UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2010

 

or

 

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

 

For the transition period from              to             

 

Commission File Number

1-11978

 

The Manitowoc Company, Inc.

(Exact name of registrant as specified in its charter)

 

Wisconsin

 

39-0448110

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

2400 South 44th Street,
Manitowoc, Wisconsin

 

54221-0066

(Address of principal executive offices)

 

(Zip Code)

 

(920) 684-4410

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller Reporting Company o

 

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

 

The number of shares outstanding of the Registrant’s common stock, $.01 par value, as of September 30, 2010, the most recent practicable date, was 131,350,472.

 

 

 



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

THE MANITOWOC COMPANY, INC.

Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net sales

 

$

877.8

 

$

881.5

 

$

2,476.2

 

$

2,943.8

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of sales

 

669.5

 

680.0

 

1,882.9

 

2,300.4

 

Engineering, selling and administrative expenses

 

138.8

 

132.7

 

397.6

 

420.0

 

Asset impairments

 

 

 

 

700.0

 

Restructuring expense

 

1.5

 

12.8

 

3.2

 

38.7

 

Integration expense

 

 

 

 

3.5

 

Amortization expense

 

9.8

 

8.4

 

29.5

 

25.2

 

Loss on disposition of property

 

2.0

 

 

2.0

 

 

Total operating costs and expenses

 

821.6

 

833.9

 

2,315.2

 

3,487.8

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from operations

 

56.2

 

47.6

 

161.0

 

(544.0

)

 

 

 

 

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

 

 

 

 

Amortization of deferred financing fees*

 

(5.3

)

(7.0

)

(17.4

)

(21.7

)

Interest expense

 

(46.3

)

(49.0

)

(130.0

)

(130.4

)

Loss on debt extinguishment

 

(1.1

)

 

(16.8

)

(1.1

)

Other income, net

 

0.5

 

2.3

 

(11.4

)

8.5

 

Total other income (expenses)

 

(52.2

)

(53.7

)

(175.6

)

(144.7

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations before taxes on income

 

4.0

 

(6.1

)

(14.6

)

(688.7

)

Provision (benefit) for taxes on income

 

3.4

 

3.6

 

(5.5

)

(63.6

)

Earnings (loss) from continuing operations

 

0.6

 

(9.7

)

(9.1

)

(625.1

)

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Earnings (loss) from discontinued operations, net of income taxes of $0.2, $0.1, $0.4 and $1.9, respectively

 

(0.1

)

(1.8

)

(0.6

)

(33.1

)

Loss on sale of discontinued operations, net of income taxes of $2.7 and $19.6, respectively

 

 

(2.6

)

 

(25.8

)

Net earnings (loss)

 

0.5

 

(14.1

)

(9.7

)

(684.0

)

Less: Net loss attributable to noncontrolling interest, net of tax

 

(0.9

)

(1.5

)

(2.1

)

(3.2

)

Net earnings (loss) attributable to Manitowoc

 

$

1.4

 

$

(12.6

)

$

(7.6

)

$

(680.8

)

 

 

 

 

 

 

 

 

 

 

Amounts attributable to the Manitowoc common shareholders:

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations

 

$

1.5

 

$

(8.2

)

$

(7.0

)

$

(621.9

)

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

 

(0.1

)

(1.8

)

(0.6

)

(33.1

)

Loss on sale of discontinued operations, net of income taxes

 

 

(2.6

)

 

(25.8

)

Net earnings (loss) attributable to Manitowoc

 

$

1.4

 

$

(12.6

)

$

(7.6

)

$

(680.8

)

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

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

 

$

0.01

 

$

(0.06

)

$

(0.05

)

$

(4.78

)

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

 

(0.00

)

(0.01

)

(0.01

)

(0.25

)

Loss on sale of discontinued operations, net of income taxes

 

 

(0.02

)

 

(0.20

)

Earnings (loss) per share attributable to Manitowoc common shareholders

 

$

0.01

 

$

(0.10

)

$

(0.06

)

$

(5.23

)

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

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

 

$

0.01

 

$

(0.06

)

$

(0.05

)

$

(4.78

)

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

 

(0.00

)

(0.01

)

(0.01

)

(0.25

)

Loss on sale of discontinued operations, net of income taxes

 

 

(0.02

)

 

(0.20

)

Earnings (loss) per share attributable to Manitowoc common shareholders

 

$

0.01

 

$

(0.10

)

$

(0.06

)

$

(5.23

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding — basic

 

130,605,417

 

130,284,925

 

130,590,248

 

130,227,298

 

Weighted average shares outstanding — diluted

 

132,232,254

 

130,284,925

 

130,590,248

 

130,227,298

 

 

See accompanying notes which are an integral part of these statements.

 


*See discussion of prior period adjustments in Note 1.

 

2



 

THE MANITOWOC COMPANY, INC.

Consolidated Balance Sheets

As of September 30, 2010 and December 31, 2009

(Unaudited)

(In millions, except share data)

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

113.2

 

$

105.8

 

Marketable securities

 

2.7

 

2.6

 

Restricted cash

 

9.7

 

6.5

 

Accounts receivable, less allowances of $33.3 and $47.3, respectively

 

353.7

 

323.2

 

Inventories — net

 

652.9

 

595.5

 

Deferred income taxes

 

161.3

 

142.0

 

Other current assets

 

73.2

 

84.3

 

Total current assets

 

1,366.7

 

1,259.9

 

 

 

 

 

 

 

Property, plant and equipment — net

 

606.2

 

673.7

 

Goodwill

 

1,249.6

 

1,246.8

 

Other intangible assets — net

 

936.3

 

957.4

 

Other non-current assets

 

108.9

 

140.9

 

Total assets

 

$

4,267.7

 

$

4,278.7

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

858.2

 

$

801.6

 

Short-term borrowings

 

162.5

 

144.9

 

Product warranties

 

87.4

 

96.5

 

Customer advances

 

40.6

 

71.2

 

Product liabilities

 

28.3

 

28.0

 

Total current liabilities

 

1,177.0

 

1,142.2

 

Non-Current Liabilities:

 

 

 

 

 

Long-term debt

 

2,005.5

 

2,027.5

 

Deferred income taxes

 

224.0

 

214.8

 

Pension obligations

 

47.0

 

47.4

 

Postretirement health and other benefit obligations

 

60.9

 

58.8

 

Long-term deferred revenue

 

32.7

 

31.8

 

Other non-current liabilities

 

149.5

 

149.0

 

Total non-current liabilities

 

2,519.6

 

2,529.3

 

 

 

 

 

 

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

 

Total Equity:

 

 

 

 

 

Common stock (300,000,000 shares authorized, 163,175,928 shares issued ,131,350,472 and 130,708,124 shares outstanding, respectively)

 

1.4

 

1.4

 

Additional paid-in capital

 

451.4

 

444.4

 

Accumulated other comprehensive income (loss)

 

28.1

 

61.8

 

Retained earnings

 

181.1

 

188.7

 

Treasury stock, at cost (31,825,456 and 32,467,804 shares, respectively)

 

(88.1

)

(88.4

)

Total Manitowoc stockholders’ equity

 

573.9

 

607.9

 

Noncontrolling interest

 

(2.8

)

(0.7

)

Total equity

 

571.1

 

607.2

 

Total liabilities and equity

 

$

4,267.7

 

$

4,278.7

 

 

See accompanying notes which are an integral part of these statements.

 

3



 

THE MANITOWOC COMPANY, INC.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2010 and 2009

(Unaudited)

(In millions)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

Cash Flows from Operations:

 

 

 

 

 

Net earnings (loss)*

 

$

(9.7

)

$

(684.0

)

Adjustments to reconcile net earnings to cash provided by operating activities of continuing operations:

 

 

 

 

 

Asset impairments

 

 

700.0

 

Discontinued operations, net of income taxes

 

0.6

 

33.1

 

Depreciation

 

72.4

 

72.0

 

Amortization of intangible assets

 

29.5

 

25.2

 

Deferred income taxes

 

(22.7

)

(122.1

)

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

 

(3.1

)

1.7

 

Restructuring expense

 

3.2

 

38.7

 

Amortization of deferred financing fees*

 

17.4

 

21.7

 

Loss on debt extinguishment

 

16.8

 

1.1

 

Loss on sale of discontinued operations

 

 

25.8

 

Other

 

6.9

 

3.8

 

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

 

 

 

 

 

Accounts receivable

 

(38.9

)

210.6

 

Inventories

 

(76.5

)

237.6

 

Other assets

 

19.7

 

22.5

 

Accounts payable

 

80.2

 

(271.2

)

Accrued expenses and other liabilities

 

(42.8

)

(115.4

)

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

 

53.0

 

201.1

 

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

 

(0.8

)

(21.2

)

Net cash provided by (used for) operating activities

 

52.2

 

179.9

 

 

 

 

 

 

 

Cash Flows from Investing:

 

 

 

 

 

Business acquisitions, net of cash acquired

 

(4.8

)

 

Capital expenditures

 

(24.8

)

(63.5

)

Change in restricted cash

 

(3.3

)

(1.4

)

Proceeds from sale of business

 

3.8

 

148.8

 

Proceeds from sale of property, plant and equipment

 

13.3

 

3.5

 

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

 

(15.8

)

87.4

 

 

 

 

 

 

 

Cash Flows from Financing:

 

 

 

 

 

Proceeds from revolving credit facility

 

 

(17.0

)

Payments on long-term debt

 

(75.3

)

(355.3

)

Proceeds from long-term debt

 

61.2

 

118.6

 

Proceeds from securitization facility

 

101.0

 

 

(Payments on) securitization facility

 

(101.0

)

 

Payments on notes financing

 

(3.4

)

(7.9

)

Debt issuance costs

 

(11.5

)

(17.8

)

Dividends paid

 

 

(7.9

)

Exercises of stock options, including windfall tax benefits

 

0.6

 

(0.1

)

Net cash used for financing activities of continuing operations

 

(28.4

)

(287.4

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(0.6

)

5.6

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

7.4

 

(14.5

)

Balance at beginning of period

 

105.8

 

173.0

 

Balance at end of period

 

$

113.2

 

$

158.5

 

 

See accompanying notes which are an integral part of these statements.

 


*See discussion of prior period adjustments in Note 1.

 

4



 

THE MANITOWOC COMPANY, INC.

Consolidated Statements of Comprehensive Income

For the Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)

(In millions)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net earnings (loss)

 

$

0.5

 

$

(14.1

)

$

(9.7

)

$

(684.0

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Derivative instrument fair market value adjustment - net of income taxes

 

4.3

 

(3.2

)

(2.5

)

2.5

 

Foreign currency translation adjustments

 

53.1

 

39.3

 

(31.2

)

15.3

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

57.4

 

36.1

 

(33.7

)

17.8

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

57.9

 

22.0

 

(43.4

)

(666.2

)

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to noncontrolling interest

 

(0.9

)

(1.5

)

(2.1

)

(3.2

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to Manitowoc

 

$

58.8

 

$

23.5

 

$

(41.3

)

$

(663.0

)

 

See accompanying notes which are an integral part of these statements.

 

5



 

THE MANITOWOC COMPANY, INC.

Notes to Unaudited Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2010 and 2009

 

1. Accounting Policies

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the results of operations and comprehensive income for the three and nine months ended September 30, 2010 and 2009, the cash flows for the same nine-month periods, and the financial position at September 30, 2010, 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, 2009.  The consolidated balance sheet as of December 31, 2009 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.

 

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

 

On June 30, 2010, the company amended its accounts receivable securitization program.  Transactions under the amended accounts receivable securitization program are accounted for as sales in accordance with ASC Topic 860, “Transfers and Servicing.”  Sales of trade receivables to the Purchaser are reflected as a reduction of accounts receivable in the accompanying Consolidated Balance Sheets and the proceeds received (which include collections on deferred purchase price notes received as part of the consideration) are included in cash flows from operating activities in the accompanying Consolidated Statements of Cash Flows.  The company has reflected the transition from the previous securitization program, which did not meet the criteria for sale treatment under ASC Topic 860, to the amended program using the gross method in the Consolidated Statements of Cash Flows.  Under this method, separate line items for the net proceeds from the securitization facility immediately prior to the amendment and repayments on the amounts outstanding under the securitization facility as a result of the amendment are included in cash flows from financing activities, while the proceeds resulting from the amendment of the securitization facility are reflected as reductions of accounts receivable in cash flows from operating activities. See further discussion in Note 10, “Accounts Receivable Securitization.”

 

Prior Period Adjustments

 

As previously disclosed certain prior period amounts have been revised to correct an error. During the fourth quarter of 2009 the company identified an error in the amortization of deferred financing fees, the correction of which reduced the expenses recognized in the previously filed Quarterly Reports for each of the first three quarters of 2009 by $0.4 million, $5.8 million, and $5.0 million, respectively. The tax impact of the adjustments was not significant. The effect of these adjustments increased the company’s previously reported 2009 earnings per share by $0.00, $0.03, and $0.02 for the quarters ended March 31, June 30 and September 30, respectively.

 

There was no impact to quarterly cash flows from operating activities in 2009 as the result of these revisions since the increase in net earnings was offset by the decrease in the non-cash reconciling items for deferred financing fee amortization and deferred taxes. The company does not believe that these adjustments are material to the results of operations, financial position or cash flows for any of its previously filed quarterly financial statements. Accordingly, the September 30, 2009 financial statements included herein have been revised to reflect the adjustments discussed above.

 

Tax Adjustments

 

During the third quarter of 2010, the company recorded an adjustment to correct an error related to the provision for income taxes, whereby during 2009 the company had incorrectly understated the income tax benefit by $6.6 million.   The company does not believe that this error is material to its condensed consolidated financial statements for the quarter or year to date period ended September 30, 2010, the estimated full year 2010 financial statements, or its 2009 annual or quarterly financial statements.  The impact of this adjustment to the quarter ended September 30, 2010 was an increase to the income tax benefit, net earnings and earnings per share of $6.6 million, $6.6 million, and $0.05, respectively.

 

During the third quarter of 2010, the company also recorded an adjustment to correct an error related to the deferred taxes for the Enodis acquisition, whereby at December 31, 2009 the company had incorrectly overstated deferred tax assets and understated goodwill by $5.8 million.   The company does not believe that this error is material to its condensed consolidated financial statements.  The correction of this error results in a reduction of deferred tax assets of $5.8 million, and an increase to goodwill for the same amount as of September 30, 2010.

 

6



 

2. Acquisitions

 

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 is being integrated into current foodservice hot-side 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 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.

 

Administrative costs related to the former Marine segment resulted in pre-tax losses from discontinued operations of $0.2 million and $2.4 million for the three month periods ended September 30, 2010 and 2009, respectively.  Tax benefits of $0.1 million and $0.1 million were recognized in the three month periods ended  September 30, 2010 and 2009, respectively.  Administrative costs related to the former Marine segment resulted in pre-tax losses from discontinued operations of $0.8 million and $2.2 million for the nine month periods ended September 30, 2010 and 2009, respectively.  Tax benefits of $0.3 million and $0.3 million were recognized in the nine month periods ended September 30, 2010 and 2009, 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 transaction.  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.

 

The company used the net proceeds from the sale of the Enodis global ice machine operations of approximately $150 million to reduce the balance on Term Loan X that matured in April of 2010.  The final sale price resulted in the company recording an additional $28.8 million non-cash impairment charge to reduce the value of the Enodis global ice machine operations in the first quarter of 2009.  As a result of the impairment charge and the net earnings of the businesses to be divested of $0.9 million, the total loss from discontinued operations related to the Enodis ice businesses was $27.9 million for the three months ended March 31, 2009.

 

Administrative costs related to the Enodis ice machine businesses resulted in a pre-tax loss from discontinued operations of $0.2 million and $0.1 million for the nine and three month periods ended September 30, 2010.  There was no tax benefit associated with the Enodis ice machine business costs in the three or nine month periods ended September 30, 2010.

 

4. Financial Instruments

 

The following tables set forth the company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2010 and December 31, 2009 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, 2010

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Current Assets:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

2.6

 

$

 

$

 

$

2.6

 

Forward commodity contracts

 

 

1.4

 

 

1.4

 

Marketable securities

 

2.7

 

 

 

2.7

 

Total Current assets at fair value

 

$

5.3

 

$

1.4

 

$

 

$

6.7

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

0.6

 

$

 

$

 

$

0.6

 

Forward commodity contracts

 

 

0.6

 

 

0.6

 

Total Current liabilities at fair value

 

$

0.6

 

$

0.6

 

$

 

$

1.2

 

 

 

 

 

 

 

 

 

 

 

Non-current Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

 

$

19.9

 

$

 

$

19.9

 

Total Non-current liabilities at fair value

 

$

 

$

19.9

 

$

 

$

19.9

 

 

7



 

 

 

Fair Value as of December 31, 2009

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Current Assets:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

1.4

 

$

 

$

 

$

1.4

 

Forward commodity contracts

 

 

1.7

 

 

1.7

 

Marketable securities

 

2.6

 

 

 

2.6

 

Total Current assets at fair value

 

$

4.0

 

$

1.7

 

$

 

$

5.7

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

$

5.4

 

$

 

$

 

$

5.4

 

Forward commodity contracts

 

 

0.1

 

 

0.1

 

Total Current liabilities at fair value

 

$

5.4

 

$

0.1

 

$

 

$

5.5

 

 

 

 

 

 

 

 

 

 

 

Non-current Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

$

 

$

6.4

 

$

 

$

6.4

 

Total Non-current liabilities at fair value

 

$

 

$

6.4

 

$

 

$

6.4

 

 

The carrying value of the amounts reported in the Consolidated Balance Sheets for cash, accounts receivable, accounts payable, deferred purchase price notes on receivables sold 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 company’s 7 1/8% Senior Notes due 2013 was approximately $151.9 million and $143.1 million at September 30, 2010 and December 31, 2009, respectively.  The fair value of the company’s 9 1/2 % Notes due 2018 was approximately $428.4 million at September 30, 2010.  The fair values of the company’s term loans under the New Credit Agreement are as follows at September 30, 2010 and December 31, 2009, respectively:  Term Loan A — $731.9 million and $883.3 million and Term Loan B — $810.7 million and $1,011.3 million.  See Note 9, “Debt,” for the related carrying values of these debt instruments.  See Note 22, “Subsequent Events,” for discussion of Debt Amendments and issuance of Senior Unsecured Notes due 2020.

 

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 and foreign currency exchange rates and commodity prices, which may adversely affect our 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 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

 

8



 

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 control business risk within limits specified by the company’s risk management policy to 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 company’s risk management 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 using derivative instruments are interest rate risk, commodity price risk and foreign currency exchange rate risk.  Interest rate swap instruments are entered into to manage interest rate risk.  Swap contracts on various commodities are used to manage the price risk associated with forecasted raw material related expenses 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 revenue and expenses along with the related balance sheet exposures.

 

ASC Topic 815-10 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 qualifying commodity swaps, foreign exchange derivative contracts and interest rate swaps as cash flow hedges of forecasted exposures to commodity, currency, and variable rate interest rate volatility.

 

For derivative instruments designated and qualifying as cash flow hedges, the effective portion of the mark-to-market gain or loss is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the forecasted item 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 $2.4 million of unrealized and realized losses related to interest rate, commodity price and currency rate hedging will be reclassified from other comprehensive income into earnings.  Foreign currency and commodity hedging is generally completed on a rolling and layering basis for twelve and eighteen months, respectively.

 

As of September 30, 2010 and December 31, 2009, the company had the following outstanding interest rate swaps, commodity swaps and foreign currency derivative contracts that were entered to hedge forecasted transactions:

 

 

 

Units Hedged

 

 

 

 

 

Commodity

 

September 30,
2010

 

December 31,
2009

 

 

 

Type

 

Aluminum

 

937

 

1,400

 

MT

 

Cash Flow

 

Copper

 

491

 

424

 

MT

 

Cash Flow

 

Natural Gas

 

387,032

 

266,934

 

MMBtu

 

Cash Flow

 

 

 

 

Units Hedged

 

 

 

 

 

Short Currency

 

September 30,
2010

 

December 31,
2009

 

Type

 

 

 

Canadian Dollar

 

17,278,556

 

24,426,423

 

Cash Flow

 

 

 

European Euro

 

43,611,904

 

51,155,115

 

Cash Flow

 

 

 

South Korean Won

 

2,980,064,972

 

2,079,494,400

 

Cash Flow

 

 

 

Singapore Dollar

 

4,600,000

 

3,240,000

 

Cash Flow

 

 

 

United States Dollar

 

6,719,000

 

12,285,292

 

Cash Flow

 

 

 

 

As of September 30, 2010, the total notional amount of the company’s receive-floating/pay-fixed interest rate swaps was $850.0 million compared to $984.0 million on December 31, 2009.

 

For derivative instruments not designated as hedging instruments under ASC Topic 815-10, the gains or losses are recognized in current earnings.

 

 

 

Units Hedged

 

 

 

 

 

Short Currency

 

September 30,
2010

 

December 31,
2009

 

Recognized
Location

 

Purpose

 

Great British Pound

 

42,603,067

 

30,385,738

 

Other income

 

Balance Sheet Hedges

 

European Euro

 

52,887,439

 

37,310,399

 

Other income

 

Balance Sheet Hedges

 

Singapore Dollar

 

800,000

 

 

Other income

 

Balance Sheet Hedges

 

United States Dollar

 

30,729,188

 

42,383,351

 

Other income

 

Balance Sheet Hedges

 

 

The fair value of outstanding derivative contracts recorded as assets in the accompanying Consolidated Balance Sheet as of September 30, 2010 and December 31, 2009 was as follows:

 

9



 

 

 

ASSET DERIVATIVES

 

 

 

September 30, 2010

 

December 31, 2009

 

Balance Sheet Location

 

 

Fair Value

 

Derivatives designated as hedging instrument under ASC 815

 

 

 

 

 

Foreign Exchange Contracts

Other current assets

 

$

2.2

 

$

1.4

 

Commodity Contracts

Other current assets

 

1.3

 

1.5

 

Total derivatives designated as hedging instruments under ASC 815

 

$

3.5

 

$

2.9

 

 

 

 

ASSET DERIVATIVES

 

 

 

September 30, 2010

 

December 31, 2009

 

Balance Sheet Location

 

 

Fair Value

 

Derivatives NOT designated as hedging instrument under ASC 815

 

 

 

 

 

Foreign Exchange Contracts

Other current assets

 

$

0.4

 

$

 

Commodity Contracts

Other current assets

 

0.1

 

0.2

 

Total derivatives NOT designated as hedging instruments under ASC 815

 

0.5

 

0.2

 

Total asset derivatives

 

$

4.0

 

$

3.1

 

 

The fair value of outstanding derivative contracts recorded as liabilities in the accompanying Consolidated Balance Sheet as of September 30, 2010 and December 31, 2009 was as follows:

 

 

 

LIABILITY DERIVATIVES

 

 

 

September 30, 2010

 

December 31, 2009

 

Balance Sheet Location

 

 

Fair Value

 

Derivatives designated as hedging instrument under ASC 815

 

 

 

 

 

Foreign Exchange Contracts

Accounts payable and accrued expenses

 

$

0.6

 

$

 0.5

 

Interest Rate Swap Contracts

Other non-current liabilities

 

19.9

 

6.4

 

Commodity Contracts

Accounts payable and accrued expenses

 

0.6

 

0.1

 

Total derivatives designated as hedging instruments under ASC 815

 

$

21.1

 

$

 7.0

 

 

 

 

LIABILITY DERIVATIVES

 

 

 

September 30, 2010

 

December 31, 2009

 

Balance Sheet Location

 

 

Fair Value

 

Derivatives NOT designated as hedging instrument under ASC 815

 

 

 

 

 

Foreign Exchange Contracts

Accounts payable and accrued expenses

 

$

 0.7

 

$

 4.9

 

Commodity Contracts

Accounts payable and accrued expenses

 

 

 

Total derivatives NOT designated as hedging instruments under ASC 815

 

$

 0.7

 

$

 4.9

 

Total liability derivatives

 

$

21.8

 

$

 11.9

 

 

The effect of derivative instruments on the consolidated statement of operations for the quarters ended September 30, 2010 and September 30, 2009 for gains or losses initially recognized in other comprehensive income in the consolidated balance sheet were as follows:

 

 

 

 

 

 

 

Amount of Gain or (Loss)

 

 

 

Amount of Gain or (Loss)

 

 

 

Reclassified from

 

 

 

Recognized in OCI on

 

Location of Gain or (Loss)

 

Accumulated OCI into

 

 

 

Derivative (Effective

 

Reclassified from

 

Income (Effective

 

 

 

Portion) (Net of Tax)

 

Accumulated OCI into

 

Portion)

 

Derivatives in ASC 815 Cash Flow
Hedging Relationships

 

September 30,
2010

 

September 30,
2009

 

Income (Effective
Portion)

 

September 30,
2010

 

September 30,
2009

 

Foreign Exchange Contracts

 

$

5.2

 

$

1.3

 

Cost of Sales

 

$

(1.7

)

$

1.0

 

Interest Rate Swap Contracts

 

(1.8

)

(3.0

)

Interest Expense

 

(2.5

)

(3.3

)

Commodity Contracts

 

0.3

 

1.2

 

Cost of Sales

 

0.3

 

(0.8

)

Total

 

$

3.7

 

$

(0.5

)

 

 

$

(3.9

)

$

(3.1

)

 

 

 

 

 

 

 

 

 

Location of Gain or (Loss)

 

Amount of Gain or (Loss) Recognized in

 

 

 

Recognized in Income on

 

Income on Derivative (Ineffective Portion

 

 

 

Derivative (Ineffective Portion and

 

and Amount Excluded from

 

Derivatives in ASC 815 Cash Flow

 

Amount Excluded from

 

Effectiveness Testing)

 

Hedging Relationships

 

Effectiveness Testing)

 

September 30, 2010

 

September 30, 2009

 

Commodity Contracts

 

Cost of Sales

 

$

0.1

 

$

0.1

 

Total

 

 

 

$

0.1

 

$

0.1

 

 

10



 

 

 

 

 

Amount of Gain or (Loss)

 

Derivatives Not Designated as
Hedging Instruments under

 

Location of Gain or (Loss)
recognized in Income on

 

Recognized in Income on
Derivative

 

ASC 815

 

Derivative

 

September 30, 2010

 

September 30, 2009

 

Foreign Exchange Contracts

 

Other Income

 

$

(0.6

)

$

(2.1

)

Commodity Contracts

 

Cost of Sales

 

 

(0.1

)

Total

 

 

 

$

(0.6

)

$

(2.2

)

 

The effect of derivative instruments on the consolidated statement of operations for the nine months ended September 30, 2010 and September 30, 2009 for gains or losses initially recognized in other comprehensive income in the consolidated balance sheet were as follows:

 

 

 

 

 

 

 

Amount of Gain or (Loss)

 

 

 

Amount of Gain or (Loss)

 

 

 

Reclassified from

 

 

 

Recognized in OCI on

 

Location of Gain or (Loss)

 

Accumulated OCI into

 

 

 

Derivative (Effective

 

Reclassified from

 

Income (Effective

 

 

 

Portion) (Net of Tax)

 

Accumulated OCI into

 

Portion)

 

Derivatives in ASC 815 Cash Flow
Hedging Relationships

 

September 30,
2010

 

September 30,
2009

 

Income (Effective
Portion)

 

September 30,
2010

 

September 30,
2009

 

Foreign Exchange Contracts

 

$

0.5

 

$

1.3

 

Cost of Sales

 

$

(4.2

)

$

(6.9

)

Interest Rate Swap Contracts

 

(8.8

)

(5.3

)

Interest Expense

 

(7.9

)

(8.3

)

Commodity Contracts

 

(0.5

)

0.1

 

Cost of Sales

 

0.8

 

(3.9

)

Total

 

$

(8.8

)

$

(3.9

)

 

 

$

(11.3

)

$

(19.1

)

 

 

 

Location of Gain or (Loss)

 

Amount of Gain or (Loss) Recognized in

 

 

 

Recognized in Income on

 

Income on Derivative (Ineffective Portion

 

 

 

Derivative (Ineffective Portion and

 

and Amount Excluded from

 

Derivatives in ASC 815 Cash Flow

 

Amount Excluded from

 

Effectiveness Testing)

 

Hedging Relationships

 

Effectiveness Testing)

 

September 30, 2010

 

September 30, 2009

 

Commodity Contracts

 

Cost of Sales

 

$

0.1

 

$

 

Total

 

 

 

$

0.1

 

$

 

 

 

 

 

 

Amount of Gain or (Loss)

 

Derivatives Not Designated as

 

Location of Gain or (Loss)

 

Recognized in Income on

 

Hedging Instruments under

 

recognized in Income on

 

Derivative

 

ASC 815

 

Derivative

 

September 30, 2010

 

September 30, 2009

 

Foreign Exchange Contracts

 

Other Income

 

$

(0.4

)

$

(5.8

)

Commodity Contracts

 

Cost of Sales

 

 

(1.2

)

Total

 

 

 

$

(0.4

)

$

(7.0

)

 

6. Inventories

 

The components of inventories at September 30, 2010 and December 31, 2009 are summarized as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Inventories — gross:

 

 

 

 

 

Raw materials

 

$

253.6

 

$

244.5

 

Work-in-process

 

158.2

 

163.5

 

Finished goods

 

362.2

 

310.8

 

Total inventories — gross

 

774.0

 

718.8

 

Excess and obsolete inventory reserve

 

(90.3

)

(90.9

)

Net inventories at FIFO cost

 

683.7

 

627.9

 

Excess of FIFO costs over LIFO value

 

(30.8

)

(32.4

)

Inventories — net

 

$

652.9

 

$

595.5

 

 

Inventories are carried at lower of cost or market value using the first-in, first-out (FIFO) method for 87% and 90% of total inventories at September 30, 2010 and December 31, 2009, respectively.  The remainder of the inventories are costed using the last-in, first-out (LIFO) method.  During the first quarter of 2010, a reduction in inventories related to working capital initiatives resulted in a liquidation of applicable LIFO inventory quantities carried at lower costs in prior years. This LIFO liquidation resulted in a $1.6 million cost of sales decrease.

 

11



 

7. Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill by reportable segment for the year ended December 31, 2009 and three month periods ended March 31, 2010,  June 30, 2010 and September 30, 2010  are as follows:

 

 

 

Crane

 

Foodservice

 

Total

 

Gross and net balance as of January 1, 2009

 

$

285.5

 

$

1,605.0

 

$

1,890.5

 

Enodis purchase accounting adjustments

 

 

(84.9

)

(84.9

)

Sale of product lines

 

 

(9.3

)

(9.3

)

Foreign currency impact

 

4.2

 

(4.9

)

(0.7

)

Gross balance as of December 31, 2009

 

$

289.7

 

$

1,505.9

 

$

1,795.6

 

Asset impairments

 

 

(548.8

)

(548.8

)

Net balance as of December 31, 2009

 

$

289.7

 

$

957.1

 

$

1,246.8

 

 

 

 

 

 

 

 

 

Acquisition of ASI

 

 

5.0

 

5.0

 

Foreign currency impact

 

(11.1

)

2.2

 

(8.9

)

Gross balance as of March 31, 2010

 

$

278.6

 

$

1,513.1

 

$

1,791.7

 

Foreign currency impact

 

(10.8

)

(0.2

)

(11.0

)

Gross balance as of June 30, 2010

 

$

267.8

 

$

1,512.9

 

$

1,780.7

 

Deferred tax adjustment

 

 

5.8

 

5.8

 

Foreign currency impact

 

11.6

 

0.3

 

11.9

 

Gross balance as of September 30, 2010

 

$

279.4

 

$

1,519.0

 

$

1,798.4

 

Asset impairments

 

 

(548.8

)

(548.8

)

Net balance as of September 30, 2010

 

$

279.4

 

$

970.2

 

$

1,249.6

 

 

The increase in goodwill of $5.8 million for the three month period ended September 30, 2010 was due to an out of period adjustment further discussed in Note 1, “Accounting Policies.”   The increase in goodwill of $5.0 million for the period ended March 31, 2010, was due to the acquisition of ASI.  See further discussion in Note 2, “Acquisitions.”

 

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 Asia; 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, 2010, the company revised its internal reporting structure and the Foodservice Retail reporting unit was combined into the Foodservice Americas reporting unit.

 

During the first quarter of 2009, the company’s stock price continued to decline as global market conditions remained depressed, the credit markets did not improve and the performance of the company’s Crane and Foodservice segments was below the company’s expectations.  In connection with a reforecast of expected 2009 financial results completed in early April 2009, the company determined the foregoing circumstances to be indicators of potential impairment under the guidance of ASC Topic 350-10. Therefore, the company performed the required initial (“Step One”) impairment test for each of the company’s operating units as of March 31, 2009.  The company re-performed its established method of present-valuing future cash flows, taking into account the company’s updated projections, to determine the fair value of the reporting units.   The determination of fair value of the reporting units requires the company to make significant estimates and assumptions. The fair value measurements (for both goodwill and indefinite-lived intangible assets) are considered Level 3 within the fair value hierarchy. These estimates and assumptions primarily include, but are not limited to, projections of revenue growth, operating earnings, discount rates, terminal growth rates, and required capital for each reporting unit. Due to the inherent uncertainty involved in making these estimates, actual results could differ materially from the estimates. The company evaluated the significant assumptions used to determine the fair value of each reporting unit, both individually and in the aggregate, and concluded they are reasonable.

 

The results of the analysis indicated that the fair values of three of the company’s eight reporting units (Foodservice Americas; Foodservice Europe, Middle East, and Africa; and Foodservice Retail) were potentially impaired; therefore, the company proceeded to measure the amount of the potential impairment (“Step Two”) with the assistance of a third-party valuation firm.  Upon completion of that assessment, the company recognized impairment charges as of March 31, 2009, of $548.8 million related to goodwill.  The company also recognized impairment charges of $151.2 million related to other indefinite-lived intangible assets as of March 31, 2009.  Both charges were within the Foodservice segment.  The goodwill and other indefinite-lived intangible assets had a carrying value of $1,598.0 million and $368.0 million, respectively, prior to the impairment charges. These non-cash impairment charges had no direct impact on the company’s cash flows, liquidity, debt covenants, debt position or tangible asset values.  There was no tax

 

12



 

benefit in relation to the goodwill impairment; however, the company did recognize a $52.0 million tax benefit associated with the other indefinite-lived intangible asset impairment.

 

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 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, 2010 and December 31, 2009:

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

Gross

 

Accumulated

 

Net

 

Gross

 

Accumulated

 

Net

 

 

 

Carrying

 

Amortization

 

Book

 

Carrying

 

Amortization

 

Book

 

 

 

Amount

 

Value

 

Amount

 

Value

 

Trademarks and tradenames

 

$

334.5

 

$

 

$

334.5

 

$

341.0

 

$

 

$

341.0

 

Customer relationships

 

439.3

 

(46.1

)

393.2

 

438.9

 

(28.9

)

410.0

 

Patents

 

33.6

 

(20.5

)

13.1

 

35.1

 

(19.4

)

15.7

 

Engineering drawings

 

11.3

 

(6.5

)

4.8

 

11.8

 

(6.2

)

5.6

 

Distribution network

 

20.8

 

 

20.8

 

21.7

 

 

21.7

 

Other intangibles

 

199.0

 

(29.1

)

169.9

 

185.9

 

(22.5

)

163.4

 

Total

 

$

1,038.5

 

$

(102.2

)

$

936.3

 

$

1,034.4

 

$

(77.0

)

$

957.4

 

 

The gross carrying amount of other intangibles increased $18.2 million due to the acquisition of ASI, as discussed in Note 2, “Acquisitions.”  Amortization expense for the three months ended Sepember 30, 2010 and 2009 was $9.8 million and $8.4 million, respectively. Amortization expense for the nine months ended September 30, 2010 and 2009 was $29.5 million and $25.2 million, respectively. Amortization expense related to intangible assets for each of the five succeeding years is estimated to be approximately $40 million per year.

 

8. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses at September 30, 2010 and December 31, 2009 are summarized as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Trade accounts payable and interest payable

 

$

431.9

 

$

357.3

 

Employee related expenses

 

108.8

 

96.6

 

Restructuring expenses

 

38.4

 

61.5

 

Profit sharing and incentives

 

22.5

 

14.0

 

Accrued rebates

 

30.3

 

35.2

 

Deferred revenue - current

 

25.2

 

40.4

 

Derivative liabilities

 

1.9

 

5.5

 

Income taxes payable

 

56.8

 

25.3

 

Miscellaneous accrued expenses

 

142.4

 

165.8

 

 

 

$

858.2

 

$

801.6

 

 

9. Debt

 

Outstanding debt at September 30, 2010 and December 31, 2009 is summarized as follows:

 

(in millions)

 

September 30, 2010

 

December 31, 2009

 

Revolving credit facility

 

$

 

$

 

Term loan A

 

738.4

 

922.5

 

Term loan B

 

808.2

 

1,041.0

 

Senior notes due 2013

 

150.0

 

150.0

 

Senior notes due 2018

 

400.0

 

 

Other

 

71.4

 

58.9

 

Total debt

 

$

2,168.0

 

$

2,172.4

 

Less current portion and short-term borrowings

 

(162.5

)

(144.9

)

Long-term debt

 

$

2,005.5

 

$

2,027.5

 

 

13



 

In April 2008, the company entered into a $2.4 billion credit agreement which was amended and restated as of August 25, 2008 to ultimately increase the size of the total facility to $2.925 billion (New Credit Agreement).  The New Credit Agreement became effective November 6, 2008.  The New Credit Agreement includes 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 company is obligated to prepay the three 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. Term Loan X was repaid in full as of December 31, 2009. At September 30, 2010 the interest rates for Term Loan A and Term Loan B were 5.56% and 8.00%, respectively.  Including interest rate swaps, Term Loan A and Term Loan B interest rates were 6.56% and 8.43% respectively, at September 30, 2010.

 

In June 2009, the company entered into Amendment No. 2 (the Amendment) to the New Credit Agreement to provide relief under its consolidated total leverage ratio and consolidated interest coverage ratio financial covenants.  This Amendment was obtained to avoid a potential financial covenant violation at the end of the second quarter of 2009 as a result of lower demand for certain of the company’s products due to continued weakness in the global economy and tight credit markets.  Terms of the Amendment include an increase in the spread on London Interbank Offered Rate (LIBOR) and Alternative Borrowing Rate (ABR) loans of between 150 and 175 basis points, depending on the consolidated total leverage ratio. Also, one additional interest rate pricing level was added for each loan facility above a certain leverage amount.

 

On January 21, 2010, the company entered into an amendment (January 2010 Amendment) to the New Credit Agreement.  The January 2010 Amendment, among other things, amends the definition of Consolidated Earnings Before Interest and Taxes (EBIT) to provide add-backs for certain additional cash restructuring charges, and amends certain financial ratios that the company is required to maintain, including (i) reducing the minimum permitted level of the Consolidated Interest Coverage Ratio, (ii) increasing the maximum permitted level of the Maximum Consolidated Total Leverage Ratio, and (iii) adjusting the start date for measurement of the Consolidated Senior Secured Leverage Ratio to December 31, 2010 and reducing the maximum permitted level for this ratio.

 

The January 2010 Amendment contains financial covenants whereby the ratio of (a) consolidated earnings before interest, taxes, depreciation and amortization, and other adjustments (EBITDA), as defined in the New Credit Agreement to (b) consolidated interest expense, each for the most recent four fiscal quarters (Consolidated Interest Coverage Ratio) and the ratio of (c) consolidated indebtedness to (d) consolidated EBITDA for the most recent four fiscal quarters (Consolidated Total Leverage Ratio), at all times must each meet certain defined limits listed below:

 

 

 

Consolidated

 

Consolidated

 

 

 

Total

 

Interest

 

 

 

Leverage

 

Coverage

 

 

 

Ratio

 

Ratio

 

Fiscal Quarter Ending:

 

(less than)

 

(greater than)

 

March 31, 2010

 

7.80:1

 

1.75:1

 

June 30, 2010

 

7.80:1

 

1.75:1

 

September 30, 2010

 

7.25:1

 

1.80:1

 

 

In addition, the January 2010 Amendment contains a financial covenant whereby the ratio of (e) consolidated senior secured indebtedness to (f) consolidated EBITDA for the most recent four fiscal quarters (Consolidated Senior Secured Indebtedness Ratio), beginning with the fiscal quarter ending December 31, 2010, must meet certain defined limits listed below:

 

14



 

 

 

Consolidated

 

 

 

Senior Secured

 

 

 

Leverage

 

 

 

Ratio

 

Fiscal quarter ending:

 

(less than)

 

December 31, 2010

 

5.00:1

 

March 31, 2011

 

5.00:1

 

June 30, 2011

 

5.00:1

 

September 30, 2011

 

5.00:1

 

December 31, 2011

 

4.25:1

 

March 31, 2012

 

4.25:1

 

June 30, 2012

 

4.00:1

 

September 30, 2012

 

3.75:1

 

December 31, 2012

 

3.50:1

 

March 31, 2013

 

3.25:1

 

June 30, 2013

 

3.25:1

 

September 30, 2013

 

3.25:1

 

December 31, 2013 and thereafter

 

3.00:1

 

 

On October 7, 2010, the company and certain of its subsidiaries entered into an amendment (the “Amendment”) to the New Credit Agreement, dated as of August 25, 2008.  In addition to other modifications, this Amendment changed the financial covenants noted above. See additional discussion in Note 22, “Subsequent Events.”

 

On February 3, 2010, the company entered into an Underwriting Agreement with J.P. Morgan Securities Inc. as representative of several underwriters, pursuant to which the company agreed to sell, and the underwriters agreed to purchase $400 million of the company’s 9.50% Senior Notes due 2018 to be guaranteed by guarantors in a public offering which closed on February 8, 2010. 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.

 

The Senior Notes due 2018 are unsecured senior obligations ranking subordinate to all existing senior secured indebtedness and equal to all existing senior unsecured obligations.  The Senior Notes due 2018 are jointly and severally and fully guaranteed on a senior unsecured basis by all of our existing and future domestic restricted subsidiaries that guarantee our senior secured credit facilities.  Interest on the Senior Notes due 2018 is payable semiannually in February and August of each year.  The Senior Notes due 2018 may be redeemed in whole or in part by the company for a premium at any time prior to February 15, 2014.  The premium is calculated as the greater of (1) 1.0% of the principal amount of such note; and (2) the excess of (a) the present value at such redemption dated of (i) the redemption price of such note on February 15, 2014 plus (ii) all required remaining scheduled interest payments due on such note through February 15, 2014, computed using a discount rate equal to the treasury rate plus 50 basis points; over (b) the principal amount of such note on such redemption date.   In addition, the company may redeem at its option, in whole or in part, at the following redemption prices if it redeems the Senior Notes due 2018 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 Senior Notes due 2018 outstanding at a redemption price of 109.500% 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 Senior Notes due 2018 outstanding remains outstanding immediately after any such redemption; and

(2)  The company makes such redemption not more than 90 days after the consummation of any such public offering.

 

The issuance of the Senior Notes due 2018 and the use of proceeds to repay Term Loan A and Term Loan B resulted in the recognition of $15.7 million for the loss on extinguishment of debt, in accordance with the provisions of ASC Topic 470-50, “Modifications and Extinguishments.”  In addition, $1.7 million of fees paid by the company to the parties to the New Credit Agreement were capitalized in connection with the January 2010 Amendment and along with the existing unamortized debt fees, are being amortized over the remaining term of the New Credit Agreement using the effective interest method.  $8.5 million of fees paid to the parties of the Senior Notes due 2018 have been capitalized and are being amortized over the term of the Senior Notes due 2018.

 

The company’s Senior Notes due 2013 and Senior Notes due 2018 contain customary affirmative and negative covenants.  Among other restrictions, these covenants limit our ability to redeem or repurchase our debt, incur additional debt, make acquisitions, merge with other entities, pay dividends or distributions, repurchase capital stock, and create or become subject to liens.

 

On October 18, 2010, the company completed the sale of $600 million aggregate principal amount of its 8.50% Senior Notes due

 

15



 

2020 (the “2020 Notes”). The 2020 Notes are guaranteed by certain of the company’s wholly-owned subsidiaries (the “Guarantors”) and were issued under an Indenture, dated as of February 8, 2010, between the company and Wells Fargo Bank, National Association, as Trustee as supplemented by a Second Supplemental Indenture, dated as of October 18, 2010, among the company, the Guarantors and the Trustee.  See additional discussion in Note 22, “Subsequent Events.”

 

As of September 30, 2010 the company was in compliance with all affirmative and negative covenants in its debt instruments inclusive of the financial covenants pertaining to the New Credit Agreement, as amended through September 30, 2010, the Senior Notes due 2013, and the Senior Notes due 2018 and based upon the company’s current plans and outlook, the company believes it will be able to comply with these covenants during the subsequent 12 months.  As of September 30, 2010 the company’s Consolidated Total Leverage Ratio was 6.75:1, below the maximum ratio of 7.25:1 and the company’s Consolidated Interest Coverage Ratio was 2.00:1, above the minimum ratio of 1.80:1.

 

As of September, 30 2010, the company had outstanding $71.4 million of other indebtedness that has a weighted-average interest rate of approximately 5.9%.  This debt includes outstanding short-term debt and overdraft balances in the Americas, Asia and Europe and various capital leases.

 

10. Accounts Receivable Securitization

 

On June 30, 2010 the company entered into the Second Amended and Restated Receivables Purchase Agreement whereby it sells certain of its domestic trade accounts receivable to a wholly owned, bankruptcy-remote special purpose subsidiary which, in turn, sells, conveys, transfers and assigns to a third-party financial institution (Purchaser), all of the Seller’s right, title and interest in and to its pool of receivables to the 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 total leverage ratio.  As of September 30, 2010, the company was in compliance with all affirmative and negative covenants inclusive of the financial covenants pertaining to the Amended and Restated Receivables Purchase Agreement.

 

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, 2010, was $65.4 million and is included in accounts receivable in the accompanying Consolidated Balance Sheets.

 

The securitization program includes certain of the company’s domestic U.S. Foodservice and Crane segment businesses.  Trade accounts receivables sold to the Purchaser and being serviced by the company totaled $114.0 million at September 30, 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 the June 30, 2010 amendment, 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.  The table below provides additional information about delinquencies and net credit losses for trade accounts receivable subject to the accounts receivable securitization program at December 31, 2009.

 

16



 

 

 

Balance Outstanding
December 31, 2009

 

Balance Outstanding 60
Days or More Past Due
December 31, 2009

 

Net Credit Losses
Year Ended
December 31, 2009

 

Trade accounts receivable subject to securitization program

 

$

107.9

 

$

5.9

 

$

 

 

 

 

 

 

 

 

 

Trade accounts receivable balance sold

 

68.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained interest

 

$

39.4

 

 

 

 

 

 

On October 11, 2010, the company entered into Amendment No. 1 to the Second Amended and Restated Receivables Purchase Agreement. See additional discussion in Note 22, “Subsequent Events.”

 

11. Income Taxes

 

For the nine months ended September 30, 2010, the company recorded an income tax benefit of $5.5 million, as compared to an income tax benefit of $63.6 million for the nine months ended September 30, 2009.  The income tax benefit for the nine months ended September 30, 2010 was calculated under the discrete method.  The mix of income (loss) between foreign and domestic operations causes 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 nine months ended September 30, 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 company’s tax benefit.

 

The company’s income tax benefit was unfavorably impacted by $4.4 million for the nine months ended September 30, 2010 as a result of the lapse of a U.S. income tax law (Internal Revenue Code Section 954(c)(6)) that had generally provided for the tax free treatment of intercompany interest, dividends and royalties.

 

The Education Jobs and Medicare Assistance Act was signed into law during the third quarter of 2010 and it contained provisions that impact the calculations of the foreign tax credit.  As a result, the Company is no longer in a position to utilize its carry forward for this credit and has recorded a valuation allowance of approximately $6.0 million against the related deferred tax asset.  However, the Company is able to amend its previously filed tax return and deduct these taxes paid, resulting in a tax benefit of $2.1 million.  In addition, beginning with the third quarter of 2010, foreign taxes paid in 2010 are being deducted instead of credited.

 

The Patient Protection and Affordable Care Act was signed into law during the first quarter of 2010 and eliminated the tax deductibility of retiree health care costs to the extent of federal subsidies that provide retiree prescription drug benefits equivalent to Medicare Part D coverage.  The company’s income tax benefit was unfavorably impacted by $1.6 million for the nine months ended September 30, 2010 for this law change.

 

The company’s unrecognized tax benefits, excluding interest and penalties, were $40.4 million as of September 30, 2010, and $35.8 million as of September 30, 2009.  All of the company’s unrecognized tax benefits as of September 30, 2010, if recognized, would impact the income tax provision. During the next twelve months, the company does not expect any material changes in its unrecognized tax benefits.

 

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

 

During the third quarter of 2010, the company recorded an adjustment to correct an error related to the provision for income taxes, whereby during 2009 the company had incorrectly understated the income tax benefit by $6.6 million.  See additional discussions in Note 1, “Accounting Policies.”

 

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,

 

 

 

2010

 

2009

 

2010

 

2009

 

Basic weighted average common shares outstanding

 

130,605,417

 

130,284,925

 

130,590,248

 

130,227,298

 

Effect of dilutive securities - stock options and restricted stock

 

1,626,837

 

 

 

 

Diluted weighted average common shares outstanding

 

132,232,254

 

130,284,925

 

130,590,248

 

130,227,298

 

 

For the nine months ended September 30, 2010, the total number of potential dilutive options was 1.9 million.  However, these options

 

17



 

were not included in the computation of diluted net loss per common share for the nine months ended September 30, 2010 since to do so would decrease the loss per share.  For the three and nine months ended September 30, 2009, the total number of potential dilutive options was 0.7 million and 0.3 million, respectively.  However, these options were not included in the computation of diluted net loss per common share for the three and nine months ended September 30, 2009, since to do so would decrease the loss per share.  In addition, for the three and nine months ended September 30, 2010, 4.2 million and 1.9 million common shares issuable upon the exercise of stock options, respectively, were anti-dilutive and were excluded from the calculation of diluted earnings per share.  For the three and nine months ended September 30, 2009, 3.4 million and 3.9 million common shares issuable upon the exercise of stock options, respectively, 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, 2010 as the company moved to an annual dividend program.  During the three and nine month periods ended September 30, 2009, the company paid a dividend of $0.02 and $0.06 per share.  On October 25, 2010 the Company declared an annual dividend of $0.08 per share.  See additional discussion at Note 22, “Subsequent Events.”

 

13. Stockholders’ Equity

 

The following is a roll forward of retained earnings and non-controlling interest for the period ending September 30, 2010 and 2009

 

 

 

Retained Earnings

 

Non-controlling
Interest

 

Balance at December 31, 2009

 

$

188.7

 

$

(0.7

)

Net earnings (loss)

 

(7.6

)

(2.1

)

Cash dividends

 

 

 

Balance at September 30, 2010

 

$

181.1

 

$

(2.8

)

 

 

 

Retained Earnings

 

Non-controlling
Interest

 

Balance at December 31, 2008

 

$

903.4