair value

 

$

 

$

9.1

 

$

 

$

9.1

 

 

 

 

 

 

 

 

 

 

 

Non-current Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

 

$

9.5

 

$

 

$

9.5

 

Total non-current liabilities at fair value

 

$

 

$

9.5

 

$

 

$

9.5

 

 

The fair value of the company’s 7.125% Senior Notes due 2013 was approximately $150.2 million and $146.6 million at March 31, 2012 and December 31, 2011, respectively. The fair value of the company’s 9.50% Senior Notes due 2018 was approximately $445.0 million and $434.0 million at March 31, 2012 and December 31, 2011, respectively. The fair value of the company’s 8.50% Senior

 

7



 

Notes due 2020 was $663.3 million and $634.9 million at March 31, 2012 and December 31, 2011, respectively. The fair values of the company’s term loans under the previous and Senior Credit Facility were as follows at March 31, 2012 and December 31, 2011, respectively:  Term Loan A — $319.6 million and $318.6 million; and Term Loan B — $330.6 million and $324.1 million.  See Note 8, “Debt,” for a description of the debt instruments and their related carrying values.

 

ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820-10 classifies the inputs used to measure fair value into the following hierarchy:

 

Level 1

 

Unadjusted quoted prices in active markets for identical assets or liabilities

 

 

 

Level 2

 

Unadjusted quoted prices in active markets for similar assets or liabilities, or

 

 

 

 

 

Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or

 

 

 

 

 

Inputs other than quoted prices that are observable for the asset or liability

 

 

 

Level 3

 

Unobservable inputs for the asset or liability

 

The company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  The company estimates fair value of its Term Loans and Senior Notes based on quoted market prices of similar instruments, and are, therefore, classified as Level 2 within the valuation hierarchy.  The carrying values of cash and cash equivalents, accounts receivable, accounts payable, deferred purchase price notes on receivables sold (see Note 9, “Accounts Receivable Securitization”) and short-term variable debt, including any amounts outstanding under our revolving credit facility, approximate fair value, without being discounted as of March 31, 2012 and December 31, 2011 due to the short-term nature of these instruments.

 

As a result of its global operating and financing activities, the company is exposed to market risks from changes in interest rates, foreign currency exchange rates, and commodity prices, which may adversely affect the company’s operating results and financial position. When deemed appropriate, the company minimizes these risks through the use of derivative financial instruments. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes, and the company does not use leveraged derivative financial instruments. The forward foreign currency exchange and interest rate swap and cap contracts and forward commodity purchase agreements are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are classified within level 1 and level 2.

 

4. Derivative Financial Instruments

 

The company’s risk management objective is to ensure that business exposures to risk that have been identified and measured and are capable of being controlled are minimized using the most effective and efficient methods to eliminate, reduce, or transfer such exposures.  Operating decisions consider associated risks and structure transactions to manage risk whenever possible.

 

Use of derivative instruments is consistent with the overall business and risk management objectives of the company.  Derivative instruments may be used to manage business risk within limits specified by the company’s risk policy and manage exposures that have been identified through the risk identification and measurement process, provided that they clearly qualify as “hedging” activities as defined in the risk policy.  Use of derivative instruments is not automatic, nor is it necessarily the only response to managing pertinent business risk.  Use is permitted only after the risks that have been identified are determined to exceed defined tolerance levels and are considered to be unavoidable.

 

The primary risks managed by the company by using derivative instruments are interest rate risk, commodity price risk and foreign currency exchange risk.  Interest rate swap and cap instruments are entered into to manage interest rate or fair value risk.  Forward contracts on various commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the company’s manufacturing process.  The company also enters into various foreign currency derivative instruments to manage foreign currency risk associated with the company’s projected foreign currency denominated purchases, sales, and receivable and payable balances.

 

ASC Topic 815-10, “Derivatives and Hedging,” requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position.  In accordance with ASC Topic 815-10, the company designates forward commodity contracts, foreign currency exchange contracts, and interest rate swaps and caps contracts as cash flow hedges of forecasted purchases of commodities and currencies, and variable rate interest payments.  Also in accordance with ASC Topic 815-10,

the company designates fixed-to-float interest rate swaps as fair market value hedges of fixed rate debt, which synthetically swap the

 

 

8



 

company’s fixed rate debt to floating rate debt.

 

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  Gains and losses on the derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.  In the next twelve months the company estimates $1.7 million of unrealized and realized losses net of tax related to commodity price and currency exchange rate hedging will be reclassified from other comprehensive income into earnings.  Foreign currency and commodity hedging is generally completed prospectively on a rolling basis for between twelve and twenty-four months, respectively.

 

The risk management objective for the company’s fair market value interest rate hedges is to effectively change the amount of the underlying debt equal to the notional value of the hedges from a fixed to a floating interest rate based on the benchmark six-month U.S. LIBOR rate.  These swaps include an embedded call feature to match the terms of the call schedule embedded in the Senior Notes. Changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the debt due to changes in the U.S. six-month LIBOR benchmark interest rate.

 

As of March 31, 2012 and December 31, 2011, the company had the following outstanding commodity and currency forward contracts that were entered into to hedge forecasted transactions:

 

 

 

Units Hedged

 

 

 

 

 

Commodity

 

March 31, 2012

 

December 31, 2011

 

 

 

Type

 

Aluminum

 

1,651

 

1,254

 

MT

 

Cash Flow

 

Copper

 

628

 

684

 

MT

 

Cash Flow

 

Natural Gas

 

241,679

 

346,902

 

MMBtu

 

Cash Flow

 

Steel

 

5,452

 

8,231

 

Tons

 

Cash Flow

 

 

 

 

Units Hedged

 

 

 

Short Currency

 

March 31, 2012

 

December 31, 2011

 

Type

 

Canadian Dollar

 

11,577,824

 

25,083,644

 

Cash Flow

 

European Euro

 

92,891,863

 

67,565,453

 

Cash Flow

 

South Korean Won

 

3,059,290,288

 

3,224,015,436

 

Cash Flow

 

Singapore Dollar

 

4,800,000

 

4,800,000

 

Cash Flow

 

United States Dollar

 

4,138,735

 

5,538,777

 

Cash Flow

 

Chinese Renminbi

 

119,660,220

 

111,177,800

 

Cash Flow

 

 

As of June 30, 2011, the company offset all of its previous interest rate swaps against Term Loan A and B interest due to the amendment of its Senior Credit Facility (See Note 8, “Debt,” for a description of the Senior Credit Facility).  As of March 31, 2012, the company had outstanding $450.0 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.  The company is also party to various fixed-to-float interest rate swaps in connection with its 2018 and 2020 Notes.  At March 31, 2012, $200.0 million and $300.0 million of the 2018 and 2020 Notes respectively, were swapped to floating rate interest (See Note 8, “Debt,” for a description of the 2018 and 2020 Notes).  The 2018 Notes accrue interest at a rate of 9.50% on the fixed portion and 7.45% plus the six-month LIBOR reset in arrears on the variable portion. The 2020 Notes accrue interest at a rate of 8.50% on the fixed portion and 6.02% plus the six-month LIBOR reset in arrears on the variable portion. At March 31, 2012, the weighted average interest rates for the 2018 and 2020 Notes taking into consideration the impact of floating rate hedges, was 8.84% and 7.62%, respectively.  Both aforementioned swap contracts of the 2018 and 2020 Notes include a call premium schedule that mirrors that of the respective debt and includes an optional early termination cash settlement at five years from the trade date.

 

The company monetized the derivative asset related to the fixed-to-float interest rate swaps and received $21.5 million in the third quarter of 2011.  The gain is treated as an increase to the debt balances for each of the 2018 and 2020 Notes and will be amortized to interest expense over the life of the original swap.

 

For derivative instruments that are not designated as hedging instruments under ASC Topic 815-10, the gains or losses on the derivatives are recognized in current earnings within cost of sales or other income, net in the Consolidated Statements of Operations.  As of March 31, 2012 and December 31, 2011, the company had the following outstanding currency forward contracts that were not designated as hedging instruments:

 

9



 

 

 

Units Hedged

 

 

 

 

 

Short Currency

 

March 31, 2012

 

December 31,
2011

 

Recognized Location

 

Purpose

 

Euro

 

18,216,530

 

33,150,213

 

Other income, net

 

Accounts Payable and Receivable Settlement

 

United States Dollar

 

8,500,000

 

6,000,000

 

Other income, net

 

Accounts Payable and Receivable Settlement

 

Australian Dollar

 

1,118,729

 

7,569,912

 

Other income, net

 

Accounts Payable and Receivable Settlement

 

 

The fair value of outstanding derivative contracts recorded as assets in the accompanying Consolidated Balance Sheet as of March 31, 2012 and December 31, 2011 was as follows:

 

 

 

 

 

ASSET DERIVATIVES

 

 

 

 

 

March 31, 2012

 

December 31, 2011

 

(in millions)

 

Balance Sheet Location

 

Fair Value

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

$

1.5

 

$

0.6

 

Interest rate swap contracts: Fixed-to-float

 

Other non-current assets

 

 

0.5

 

Interest rate cap contracts

 

Other non-current assets

 

0.1

 

0.3

 

Total derivatives designated as hedging instruments

 

 

 

$

1.6

 

$

1.4

 

 

 

 

 

 

ASSET DERIVATIVES

 

 

 

 

 

March 31, 2012

 

December 31, 2011

 

(in millions)

 

Balance Sheet Location

 

Fair Value

 

Derivatives NOT designated as hedging instruments

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

$

0.1

 

$

0.1

 

Total derivatives NOT designated as hedging instruments

 

 

 

$

0.1

 

$

0.1

 

 

 

 

 

 

 

 

 

Total asset derivatives

 

 

 

$

1.7

 

$

1.5

 

 

The fair value of outstanding derivative contracts recorded as liabilities in the accompanying Consolidated Balance Sheet as of March 31, 2012 and December 31, 2011 was as follows:

 

 

 

 

 

LIABILITY DERIVATIVES

 

 

 

 

 

March 31, 2012

 

December 31, 2011

 

(in millions)

 

Balance Sheet Location

 

Fair Value

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Foreign exchange contracts

 

Accounts payable and accrued expenses

 

$

2.5

 

$

5.2

 

Interest rate swap contracts: Fixed-to-float

 

Other non-current liabilities

 

3.1

 

 

Commodity contracts

 

Accounts payable and accrued expenses

 

1.6

 

2.5

 

Total derivatives designated as hedging instruments

 

 

 

$

7.2

 

$

7.7

 

 

 

 

 

 

LIABILITY DERIVATIVES

 

 

 

 

 

March 31, 2012

 

December 31, 2011

 

(in millions)

 

Balance Sheet Location

 

Fair Value

 

Derivatives NOT designated as hedging instruments

 

 

 

 

 

 

 

Foreign exchange contracts

 

Accounts payable and accrued expenses

 

$

0.9

 

$

1.6

 

Interest rate swap contracts: Float-to-fixed

 

Accounts payable and accrued expenses

 

7.3

 

9.5

 

Total derivatives NOT designated as hedging instruments

 

 

 

$

8.2

 

$

11.1

 

 

 

 

 

 

 

 

 

Total liability derivatives

 

 

 

$

15.4

 

$

18.8

 

 

The effect of derivative instruments on the Consolidated Statements of Operations for the three months ended March 31, 2012 and March 31, 2011 for gains or losses initially recognized in Other Comprehensive Income (OCI) in the Consolidated Balance Sheet was as follows:

 

10



 

 

 

Amount of Gain or (Loss) on Derivative
Recognized in OCI (Effective Portion,
net of tax)

 

Location of Gain or (Loss)
Reclassified from
Accumulated

 

Amount of Gain or (Loss) Reclassified
from Accumulated OCI into Income
(Effective Portion)

 

Derivatives in Cash Flow Hedging
Relationships (in millions)

 

March 31, 2012

 

March 31, 2011

 

OCI into Income
(Effective Portion)

 

March 31, 2012

 

March 31, 2011

 

Foreign exchange contracts

 

$

2.2

 

$

1.9

 

Cost of sales

 

$

(0.8

)

$

0.7

 

Interest rate swap & cap contracts

 

(0.1

)

1.1

 

Interest expense

 

 

(2.6

)

Commodity contracts

 

2.5

 

(0.1

)

Cost of sales

 

(0.7

)

0.1

 

Total

 

$

4.6

 

$

2.9

 

 

 

$

(1.5

)

$

(1.8

)

 

Derivatives

 

Location of Gain or (Loss)
on Derivative Recognized in
Income (Ineffective Portion
and Amount Excluded from

 

Amount of Gain or (Loss) on Derivative Recognized in
Income (Ineffective Portion and Amount Excluded
from
Effectiveness Testing)

 

Relationships (in millions)

 

Effectiveness Testing)

 

March 31, 2012

 

March 31, 2011

 

Commodity contracts

 

Cost of sales

 

$

(0.1

)

$

 

Total

 

 

 

$

(0.1

)

$

 

 

Derivatives Not Designated as

 

Location of Gain or (Loss)
Recognized on Derivative in

 

Amount of Gain or (Loss) on Derivative Recognized in
Income

 

Hedging Instruments (in millions)

 

Income

 

March 31, 2012

 

March 31, 2011

 

Foreign exchange contracts

 

Other income

 

$

(0.8

)

$

(2.1

)

Interest rate swaps

 

Other income

 

2.3

 

 

Total

 

 

 

$

1.5

 

$

(2.1

)

 

The effect of Fair Market Value designated derivative instruments on the Consolidated Statements of Operations for the three months ended March 31, 2012 and March 31, 2011 for gains or losses recognized through income was as follows:

 

Derivatives Designated as Fair Market Value

 

Location of Gain or (Loss)
on Derivative

 

Amount of Gain or (Loss) on Derivative Recognized in
Income

 

Instruments under ASC 815 (in millions)

 

Recognized in Income

 

March 31, 2012

 

March 31, 2011

 

Interest rate swap contracts

 

Interest expense

 

$

(3.8

)

$

 

Total

 

 

 

$

(3.8

)

$

 

 

5. Inventories

 

The components of inventories at March 31, 2012 and December 31, 2011 are summarized as follows:

 

 

 

March 31,

 

December 31,

 

(in millions)

 

2012

 

2011

 

Inventories — gross:

 

 

 

 

 

Raw materials

 

$

252.0

 

$

249.7

 

Work-in-process

 

204.9

 

168.1

 

Finished goods

 

429.8

 

357.6

 

Total inventories — gross

 

886.7

 

775.4

 

Excess and obsolete inventory reserve

 

(77.1

)

(75.3

)

Net inventories at FIFO cost

 

809.6

 

700.1

 

Excess of FIFO costs over LIFO value

 

(32.5

)

(31.4

)

Inventories — net

 

$

777.1

 

$

668.7

 

 

6. Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill by reportable segment for the year ended December 31, 2011 and three months ended March 31, 2012 are as follows:

 

(in millions)

 

Crane

 

Foodservice

 

Total

 

Gross balance as of January 1, 2011

 

$

279.0

 

$

1,414.5

 

$

1,693.5

 

Restructuring reserve adjustment

 

 

(3.0

)

(3.0

)

Foreign currency impact

 

(5.1

)

(0.3

)

(5.4

)

Gross balance as of December 31, 2011

 

$

273.9

 

$

1,411.2

 

$

1,685.1

 

Asset impairments

 

 

(520.3

)

(520.3

)

Net balance as of December 31, 2011

 

$

273.9

 

$

890.9

 

$

1,164.8

 

 

 

 

 

 

 

 

 

Foreign currency impact

 

$

3.8

 

$

0.2

 

$

4.0

 

Gross balance as of March 31, 2012

 

$

277.7

 

$

1,411.4

 

$

1,689.1

 

Asset impairments

 

 

(520.3

)

(520.3

)

Net balance as of March 31, 2012

 

$

277.7

 

$

891.1

 

$

1,168.8

 

 

11



 

The company accounts for goodwill and other intangible assets under the guidance of ASC Topic 350, “Intangibles — Goodwill and Other.”  Under ASC Topic 350, goodwill is not amortized; however, the company performs an annual impairment review at June 30 of every year or more frequently if events or changes in circumstances indicate that the asset might be impaired. The company performs impairment reviews for its reporting units, which are Cranes Americas; Cranes Europe, Middle East, and Africa; Cranes China; Cranes Greater Asia Pacific; Crane Care; Foodservice Americas; Foodservice Europe, Middle East, and Africa; and Foodservice Asia, using a fair-value method based on the present value of future cash flows, which involves management’s judgments and assumptions about the amounts of those cash flows and the discount rates used. The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill.  Goodwill is then subject to risk of write-down to the extent that the carrying amount exceeds the estimated fair value.

 

As of June 30, 2011, the company performed its annual impairment analysis relative to goodwill and indefinite-lived intangible assets and based on those results no impairment was indicated.  The company will continue to monitor market conditions and determine if any additional interim reviews of goodwill, other intangibles or long-lived assets are warranted.  Further deterioration in the market or actual results as compared with the company’s projections may ultimately result in a future impairment.  In the event the company determines that assets are impaired in the future, the company would need to recognize a non-cash impairment charge, which could have a material adverse effect on the company’s consolidated balance sheet and results of operations.

 

The gross carrying amount, accumulated amortization and net book value of the company’s intangible assets other than goodwill were as follows as of March 31, 2012 and December 31, 2011:

 

 

 

March 31, 2012

 

December 31, 2011

 

(in millions)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Book
Value

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Book
Value

 

Trademarks and tradenames

 

$

317.6

 

$

 

$

317.6

 

$

315.0

 

$

 

$

315.0

 

Customer relationships

 

438.1

 

(79.7

)

358.4

 

437.7

 

(73.8

)

363.9

 

Patents

 

33.7

 

(24.3

)

9.4

 

33.1

 

(23.3

)

9.8

 

Engineering drawings

 

11.3

 

(7.7

)

3.6

 

11.1

 

(7.3

)

3.8

 

Distribution network

 

20.7

 

 

20.7

 

20.4

 

 

20.4

 

Other intangibles

 

183.8

 

(47.1

)

136.7

 

182.7

 

(43.8

)

138.9

 

Total

 

$

1,005.2

 

$

(158.8

)

$

846.4

 

$

1,000.0

 

$

(148.2

)

$

851.8

 

 

Amortization expense for the three months ended March 31, 2012 and 2011 was $9.6 million and $9.7 million, respectively. Amortization expense related to intangible assets for each of the five succeeding years is estimated to be approximately $40 million per year.

 

7.  Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses at March 31, 2012 and December 31, 2011 are summarized as follows:

 

 

 

March 31,

 

December 31,

 

(in millions)

 

2012

 

2011

 

Trade accounts payable and interest payable

 

$

498.1

 

$

482.2

 

Employee related expenses

 

109.4

 

96.7

 

Restructuring expenses

 

20.9

 

21.9

 

Profit sharing and incentives

 

13.4

 

33.4

 

Accrued rebates

 

27.7

 

39.3

 

Deferred revenue - current

 

21.3

 

27.0

 

Derivative liabilities

 

12.3

 

18.8

 

Income taxes payable

 

5.4

 

 

Miscellaneous accrued expenses

 

142.0

 

150.5

 

 

 

$

850.5

 

$

869.8

 

 

12



 

8. Debt

 

Outstanding debt at March 31, 2012 and December 31, 2011 is summarized as follows:

 

(in millions)

 

March 31, 2012

 

December 31, 2011

 

Revolving credit facility

 

$

149.0

 

$

 

Term loan A

 

323.8

 

332.5

 

Term loan B

 

332.0

 

332.0

 

Senior notes due 2013

 

150.0

 

150.0

 

Senior notes due 2018

 

406.9

 

407.7

 

Senior notes due 2020

 

609.7

 

613.5

 

Other

 

72.0

 

54.3

 

Total debt

 

2,043.4

 

1,890.0

 

Less current portion and short-term borrowings

 

(99.2

)

(79.1

)

Long-term debt

 

$

1,944.2

 

$

1,810.9

 

 

The company’s Senior Credit Facility originally became effective November 6, 2008 and initially included four loan facilities — a revolving facility of $400.0 million with a five-year term, a Term Loan A of $1,025.0 million with a five-year term, a Term Loan B of $1,200.0 million with a six-year term, and a Term Loan X of $300.0 million with an eighteen-month term.  The balance of Term Loan X was repaid in 2009.  On May 13, 2011, the company amended and extended the maturities of its Senior Credit Facility and by entering into a $1,250.0 million Second Amended and Restated Credit Agreement (the “Senior Credit Facility.”)

 

The 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 at March 31, 2012, the weighted average interest rates for the Term Loan A and the Term Loan B loans were 3.25% and 4.25%, respectively.  Excluding interest rate caps, Term Loan A and Term Loan B interest rates were 3.25% and 4.25% respectively, at March 31, 2012.

 

The Senior Credit Facility contains financial covenants including (a) a Consolidated Interest Coverage Ratio, which measures the ratio of (i) consolidated earnings before interest, taxes, depreciation and amortization, and other adjustments (EBITDA), as defined in the credit agreement to (ii) consolidated cash interest expense, each for the most recent four fiscal quarters, and (b) a Consolidated Senior Secured Leverage Ratio, which measure the ratio of (i) consolidated senior secured indebtedness to (ii) consolidated EBITDA for the most recent four fiscal quarters.  The current covenant levels of the financial covenants under the Senior Credit Facility are as set forth below:

 

Fiscal Quarter Ending

 

Consolidated
Senior Secured
Leverage Ratio
(less than)

 

Consolidated Interest
Coverage Ratio
(greater than)

 

March 31, 2012

 

3.75:1.00

 

1.75:1.00

 

June 30, 2012

 

3.50:1.00

 

1.875:1.00

 

September 30, 2012

 

3.50:1.00

 

2.00:1.00

 

December 31, 2012

 

3.50:1.00

 

2.00:1.00

 

March 31, 2013

 

3.50:1.00

 

2.25:1.00

 

June 30, 2013

 

3.25:1.00

 

2.25:1.00

 

September 30, 2013

 

3.25:1.00

 

2.50:1.00

 

December 31, 2013

 

3.25:1.00

 

2.50:1.00

 

March 31, 2014

 

3.25:1.00

 

2.75:1.00

 

June 30, 2014

 

3.25:1.00

 

2.75:1.00

 

September 30, 2014

 

3.25:1.00

 

2.75:1.00

 

December 31, 2014, and thereafter

 

3.00:1.00

 

3.00:1.00

 

 

The Senior Credit Facility includes customary representations and warranties and events of default and customary covenants, including without limitation (i)  a requirement that the company prepay the term loan facilities from the net proceeds of asset sales, casualty losses, equity offerings, and new indebtedness for borrowed money, and from a portion of its excess cash flow, subject to certain exceptions; and (ii) limitations on indebtedness, capital expenditures, restricted payments, and acquisitions.

 

The company has three series of Senior Notes outstanding, including the 2013, 2018, and 2020 Notes (collectively the “Senior

Notes”).  Each series of Senior Notes is an unsecured senior obligation ranking subordinate to all existing senior secured indebtedness

 

13



 

and equal to all existing senior unsecured obligations.  Each series of Senior Notes is guaranteed by certain of the company’s wholly owned domestic subsidiaries; which subsidiaries also guaranty the company’s obligations under the Senior Credit Facility.  Each series of Senior Notes contains affirmative and negative covenants which limit, among other things, the company’s ability to redeem or repurchase its debt, incur additional debt, make acquisitions, merge with other entities, pay dividends or distributions, repurchase capital stock, and create or become subject to liens.  Each series of Senior Notes also includes customary events of default. If an event of default occurs and is continuing with respect to the Senior Notes, then the Trustee or the holders of at least 25% of the principal amount of the outstanding Senior Notes may declare the principal and accrued interest on all of the Senior Notes to be due and payable immediately. In addition, in the case of an event of default arising from certain events of bankruptcy, all unpaid principal of, and premium, if any, and accrued and unpaid interest on all outstanding Senior Notes will become due and payable immediately.

 

On March 31, 2012, the company had outstanding $150.0 million of 7.125% Senior Notes due 2013 (the “2013 Notes”).  Interest on the 2013 Notes is payable semiannually in May and November each year. The 2013 Notes can be redeemed by the company in whole or in part for a premium on or after November 1, 2008.  As of November 1, 2011, the company is permitted to redeem the 2013 Notes in whole or in part at any time with no prepayment premium.

 

On February 8, 2010, the company completed the sale of $400.0 million aggregate principal amount of its 9.50% Senior Notes due 2018 (the “2018 Notes”). Net proceeds of $392.0 million from this offering were used to partially pay down ratably the then outstanding balances on Term Loan A and Term Loan B.  Interest on the 2018 Notes is payable semiannually in February and August of each year.  The 2018 Notes may be redeemed in whole or in part by the company for a premium at any time on or after February 15, 2014.  The following would be the premium paid by the company, expressed as a percentage of the principal amount, if it redeems the 2018 Notes during the 12-month period commencing on February 15 of the year set forth below:

 

Year

 

Percentage

 

2014

 

104.750

%

2015

 

102.375

%

2016 and thereafter

 

100.000

%

 

In addition, at any time, or from time to time, on or prior to February 15, 2013, the company may, at its option, use the net cash proceeds of one or more public equity offerings to redeem up to 35% of the principal amount of the 2018 Notes outstanding at a redemption price of 109.5% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of redemption; provided that (1)  at least 65% of the principal amount of the 2018 Notes outstanding remains outstanding immediately after any such redemption; and (2)  the company makes such redemption not more than 90 days after the consummation of any such public offering.

 

On October 18, 2010, the company completed the sale of $600.0 million aggregate principal amount of its 8.50% Senior Notes due 2020 (the “2020 Notes”). Net proceeds of $583.7 million from this offering were used to pay down ratably the then outstanding balances of Term Loans A and B.  Interest on the 2020 Notes is payable semi-annually in May and November of each year. The company may redeem the 2020 Notes in whole or in part for a premium at any time on or after November 1, 2015.  The following would be the premium paid by the company, expressed as a percentage of the principal amount, if it redeems the 2020 Notes during the 12-month period commencing on November 1 of the year set forth below:

 

Year

 

Percentage

 

2015

 

104.250

%

2016

 

102.833

%

2017

 

101.417

%

2018 and thereafter

 

100.000

%

 

In addition, at any time, or from time to time, on or prior to November 1, 2013, the company may, at its option, use the net cash proceeds of one or more public equity offerings to redeem up to 35% of the principal amount of the 2020 Notes outstanding at a redemption price of 108.5% of the principal amount thereof, plus accrued but unpaid interest, if any, to the date of redemption; provided that (1) at least 65% of the principal amount of the 2020 Notes outstanding remains outstanding immediately after any such redemption; and (2) the company makes such redemption not more than 90 days after the consummation of any such public offering.

 

The balance sheet values of the 2018 and 2020 Notes at March 31, 2012 and December 31, 2011 are not equal to the face value of the Notes due to the fact that the fair market value of the interest rate hedges on these Notes are included in the balance sheet value.

 

As of March 31, 2012, the company had outstanding $72.0 million of other indebtedness that has a weighted-average interest rate of approximately 6.5%.  This debt includes outstanding overdraft balances and capital lease obligations in its Americas, Asia-Pacific and European regions.

 

As of June 30, 2011, the company offset all of its previous interest rate swaps against Term Loan A and B interest due to the

 

14



 

amendment of its Senior Credit Facility.  As of March 31, 2012, the company had outstanding $450.0 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.  The company is also party to various fixed-to-float interest rate swaps in connection with its 2018 and 2020 Notes.  At March 31, 2012, $200.0 million and $300.0 million of the 2018 and 2020 Notes respectively, were swapped to floating rate interest,  The 2018 Notes accrue interest at a rate of 9.50% on the fixed portion and 7.45% plus the six-month LIBOR reset in arrears on the variable portion. The 2020 Notes accrue interest at a rate of 8.50% on the fixed portion and 6.02% plus the six-month LIBOR reset in arrears on the variable portion. At March 31, 2012, the weighted average interest rates for the 2018 and 2020 Notes taking into consideration the impact of floating rate hedges, was 8.84% and 7.62%, respectively.  Both aforementioned swap contracts of the 2018 and 2020 Notes include a call premium schedule that mirrors that of the respective debt and includes an optional early termination cash settlement at five years from the trade date.

 

As of March 31, 2012, 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 2013 Notes, the 2018 Notes, and the 2020 Notes.  Based upon our current plans and outlook, we believe we will be able to comply with these covenants during the subsequent 12 months. As of March 31, 2012 our Consolidated Senior Secured Leverage Ratio was 2.86:1, while the maximum ratio is 3.75:1 and our Consolidated Interest Coverage Ratio was 2.65:1, above the minimum ratio of 1.75:1.

 

9. Accounts Receivable Securitization

 

Effective September 27, 2011, the company entered into a Third Amended and Restated Receivables Purchase Agreement related to its accounts receivable securitization program with various lenders and servicers.  The company’s accounts receivable securitization program has a maximum capacity of $125.0 million and includes certain of the company’s U.S., Canadian and German Foodservice and U.S. Crane segment businesses.  Trade accounts receivables sold to a third-party financial institution (“Purchaser”) and being serviced by the company totaled $123.0 million at March 31, 2012 and $121.1 million at December 31, 2011.

 

Transactions under the accounts receivable securitization program are accounted for as sales in accordance with ASC Topic 860, “Transfers and Servicing.”  Sales of trade receivables to the Purchaser are reflected as a reduction of accounts receivable in the accompanying 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 Consolidated Statements of Cash Flows.  The company deems the interest rate risk related to the deferred purchase price notes to be de minimis, primarily due to the short average collection cycle of the related receivables (i.e. 60 days) as noted below.

 

Due to an average collection cycle of less than 60 days for such accounts receivable as well as the company’s collection history, the fair value of the company’s deferred purchase price notes approximates book value.  The fair value of the deferred purchase price notes recorded at March 31, 2012 and December 31, 2011 was $73.2 million and $40.3 million, respectively, and is included in accounts receivable in the accompanying Consolidated Balance Sheets.

 

The accounts receivable securitization program also contains customary affirmative and negative covenants. Among other restrictions, these covenants require the company to meet specified financial tests, which include a consolidated interest coverage ratio and a consolidated senior secured leverage ratio that are the same as the covenant ratios required per the New Senior Credit Facility.  As of March 31, 2012, the company was in compliance with all affirmative and negative covenants inclusive of the financial covenants pertaining to the accounts receivable securitization program.  Based on our current plans and outlook, we believe we will be able to comply with these covenants during the subsequent 12 months.

 

10.  Income Taxes

 

For the three months ended March 31, 2012, the company recorded an income tax expense of $12.4 million, as compared to an income tax expense of $1.4 million for the three months ended March 31, 2011.  The increase in the company’s tax expense for the three months ended March 31, 2012 relative to the prior year resulted primarily from an increase in 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’s unrecognized tax benefits, excluding interest and penalties, were $56.7 million as of March 31, 2012, and $45.4 million as of March 31, 2011.  All of the company’s unrecognized tax benefits as of March 31, 2012, if recognized, would impact income tax expense. It is reasonably possible that a number of uncertain tax positions may be settled within the next 12 months.  Settlement of these matters may have a material effect on the company’s consolidated results of operations, financial positions, or cash flows.

 

There have been no significant developments in the quarter with respect to the company’s ongoing tax audits in various jurisdictions.

 

15



 

11.  Earnings Per Share

 

The following is a reconciliation of the average shares outstanding used to compute basic and diluted earnings per share:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Basic weighted average common shares outstanding

 

130,550,681

 

130,448,118

 

Effect of dilutive securities - stock options and restricted stock

 

3,131,095

 

 

Diluted weighted average common shares outstanding

 

133,681,776

 

130,448,118

 

 

For the three months ended March 31, 2011, the total number of potential dilutive securities was 3.3 million.  However, these securities were not included in the computation of diluted net loss per common share for the three months ended March 31, 2011, since to do so would decrease the loss per share.  In addition, for the three months ended March 31, 2012 and 2011, 3.5 million and 2.9 million, respectively, of common shares issuable upon the exercise of stock options were anti-dilutive and were also excluded from the calculation of diluted earnings per share.

 

No dividends were paid during each of the three-month periods ended March 31, 2012 and March 31, 2011.

 

12.  Stockholders’ Equity

 

The following is a roll forward of retained earnings and noncontrolling interest for the three months ended March 31, 2012 and 2011:

 

(in millions)

 

Retained Earnings

 

Noncontrolling
Interest

 

Balance at December 31, 2011

 

$

113.6

 

$

(9.9

)

Net earnings (loss)

 

0.1

 

(1.9

)

Balance at March 31, 2012

 

$

113.7

 

$

(11.8

)

 

(in millions)

 

Retained Earnings

 

Noncontrolling
Interest

 

Balance at December 31, 2010

 

$

134.7

 

$

(3.4

)

Net earnings (loss)

 

(52.4

)

(0.9

)

Balance at March 31, 2011

 

$

82.3

 

$

(4.3

)

 

Authorized capitalization consists of 300 million shares of $0.01 par value common stock and 3.5 million shares of $0.01 par value preferred stock.  None of the preferred shares have been issued.

 

Currently, the company has authorization to purchase up to 10 million shares of common stock at management’s discretion.  As of March 31, 2012, the company has purchased approximately 7.6 million shares at a cost of $49.8 million pursuant to this authorization; however, the company has not purchased any shares of its common stock under this authorization since 2006.

 

13.  Stock-Based Compensation

 

Stock-based compensation expense is calculated by estimating the fair value of incentive and non-qualified stock options at the time of grant and amortized over the stock options’ vesting period.  Stock-based compensation expense was $4.9 million and $3.6 million for the three-months ended March 31, 2012 and 2011, respectively.  The company granted options to acquire 0.7 million and 1.0 million shares of common stock to officers and employees during the first quarters of 2012 and 2011, respectively.  The company does not currently grant options to directors; however, prior to 2011, any option grants to directors were exercisable immediately upon granting and expire ten years subsequent to the grant date.  For all outstanding grants made to officers and employees prior to 2011, options become exercisable in 25% increments annually over a four-year period beginning on the second anniversary of the grant date and expire ten years subsequent to the grant date.  For directors, and starting with 2011 grants to officers, any options become exercisable in 25% increments annually over a four-year period beginning on the first anniversary of the grant date and expire ten years subsequent to the grant date.  In addition, the company issued a total of 0.2 million and 0.3 million shares of restricted stock to directors, officers and employees during the first quarter of 2012 and 2011, respectively.  The restrictions on all shares of restricted stock expire on the third anniversary of the applicable grant date.

 

Performance shares granted are earned based on the extent to which performance goals are met over the applicable performance period.  The performance goals and the applicable performance period vary for each grant year.  The performance shares granted in

 

16



 

2011 are earned based on the extent to which performance goals are met by the company over a two-year period from January 1, 2011 to December 31, 2012.  The performance goals for the performance shares granted in 2011 are based fifty percent (50%) on EVA®  performance and fifty percent (50%) on debt reduction over the two-year period.  Seventy-five percent (75%) of the shares earned by an employee will be paid out after the end of the two-year period and the remaining twenty-five percent (25%) of the shares earned are subject to the further requirement that the employee be continuously employed by the company during the entire 2013 calendar year.  If that criterion is met then the twenty-five percent (25%) will be paid out to the employee after the end of the 2013 calendar year.  The performance shares granted in 2012 are earned based on the extent which performance goals are met by the company over a three-year period from January 1, 2012 to December 31, 2014.  The performance goals for the performance shares granted in 2012 are based fifty percent (50%) on total shareholder return relative to a peer group of companies over the three-year period and fifty percent (50%) on improvement in the company’s total leverage ratio over the three-year period.  Depending on the foregoing factors, the number of shares awarded could range from zero to 0.9 million and zero to 0.7 million for the 2011 and 2012 performance share grants, respectively.

 

The company recognizes expense for all stock-based compensation with graded vesting on a straight-line basis over the vesting period for the entire award.

 

14.  Contingencies and Significant Estimates

 

As of March 31, 2012, the company held reserves for environmental matters related to Enodis locations of approximately $1.1 million.  At certain of the company’s other facilities, the company has identified potential contaminants in soil and groundwater.  The ultimate cost of any remediation required will depend upon the results of future investigation.  Based upon available information, the company does not expect the ultimate costs at any of these locations will have a material adverse effect on its financial condition, results of operations, or cash flows individually and in the aggregate.

 

The company believes that it has obtained and is in substantial compliance with those material environmental permits and approvals necessary to conduct its various businesses.  Based on the facts presently known, the company does not expect environmental compliance costs to have a material adverse effect on its financial condition, results of operations, or cash flows.

 

As of March 31, 2012, various product-related lawsuits were pending.  To the extent permitted under applicable law, all of these are insured with self-insurance retention levels.  The company’s self-insurance retention levels vary by business, and have fluctuated over the last five years.  The range of the company’s self-insured retention levels is $0.1 million to $3.0 million per occurrence.  The high-end of the company’s self-insurance retention level is a legacy product liability insurance program inherited in the Grove acquisition for cranes manufactured in the United States for occurrences from January 2000 through October 2002.  As of March 31, 2012, the largest self-insured retention level for new occurrences currently maintained by the company is $2.0 million per occurrence and applies to product liability claims for cranes manufactured in the United States.

 

Product liability reserves in the Consolidated Balance Sheet at March 31, 2012 were $27.9 million; $5.7 million was reserved specifically for actual cases and $22.2 million for claims incurred but not reported, which were estimated using actuarial methods.  Based on the company’s experience in defending product liability claims, management believes the current reserves are adequate for estimated case resolutions on aggregate self-insured claims and insured claims.  Any recoveries from insurance carriers are dependent upon the legal sufficiency of claims and solvency of insurance carriers.

 

At March 31, 2012 and December 31, 2011, the company had reserved $104.2 million and $104.4 million, respectively, for warranty claims included in product warranties and other non-current liabilities in the Consolidated Balance Sheets.  Certain of these warranty and other related claims involve matters in dispute that ultimately are resolved by negotiation, arbitration, or litigation.

 

It is reasonably possible that the estimates for environmental remediation, product liability and warranty costs may change in the near future based upon new information that may arise or matters that are beyond the scope of the company’s historical experience.  Presently, there are no reliable methods to estimate the amount of any such potential changes.

 

The company is involved in numerous lawsuits involving asbestos-related claims in which the company is one of numerous defendants.  After taking into consideration legal counsel’s evaluation of such actions, the current political environment with respect to asbestos related claims, and the liabilities accrued with respect to such matters, in the opinion of management, ultimate resolution is not expected to have a material adverse effect on the financial condition, results of operations, or cash flows of the company.

 

The company is also involved in various legal actions arising out of the normal course of business, which, taking into account the liabilities accrued and legal counsel’s evaluation of such actions, in the opinion of management, the ultimate resolution, individually and in the aggregate, is not expected to have a material adverse effect on the company’s financial condition, results of operations, or cash flows.

 

17



 

15. Guarantees

 

The company periodically enters into transactions with customers that provide for residual value guarantees and buyback commitments.  These initial transactions are recorded as deferred revenue and are amortized to income on a straight-line basis over a period equal to that of the customer’s third party financing agreement.  The deferred revenue included in other current and non-current liabilities at March 31, 2012 and December 31, 2011 was $54.1 million and $61.2 million, respectively.  The total amount of residual value guarantees and buyback commitments given by the company and outstanding at March 31, 2012 and December 31, 2011 was $77.8 million and $89.5 million, respectively.  These amounts are not reduced for amounts the company would recover from repossession and subsequent resale of the units.  The residual value guarantees and buyback commitments expire at various times through 2015.

 

During the three months ended March 31, 2012 and 2011, the company sold no additional long term notes receivable to third party financing companies. Related to notes sold in other periods, the company guarantees some percentage, up to 100%, of collection of the notes to the financing companies.  The company has accounted for the sales of the notes as a financing of receivables.  The receivables remain on the company’s Consolidated Balance Sheets, net of payments made, in other current and non-current assets, and the company has recognized an obligation equal to the net outstanding balance of the notes in other current and non-current liabilities in the Consolidated Balance Sheets.  The cash flow benefit of these transactions is reflected as financing activities in the Consolidated Statements of Cash Flows.  During the three months ended March 31, 2012 and 2011, the customers paid $9.0 million and $0.7 million, respectively, on the notes to the third party financing companies.  As of March 31, 2012 and December 31, 2011, the outstanding balance of the notes receivable guaranteed by the company was $5.5 million and $14.1 million, respectively.

 

In the normal course of business, the company provides its customers a warranty covering workmanship, and in some cases materials, on products manufactured by the company.  The warranty generally provides that products will be free from defects for periods ranging from 12 to 60 months with certain equipment having longer-term warranties.  If a product fails to comply with the company’s warranty, the company may be obligated, at its expense, to correct any defect by repairing or replacing such defective products.  The company provides for an estimate of costs that may be incurred under its warranty at the time product revenue is recognized.  These costs primarily include labor and materials, as necessary, associated with repair or replacement.  The primary factors that affect the company’s warranty liability include the number of units shipped and historical and anticipated warranty claims.  As these factors are impacted by actual experience and future expectations, the company assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary.  Below is a table summarizing the warranty activity for the three months ended March 31, 2012 and the year ended December 31, 2011:

 

(in millions)

 

Three Months 
Ended
March 31, 2012

 

Year Ended
December 31, 2011

 

Balance at beginning of period

 

$

104.4

 

$

99.9

 

Accruals for warranties issued during the period

 

13.5

 

66.8

 

Settlements made (in cash or in kind) during the period

 

(14.4

)

(62.3

)

Currency translation

 

0.7

 

 

Balance at end of period

 

$

104.2

 

$

104.4

 

 

16. Employee Benefit Plans

 

The company provides certain pension, health care and death benefits for eligible retirees and their dependents.  The pension benefits are funded, while the health care and death benefits are not funded but are paid as incurred.  Eligibility for coverage is based on meeting certain years of service and retirement qualifications.  These benefits may be subject to deductibles, co-payment provisions, and other limitations.  The company has reserved the right to modify these benefits.

 

The components of periodic benefit costs for the three months ended March 31, 2012 and March 31, 2011 are as follows:

 

 

 

Three Months Ended March 31, 2012

 

 

 

U.S.

 

Non-U.S.

 

Postretirement

 

 

 

Pension

 

Pension

 

Health and

 

(in millions)

 

Plans

 

Plans

 

Other Plans

 

Service cost - benefits earned during the period

 

$

 

$

0.5

 

$

0.2

 

Interest cost of projected benefit obligations

 

2.5

 

2.5

 

0.7

 

Expected return on plan assets

 

(2.5

)

(2.0

)

 

Amortization of actuarial net (gain) loss

 

0.7

 

0.2

 

0.1

 

Net periodic benefit costs

 

$

0.7

 

$

1.2

 

$

1.0

 

 

18



 

 

 

Three Months Ended March 31, 2011

 

 

 

U.S.

 

Non-U.S.

 

Postretirement

 

 

 

Pension

 

Pension

 

Health and

 

(in millions)

 

Plans

 

Plans

 

Other Plans

 

Service cost - benefits earned during the period

 

$

 

$

0.4

 

$

0.2

 

Interest cost of projected benefit obligations

 

2.6

 

2.6

 

0.8

 

Expected return on plan assets

 

(2.4

)

(2.2

)

 

Amortization of actuarial net (gain) loss

 

0.4

 

0.1

 

0.1

 

Net periodic benefit costs

 

$

0.6

 

$

0.9

 

$

1.1

 

 

17. Restructuring

 

The following is a rollforward of all restructuring activities relating to the Crane segment for the three-month period ended March 31, 2012 (in millions):

 

Restructuring Reserve 
Balance as of
December 31, 2011

 

Restructuring
Charges

 

Use of Reserve

 

Reserve Revisions

 

Restructuring Reserve 
Balance as of
March 31, 2012

 

$

 4.3

 

$

 

$

(1.0

)

$

 

$

3.3

 

 

The following is a rollforward of all restructuring activities relating to the Foodservice segment for the three-month period ended March 31, 2012 (in millions):

 

Restructuring Reserve 
Balance as of
December 31, 2011

 

Restructuring
Charges

 

Use of Reserve

 

Reserve Revisions

 

Restructuring Reserve 
Balance as of
March 31, 2012

 

$

 17.6

 

$

 

$

 

$

 

$

17.6

 

 

During the first and fourth quarter of 2011, the company determined that certain restructuring actions originally contemplated in conjunction with the acquisition of Enodis in October 2008 were no longer necessary.  Accordingly, the company adjusted the excess reserves of $5.1 million to goodwill.

 

18. Recent Accounting Changes and Pronouncements

 

In September 2011, the FASB issued ASU 2011-08 which provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment.  If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required.  Otherwise, no further testing is required. The revised standard is effective for the company’s annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The adoption of this ASU did not significantly impact the company’s consolidated financial statements.

 

In June 2011 and December 2011, the FASB issued an update to ASC Topic No. 220, “Presentation of Comprehensive Income,” which eliminates the option to present other comprehensive income and its components in the statement of shareholders’ equity. The company can elect to present the items of net income and other comprehensive income in a single continuous statement of comprehensive income or in two separate, but consecutive, statements. Under either method the statement would need to be presented with equal prominence as the other primary financial statements. The amended guidance, which must be applied retroactively, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and has been incorporated into these financial statements.

 

19.  Business Segments

 

The company identifies its segments using the “management approach,” which designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the company’s reportable segments.  The company has two reportable segments: Crane and Foodservice. The company has not aggregated individual operating segments within these reportable segments.  Net sales and earnings from operations by segment are summarized as follows:

 

19



 

 

 

Three Months Ended

 

 

 

March 31,

 

(in millions)

 

2012

 

2011

 

Net sales:

 

 

 

 

 

Crane

 

$

507.9

 

$

392.8

 

Foodservice

 

352.2

 

339.4

 

Total net sales

 

$

860.1

 

$

732.2

 

Earnings (loss) from operations:

 

 

 

 

 

Crane

 

$

20.9

 

$

10.8

 

Foodservice

 

43.3

 

33.2

 

Corporate expense

 

(16.0

)

(13.4

)

Restructuring expense

 

(0.6

)

(0.8

)

Other

 

 

(0.1

)

Operating earnings from operations

 

$

47.6

 

$

29.7

 

 

Crane segment operating earnings for the three months ended March 31, 2012 and 2011 includes amortization expense of $1.6 million and $1.6 million, respectively.  Foodservice segment operating earnings for the three months ended March 31, 2012 and 2011 includes amortization expense of $8.0 million and $8.1 million, respectively.

 

As of March 31, 2012 and December 31, 2011, the total assets by segment were as follows:

 

(in millions)

 

March 31, 2012

 

December 31, 2011

 

Crane

 

$

1,816.5

 

$

1,698.8

 

Foodservice

 

1,992.3

 

2,201.2

 

Corporate

 

306.9

 

65.2

 

Total

 

$

4,115.7

 

$

3,965.2

 

 

20



 

20.  Subsidiary Guarantors of 2013 Notes, 2018 Notes and 2020 Notes

 

The following tables present condensed consolidating financial information for (a) The Manitowoc Company, Inc. (Parent); (b) the guarantors of the 2013 Notes, 2018 Notes and 2020 Notes, which include substantially all of the domestic, wholly-owned subsidiaries of the company (Subsidiary Guarantors); and (c) the wholly- and partially-owned foreign subsidiaries of the Parent, which do not guarantee the 2013 Notes, 2018 Notes and 2020 Notes (Non-Guarantor Subsidiaries).  Separate financial statements of the Subsidiary Guarantors are not presented because the guarantors are fully and unconditionally, jointly and severally liable under the guarantees, except for normal and customary release provisions.

 

The Manitowoc Company, Inc.

Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2012

(In millions)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

Parent

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

Net sales

 

$

 

$

584.1

 

$

416.2

 

$

(140.2

)

$

860.1

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

447.9

 

346.2

 

(140.2

)

653.9

 

Engineering, selling and administrative expenses

 

15.4

 

60.0

 

73.0

 

 

148.4

 

Restructuring expense

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