MANITOWOC CO INC, 10-Q filed on 11/5/2012
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2012
Sep. 29, 2012
Document and Entity Information
 
 
Entity Registrant Name
MANITOWOC CO INC 
 
Entity Central Index Key
0000061986 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2012 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
132,473,053 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q3 
 
Condensed Consolidated Statements of Operations (USD $)
In Millions, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Net sales
$ 955.7 
$ 935.4 
$ 2,821.7 
$ 2,617.4 
Costs and expenses:
 
 
 
 
Cost of sales
719.7 
712.3 
2,126.9 
1,990.3 
Engineering, selling and administrative expenses
154.0 
143.2 
453.5 
428.8 
Restructuring expense
0.7 
0.9 
1.6 
3.8 
Amortization expense
9.5 
9.9 
28.6 
29.2 
Other
1.9 
0.3 
2.0 
0.4 
Total operating costs and expenses
885.8 
866.6 
2,612.6 
2,452.5 
Earnings (loss) from operations
69.9 
68.8 
209.1 
164.9 
Other income (expenses):
 
 
 
 
Amortization of deferred financing fees
(2.0)
(2.2)
(6.1)
(8.2)
Interest expense
(34.4)
(34.0)
(101.2)
(111.7)
Loss on debt extinguishment
 
 
 
(27.8)
Other income (expense), net
(0.2)
2.0 
0.1 
3.1 
Total other income (expenses)
(36.6)
(34.2)
(107.2)
(144.6)
Earnings (loss) from continuing operations before taxes on income
33.3 
34.6 
101.9 
20.3 
Provision (benefit) for taxes on income
13.7 
12.9 
41.0 
13.8 
Earnings (loss) from continuing operations
19.6 
21.7 
60.9 
6.5 
Discontinued operations:
 
 
 
 
Earnings (loss) from discontinued operations, net of income taxes of $0.0, ($0.2), ($0.2) and ($2.1), respectively
0.1 
(0.1)
(0.4)
(3.1)
Gain (loss) on sale of discontinued operations, net of income taxes of $0.0, $0.0, $0.0 and $29.0, respectively
 
 
 
(33.6)
Net earnings (loss)
19.7 
21.6 
60.5 
(30.2)
Less: Net loss attributable to noncontrolling interest, net of income taxes
(2.5)
(2.1)
(6.7)
(4.1)
Net earnings (loss) attributable to Manitowoc
22.2 
23.7 
67.2 
(26.1)
Amounts attributable to the Manitowoc common shareholders:
 
 
 
 
Earnings (loss) from continuing operations
22.1 
23.8 
67.6 
10.6 
Earnings (loss) from discontinued operations, net of income taxes
0.1 
(0.1)
(0.4)
(3.1)
Loss on sale of discontinued operations, net of income taxes
 
 
 
(33.6)
Net earnings (loss) attributable to Manitowoc
$ 22.2 
$ 23.7 
$ 67.2 
$ (26.1)
Basic earnings (loss) per common share:
 
 
 
 
Earnings (loss) from continuing operations attributable to Manitowoc common shareholders (in dollars per share)
$ 0.17 
$ 0.18 
$ 0.52 
$ 0.08 
Earnings (loss) from discontinued operations attributable to Manitowoc common shareholders (in dollars per share)
$ 0.00 
$ 0.00 
$ 0.00 
$ (0.02)
Loss on sale of discontinued operations, net of income taxes (in dollars per share)
 
 
 
$ (0.26)
Earnings (loss) per share attributable to Manitowoc common shareholders (in dollars per share)
$ 0.17 
$ 0.18 
$ 0.51 
$ (0.20)
Diluted earnings (loss) per common share:
 
 
 
 
Earnings (loss) from continuing operations attributable to Manitowoc common shareholders (in dollars per share)
$ 0.17 
$ 0.18 
$ 0.51 
$ 0.08 
Earnings (loss) from discontinued operations attributable to Manitowoc common shareholders (in dollars per share)
$ 0.00 
$ 0.00 
$ 0.00 
$ (0.02)
Loss on sale of discontinued operations, net of income taxes (in dollars per share)
 
 
 
$ (0.25)
Earnings (loss) per share attributable to Manitowoc common shareholders (in dollars per share)
$ 0.17 
$ 0.18 
$ 0.51 
$ (0.20)
Weighted average shares outstanding - basic (in shares)
130,704,895 
130,510,828 
130,610,592 
130,464,015 
Weighted average shares outstanding - diluted (in shares)
132,602,292 
133,036,277 
132,576,695 
133,584,302 
Condensed Consolidated Statements of Operations (Parenthetical) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Condensed Consolidated Statements of Operations
 
 
 
 
Earnings (loss) from discontinued operations, income taxes
$ 0 
$ (0.2)
$ (0.2)
$ (2.1)
Gain (loss) on sale of discontinued operations, income taxes
$ 0 
$ 0 
$ 0 
$ 29.0 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Net earnings (loss)
$ 19.7 
$ 21.6 
$ 60.5 
$ (30.2)
Other comprehensive income (loss), net of tax
 
 
 
 
Derivative instrument fair market value adjustment, net of income taxes of $2.0, $(4.3), $1.6 and $2.3, respectively
4.0 
(8.8)
3.1 
4.7 
Foreign currency translation adjustments
24.9 
(31.8)
2.0 
8.4 
Total other comprehensive income (loss), net of tax
28.9 
(40.6)
5.1 
13.1 
Comprehensive income (loss)
48.6 
(19.0)
65.6 
(17.1)
Comprehensive income (loss) attributable to noncontrolling interest
(2.5)
(2.1)
(6.7)
(4.1)
Comprehensive income (loss) attributable to Manitowoc
$ 51.1 
$ (16.9)
$ 72.3 
$ (13.0)
Condensed Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
 
 
 
Derivative instrument fair market value adjustment, income taxes
$ 2.0 
$ (4.3)
$ 1.6 
$ 2.3 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Current Assets:
 
 
Cash and cash equivalents
$ 68.3 
$ 68.6 
Marketable securities
2.7 
2.7 
Restricted cash
10.1 
7.2 
Accounts receivable, less allowances of $14.1 and $12.8, respectively
339.3 
297.0 
Inventories - net
866.4 
665.8 
Deferred income taxes
115.7 
117.8 
Other current assets
98.0 
77.8 
Total current assets
1,500.5 
1,236.9 
Property, plant and equipment - net
561.6 
568.2 
Goodwill
1,230.5 
1,229.7 
Other intangible assets - net
822.9 
851.8 
Other non-current assets
139.7 
144.6 
Total assets
4,255.2 
4,031.2 
Current Liabilities:
 
 
Accounts payable and accrued expenses
890.4 
868.7 
Current portion of long-term debt and short-term borrowings
114.0 
79.1 
Product warranties
92.6 
93.8 
Customer advances
27.9 
35.1 
Product liabilities
28.5 
26.8 
Total current liabilities
1,153.4 
1,103.5 
Non-Current Liabilities:
 
 
Long-term debt
1,915.6 
1,810.9 
Deferred income taxes
267.7 
266.7 
Pension obligations
89.8 
90.6 
Postretirement health and other benefit obligations
61.0 
59.8 
Long-term deferred revenue
34.0 
34.2 
Other non-current liabilities
164.0 
175.8 
Total non-current liabilities
2,532.1 
2,438.0 
Commitments and contingencies (Note 14)
   
   
Total Equity:
 
 
Common stock (300,000,000 shares authorized, 163,175,928 shares issued, 132,473,053 and 131,884,765 shares outstanding, respectively)
1.4 
1.4 
Additional paid-in capital
484.2 
470.8 
Accumulated other comprehensive income (loss)
(9.9)
(15.0)
Retained earnings
197.0 
129.8 
Treasury stock, at cost (30,702,875 and 31,291,163 shares, respectively)
(86.4)
(87.4)
Total Manitowoc stockholders' equity
586.3 
499.6 
Noncontrolling interest
(16.6)
(9.9)
Total equity
569.7 
489.7 
Total liabilities and equity
$ 4,255.2 
$ 4,031.2 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Condensed Consolidated Balance Sheets
 
 
Accounts receivable, allowances (in dollars)
$ 14.1 
$ 12.8 
Common stock, shares authorized
300,000,000 
300,000,000 
Common stock, shares issued
163,175,928 
163,175,928 
Common stock, shares outstanding
132,473,053 
131,884,765 
Treasury stock, shares
30,702,875 
31,291,163 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Cash Flows from Operations:
 
 
Net earnings (loss)
$ 60.5 
$ (30.2)
Adjustments to reconcile net earnings (loss) to cash provided by (used for) operating activities of continuing operations:
 
 
Discontinued operations, net of income taxes
0.4 
3.1 
Depreciation
51.4 
62.6 
Amortization of intangible assets
28.6 
29.2 
Deferred income taxes
1.8 
(4.5)
Loss (gain) on sale of property, plant and equipment
0.8 
(0.5)
Restructuring expense
1.6 
3.8 
Amortization of deferred financing fees
6.1 
8.2 
Loss on debt extinguishment
 
27.8 
Loss on sale of discontinued operations
 
33.6 
Stock-based compensation expense
11.8 
11.0 
Changes in operating assets and liabilities, excluding effects of business acquisitions and divestitures:
 
 
Accounts receivable
(42.1)
(129.0)
Inventories
(200.9)
(254.3)
Other assets
(15.5)
(5.4)
Accounts payable
3.4 
124.9 
Accrued expenses and other liabilities
21.6 
(43.9)
Net cash provided by (used for) operating activities of continuing operations
(70.5)
(163.6)
Net cash provided by (used for) operating activities of discontinued operations
(0.4)
(18.7)
Net cash provided by (used for) operating activities
(70.9)
(182.3)
Cash Flows from Investing:
 
 
Capital expenditures
(50.3)
(32.3)
Restricted cash
(2.9)
0.2 
Proceeds from sale of business
 
143.6 
Proceeds from sale of property, plant and equipment
0.7 
5.8 
Net cash provided by (used for) investing activities
(52.5)
117.3 
Cash Flows from Financing:
 
 
Proceeds from revolving credit facility
123.4 
98.0 
Proceeds from swap monetization
14.8 
21.5 
(Payments on) long-term debt
(70.3)
(861.6)
Proceeds from long-term debt
73.1 
835.6 
(Payments on) notes financing
(21.5)
(7.3)
Debt issuance costs
(0.3)
(14.3)
Exercises of stock options
2.6 
1.6 
Net cash provided by (used for) financing activities of continuing operations
121.8 
73.5 
Effect of exchange rate changes on cash
1.3 
(2.1)
Net increase (decrease) in cash and cash equivalents
(0.3)
6.4 
Balance at beginning of period
68.6 
83.7 
Balance at end of period
$ 68.3 
$ 90.1 
Accounting Policies
Accounting Policies

1.  Accounting Policies

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair statement of the results of operations and comprehensive income for the three and nine months ended September 30, 2012 and 2011, the cash flows for the same nine-month periods, and the financial position at September 30, 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 condensed consolidated financial statements and notes for the year ended December 31, 2011.  Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to SEC’s rules and regulations dealing with interim financial statements.  However, the company believes that the disclosures made in the condensed consolidated financial statements included herein are adequate to make the information presented not misleading. 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.

 

Revision of Prior Period Financial Statements:  During the third quarter of 2012 the company identified errors related to its deferred tax liability and goodwill accounts that originated in connection with certain acquisitions five to eleven years ago, resulting in an understatement of these accounts, and a cumulative overstatement of income tax expense of $18.6 million through June 30, 2012. In addition, the company had previously identified an error related to the overstatement of inventory ($2.9 million in 2011 and $1.1 million in the first quarter of 2012) that had been corrected as an out-of-period adjustment in the second quarter of 2012. The company does not believe these errors to be material to the company’s results of operations, financial position, or cash flows for any of the company’s previously filed annual or quarterly financial statements. The company has revised the condensed consolidated financial statements included herein to correct for these errors.  These revisions, including those previously disclosed in the company’s Annual report on Form 10-K, for the year ended December 31, 2011, impacted the condensed consolidated financial statements as follows:

 

(a) Increase to cost of sales and decrease to earnings (loss) from continuing operations before taxes on earnings of $0.4 million and $1.4 million for the three and nine months ended September 30, 2011, respectively.

 

(b) Decrease to provision for taxes on income of: $0.4 million and $1.3 million for the three and nine months ended September 30, 2011, respectively, and decrease to net earnings of $0.1 million for the nine months ended, September 30, 2011.

 

(c) At December 31, 2011: Decrease to inventories net of $2.9 million; increase to goodwill of $64.9 million; increase to other non-current assets of $4.0 million; increase to total assets of $66.0 million; decrease to accounts payable and accrued expenses of $1.1 million; increase to deferred income taxes of $50.9 million; and increase to total equity of $16.2 million.

 

Discontinued Operations
Discontinued Operations

2. Discontinued Operations

 

On January 14, 2011, the company closed the previously announced divestiture of 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 resulted in a $34.6 million loss on sale, primarily consisting of $29.9 million of income tax expense.  The net proceeds from the sale were used to pay down outstanding term 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 and nine months ended September 30, 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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in millions)

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

$

 

$

 

$

 

$

3.3

 

 

 

 

 

 

 

 

 

 

 

Pretax earnings (loss) from discontinued operation

 

$

 

$

(0.1

)

$

(0.4

)

$

(4.2

)

Provision (benefit) for taxes on earnings

 

 

(0.1

)

(0.1

)

(1.7

)

Net earnings (loss) from discontinued operation

 

$

 

$

 

$

(0.3

)

$

(2.5

)

 

The following selected financial data of various other businesses disposed of prior to 2012, primarily consisting of administrative costs, for the three and nine-months ended September 30, 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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in millions)

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Pretax earnings (loss) from discontinued operation

 

$

0.1

 

$

(0.2

)

$

(0.2

)

$

(1.0

)

Provision (benefit) for taxes on earnings

 

 

(0.1

)

(0.1

)

(0.4

)

Net earnings (loss) from discontinued operation

 

$

0.1

 

$

(0.1

)

$

(0.1

)

$

(0.6

)

 

Fair Value of Financial Instruments
Fair Value of Financial Instruments

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 September 30, 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 September 30, 2012

 

(in millions)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

 

$

1.7

 

$

 

$

1.7

 

Commodity contracts

 

 

0.1

 

 

0.1

 

Marketable securities

 

2.6

 

 

 

2.6

 

Total current assets at fair value

 

$

2.6

 

$

1.8

 

$

 

$

4.4

 

 

 

 

 

 

 

 

 

 

 

Non-Current Assets:

 

 

 

 

 

 

 

 

 

Interest rate cap contracts

 

$

 

$

0.7

 

$

 

$

0.7

 

Total non-current assets at fair value

 

$

 

$

0.7

 

$

 

$

0.7

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

 

$

1.8

 

$

 

$

1.8

 

Commodity contracts

 

 

1.4

 

 

1.4

 

Interest rate swap contracts

 

 

2.5

 

 

2.5

 

Total current liabilities at fair value

 

$

 

$

5.7

 

$

 

$

5.7

 

 

 

 

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

 

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 $150.8 million and $146.6 million at September 30, 2012 and December 31, 2011, respectively. The fair value of the company’s 9.50% Senior Notes due 2018 was approximately $449.0 million and $434.0 million at September 30, 2012 and December 31, 2011, respectively. The fair value of the company’s 8.50% Senior Notes due 2020 was approximately $672.8 million and $634.9 million at September 30, 2012 and December 31, 2011, respectively. The fair values of the company’s Term Loans under its Senior Credit Facility were as follows at September 30, 2012 and December 31, 2011, respectively:  Term Loan A — $304.3 million and $318.6 million; and Term Loan B — $333.9 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 the instruments; though these markets are typically thinly traded, the liabilities 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 September 30, 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 commodity contracts are valued using broker quotations. As such, these derivative instruments are classified within Level 2.

 

Derivative Financial Instruments
Derivative Financial Instruments

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.  Swap 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 commodity swaps, foreign currency exchange contracts, and interest rate derivative contracts as cash flow hedges of forecasted purchases of commodities and currencies, and fixed or 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 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 $1.0 million of unrealized 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, depending on the type of risk being hedged.

 

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 September 30, 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

 

September 30, 2012

 

December 31, 2011

 

 

 

Type

 

Aluminum

 

1,501

 

1,254

 

MT

 

Cash Flow

 

Copper

 

513

 

684

 

MT

 

Cash Flow

 

Natural Gas

 

227,127

 

346,902

 

MMBtu

 

Cash Flow

 

Steel

 

10,758

 

8,231

 

Tons

 

Cash Flow

 

 

 

 

 

 

 

 

 

 

 

 

 

Units Hedged

 

 

 

 

 

Short Currency

 

September 30, 2012

 

December 31, 2011

 

Type

 

 

 

Canadian Dollar

 

7,681,869

 

25,083,644

 

Cash Flow

 

 

 

European Euro

 

80,882,410

 

67,565,453

 

Cash Flow

 

 

 

South Korean Won

 

2,552,218,195

 

3,224,015,436

 

Cash Flow

 

 

 

Singapore Dollar

 

4,800,000

 

4,800,000

 

Cash Flow

 

 

 

United States Dollar

 

2,701,939

 

5,538,777

 

Cash Flow

 

 

 

Chinese Renminbi

 

59,595,280

 

111,177,800

 

Cash Flow

 

 

 

 

As of June 30, 2011, the company offset, dedesignated and wrote-off 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 September 30, 2012, the company had outstanding $350.0 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.

 

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

 

In the third quarter of 2012, the company further monetized the derivative asset related to certain portions of its fixed-to-float interest rate swaps related to its 2018 and 2020 Notes and received $14.8 million in the quarter.  Consistent with the prior year monetization, the company treated the gain as an increase to the debt balances for each of the 2018 and 2020 notes, which will be amortized against interest expense over the life of the original swaps.

 

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 Condensed Consolidated Statements of Operations.  As of September 30, 2012 and December 31, 2011, the company had the following outstanding currency forward contracts that were not designated as hedging instruments:

 

 

 

Units Hedged

 

 

 

 

 

Short Currency

 

September 30,
2012

 

December 31,
2011

 

Recognized Location

 

Purpose

 

British Pound

 

7,100,000

 

 

Other income, net

 

Accounts Payable and Receivable Settlement

 

Euro

 

35,378,670

 

33,150,213

 

Other income, net

 

Accounts Payable and Receivable Settlement

 

United States Dollar

 

 

6,000,000

 

Other income, net

 

Accounts Payable and Receivable Settlement

 

Australian Dollar

 

1,988,000

 

7,569,912

 

Other income, net

 

Accounts Payable and Receivable Settlement

 

 

The fair value of outstanding derivative contracts recorded as assets in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2012 and December 31, 2011 was as follows:

 

 

 

 

 

ASSET DERIVATIVES

 

 

 

 

 

September 30, 2012

 

December 31, 2011

 

(in millions)

 

Balance Sheet Location

 

Fair Value

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

$

1.3

 

$

0.6

 

Commodity contracts

 

Other current assets

 

0.1

 

 

Interest rate swap contracts: Fixed-to-float

 

Other non-current assets

 

 

0.5

 

Interest rate cap contracts

 

Other non-current assets

 

0.7

 

0.3

 

Total derivatives designated as hedging instruments

 

 

 

$

2.1

 

$

1.4

 

 

 

 

 

 

ASSET DERIVATIVES

 

 

 

 

 

September 30, 2012

 

December 31, 2011

 

(in millions)

 

Balance Sheet Location

 

Fair Value

 

Derivatives NOT designated as hedging instruments

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

$

0.4

 

$

0.1

 

Total derivatives NOT designated as hedging instruments

 

 

 

$

0.4

 

$

0.1

 

 

 

 

 

 

 

 

 

Total asset derivatives

 

 

 

$

2.5

 

$

1.5

 

 

The fair value of outstanding derivative contracts recorded as liabilities in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2012 and December 31, 2011 was as follows:

 

 

 

 

 

LIABILITY DERIVATIVES

 

 

 

 

 

September 30, 2012

 

December 31, 2011

 

(in millions)

 

Balance Sheet Location

 

Fair Value

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Foreign exchange contracts

 

Accounts payable and accrued expenses

 

$

1.7

 

$

5.2

 

Commodity contracts

 

Accounts payable and accrued expenses

 

1.3

 

2.5

 

Total derivatives designated as hedging instruments

 

 

 

$

3.0

 

$

7.7

 

 

 

 

 

 

LIABILITY DERIVATIVES

 

 

 

 

 

September 30, 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

 

$

0.2

 

$

1.6

 

Interest rate swap contracts: Float-to-fixed

 

Accounts payable and accrued expenses

 

2.5

 

9.5

 

Total derivatives NOT designated as hedging instruments

 

 

 

$

2.7

 

$

11.1

 

 

 

 

 

 

 

 

 

Total liability derivatives

 

 

 

$

5.7

 

$

18.8

 

 

The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three months ended September 30, 2012 and September 30, 2011 for gains or losses initially recognized in Other Comprehensive Income (OCI) in the Condensed Consolidated Balance Sheet was as follows:

 

 

 

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)

 

September 30,
2012

 

September 30,
2011

 

OCI into Income
(Effective Portion)

 

September 30,
2012

 

September 30,
 2011

 

Foreign exchange contracts

 

$

2.7

 

$

(6.1

)

Cost of sales

 

$

(3.6

)

$

0.7

 

Interest rate swap & cap contracts

 

 

0.2

 

Interest expense

 

 

 

Commodity contracts

 

0.9

 

(2.0

)

Cost of sales

 

(0.8

)

(0.1

)

Total

 

$

3.6

 

$

(7.9

)

 

 

$

(4.4

)

$

0.6

 

 

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)

 

September 30, 2012

 

September 30, 2011

 

Commodity contracts

 

Cost of sales

 

$

(0.1

)

$

(0.1

)

Total

 

 

 

$

(0.1

)

$

(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

 

September 30, 2012

 

September 30, 2011

 

Foreign exchange contracts

 

Other income

 

$

0.3

 

$

1.5

 

Interest rate swaps

 

Other income

 

2.3

 

2.4

 

Total

 

 

 

$

2.6

 

$

3.9

 

 

The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2012 and September 30, 2011 for gains or losses initially recognized in Other Comprehensive Income (OCI) in the Condensed Consolidated Balance Sheet was as follows:

 

 

 

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)

 

September 30,
2012

 

September 30,
2011

 

OCI into Income
(Effective Portion)

 

September 30,
2012

 

September 30,
2011

 

Foreign exchange contracts

 

$

2.5

 

$

(4.2

)

Cost of sales

 

$

(6.9

)

$

(4.2

)

Interest rate swap & cap contracts

 

(0.1

)

1.3

 

Interest expense

 

 

(7.9

)

Commodity contracts

 

0.7

 

(2.3

)

Cost of sales

 

(2.2

)

0.8

 

Total

 

$

3.1

 

$

(5.2

)

 

 

$

(9.1

)

$

(11.3

)

 

Derivatives

 

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

 

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

 

Relationships (in millions)

 

Effectiveness Testing)

 

September 30, 2012

 

September 30, 2011

 

Commodity contracts

 

Cost of sales

 

$

(0.2

)

$

(0.1

)

Total

 

 

 

$

(0.2

)

$

(0.1

)

 

Derivatives Not Designated as

 

Location of Gain or (Loss)
Recognized
in Income on

 

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

 

Hedging Instruments (in millions)

 

Derivative

 

September 30, 2012

 

September 30, 2011

 

Foreign exchange contracts

 

Other income

 

$

(1.2

)

$

(1.2

)

Interest rate swaps

 

Other income

 

6.9

 

$

2.4

 

Total

 

 

 

$

5.7

 

$

1.2

 

 

The effect of Fair Market Value designated derivative instruments on the Condensed Consolidated Statements of Operations for the three months ended September 30, 2012 and September 30, 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

 

September 30, 2012

 

September 30, 2011

 

Interest rate swap contracts

 

Interest expense

 

$

 

$

7.1

 

Total

 

 

 

$

 

$

7.1

 

 

The effect of Fair Market Value designated derivative instruments on the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2012 and September 30, 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

 

September 30, 2012

 

September 30, 2011

 

Interest rate swap contracts

 

Interest expense

 

$

11.5

 

$

18.8

 

Total

 

 

 

$

11.5

 

$

18.8

 

 

Inventories
Inventories

5. Inventories

 

The components of inventories at September 30, 2012 and December 31, 2011 are summarized as follows:

 

 

 

September 30,

 

December 31,

 

(in millions)

 

2012

 

2011

 

Inventories — gross:

 

 

 

 

 

Raw materials

 

$

257.8

 

$

246.8

 

Work-in-process

 

228.7

 

168.1

 

Finished goods

 

487.5

 

357.6

 

Total inventories — gross

 

974.0

 

772.5

 

Excess and obsolete inventory reserve

 

(73.1

)

(75.3

)

Net inventories at FIFO cost

 

900.9

 

697.2

 

Excess of FIFO costs over LIFO value

 

(34.5

)

(31.4

)

Inventories — net

 

$

866.4

 

$

665.8

 

 

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

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 the three months ended March 31, 2012, June 30, 2012, and September 30, 2012 are as follows:

 

(in millions)

 

Crane

 

Foodservice

 

Total

 

Gross balance as of January 1, 2011

 

$

343.9

 

$

1,414.5

 

$

1,758.4

 

Restructuring reserve adjustment

 

 

(3.0

)

(3.0

)

Foreign currency impact

 

(5.1

)

(0.3

)

(5.4

)

Gross balance as of December 31, 2011

 

$

338.8

 

$

1,411.2

 

$

1,750.0

 

Asset impairments

 

 

(520.3

)

(520.3

)

Net balance as of December 31, 2011

 

$

338.8

 

$

890.9

 

$

1,229.7

 

 

 

 

 

 

 

 

 

Foreign currency impact

 

$

3.8

 

$

0.2

 

$

4.0

 

Gross balance as of March 31, 2012

 

$

342.6

 

$

1,411.4

 

$

1,754.0

 

Foreign currency impact

 

$

(10.8

)

$

(0.1

)

$

(10.9

)

Gross balance as of June 30, 2012

 

$

331.8

 

$

1,411.3

 

$

1,743.1

 

Foreign currency impact

 

7.6

 

0.1

 

7.7

 

Gross balance as of September 30, 2012

 

$

339.4

 

$

1,411.4

 

$

1,750.8

 

Asset impairments

 

 

(520.3

)

(520.3

)

Net balance as of September 30, 2012

 

$

339.4

 

$

891.1

 

$

1,230.5

 

 

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, 2012, the company performed its annual impairment analysis relative to goodwill and indefinite-lived intangible assets and based on those results no further 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.  In the event the company determines that assets are impaired in the future, the company would recognize a non-cash impairment charge, which could have a material adverse effect on the company’s condensed 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 at September 30, 2012 and December 31, 2011 are as follows:

 

 

 

September 30, 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

 

$

314.6

 

$

 

$

314.6

 

$

315.0

 

$

 

$

315.0

 

Customer relationships

 

437.9

 

(90.9

)

347.0

 

437.7

 

(73.8

)

363.9

 

Patents

 

33.2

 

(25.2

)

8.0

 

33.1

 

(23.3

)

9.8

 

Engineering drawings

 

11.0

 

(7.8

)

3.2

 

11.1

 

(7.3

)

3.8

 

Distribution network

 

20.3

 

 

20.3

 

20.4

 

 

20.4

 

Other intangibles

 

183.1

 

(53.3

)

129.8

 

182.7

 

(43.8

)

138.9

 

Total

 

$

1,000.1

 

$

(177.2

)

$

822.9

 

$

1,000.0

 

$

(148.2

)

$

851.8

 

 

Amortization expense for the three months ended September 30, 2012 and 2011 was $9.5 million and $9.9 million, respectively. Amortization expense for the nine months ended September 30, 2012 and 2011 was $28.6 million and $29.2 million, respectively. Amortization expense related to intangible assets for each of the five succeeding years is estimated to be approximately $40 million per year.

 

Accounts Payable and Accrued Expenses
Accounts Payable and Accrued Expenses

7.  Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses at September 30, 2012 and December 31, 2011 are summarized as follows:

 

 

 

September 30,

 

December 31,

 

(in millions)

 

2012

 

2011

 

Trade accounts payable and interest payable

 

$

491.7

 

$

482.2

 

Employee related expenses

 

104.0

 

96.7

 

Restructuring expenses

 

19.9

 

21.9

 

Profit sharing and incentives

 

35.2

 

33.4

 

Accrued rebates

 

36.7

 

39.3

 

Deferred revenue - current

 

25.5

 

27.0

 

Derivative liabilities

 

5.8

 

18.8

 

Income taxes payable

 

25.2

 

 

Miscellaneous accrued expenses

 

146.4

 

149.4

 

 

 

$

890.4

 

$

868.7

 

 

Debt
Debt

8. Debt

 

Outstanding debt at September 30, 2012 and December 31, 2011 is summarized as follows:

 

(in millions)

 

September 30, 2012

 

December 31, 2011

 

Revolving credit facility

 

$

124.0

 

$

 

Term loan A

 

306.3

 

332.5

 

Term loan B

 

332.0

 

332.0

 

Senior notes due 2013

 

150.0

 

150.0

 

Senior notes due 2018

 

411.0

 

407.7

 

Senior notes due 2020

 

621.9

 

613.5

 

Other

 

84.4

 

54.3

 

Total debt

 

2,029.6

 

1,890.0

 

Less current portion and short-term borrowings

 

(114.0

)

(79.1

)

Long-term debt

 

$

1,915.6

 

$

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 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 September 30, 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 September 30, 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)

 

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”; see below for the description of the 2013, 2018 and 2020 Notes).  Each series of Senior Notes is an unsecured senior obligation ranking subordinate to all existing senior secured indebtedness and equal to all existing senior unsecured obligations.  Each series of Senior Notes is guaranteed by certain of the company’s 100% 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 September 30, 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.  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.  See Note 20, “Subsequent Events,” for information regarding the redemption of the 2013 Notes.

 

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 principal and 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 principal and 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.

 

As of September 30, 2012, the company had outstanding $84.4 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, dedesignated and wrote-off all of its previous interest rate swaps against Term Loans A and B interest due to the amendment of its Senior Credit Facility.  As of September 30, 2012, the company had outstanding $350.0 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.

 

In the third quarter of 2011, the company monetized the derivative asset related to the fixed-to-float interest rate swaps in connection with the 2018 and 2020 Notes and received $21.5 million.  The gain was 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.  The company subsequently entered new interest rate swaps.

 

In the third quarter of 2012, the company further monetized the derivative asset related to certain portions of its fixed-to-float interest rate swaps related to its 2018 and 2020 notes and received $14.8 million in the quarter.  Consistent with the prior year monetization, the company treated the gain as an increase to the debt balances for each of the 2018 and 2020 notes, which will be amortized to interest expense over the life of the original swaps.

 

The balance sheet values of the 2018 and 2020 Notes at September 30, 2012 and December 31, 2011 are not equal to the face value of the Notes due to the fact that the monetized value and the fair market value of the fixed-to-float interest rate hedges on these Notes is included in the applicable balance sheet value (See Note 4, “Derivative Financial Instruments” for more information).

 

As of September 30, 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 September 30, 2012 our Consolidated Senior Secured Leverage Ratio was 2.83:1, while the maximum ratio is 3.50:1 and our Consolidated Interest Coverage Ratio was 2.85:1, above the minimum ratio of 2.00:1.

 

Accounts Receivable Securitization
Accounts Receivable Securitization

9. Accounts Receivable Securitization

 

On September 26, 2012, the company entered into a Fourth Amended and Restated Receivables Purchase Agreement among Manitowoc Funding, LLC (“U.S. Seller”) and Manitowoc Cayman Islands Funding Ltd. (“Cayman Seller”), as sellers, the Company, Garland Commercial Ranges Limited (“Garland”), Convotherm Elektrogeräte GmbH (“Convotherm”), and the other persons from time to time party thereto, as servicers, and Wells Fargo Bank, N.A. (“Wells Fargo”), as purchaser and agent (the “Fourth Amended and Restated Receivables Purchase Agreement”).  Pursuant to this amendment, (i) the commitment size of this facility increased from up to $125 million to up to $150 million; (ii) Wells Fargo was added as purchaser and agent, replacing Hannover Funding Company, LLC, and Norddeutsche Landesbank Girozentrale, respectively; (iii) the facility commitment was extended for a three-year period; and (iv) the company’s cost of funds decreased through the use of a LIBOR index rate plus a 1.45% fixed spread for three years (as opposed to using an underlying commercial paper rate, as was previously the case).  Trade accounts receivables sold to a third-party financial institution (“Purchaser”) and being serviced by the company totaled $146.9 million at September 30, 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 Condensed Consolidated Balance Sheets and the proceeds received, including collections on the deferred purchase price notes, are included in cash flows from operating activities in the accompanying Condensed Consolidated Statements of Cash Flows.  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 September 30, 2012 and December 31, 2011 was $59.8 million and $40.3 million, respectively, and is included in accounts receivable in the accompanying Condensed 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 Senior Credit Facility.  As of September 30, 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.

 

Income Taxes
Income Taxes

10.  Income Taxes

 

For the nine months ended September 30, 2012, the company recorded an income tax expense of $41.0 million, compared to an income tax expense of $13.8 million for the nine months ended September 30, 2011.  The increase in the company’s tax expense for the nine months ended September 30, 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 $55.6 million as of September 30, 2012, and $48.7 million as of September 30, 2011.  All of the company’s unrecognized tax benefits as of September 30, 2012, if recognized, would impact the effective tax rate. During the next twelve months, it is reasonably possible that federal, state and foreign tax audit resolutions could reduce unrecognized tax benefits and income tax expense by up to $16.0 million, either because the company’s tax positions are sustained on audit or settled, or the applicable statute of limitations closes.

 

The company is under examination by the Internal Revenue Service (“IRS”) for the calendar years 2008 and 2009.  In August 2012, the company received a Notice of Proposed Assessment (“NOPA”) related to the disallowance of the deductibility of a $380.9 million foreign currency loss incurred in calendar year 2008.  In September 2012, the company responded to the NOPA indicating its formal disagreement and subsequently received an Examination Report which includes the proposed disallowance.  The largest potential adjustment for this matter could, if the IRS were to prevail, increase the company’s potential federal tax expense and cash outflow by approximately $134.0 million plus interest and penalties, if any.  The company will file a formal protest to the proposed adjustment during the fourth quarter of 2012.  The company plans to pursue all administrative and, if necessary, judicial remedies with respect to resolving this matter.  However, there can be no assurance that this matter will be resolved in the company’s favor.  The IRS also examined and proposed adjustments to the research and development credit generated in 2009; the company also formally disagreed with these adjustments.

 

The company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves.  As of September 30, 2012, 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 September 30, 2012, there have been no significant developments in the quarter with respect to the company’s other ongoing tax audits in various jurisdictions.

 

Earnings Per Share
Earnings Per Share

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Basic weighted average common shares outstanding

 

130,704,895

 

130,510,828

 

130,610,592

 

130,464,015

 

Effect of dilutive securities - stock options and restricted stock

 

1,897,397

 

2,525,449

 

1,966,103

 

3,120,287

 

Diluted weighted average common shares outstanding

 

132,602,292

 

133,036,277

 

132,576,695

 

133,584,302

 

 

For the three and nine months ended September 30, 2012, 3.4 million and 3.4 million, respectively, of common shares issuable upon the exercise of stock options were anti-dilutive and were excluded from the calculation of diluted earnings per share.

 

No dividends were paid during each of the three and nine-month periods ended September 30, 2012 and September 30, 2011.

 

Stockholders' Equity
Stockholders' Equity

12.  Stockholders’ Equity

 

The following is a roll forward of retained earnings and noncontrolling interest for the nine months ended September 30, 2012 and 2011:

 

(in millions)

 

Retained Earnings

 

Noncontrolling
Interest

 

Balance at December 31, 2011

 

$

129.8

 

$

(9.9

)

Net earnings (loss)

 

67.2

 

(6.7

)

Balance at September 30, 2012

 

$

197.0

 

$

(16.6

)

 

(in millions)

 

Retained Earnings

 

Noncontrolling
Interest

 

Balance at December 31, 2010

 

$

151.6

 

$

(3.4

)

Net earnings (loss)

 

(26.1

)

(4.1

)

Balance at September 30, 2011

 

$

125.5

 

$

(7.5

)

 

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 September 30, 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.

 

Stock-Based Compensation
Stock-Based Compensation

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 $3.2 million and $2.6 million for the three months ended September 30, 2012 and 2011, respectively.  Stock-based compensation expense was $11.8 million and $11.0 million for the nine months ended September 30, 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 three 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.  Starting with 2011 grants, 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 0.5 million and 0.8 million shares of restricted stock to directors, officers and employees during the first three quarters 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 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 2012 EVA® results 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 stock-based compensation expense over the stock-based awards’ vesting period.

 

Contingencies and Significant Estimates
Contingencies and Significant Estimates

14.  Contingencies and Significant Estimates

 

As of September 30, 2012, the company held reserves for environmental matters related to Enodis locations of approximately $0.9 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 September 30, 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 September 30, 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.