Manitowoc Company 10-Q 2011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2011
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number
The Manitowoc Company, Inc.
(Exact name of registrant as specified in its charter)
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the Registrants common stock, $.01 par value, as of March 31, 2011, the most recent practicable date, was 131,788,197.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE MANITOWOC COMPANY, INC.
Consolidated Statements of Operations
For the Three Months Ended March 31, 2011 and 2010
(In millions, except per-share and average shares data)
See accompanying notes which are an integral part of these statements.
THE MANITOWOC COMPANY, INC.
Consolidated Balance Sheets
As of March 31, 2011 and December 31, 2010
(In millions, except share data)
See accompanying notes which are an integral part of these statements.
THE MANITOWOC COMPANY, INC.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2011 and 2010
See accompanying notes which are an integral part of these statements.
THE MANITOWOC COMPANY, INC.
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2011 and 2010
See accompanying notes which are an integral part of these statements.
THE MANITOWOC COMPANY, INC.
Notes to Unaudited Consolidated Financial Statements
For the Three Months Ended March 31, 2011 and 2010
1. Accounting Policies
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair statement of the results of operations and comprehensive income for the three months ended March 31, 2011 and 2010, the cash flows for the same three-month periods, and the financial position at March 31, 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 companys 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 companys 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.
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.
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 since that date.
Administrative costs related to the former Marine segment resulted in pre-tax losses from discontinued operations of $0.3 million and $0.3 million for the three-month periods ended March 31, 2011 and March 31, 2010, respectively. Tax benefits of $0.1 million and $0.1 million were recognized in the three-month periods ended March 31, 2011 and March 31, 2010, respectively.
In addition to the former Marine segment, the company has classified the Enodis ice and related businesses acquired in connection with the companys 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 pre-tax losses from discontinued operations of $0.1 million and $0.2 million for the three-month periods ended March 31, 2011 and March 31, 2010, respectively. Tax benefits of $0.0 million and $0.1 million were recognized in the three-month periods ended March 31, 2011 and March 31, 2010, respectively.
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. The results of these operations have been classified as discontinued operations.
Results of the Kysor/Warren businesses in the current and prior periods have been classified as discontinued in the Consolidated Financial Statements to exclude the results from continuing operations. The following selected financial data of Kysor/Warren for the three months ended March 31, 2011 and 2010, 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 were no general corporate expenses or interest expense allocated to discontinued operations for this business during the periods presented.
4. Fair Value of Financial Instruments
The following tables set forth the companys 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 March 31, 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.
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 periods during which these amounts are outstanding. The fair value of the companys 7.125% Senior Notes due 2013 was approximately $151.5 million and $152.4 million at March 31, 2011 and December 31, 2010, respectively. The fair value of the companys 9.50% Senior Notes due 2018 was approximately $447.3 million
and $438.8 million at March 31, 2011 and December 31, 2010, respectively. The fair value of the companys 8.50% Senior Notes due 2020 was $649.3 million and $645.0 million at March 31, 2011 and December 31, 2010, respectively. The fair values of the companys term loans under the Senior Credit Agreement are as follows at March 31, 2011 and December 31, 2010, respectively: Term Loan A $388.4 million and $461.2 million; and Term Loan B $286.2 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:
The company endeavors to use 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 and foreign currency exchange rates and commodity prices, which may adversely affect its 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.
5. Derivative Financial Instruments
The companys risk management objective is to ensure that business exposures to risk that have been identified and measured and that those that 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 companys 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 instruments are entered into to help manage interest rate or fair value risk. Forward contracts on various commodities are entered into to help manage the price risk associated with forecasted purchases of materials used in the companys manufacturing process. The company also enters into various foreign currency derivative instruments to help manage foreign currency risk associated with the companys projected purchases and sales and foreign currency denominated 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, currency forward contracts and interest rate swaps as cash flow hedges of forecasted purchases of commodities and currencies, and variable rate interest payments.
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 $3.2 million of unrealized and realized gain net of tax related to commodity price and currency 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.
As of March 31, 2011 and December 31, 2010, the company had the following outstanding commodity and currency forward contracts that were entered into to hedge forecasted transactions:
As of March 31, 2011, the total notional amount of the companys receive-floating/pay-fixed interest rate swaps of the companys term loans was $626.0 million compared to $650.8 million on December 31, 2010.
The designated fair market value hedges of receive-fixed/pay-float swaps of the companys 2018 Senior Notes was $200.0 million as of both March 31, 2011 and December 31, 2010. The designated fair market value hedges of receive-fixed/pay-float swaps of the companys 2020 Senior Notes was $300.0 million as of both March 31, 2011 and December 31, 2010.
For derivative instruments that are not designated as hedging instruments under ASC Topic 815-10, the gains or losses on the derivatives are recognized in current earnings within cost of sales or other income, net in the Consolidated Statements of Operations. As of March 31, 2011 and December 31, 2010, the company had the following outstanding currency forward contracts that were not designated as hedging instruments:
The fair value of outstanding derivative contracts recorded as assets in the accompanying Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010 was as follows:
The fair value of outstanding derivative contracts recorded as liabilities in the accompanying Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010 was as follows:
The effect of derivative instruments on the consolidated statement of operations for the quarters ended March 31, 2011 and March 31, 2010 for gains or losses initially recognized in Other Comprehensive Income (OCI) in the Consolidated Balance Sheet was as follows:
The components of inventories at March 31, 2011 and December 31, 2010 are summarized as follows:
7. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill by reportable segment for the year ended December 31, 2010 and three-month period ended March 31, 2011 are as follows:
During the first quarter of 2011, the company determined that certain restructuring actions originally contemplated in conjunction with the Enodis acquisition were no longer necessary. Accordingly, the company adjusted the excess reserve of $2.6 million, net of deferred tax assets, to goodwill.
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 have been determined to be: 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 managements 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, 2010, the company revised its internal reporting structure and, as a result, the Foodservice Retail reporting unit was combined into the Foodservice Americas reporting unit. 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, 2010, 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. Deterioration in our end markets or actual results as compared with the companys projections could 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 companys consolidated balance sheet and results of operations.
The gross carrying amount and accumulated amortization of the companys intangible assets other than goodwill were as follows as of March 31, 2011 and December 31, 2010:
Amortization expense for the three months ended March 31, 2011 and 2010 was $9.7 million and $9.5 million, respectively. Amortization expense related to intangible assets for each of the five succeeding years is estimated to be approximately $40 million per year.
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at March 31, 2011 and December 31, 2010 are summarized as follows:
Outstanding debt at March 31, 2011 and December 31, 2010 is summarized as follows:
The companys current senior credit facility, as amended to date (the Senior Credit Facility), 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. Including interest rate swaps at March 31, 2011, the weighted average interest rates for the Term Loan A and the Term Loan B loans were 7.27% and 9.00%, respectively. Excluding interest rate swaps, the interest rates on Term Loan A and Term Loan B were 5.31% and 8.00% respectively, at March 31, 2011.
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:
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, 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, 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 companys wholly owned domestic subsidiaries, which subsidiaries also guarantee the companys obligations under the Senior Credit Facility. Each series of Notes contains affirmative and negative covenants that limit, among other things, the companys 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 March 31, 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:
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:
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. Net proceeds of $583.7 million from the 2020 Notes 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 at a make-whole redemption price, and at any time on or after November 1, 2015 at various redemption prices set forth in the indenture, plus, in each case, accrued but unpaid interest, if any, to the date of redemption. 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.
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:
As of March 31, 2011, the company had outstanding $66.1 million of other indebtedness that has a weighted-average interest rate of approximately 5.7%. This debt includes outstanding overdraft balances and capital lease obligations in its Americas, Asia-Pacific and European regions.
The company is party to various interest rate swaps in connection with the Senior Credit Facility and the Notes. At inception, $449.4 million of Term Loan A interest was fixed at 2.50% plus the applicable basis point spread and $600.0 million of Term Loan B interest was fixed at 3.64% rate plus the applicable basis point spread. The remaining unhedged portions of the Term Loans A and B continue to bear interest according to the terms of the Senior Credit Facility. As of March 31, 2011, total notional amounts equal to $344.5 million and $281.6 million of fixed interest rate hedges were outstanding on Term Loans A and B, respectively. The company is also party to various variable interest rate swaps in connection with its 2018 and 2020 Notes. At March 31, 2011, $200.0 million and $300.0 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 6.60% plus the 6 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 5.18% plus the 6 month LIBOR in arrears on the variable portion. At March 31, 2011, the weighted average interest rates for the 2018 and 2020 Notes taking into consideration the impact of floating rate hedges were 8.28% and 7.07%, respectively. Both aforementioned swap contracts of the Notes include a call premium schedule that mirrors that of the respective debt and include an optional early termination and cash settlement at five years from the trade date.
As of March 31, 2011, 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, 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 March 31, 2011 our Consolidated Senior Secured Leverage Ratio was 3.02:1, while the maximum ratio is 4.50:1 and our Consolidated Interest Coverage Ratio was 1.94:1, above the minimum ratio of 1.50:1.
10. Accounts Receivable Securitization
On June 30, 2010 the company entered into the Second Amended and Restated Receivables Purchase Agreement (the Receivables Purchase Agreement) whereby it sells certain of its trade accounts receivable to a wholly owned, bankruptcy-remote special purpose subsidiary which, in turn, sells, conveys, transfers and assigns all of the sellers right, title and interest in and to its pool of receivables to a third party financial institution (Purchaser). The Purchaser receives ownership of the pool of receivables. New receivables are purchased by the special purpose subsidiary and resold to the Purchaser as cash collections reduce previously sold investments. The company acts as the servicer of the receivables and as such administers, collects and otherwise enforces the receivables. The company is compensated for doing so on terms that are generally consistent with what would be charged by an unrelated servicer. As servicer, the company will initially receive payments made by obligors on the receivables but will be required to remit those payments in accordance with the Receivables Purchase Agreement. The Purchaser has no recourse against the company 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 March 31, 2011, the company was in compliance with all affirmative and negative covenants inclusive of the financial covenants pertaining to the 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.
On October 11, 2010, the company entered into Amendment No. 1 to the Receivables Purchase Agreement among Manitowoc Funding, LLC, as Seller, the Company, as Servicer, Hannover Funding Company, LLC, as Purchaser, and Norddeutsche Landesbank Girozentrale, as Agent. Amendment No. 1 contains non-material changes to the Receivables Purchase Agreement, including
conforming the financial covenants to the revised financial covenants in the Amendment to the Senior Credit Facility.
Due to a short average collection cycle of less than 60 days for such accounts receivable and due to the companys collection history, the fair value of the companys deferred purchase price notes approximates book value. The fair value of the deferred purchase price notes recorded at March 31, 2011, was $50.1 million and is included in accounts receivable in the accompanying Consolidated Balance Sheets.
The securitization program has a maximum capacity of $125.0 million and includes certain of the companys U.S. and Canadian Foodservice and U.S. Crane segment businesses. Trade accounts receivables sold to the Purchaser and being serviced by the company totaled $90.0 million at March 31, 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, 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 companys 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.
11. Income Taxes
For the three months ended March 31, 2011, the company recorded income tax expense in continuing operations of $1.3 million, as compared to an income tax benefit of $13.8 million for the three months ended March 31, 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 has not been recognized on those losses. This was the primary driver of the increased tax expense for the three months ended March 31, 2011. The income tax benefit for the three months ended March 31, 2010 was calculated under the discrete method. The mix of income (loss) between foreign and domestic operations 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 months ended March 31, 2010 by applying the actual effective tax rate to the year-to-date loss. The company believes that the discrete calculation of the effective tax rate provides a more reasonable approximation of the companys tax benefit for this period.
The companys unrecognized tax benefits, excluding interest and penalties, were $45.4 million as of March 31, 2011, and $42.3 million as of March 31, 2010. All of the companys unrecognized tax benefits as of March 31, 2011, if recognized, would impact the effective tax rate. 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 companys consolidated results of operations, financial positions, or cash flows.
There have been no significant developments in the quarter with respect to the companys ongoing tax audits in various jurisdictions.
12. Earnings Per Share
The following is a reconciliation of the average shares outstanding used to compute basic and diluted earnings per share:
For the three months ended March 31, 2011 and 2010, the total number of potential dilutive securities was 3.3 million and 2.0 million, respectively. However, these securities were not included in the computation of diluted net loss per common share for the months ended March 31, 2011 and 2010, since to do so would decrease the loss per share. In addition, for the three months ended March 31, 2011 and 2010, 2.9 million and 2.0 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-month periods ended March 31, 2011 and March 31, 2010.
13. Stockholders Equity
The following is a roll forward of retained earnings and noncontrolling interest for the periods ending March 31, 2011 and 2010:
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 that 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 managements discretion. As of March 31, 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.
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 $3.6 million and $2.3 million for the three months ended March 31, 2011 and 2010, respectively. The company granted options to acquire 1.0 million and 1.4 million shares of stock to officers and employees during the first 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 employees, options become exercisable in 25% increments annually over a four year period beginning on the grant date and expire ten years subsequent to the grant date. In addition, the company issued 0.3 million and 0.5 million shares of restricted stock during the first quarters of 2011 and 2010, respectively. The restrictions on all shares of restricted stock expire on the third anniversary of the grant date.
The company granted performance shares to officers and employees during the first quarter of 2011. The number of shares issued will vary dependent on the companys economic value add (EVA) improvement 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. Dependent on company performance, 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.
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 companys 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 companys remaining estimated liability for this matter, included in accounts payable and accrued expenses in the Consolidated Balance Sheets at March 31, 2011, is $0.6 million. Based on the size of the companys 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 March 31, 2011, the company also has recorded accruals for environmental matters related to Enodis locations of approximately $1.2 million. At certain of the companys 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 March 31, 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 companys self-insurance retention levels vary by business, and have fluctuated over the last five years. The range of the companys self-insured retention levels is $0.1 million to $3.0 million per occurrence. The high-end of the companys self-insurance retention level is a legacy product liability insurance program inherited in the Grove acquisition for cranes manufactured in the United States for occurrences from January 2000 through October 2002. As of March 31, 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 March 31, 2011 were $29.0 million; $8.3 million was reserved specifically for actual cases and $20.7 million for claims incurred but not reported, which were estimated using actuarial methods. Based on the companys experience in defending product liability claims, management believes the current reserves are adequate for estimated case resolutions on aggregate self-insured claims and insured claims. Any recoveries from insurance carriers are dependent upon the legal sufficiency of claims and solvency of insurance carriers.
At March 31, 2011 and December 31, 2010, the company had reserved $99.7 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 companys 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 counsels 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 counsels evaluation of such actions, in the opinion of management, the ultimate resolution is not expected to have a material adverse effect on the companys financial condition, results of operations, or cash flows.
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 customers third party financing agreement. The deferred revenue included in other current and non-current liabilities at March 31, 2011 and December 31, 2010 was $56.6 million and $57.6 million, respectively. The total amount of residual value guarantees and buyback commitments given by the company and outstanding at March 31, 2011 and December 31, 2010 was $75.4 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 three months ended March 31, 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 companys Consolidated Balance Sheets, net of payments made, in other current and non-current assets, and the company has recognized an obligation equal to the net outstanding balance of the notes in other current and non-current liabilities in the Consolidated Balance Sheets. The cash flow benefit of these transactions is reflected as financing activities in the Consolidated Statements of Cash Flows. During the three months ended March 31, 2011, the customers paid $0.7 million on the notes to the third party financing companies. As of March 31, 2011, the outstanding balance of the notes receivables guaranteed by the company was $4.2 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 companys 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 companys warranty liability include the number of units shipped and historical and anticipated warranty claims. As these factors are impacted by actual experience and future expectations, the company assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary. Below is a table summarizing the warranty activity for the three months ended March 31, 2011 and the year ended December 31, 2010:
17. Employee Benefit Plans
The company provides certain pension, health care and death benefits for eligible retirees and their dependents. The pension benefits are funded, while the health care and death benefits are not funded but are paid as incurred. Eligibility for coverage is based on meeting certain years of service and retirement qualifications. These benefits may be subject to deductibles, co-payment provisions, and other limitations. The company has reserved the right to modify these benefits.
The components of periodic benefit costs for the three months ended March 31, 2011 and March 31, 2010 are as follows: