MANITOWOC CO INC, 10-Q filed on 11/8/2011
Quarterly Report
Consolidated Statements of Operations (USD $)
In Millions, except Share data
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
2010
2011
2010
Net sales
$ 935.4 
$ 807.1 
$ 2,617.4 
$ 2,310.8 
Costs and expenses:
 
 
 
 
Cost of sales
711.9 
606.9 
1,988.9 
1,738.0 
Engineering, selling and administrative expenses
143.2 
133.4 
428.8 
382.4 
Restructuring expense
0.9 
1.4 
3.8 
3.2 
Amortization expense
9.9 
9.5 
29.2 
28.7 
Loss on disposition of property
 
2.0 
 
2.0 
Other
0.3 
 
0.4 
 
Total operating costs and expenses
866.2 
753.2 
2,451.1 
2,154.3 
Earnings (loss) from operations
69.2 
53.9 
166.3 
156.5 
Other income (expenses):
 
 
 
 
Amortization of deferred financing fees
(2.2)
(5.3)
(8.2)
(17.4)
Interest expense
(34.0)
(46.2)
(111.7)
(130.0)
Loss on debt extinguishment
 
(1.1)
(27.8)
(16.8)
Other income (expense), net
2.0 
 
3.1 
(11.8)
Total other income (expenses)
(34.2)
(52.6)
(144.6)
(176.0)
Earnings (loss) from continuing operations before taxes on income
35.0 
1.3 
21.7 
(19.5)
Provision (benefit) for taxes on income
13.3 
2.7 
15.1 
(7.3)
Earnings (loss) from continuing operations
21.7 
(1.4)
6.6 
(12.2)
Discontinued operations:
 
 
 
 
Earnings (loss) from discontinued operations, net of income taxes of ($0.2), $0.7, ($2.1) and $1.4, respectively
(0.1)
1.9 
(3.1)
2.4 
Gain (loss) on sale of discontinued operations, net of income taxes of $0.0, $0.0, $29.0 and $0.0, respectively
 
 
(33.6)
 
Net earnings (loss)
21.6 
0.5 
(30.1)
(9.8)
Less: Net loss attributable to noncontrolling interest, net of income taxes
(2.1)
(0.9)
(4.1)
(2.2)
Net earnings (loss) attributable to Manitowoc
23.7 
1.4 
(26.0)
(7.6)
Amounts attributable to the Manitowoc common shareholders:
 
 
 
 
Earnings (loss) from continuing operations
23.8 
(0.5)
10.7 
(10.0)
Earnings (loss) from discontinued operations, net of income taxes
(0.1)
1.9 
(3.1)
2.4 
Loss on sale of discontinued operations, net of income taxes
 
 
(33.6)
 
Net earnings (loss) attributable to Manitowoc
$ 23.7 
$ 1.4 
$ (26.0)
$ (7.6)
Basic earnings (loss) per common share:
 
 
 
 
Earnings (loss) from continuing operations attributable to Manitowoc common shareholders (in dollars per share)
$ 0.18 
$ 0 
$ 0.08 
$ (0.08)
Earnings (loss) from discontinued operations attributable to Manitowoc common shareholders (in dollars per share)
$ 0 
$ 0.01 
$ (0.02)
$ 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)
$ 0.18 
$ 0.01 
$ (0.20)
$ (0.06)
Diluted earnings (loss) per common share:
 
 
 
 
Earnings (loss) from continuing operations attributable to Manitowoc common shareholders (in dollars per share)
$ 0.18 
$ 0 
$ 0.08 
$ (0.08)
Earnings (loss) from discontinued operations attributable to Manitowoc common shareholders (in dollars per share)
$ 0 
$ 0.01 
$ (0.02)
$ 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)
$ 0.18 
$ 0.01 
$ (0.20)
$ (0.06)
Weighted average shares outstanding - basic (in shares)
130,510,828 
130,605,417 
130,464,015 
130,590,248 
Weighted average shares outstanding - diluted (in shares)
133,036,277 
132,232,254 
130,464,015 
130,590,248 
Consolidated Statements of Operations (Parenthetical) (USD $)
In Millions
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
2010
2011
2010
Consolidated Statements of Operations
 
 
 
 
Earnings (loss) from discontinued operations, income taxes
$ (0.2)
$ 0.7 
$ (2.1)
$ 1.4 
Gain (loss) on sale of discontinued operations, income taxes
$ 0 
$ 0 
$ 29.0 
$ 0 
Consolidated Balance Sheets (USD $)
In Millions
Sep. 30, 2011
Dec. 31, 2010
Current Assets:
 
 
Cash and cash equivalents
$ 90.1 
$ 83.7 
Marketable securities
2.7 
2.7 
Restricted cash
9.2 
9.4 
Accounts receivable, less allowances of $16.5 and $27.6, respectively
329.9 
255.1 
Inventories - net
816.7 
557.0 
Deferred income taxes
124.6 
131.3 
Other current assets
78.4 
57.7 
Current assets of discontinued operation
 
63.7 
Total current assets
1,451.6 
1,160.6 
Property, plant and equipment - net
537.2 
565.8 
Goodwill
1,172.6 
1,173.2 
Other intangible assets - net
867.8 
893.5 
Other non-current assets
148.7 
92.6 
Long-term assets of discontinued operation
 
123.6 
Total assets
4,177.9 
4,009.3 
Current Liabilities:
 
 
Accounts payable and accrued expenses
934.5 
776.1 
Current portion of long-term debt and short-term borrowings
102.9 
61.8 
Product warranties
85.7 
86.7 
Customer advances
35.6 
48.9 
Product liabilities
28.2 
27.8 
Current liabilities of discontinued operation
 
24.2 
Total current liabilities
1,186.9 
1,025.5 
Non-Current Liabilities:
 
 
Long-term debt
1,997.5 
1,935.6 
Deferred income taxes
213.2 
213.3 
Pension obligations
65.2 
64.4 
Postretirement health and other benefit obligations
57.2 
59.9 
Long-term deferred revenue
30.1 
27.8 
Other non-current liabilities
153.8 
185.7 
Long-term liabilities of discontinued operation
 
18.6 
Total non-current liabilities
2,517.0 
2,505.3 
Commitments and contingencies (Note 15)
 
 
Total Equity:
 
 
Common stock (300,000,000 shares authorized, 163,175,928 shares issued, 131,905,430 and 131,388,472 shares outstanding, respectively)
1.4 
1.4 
Additional paid-in capital
465.9 
454.0 
Accumulated other comprehensive income (loss)
23.0 
9.9 
Retained earnings
78.7 
104.7 
Treasury stock, at cost (31,270,498 and 31,787,456 shares, respectively)
(87.5)
(88.1)
Total Manitowoc stockholders' equity
481.5 
481.9 
Noncontrolling interest
(7.5)
(3.4)
Total equity
474.0 
478.5 
Total liabilities and equity
$ 4,177.9 
$ 4,009.3 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data
Sep. 30, 2011
Dec. 31, 2010
Consolidated Balance Sheets
 
 
Accounts receivable, allowances (in dollars)
$ 16.5 
$ 27.6 
Common stock, shares authorized
300,000,000 
300,000,000 
Common stock, shares issued
163,175,928 
163,175,928 
Common stock, shares outstanding
131,905,430 
131,388,472 
Treasury stock, shares
31,270,498 
31,787,456 
Consolidated Statements of Cash Flows (USD $)
In Millions
9 Months Ended
Sep. 30,
2011
2010
Cash Flows from Operations:
 
 
Net earnings (loss)
$ (30.1)
$ (9.8)
Adjustments to reconcile net earnings (loss) to cash provided by (used for) operating activities of continuing operations:
 
 
Discontinued operations, net of income taxes
3.1 
(2.4)
Depreciation
62.6 
69.6 
Amortization of intangible assets
29.2 
28.7 
Deferred income taxes
(4.5)
(22.7)
Loss (gain) on sale of property, plant and equipment
(0.5)
(3.1)
Restructuring expense
3.8 
3.2 
Amortization of deferred financing fees
8.2 
17.4 
Loss on debt extinguishment
27.8 
16.8 
Loss on sale of discontinued operations
33.6 
 
Other
5.6 
6.9 
Changes in operating assets and liabilities, excluding effects of business acquisitions and divestitures:
 
 
Accounts receivable
(128.6)
(32.9)
Inventories
(255.6)
(63.0)
Other assets
(6.0)
26.4 
Accounts payable
124.8 
68.2 
Accrued expenses and other liabilities
(39.6)
(51.0)
Net cash provided by (used for) operating activities of continuing operations
(166.2)
52.3 
Net cash provided by (used for) operating activities of discontinued operations
(18.7)
(0.1)
Net cash provided by (used for) operating activities
(184.9)
52.2 
Cash Flows from Investing:
 
 
Business acquisitions, net of cash acquired
 
(4.8)
Capital expenditures
(32.3)
(22.2)
Restricted cash
0.2 
(3.3)
Proceeds from sale of business
143.6 
3.8 
Proceeds from sale of property, plant and equipment
5.8 
13.4 
Net cash provided by (used for) investing activities of continuing operations
117.3 
(13.1)
Net cash provided by (used for) investing activities of discontinued operations
 
(2.7)
Net cash provided by (used for) investing activities
117.3 
(15.8)
Cash Flows from Financing:
 
 
Proceeds from revolving credit facility
98.0 
 
Proceeds from swap monetization
21.5 
 
(Payments on) long-term debt
(861.4)
(467.3)
Proceeds from long-term debt
835.6 
453.2 
Proceeds from securitization facility
 
101.0 
(Payments on) securitization facility
 
(101.0)
(Payments on) notes financing
(7.4)
(3.4)
Debt issuance costs
(14.3)
(11.5)
Exercises of stock options, including windfall tax benefits
4.0 
0.6 
Net cash used for financing activities of continuing operations
76.0 
(28.4)
Effect of exchange rate changes on cash
(2.0)
(0.6)
Net increase (decrease) in cash and cash equivalents
6.4 
7.4 
Balance at beginning of period
83.7 
103.7 
Balance at end of period
$ 90.1 
$ 111.1 
Consolidated Statements of Comprehensive Income (USD $)
In Millions
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
2010
2011
2010
Net earnings (loss)
$ 21.6 
$ 0.5 
$ (30.1)
$ (9.8)
Other comprehensive income (loss)
 
 
 
 
Derivative instrument fair market value adjustment - net of income taxes
(8.8)
4.3 
4.7 
(9.2)
Foreign currency translation adjustments
(31.8)
53.1 
8.4 
(24.5)
Total other comprehensive income (loss)
(40.6)
57.4 
13.1 
(33.7)
Comprehensive income (loss)
(19.0)
57.9 
(17.0)
(43.5)
Comprehensive loss attributable to noncontrolling interest
(2.1)
(0.9)
(4.1)
(2.2)
Comprehensive income (loss) attributable to Manitowoc
$ (16.9)
$ 58.8 
$ (12.9)
$ (41.3)
Accounting Policies
Accounting Policies

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 and nine-months ended September 30, 2011 and 2010, the cash flows for the same nine-month periods, and the financial position at September 30, 2011, 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, 2010.  The Consolidated Balance Sheet as of December 31, 2010 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.

Acquisition
Acquisition

2. Acquisition

 

On March 1, 2010, the company acquired 100% of the issued and to be issued shares of Appliance Scientific, Inc. (ASI).  ASI is a leader in accelerated cooking technologies and these technologies are being integrated into current foodservice hot-side product offerings.   Allocation of the purchase price resulted in $5.0 million of goodwill, $18.2 million of intangible assets and an estimated liability for future earnouts of $1.8 million.  In accordance with guidance primarily codified in Accounting Standards Council (“ASC”) Topic 805, “Business Combinations,” any future adjustment to the estimated earnout liability would be recognized in the earnings of that period.  The results of ASI have been included in the Foodservice segment since the date of acquisition.

Discontinued Operations
Discontinued Operations

3. Discontinued Operations

 

On December 31, 2008, the company completed the sale of its Marine segment to Fincantieri Marine Group Holdings Inc., a subsidiary of Fincantieri — Cantieri Navali Italiani SpA.  The sale price in the all-cash deal was approximately $120 million.    The results of the Marine segment have been classified as a discontinued operation.

 

Administrative costs related to the former Marine segment resulted in pre-tax losses from discontinued operations of $0.2 million and $0.2 million for the three-month periods ended September 30, 2011 and September 30, 2010, respectively.  Tax benefits of $0.1 million and $0.1 million were recognized in the three-month periods ended September 30, 2011 and September 30, 2010, respectively.  Administrative costs related to the former Marine segment resulted in pre-tax losses from discontinued operations of $1.0 million and $0.8 million for the nine month periods ended September 30, 2011 and September 30, 2010, respectively.  Tax benefits of $0.4 million and $0.3 million were recognized in the nine month periods ended September 30, 2011 and September 30, 2010, respectively.

 

In addition to the former Marine segment, the company has classified the Enodis ice and related businesses acquired in connection with the company’s acquisition of Enodis plc (Enodis) in October of 2008, as discontinued in compliance with ASC Topic 360-10, “Property, Plant, and Equipment.”  In order to secure clearance for the acquisition of Enodis from various regulatory authorities including the European Commission and the United States Department of Justice, the company agreed to sell substantially all of Enodis’ global ice machine operations following completion of the acquisition of Enodis.  On May 15, 2009, the company completed the sale of the Enodis global ice machine operations to Braveheart Acquisition, Inc., an affiliate of Warburg Pincus Private Equity X, L.P., for $160 million.   The businesses sold were operated under the Scotsman, Ice-O-Matic, Simag, Barline, Icematic, and Oref brand names.  The company also agreed to sell certain non-ice businesses of Enodis located in Italy that are operated under the Tecnomac and Icematic brand names.  Prior to disposal, the antitrust clearances required that the ice businesses be treated and operated as standalone operations, in competition with the company.  The results of these operations have been classified as discontinued operations.

 

Administrative costs related to the Enodis ice machine businesses resulted in no pre-tax gains or losses from discontinued operations in the three-months ended September 30, 2011 and $0.2 million of earnings for the three-month period ended September 30, 2010.  The company did not recognize a tax benefit or expense related to the Enodis ice machine businesses during both the three-months ended September 30, 2011 and September 30, 2010.

 

Administrative costs related to the Enodis ice machine businesses resulted in no pre-tax gains or losses from discontinued operations in the nine-months ended September 30, 2011 and $0.2 million losses for the nine-month period ended September 30, 2010.  The company recognized no tax benefit or expense related to the Enodis ice machine businesses during the nine-months ended September 30, 2011 and a tax benefit of $0.1 million during the nine-months ended September 30, 2010.

 

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 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 Kysor/Warren for the three and nine-months ended September 30, 2011 and 2010, is presented for informational purposes only and does not necessarily reflect what the results of operations would have been had the business operated as a stand-alone entity.  There were no general corporate expenses 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)

 

2011

 

2010

 

2011

 

2010

 

Net sales

 

$

 

$

80.8

 

$

3.3

 

$

175.6

 

 

 

 

 

 

 

 

 

 

 

Pretax earnings (loss) from discontinued operations

 

$

(0.1

)

$

2.6

 

$

(4.2

)

$

4.8

 

Provision (benefit) for taxes on income

 

(0.1

)

0.8

 

(1.7

)

1.8

 

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

 

$

 

$

1.8

 

$

(2.5

)

$

3.0

Fair Value of Financial Instruments
Fair Value of Financial Instruments

4. Fair Value of Financial Instruments

 

The following tables set forth the company’s financial assets and liabilities that were accounted for at fair value according to ASC Topic 820-10, “Fair Value Measurements and Disclosures,” on a recurring basis as of September 30, 2011 and December 31, 2010 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, 2011

 

(in millions)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

0.6

 

$

 

$

 

$

0.6

 

Forward commodity contracts

 

 

 

 

 

Marketable securities

 

2.7

 

 

 

2.7

 

Total current assets at fair value

 

$

3.3

 

$

 

$

 

$

3.3

 

 

 

 

 

 

 

 

 

 

 

Non-Current Assets:

 

 

 

 

 

 

 

 

 

Interest rate cap contracts

 

$

 

$

0.4

 

$

 

$

0.4

 

Total non-current assets at fair value

 

$

 

$

0.4

 

$

 

$

0.4

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

6.6

 

$

 

$

 

$

6.6

 

Forward commodity contracts

 

 

2.8

 

 

2.8

 

Total current liabilities at fair value

 

$

6.6

 

$

2.8

 

$

 

$

9.4

 

 

 

 

 

 

 

 

 

 

 

Non-current Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

 

$

14.9

 

$

 

$

14.9

 

Total non-current liabilities at fair value

 

$

 

$

14.9

 

$

 

$

14.9

 

 

 

 

 

 

Fair Value as of December 31, 2010

 

(in millions)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

2.3

 

$

 

$

 

$

2.3

 

Forward commodity contracts

 

 

1.1

 

 

1.1

 

Marketable securities

 

2.7

 

 

 

2.7

 

Total current assets at fair value

 

$

5.0

 

$

1.1

 

$

 

$

6.1

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

0.6

 

$

 

$

 

$

0.6

 

Forward commodity contracts

 

 

0.3

 

 

0.3

 

Total current liabilities at fair value

 

$

0.6

 

$

0.3

 

$

 

$

0.9

 

 

 

 

 

 

 

 

 

 

 

Non-current Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

 

$

38.4

 

$

 

$

38.4

 

Total non-current liabilities at fair value

 

$

 

$

38.4

 

$

 

$

38.4

 

 

The carrying value of the amounts reported in the Consolidated Balance Sheets for cash, accounts receivable, accounts payable, deferred purchase price notes and short-term variable debt, including any amounts outstanding under our revolving credit facility, approximate fair value, without being discounted, due to the short time periods during which these amounts are outstanding.  The fair value of the company’s 7.125% Senior Notes due 2013 was approximately $147.0 million and $152.4 million at September 30, 2011 and December 31, 2010, respectively. The fair value of the company’s 9.50% Senior Notes due 2018 was approximately $392.0 million and $438.8 million at September 30, 2011 and December 31, 2010, respectively. The fair value of the company’s 8.50% Senior Notes due 2020 was approximately $546.0 million and $645.0 million at September 30, 2011 and December 31, 2010, respectively. The fair values of the company’s term loans under the previous senior credit facility dated November 8, 2008 and the $1,250.0 million Second Amended and Restated Credit Agreement dated May 13, 2011 (the “New Senior Credit Agreement”) were as follows at September 30, 2011 and December 31, 2010, respectively:  Term Loan A — $328.7 million and $461.2 million; and Term Loan B — $385.5 million and $342.0 million.  See Note 9, “Debt,” for the related carrying values of these debt instruments.

 

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 has determined that its financial assets and liabilities are level 1 and level 2 in the fair value hierarchy.

 

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 its risks from interest and foreign currency exchange rate and commodity price fluctuations 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 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.

Derivative Financial Instruments
Derivative Financial Instruments

5. 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 avoid 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 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 $5.2 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 depending on the type of risk being hedged.

 

Regarding the fair market value hedges related to the Notes (see Note 9, Debt), the risk management objective is to offset the changes in fair value of the company’s fixed-rate debt associated with the risk of variability in the six-month U.S. LIBOR rate.  In essence, the objective is to economically change the company’s fixed-rate debt to variable rate debt.  The swap includes an embedded call feature to match the terms of the call embedded in the debt. Changes in the fair value of the interest rate swap (which includes an embedded mirror image option) are expected to offset changes in the fair value of the debt due to changes in the U.S. LIBOR rate (the designated benchmark interest rate).  In order to meet the risk management objective, the company entered into an interest rate swap with the same critical terms (notional amounts, re-pricing dates, call schedule, and index on which the variable rate is based) as the Company’s fixed-rate debt.  Since the critical terms of the hedging instrument match the critical terms of the company’s fixed rate debt, the company expects the interest rate swap to offset the changes in fair value of the debt attributable to the variability in the six-month US LIBOR rate.  The company is applying the “shortcut method” outlined in ASC 815-20-25-102 through 25-117 and accordingly, since all of the requirements under ASC 815-20-25-104 through 25-105 for the assumption of no ineffectiveness have been met, the company believes that the hedging relationship is effective.

 

As of September 30, 2011 and December 31, 2010, the company had the following outstanding commodity and currency forward contracts that were entered into to hedge forecasted transactions:

 

 

 

Units Hedged

 

 

 

 

 

Commodity

 

September 30, 2011

 

December 31, 2010

 

 

 

Type

 

Aluminum

 

1,460

 

688

 

MT

 

Cash Flow

 

Copper

 

790

 

312

 

MT

 

Cash Flow

 

Natural Gas

 

215,463

 

304,177

 

MMBtu

 

Cash Flow

 

Steel

 

11,937

 

 

Tons

 

Cash Flow

 

 

 

 

Units Hedged

 

 

 

 

 

Short Currency

 

September 30, 2011

 

December 31, 2010

 

Type

 

 

 

Canadian Dollar

 

29,954,694

 

21,186,951

 

Cash Flow

 

 

 

Chinese Renminbi

 

46,406,557

 

 

Cash Flow

 

 

 

European Euro

 

74,872,056

 

43,440,929

 

Cash Flow

 

 

 

South Korean Won

 

1,970,968,575

 

2,245,331,882

 

Cash Flow

 

 

 

Singapore Dollar

 

6,720,000

 

4,140,000

 

Cash Flow

 

 

 

United States Dollar

 

10,314,400

 

8,828,840

 

Cash Flow

 

 

 

British Pound

 

 

399,999

 

Cash Flow

 

 

 

 

 

The total notional amount of the company’s receive-floating/pay-fixed interest rate swaps of the company’s term loans was $650.8 million on December 31, 2010.  These hedges were dedesignated, offset, and written off on June 30, 2011.  The total notional amount of the company’s interest rate caps entered into during the third quarter 2011 was $450.0 million on September 30, 2011.  These interest rate derivative instruments effectively cap the company’s future interest rate exposure for the notional value of its variable term debt at a LIBOR rate of 3.00% plus the applicable spread per the New Senior Credit Agreement.

 

The company monetized the derivative asset related to its 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 senior notes and will be amortized to interest expense over the life of the original swap.

 

The designated fair market value hedges of fixed-to-float swaps of the company’s 9.50% Senior Notes due 2018 (the “2018 Notes”) was $125.0 million and $200.0 million as of September 30, 2011 and December 31, 2010, respectively.  The designated fair market value hedges of fixed-to-float swaps of the company’s 8.50% Senior Notes due 2020 (the “2020 Notes”) was $200.0 million and $300.0 million as of September 30, 2011 and December 31, 2010, respectively.

 

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 September 30, 2011 and December 31, 2010, the company had the following outstanding currency forward contracts that were not designated as hedging instruments:

 

 

 

Units Hedged

 

 

 

 

 

Short Currency

 

September 30,
2011

 

December 31,
2010

 

Recognized Location

 

Purpose

 

British Pound

 

 

8,172,569

 

Other income, net

 

Accounts Payable and Receivable Settlement

 

Euro

 

20,732,338

 

7,732,026

 

Other income, net

 

Accounts Payable and Receivable Settlement

 

United States Dollar

 

38,879,449

 

33,158,979

 

Other income, net

 

Accounts Payable and Receivable Settlement

 

Japanese Yen

 

190,000,000

 

 

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 September 30, 2011 and December 31, 2010 was as follows:

 

 

 

 

 

ASSET DERIVATIVES

 

 

 

 

 

September 30, 2011

 

December 31, 2010

 

(in millions)

 

Balance Sheet Location

 

Fair Value

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

$

0.6

 

$

1.8

 

Commodity contracts

 

Other current assets

 

 

1.1

 

Interest rate cap contracts

 

Other non-current assets

 

0.4

 

 

Total derivatives designated as hedging instruments

 

 

 

$

1.0

 

$

2.9

 

 

 

 

 

 

ASSET DERIVATIVES

 

 

 

 

 

September 30, 2011

 

December 31, 2010

 

(in millions)

 

Balance Sheet Location

 

Fair Value

 

Derivatives NOT designated as hedging instruments

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

$

 

$

0.5

 

Total derivatives NOT designated as hedging instruments

 

 

 

$

 

$

0.5

 

 

 

 

 

 

 

 

 

Total asset derivatives

 

 

 

$

1.0

 

$

3.4

 

 

The fair value of outstanding derivative contracts recorded as liabilities in the accompanying Consolidated Balance Sheet as of September 30, 2011 and December 31, 2010 was as follows:

 

 

 

 

 

 

 

LIABILITY DERIVATIVES

 

 

 

 

 

September 30, 2011

 

December 31, 2010

 

(in millions)

 

Balance Sheet Location

 

Fair Value

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Foreign exchange contracts

 

Accounts payable and accrued expenses

 

$

5.9

 

$

0.6

 

Interest rate swap contracts: Fixed-to-float

 

Other non-current liabilities

 

3.0

 

38.4

 

Commodity contracts

 

Accounts payable and accrued expenses

 

2.8

 

0.3

 

Total derivatives designated as hedging instruments

 

 

 

$

11.7

 

$

39.3

 

 

 

 

 

 

LIABILITY DERIVATIVES

 

 

 

 

 

September 30, 2011

 

December 31, 2010

 

(in millions)

 

Balance Sheet Location

 

Fair Value

 

Derivatives NOT designated as hedging instruments

 

 

 

 

 

 

 

Foreign exchange contracts

 

Accounts payable and accrued expenses

 

$

0.7

 

$

 

Interest rate swap contracts: Float-to-fixed

 

Other non-current liabilities

 

11.9

 

 

Total derivatives NOT designated as hedging instruments

 

 

 

$

12.6

 

$

 

 

 

 

 

 

 

 

 

Total liability derivatives

 

 

 

$

24.3

 

$

39.3

 

 

The effect of derivative instruments on the consolidated statement of operations for the three-months ended September 30, 2011 and September 30, 2010 for gains or losses initially recognized in Other Comprehensive Income (OCI) in the Consolidated Balance Sheet was as follows:

 

 

 

Amount of Gain or (Loss) Recognized in

 

Location of Gain or (Loss)

 

Amount of Gain or (Loss) Reclassified

 

 

 

OCI on Derivative (Effective Portion,

 

Reclassified from

 

from Accumulated OCI into Income

 

 

 

net of tax)

 

Accumulated

 

(Effective Portion)

 

Derivatives in Cash Flow Hedging

 

September 30,

 

September 30,

 

OCI into Income

 

September 30,

 

September 30,

 

Relationships

 

2011

 

2010

 

(Effective Portion)

 

2011

 

2010

 

Foreign exchange contracts

 

$

(6.1

)

$

5.2

 

Cost of sales

 

$

0.7

 

$

(1.7

)

Interest rate swap & cap contracts

 

0.2

 

(1.8

)

Interest expense

 

 

(2.5

)

Commodity contracts

 

(2.0

)

0.3

 

Cost of sales

 

(0.1

)

0.3

 

Total

 

$

(7.9

)

$

3.7

 

 

 

$

0.6

 

$

(3.9

)

 

 

 

Location of Gain or (Loss)

 

 

 

 

 

Recognized in Income on

 

Amount of Gain or (Loss) Recognized in Income on

 

 

 

Derivative (Ineffective

 

Derivative (Ineffective Portion and Amount Excluded

 

 

 

Portion and Amount

 

from

 

Derivatives

 

Excluded from

 

Effectiveness Testing)

 

Relationships

 

Effectiveness Testing)

 

September 30, 2011

 

September 30, 2010

 

Commodity contracts

 

Cost of sales

 

$

(0.1

)

$

0.1

 

Total

 

 

 

$

(0.1

)

$

0.1

 

 

 

 

Location of Gain or (Loss)

 

 

 

 

 

Recognized

 

Amount of Gain or (Loss) Recognized in Income on

 

Derivatives Not Designated as

 

in Income on

 

Derivative

 

Hedging Instruments

 

Derivative

 

September 30, 2011

 

September 30, 2010

 

Foreign exchange contracts

 

Other income

 

$

1.5

 

$

(0.6

)

Interest rate swaps

 

Other income

 

2.4

 

 

Total

 

 

 

$

3.9

 

$

(0.6

)

 

The effect of derivative instruments on the consolidated statement of operations for the nine-months ended September 30, 2011 and September 30, 2010 for gains or losses initially recognized in Other Comprehensive Income (OCI) in the Consolidated Balance Sheet was as follows:

 

 

 

Amount of Gain or (Loss) Recognized in

 

Location of Gain or (Loss)

 

Amount of Gain or (Loss) Reclassified

 

 

 

OCI on Derivative (Effective Portion,

 

Reclassified from

 

from Accumulated OCI into Income

 

 

 

net of tax)

 

Accumulated

 

(Effective Portion)

 

Derivatives in Cash Flow Hedging

 

September 30,

 

September 30,

 

OCI into Income

 

September 30,

 

September 30,

 

Relationships

 

2011

 

2010

 

(Effective Portion)

 

2011

 

2010

 

Foreign exchange contracts

 

$

(4.2

)

$

0.5

 

Cost of sales

 

$

4.1

 

$

(4.2

)

Interest rate swap & cap contracts

 

1.3

 

(8.8

)

Interest expense

 

(5.3

)

(7.9

)

Commodity contracts

 

(2.3

)

(0.5

)

Cost of sales

 

0.2

 

0.8

 

Total

 

$

(5.2

)

$

(8.8

)

 

 

$

(1.0

)

$

(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

 

Effectiveness Testing)

 

September 30, 2011

 

September 30, 2010

 

Commodity contracts

 

Cost of sales

 

$

(0.1

)

$

0.1

 

Total

 

 

 

$

(0.1

)

$

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

 

Derivative

 

September 30, 2011

 

September 30, 2010

 

Foreign exchange contracts

 

Other income

 

$

(1.2

)

$

(0.4

)

Interest rate swaps

 

Other income

 

2.4

 

$

 

Total

 

 

 

$

1.2

 

$

(0.4

)

 

The effect of Fair Market Value designated derivative instruments on the consolidated statement of operations for the three-months ended September 30, 2011 and September 30, 2010 for gains or losses recognized through income was as follows:

 

Derivatives Designated as Fair Market Value

 

Location of Gain or (Loss)
Recognized in

 

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

 

Instruments under ASC 815

 

Income on Derivative

 

September 30, 2011

 

September 30, 2010

 

Interest rate swap contracts

 

Interest expense

 

$

7.1

 

$

 

Total

 

 

 

$

7.1

 

$

 

 

The effect of Fair Market Value designated derivative instruments on the consolidated statement of operations for the nine-months ended September 30, 2011 and September 30, 2010 for gains or losses recognized through income was as follows:

 

Derivatives Designated as Fair Market Value

 

Location of Gain or (Loss)
Recognized in

 

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

 

Instruments under ASC 815

 

Income on Derivative

 

September 30, 2011

 

September 30, 2010

 

Interest rate swap contracts

 

Interest expense

 

$

18.8

 

$

 

Total

 

 

 

$

18.8

 

$

Inventories
Inventories

6. Inventories

 

The components of inventories at September 30, 2011 and December 31, 2010 are summarized as follows:

 

 

 

September 30,

 

December 31,

 

(in millions)

 

2011

 

2010

 

Inventories — gross:

 

 

 

 

 

Raw materials

 

$

294.9

 

$

224.0

 

Work-in-process

 

207.7

 

119.8

 

Finished goods

 

424.5

 

324.5

 

Total inventories — gross

 

927.1

 

668.3

 

Excess and obsolete inventory reserve

 

(79.4

)

(80.3

)

Net inventories at FIFO cost

 

847.7

 

588.0

 

Excess of FIFO costs over LIFO value

 

(31.0

)

(31.0

)

Inventories — net

 

$

816.7

 

$

557.0

Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

7. Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill by reportable segment for the year ended December 31, 2010, three-months ended March 31, 2011, June 30, 2011, and September 30, 2011 are as follows:

 

 

 

(in millions)

 

Crane

 

Foodservice

 

Total

 

Gross and net balance as of January 1, 2010

 

$

289.7

 

$

1,435.0

 

$

1,724.7

 

Acquisition of ASI

 

 

5.0

 

5.0

 

Deferred tax adjustment

 

 

5.8

 

5.8

 

Restructuring reserve adjustment

 

 

(2.7

)

(2.7

)

Foreign currency impact

 

(10.7

)

(0.1

)

(10.8

)

Gross balance as of December 31, 2010

 

$

279.0

 

$

1,443.0

 

$

1,722.0

 

Asset impairments

 

 

(548.8

)

(548.8

)

Net balance as of December 31, 2010

 

$

279.0

 

$

894.2

 

$

1,173.2

 

 

 

 

 

 

 

 

 

Restructuring reserve adjustment

 

$

 

$

(2.6

)

$

(2.6

)

Foreign currency impact

 

9.0

 

0.2

 

9.2

 

Gross balance as of March 31, 2011

 

$

288.0

 

$

1,440.6

 

$

1,728.6

 

Foreign currency impact

 

1.2

 

0.1

 

1.3

 

Gross balance as of June 30, 2011

 

$

289.2

 

$

1,440.7

 

$

1,729.9

 

Foreign currency impact

 

(8.4

)

(0.1

)

(8.5

)

Gross balance as of September 30, 2011

 

280.8

 

$

1,440.6

 

$

1,721.4

 

Asset impairments

 

 

(548.8

)

(548.8

)

Net balance as of September 30, 2011

 

$

280.8

 

$

891.8

 

$

1,172.6

 

 

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 no longer 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.  Effective January 1, 2011, the Company revised its internal reporting structure and, as a result, the Cranes Asia reporting unit was split into Cranes China and Cranes Greater Asia Pacific reporting units.

 

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 and accumulated amortization of the company’s intangible assets other than goodwill were as follows as of September 30, 2011 and December 31, 2010:

 

 

 

September 30, 2011

 

December 31, 2010

 

(in millions)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Book
Value

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Book
Value

 

Trademarks and tradenames

 

$

319.2

 

$

 

$

319.2

 

$

317.0

 

$

 

$

317.0

 

Customer relationships

 

438.4

 

(68.4

)

370.0

 

439.2

 

(51.8

)

387.4

 

Patents

 

33.8

 

(23.2

)

10.6

 

33.3

 

(20.9

)

12.4

 

Engineering drawings

 

11.4

 

(7.4

)

4.0

 

11.2

 

(6.7

)

4.5

 

Distribution network

 

20.9

 

 

20.9

 

20.6

 

 

20.6

 

Other intangibles

 

184.5

 

(41.4

)

143.1

 

183.9

 

(32.3

)

151.6

 

Total

 

$

1,008.2

 

$

(140.4

)

$

867.8

 

$

1,005.2

 

$

(111.7

)

$

893.5

 

 

Amortization expense for the three months ended September 30, 2011 and 2010 was $9.9 million and $9.5 million, respectively. Amortization expense for the nine months ended September 30, 2011 and 2010 was $29.2 million and $28.7 million, respectively. Amortization expense related to intangible assets for each of the five succeeding years is estimated to be approximately $40 million per year.

Accounts Payable and Accrued Expenses
Accounts Payable and Accrued Expenses

8.  Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses at September 30, 2011 and December 31, 2010 are summarized as follows:

 

 

 

 

 

September 30,

 

December 31,

 

(in millions)

 

2011

 

2010

 

Trade accounts payable and interest payable

 

$

522.6

 

$

394.4

 

Employee related expenses

 

101.0

 

93.4

 

Restructuring expenses

 

25.1

 

32.5

 

Profit sharing and incentives

 

25.4

 

28.7

 

Accrued rebates

 

33.2

 

32.8

 

Deferred revenue - current

 

25.6

 

29.7

 

Derivative liabilities

 

9.5

 

1.0

 

Income taxes payable

 

61.8

 

33.2

 

Miscellaneous accrued expenses

 

130.3

 

130.4

 

 

 

$

934.5

 

$

776.1

Debt
Debt

9. Debt

 

Outstanding debt at September 30, 2011 and December 31, 2010 is summarized as follows:

 

(in millions)

 

September 30, 2011

 

December 31, 2010

 

Revolving credit facility

 

$

118.4

 

$

24.2

 

Term loan A

 

341.3

 

459.7

 

Term loan B

 

399.0

 

338.1

 

Senior notes due 2013

 

150.0

 

150.0

 

Senior notes due 2018

 

407.0

 

392.9

 

Senior notes due 2020

 

611.2

 

585.3

 

Other

 

73.5

 

47.2

 

Total debt

 

2,100.4

 

1,997.4

 

Less current portion and short-term borrowings

 

(102.9

)

(61.8

)

Long-term debt

 

$

1,997.5

 

$

1,935.6

 

 

The company’s current senior credit facility, as amended to date, 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 entered into a $1,250.0 million Second Amended and Restated Credit Agreement (the “New Senior Credit Facility”).

 

The New Senior Credit Facility includes three different loan facilities.  The first is a revolving facility in the amount of $500.0 million, with a term of five years.  The second facility is 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, 2011, 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, 2011.

 

The New 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 financial covenant levels under the New Senior Credit Facility are as set forth below:

 

Fiscal Quarter Ending

 

Consolidated
Senior Secured
Leverage Ratio
(less than)

 

Consolidated Interest
Coverage Ratio
(greater than)

9/30/2011

 

4.00:1.00

 

1.575:1.00

12/31/2011

 

3.875:1.00

 

1.625:1.00

3/31/2012

 

3.75:1.00

 

1.75:1.00

6/30/2012

 

3.50:1.00

 

1.875:1.00

9/30/2012

 

3.50:1.00

 

2.00:1.00

12/31/2012

 

3.50:1.00

 

2.00:1.00

3/31/2013

 

3.50:1.00

 

2.25:1.00

6/30/2013

 

3.25:1.00

 

2.25:1.00

9/30/2013

 

3.25:1.00

 

2.50:1.00

12/31/2013

 

3.25:1.00

 

2.50:1.00

3/31/2014

 

3.25:1.00

 

2.75:1.00

6/30/2014

 

3.25:1.00

 

2.75:1.00

9/30/2014

 

3.25:1.00

 

2.75:1.00

December 31, 2014, and thereafter

 

3.00:1.00

 

3.00:1.00

 

 

 

The loss on debt extinguishment of $27.8 million during the nine-months ended September 30, 2011 consisted of $14.2 million related to the write-off of deferred financing fees and $13.6 million related to the unwinding of related float-to-fixed interest rate swaps.

 

The New 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 Notes”).  Each series of Notes are unsecured senior obligations ranking subordinate to all existing senior secured indebtedness and equal to all existing senior unsecured obligations.  Each series of 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 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 Notes also includes customary events of default. If an event of default occurs and is continuing with respect to the Notes, then the Trustee or the holders of at least 25% of the principal amount of the outstanding Notes may declare the principal and accrued interest on all of the 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 Notes will become due and payable immediately.

 

On September 30, 2011, 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. The following would be the premium paid by the company, expressed as a percentage of the principal amount, if it redeems the 2013 Notes during the 12-month period commencing on November 1 of the year set forth below:

 

Year

 

Percentage

 

2010

 

101.188

%

2011 and thereafter

 

100.000

%

 

On February 3, 2010, the company completed the sale of $400.0 million aggregate principal amount of its 9.50% Senior Notes due 2018 (the “2018 Notes”). The offering closed on February 8, 2010 and 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”). The offering closed on October 18, 2010 and 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 on May 1 and November 1 of each year, beginning on May 1, 2011.  The company may redeem the 2020 Notes at any time prior to November 1, 2015.

 

The company may redeem the 2020 Notes at its option, in whole or in part at the following redemption prices (expressed as percentages of the principal amount thereof) plus accrued and unpaid interest, if any, thereon to the applicable redemption date, if redeemed 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 prior to November 1, 2013, the company is permitted to redeem up to 35% of the 2020 Notes with the proceeds of certain equity offerings at a redemption price of 108.5%, plus accrued but unpaid interest, 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.

 

As of September 30, 2011, the company had outstanding $73.5 million of other indebtedness that has a weighted-average interest rate of approximately 6.4%.  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 amendment of its senior credit facility.  As of September 30, 2011, the company had outstanding $450.0 million notional amount of 3.00% LIBOR caps related to the term loan portion of the New Senior Credit Facility.  The remaining unhedged portions of Term Loans A and B continue to bear interest according to the terms of the New 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 September 30, 2011, $125.0 million and $200.0 million of the 2018 and 2020 Notes were swapped to floating rate interest, respectively.  The 2018 Notes accrue interest at a fixed rate of 9.50% on the fixed portion and 7.48% plus the six-month LIBOR in arrears on the variable portion. The 2020 Notes accrue interest at a fixed rate of 8.50% on the fixed portion and 6.05% plus the six-month LIBOR in arrears on the variable portion. At September 30, 2011, the weighted average interest rates for the 2018 and 2020 Notes taking into consideration the impact of floating rate hedges was 9.01% and 7.83%, respectively.  Both aforementioned new swap contracts of the Senior Notes include a call premium schedule that mirrors that of the respective debt and includes an optional early termination and cash settlement at five years from the trade date.

 

As of September 30, 2011, the company was in compliance with all affirmative and negative covenants in its debt instruments inclusive of the financial covenants pertaining to the New Senior Credit Facility, the 2013 Notes, 2018 Notes, and 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, 2011 our Consolidated Senior Secured Leverage Ratio was 3.18:1, while the maximum ratio is 4.00:1 and our Consolidated Interest Coverage Ratio was 2.22:1, above the minimum ratio of 1.575:1.

Accounts Receivable Securitization
Accounts Receivable Securitization

10. Accounts Receivable Securitization

 

Effective September 27, 2011, the company made changes to its accounts receivable securitization program by entering into a Third Amended and Restated Receivables Purchase Agreement among Manitowoc Funding, LLC, as U.S. Seller, Manitowoc Cayman Islands Funding Ltd., as Cayman Seller, The Manitowoc Company, Inc. as a Servicer, Garland Commercial Ranges Limited, as a Servicer, Convotherm Elektrogeräte GmbH, as a Servicer, Hannover Funding Company, LLC, as Purchaser, and Norddeutsche Landesbank Girozentrale, as Agent (the “Third Amended and Restated Receivables Purchase Agreement”).  The changes materially expanded the scope of the Company’s asset securitization program by including receivables from a German subsidiary, Convotherm Elektrogeräte GmbH, and creating a new wholly owned, bankruptcy-remote foreign special purpose subsidiary, Manitowoc Cayman Islands Funding Ltd. (“Cayman Seller”), as purchaser of Convotherm’s receivables.  Cayman Seller will also purchase receivables from Garland Commercial Ranges Limited, a Canadian subsidiary of the Company that previously sold its receivables to Manitowoc Funding, LLC, a wholly owned, bankruptcy-remote, domestic special purpose entity (“U.S. Seller”).

 

Under the Third Amended and Restated Receivables Purchase Agreement (and the related Purchase and Sale Agreements referenced therein), the Company’s domestic trade accounts receivable are sold to U.S. Seller which, in turn, sells, conveys, transfers and assigns to a third-party financial institution (“Purchaser”), all of the U.S. Sellers’ right, title and interest in and to a pool of receivables to the Purchaser.  Certain of the Company’s non-U.S. trade accounts receivable will be sold to Cayman Seller which, in turn, will sell, convey, transfer and assign to Purchaser, all of Cayman Seller’s right, title and interest in and to a pool of receivables to the Purchaser. 

 

The Purchaser receives ownership of the pool of receivables, in each instance.  New receivables are purchased by U.S. Seller or Cayman Seller, as applicable, and resold to the Purchaser as cash collections reduce previously sold investments.  The Manitowoc Company, Inc., Garland Commercial Ranges Limited, and Convotherm Elektrogeräte GmbH act as the servicers of the receivables and as such administer, collect and otherwise enforce the receivables.  The servicers are compensated for doing so on terms that are generally consistent with what would be charged by an unrelated servicer.  As servicers, they will initially receive payments made by obligors on the receivables but will be required to remit those payments in accordance with the Third Amended and Restated Receivables Purchase Agreement.  The Purchaser has no recourse for uncollectible receivables.  The 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.  As of September 30, 2011, the company was in compliance with all affirmative and negative covenants includes of the financial covenants pertaining to the Third Amended and Restated Receivables Purchase Agreement.  Based on our current plans and outlook, we believe we will be able to comply with these covenants during the subsequent 12 months.

 

Due to a short average collection cycle of less than 60 days for such accounts receivable and due to 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, 2011 was $79.5 million and is included in accounts receivable in the accompanying Consolidated Balance Sheets.

 

The securitization program has a maximum capacity of $200.0 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 the Purchaser and being serviced by the company totaled $119.3 million at September 30, 2011 and $123.0 million at December 31, 2010.

 

Transactions under the accounts receivables 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 above.

 

Prior to June 30, 2010 (date of the Second Amended and Restated Receivables Purchase Agreement), the Purchaser received an ownership and security interest in the pool of receivables.  The Purchaser had no recourse against the company for uncollectible receivables; however the company’s retained interest in the receivable pool was subordinate to the Purchaser.  Prior to the adoption on January 1, 2010 of new guidance as codified in ASC 860, the receivables sold under this program qualified for de-recognition.  After adoption of this guidance on January 1, 2010, receivables sold under this program no longer qualified for de-recognition and, accordingly, cash proceeds on the balance of outstanding trade receivables sold were recorded as a securitization liability in the Consolidated Balance Sheet.

Income Taxes
Income Taxes

11.  Income Taxes

 

For the nine months ended September 30, 2011, the company recorded income tax expense in continuing operations of $15.1 million, as compared to an income tax benefit of $7.3 million for the nine months ended September 30, 2010.  The company has determined that it is more likely than not that the deferred tax assets related to net operating losses in certain jurisdictions will not be used and therefore a tax benefit for current period losses has not been recognized.  This was the primary driver of the increased tax expense for the three and nine months ended September 30, 2011.  The income tax provision for the three and nine months ended September 30, 2011 was calculated under the annual effective tax rate method.  The income tax provision for the three and nine months ended September 30, 2010 was calculated under the discrete method.  The mix of income (loss) between foreign and domestic operations in 2010 caused an unusual relationship between income (loss) and income tax expense (benefit) with small changes in the annual pre-tax book income resulting in a significant impact on the rate and unreliable estimates. As a result, the company computed the provision for income taxes for the three and nine months ended September 30, 2010 by applying the actual effective tax rate to the year-to-date loss, which the company believes provided a more reasonable approximation of the company’s tax provision for that period.

 

The company’s unrecognized tax benefits, excluding interest and penalties, were $48.7 million as of September 30, 2011 and $40.4 million as of September 30, 2010.  All of the company’s unrecognized tax benefits as of September 30, 2011, if recognized, would impact the effective tax rate. The increase in the company’s unrecognized tax benefits as of September 30, 2011 relative to the prior year resulted primarily from audit examination activity related to prior years.  It is reasonably possible that a number of uncertain tax positions may be settled within the next 12 months.  Settlement of these matters is not expected to 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.

 

As a result of Wisconsin legislation enacted in June 2011, an income tax benefit of $5.5 million was recorded in the second quarter relating to the release of previously recorded valuation allowances on net operating loss carryforwards in the state.

Earnings Per Share
Earnings Per Share

12.  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,

 

 

 

2011

 

2010

 

2011

 

2010

 

Basic weighted average common shares outstanding

 

130,510,828

 

130,605,417

 

130,464,015

 

130,590,248

 

Effect of dilutive securities - stock options and restricted stock

 

2,525,449

 

1,626,837

 

 

 

Diluted weighted average common shares outstanding

 

133,036,277

 

132,232,254

 

130,464,015

 

130,590,248

 

 

For the nine months ended September 30, 2011 and 2010, the total number of potential dilutive securities was 3.1 million and 1.9 million, respectively.  However, the stock options representing these potential dilutive securities were not included in the computation of diluted net loss per common share for the nine- months ended September 30, 2011 and 2010, since to do so would decrease the loss per share.  In addition, for the three and nine- months ended September 30, 2011, 2.8 million and 2.8 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.  For the three and nine-months ended September 30, 2010, 4.2 million and 1.9 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, 2011 and September 30, 2010.

Stockholders' Equity
Stockholders' Equity

13.  Stockholders’ Equity

 

The following is a roll forward of retained earnings and noncontrolling interest for the nine-months ended September 30, 2011 and 2010:

 

(in millions)

 

Retained Earnings

 

Noncontrolling
Interest

 

Balance at December 31, 2010

 

$

104.7

 

$

(3.4

)

Net earnings (loss)

 

(26.0

)

(4.1

)

Balance at September 30, 2011

 

$

78.7

 

$

(7.5

)

 

(in millions)

 

Retained Earnings

 

Noncontrolling
Interest

 

Balance at December 31, 2009

 

$

188.7

 

$

(0.7

)

Net earnings (loss)

 

(7.6

)

(2.1

)

Balance at September 30, 2010

 

$

181.1

 

$

(2.8

)

 

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.

 

On March 21, 2007, the Board of Directors of the company approved the Rights Agreement between the company and Computershare Trust Company, N.A., as Rights Agent and declared a dividend distribution of one right (a “Right”) for each outstanding share of common stock, par value $0.01 per share, of the company (the “Common Stock”), to shareholders of record at the close of business on March 30, 2007 (the “Record Date”).  In addition to the Rights issued as a dividend on the Record Date, the Board of Directors has also determined that one Right will be issued together with each share of Common Stock issued by the company after the Record Date.  Generally, each Right, when it becomes exercisable, entitles the registered holder to purchase from the company one share of Common Stock at a purchase price, in cash, of $110.00 per share, subject to adjustment as set forth in the Rights Agreement.

 

As explained in the Rights Agreement, the Rights become exercisable on the “Distribution Date”, which is the date that any of the following occurs: (1) 10 days following a public announcement that a person or group of affiliated persons has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of Common Stock of the company; or (2) 10 business days following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 20% or more of such outstanding shares of Common Stock.  The Rights will expire at the close of business on March 29, 2017, unless earlier redeemed or exchanged by the company as described in the Rights Agreement.

 

Currently, the company has authorization to purchase up to 10 million shares of common stock at management’s discretion.  As of September 30, 2011, 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

14.  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 $11.0 million and $6.8 million for the nine-months ended September 30, 2011 and 2010, respectively.  The company granted options to acquire 1.0 million and 1.4 million shares of common stock to officers and employees during the first three quarters of 2011 and 2010, respectively.  Any option grants to directors are 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 to officers and directors, 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 0.8 million and 0.5 million shares of restricted stock and performance shares during the first three quarters of 2011 and 2010, respectively.  The restrictions on all shares of restricted stock expire on the third anniversary of the applicable grant date.

 

The company granted performance shares to officers and employees during the first quarter of 2011.  The number of shares to be issued will vary depending on the company’s improvement in economic value add (EVA) from December 31, 2010 to December 31, 2012, the cumulative debt reduction in 2011 and 2012 and whether the officer or employee is continuously employed by the company through the end of 2013.  Depending on the foregoing factors, the number of shares awarded could range from zero to 0.9 million.  These shares vest 75% on the second anniversary of the grant date and 25% on the third anniversary of the grant date subject to the achievement of the performance criteria.

Contingencies and Significant Estimates
Contingencies and Significant Estimates

15.  Contingencies and Significant Estimates

 

The company has been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in connection with the Lemberger Landfill Superfund Site near Manitowoc, Wisconsin.  Approximately 150 potentially responsible parties have been identified as having shipped hazardous materials to this site.  Eleven of those, including the company, have formed the Lemberger Site Remediation Group and have successfully negotiated with the United States Environmental Protection Agency and the Wisconsin Department of Natural Resources to fund the cleanup and settle their potential liability at this site.  The estimated remaining cost to complete the cleanup of this site is approximately $8.1 million.  Although liability is joint and several, the company’s share of the liability is estimated to be 11% of the remaining cost.   Remediation work at the site has been substantially completed, with only long-term pumping and treating of groundwater and site maintenance remaining.  The company’s remaining estimated liability for this matter, included in accounts payable and accrued expenses in the Consolidated Balance Sheets at September 30, 2011, is $0.7 million.  Based on the size of the company’s current allocation of liabilities at this site, the existence of other viable potentially responsible parties and current reserve, the company does not believe that any liability imposed in connection with this site will have a material adverse effect on its financial condition, results of operations, or cash flows.

 

As of September 30, 2011, the company also has recorded accruals 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.

 

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, 2011, 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, 2011, 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 September 30, 2011 were $28.2 million; $5.9 million was reserved specifically for actual cases and $22.3 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 September 30, 2011 and December 31, 2010, the company had reserved $97.8 million and $99.9 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 is not expected to have a material adverse effect on the company’s financial condition, results of operations, or cash flows.

Guarantees
Guarantees

16. 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 September 30, 2011 and December 31, 2010 was $55.7 million and $57.5 million, respectively.  The total amount of residual value guarantees and buyback commitments given by the company and outstanding at September 30, 2011 and December 31, 2010 was $69.0 million and $79.2 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 nine months ended September 30, 2011 and 2010, 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 and nine-months ended September 30, 2011, the customers paid $0.6 million and $2.0 million respectively, on the notes to the third party financing companies.  As of September 30, 2011, the outstanding balance of the notes receivables guaranteed by the company was $2.8 million.

 

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.  Such 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 nine-months ended September 30, 2011 and the year ended December 31, 2010:

 

(in millions)

 

2011

 

2010

 

Balance at beginning of period

 

$

99.9

 

$

113.1

 

Accruals for warranties issued during the period

 

41.9