UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONN

Washington, D.C.  20549

 

FORM 10-Q

 

ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended March 31, 2005
		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  ý   No  o

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ý   No  o

 

The number of shares outstanding of the Registrant’s common stock, $.01 par value, as of March 31, 2005, the most recent practicable date, was 30,083,794.

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

THE MANITOWOC COMPANY, INC.
Consolidated Statements of Operations
For the Three Months Ended March 31, 2005 and 2004
(Unaudited)
(In thousands, except per-share and average shares data)

		Three Months Ended March 31,
		2005			2004
Net sales		$	536,919		$	411,826
Costs and expenses:
Cost of sales		438,203			320,509
Engineering, selling and administrative expenses		68,623			67,992
Amortization expense		821			790
Total costs and expenses		507,647			389,291
Earnings from operations		29,272			22,535
Other expense:
Interest expense		(13,511		)	(13,548		)
Loss on debt extinguishment		(8,275		)	(555		)
Other income, net		1,732			1,059
Total other expense		(20,054		)	(13,044		)
Earnings from continuing operations before taxes on income		9,218			9,491
Provision for taxes on income		2,766			2,753
Earnings from continuing operations		6,452			6,738
Discontinued operations:
Loss from discontinued operations, net of income taxes of $370		—			(971		)
Net earnings		$	6,452		$	5,767
Basic earnings per share:
Earnings from continuing operations		$	0.22		$	0.25
Loss from discontinued operations, net of income taxes		—			(0.04		)
Net earnings		$	0.22		$	0.22
Diluted earnings per share:
Earnings from continuing operations		$	0.21		$	0.25
Loss from discontinued operations, net of income taxes		—			(0.04		)
Net earnings		$	0.21		$	0.21
Weighted average shares outstanding - basic		29,994,069			26,673,710
Weighted average shares outstanding - diluted		30,611,186			27,121,025

 

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

 

2

 

THE MANITOWOC COMPANY, INC.
Consolidated Balance Sheets
As of March 31, 2005 and December 31, 2004

(Unaudited)
(In thousands, except share data)

 

		March 31, 2005			December 31, 2004
Assets
Current Assets:
Cash and cash equivalents		$	68,849		$	176,415
Marketable securities		2,262			2,248
Accounts receivable, less allowances of $26,398 and $26,308		276,687			244,335
Inventories - net		329,984			287,036
Deferred income taxes		59,677			60,963
Other current assets		73,784			74,964
Total current assets		811,243			845,961
Property, plant and equipment - net		352,231			357,568
Goodwill		444,769			451,868
Other intangible assets - net		148,000			154,342
Deferred income taxes		48,468			48,490
Other non-current assets		62,798			69,907
Total assets		$	1,867,509		$	1,928,136
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses		$	540,236		$	513,504
Current portion of long-term debt		—			61,250
Short-term borrowings		9,811			10,355
Product warranties		36,659			37,870
Product liabilities		30,170			29,701
Total current liabilities		616,876			652,680
Non-Current Liabilities:
Long-term debt, less current portion		496,951			512,236
Pension obligations		66,435			67,798
Postretirement health and other benefit obligations		54,461			54,097
Long-term deferred revenue		83,099			82,587
Other non-current liabilities		44,680			39,809
Total non-current liabilities		745,626			756,527
Commitments and contingencies (Note 5)
Stockholders’ Equity:
Common stock (39,793,982 shares issued, 30,083,794 and 29,949,715 shares outstanding, respectively)		397			397
Additional paid-in capital		190,886			188,746
Accumulated other comprehensive income		39,408			61,014
Unearned compensation		—			(47		)
Retained earnings		376,749			372,398
Treasury stock, at cost (9,710,188 and 9,844,267 shares, respectively)		(102,433		)	(103,579		)
Total stockholders’ equity		505,007			518,929
Total liabilities and stockholders’ equity		$	1,867,509		$	1,928,136

 

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

 

3

 

THE MANITOWOC COMPANY, INC.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2005 and 2004
(Unaudited)
(In thousands)

 

		Three Months Ended March 31,
		2005			2004
Cash Flows from Operations:
Net earnings		$	6,452		$	5,767
Adjustments to reconcile net earnings to cash used for operating activities of continuing operations:
Discontinued operations, net of income taxes		—			971
Depreciation		14,055			11,859
Amortization of intangible assets		821			790
Amortization of deferred financing fees		589			983
Loss on debt extinguishment		1,844			555
Deferred income taxes		1,883			(570		)
Loss (gain) on sale of property, plant and equipment		(1,496		)	2,202
Changes in operating assets and liabilities:
Accounts receivable		(39,325		)	(9,939		)
Inventories		(61,811		)	(83,901		)
Other assets		(11,938		)	(3,078		)
Accounts payable		40,774			48,987
Other liabilities		6,649			19,115
Net cash used for operating activities of continuing operations		(41,503		)	(6,259		)
Net cash used for operating activities of discontinued operations		—			(2,080		)
Net cash used for operating activities		(41,503		)	(8,339		)
Cash Flows from Investing:
Capital expenditures		(8,220		)	(11,481		)
Proceeds from sale of property, plant and equipment		2,994			1,410
Purchase of marketable securities		(14		)	(9		)
Net cash used for investing activities		(5,240		)	(10,080		)
Cash Flows from Financing:
Payments on long-term debt		(67,715		)	(7,907		)
Proceeds from long-term debt		7,615			11,807
Payments on note financings		(285		)	—
Dividends paid		(2,101		)	—
Exercises of stock options		3,287			2,889
Net cash provided by (used for) financing activities		(59,199		)	6,789
Effect of exchange rate changes on cash		(1,624		)	(269		)
Net decrease in cash and cash equivalents		(107,566		)	(11,899		)
Balance at beginning of period		176,415			44,968
Balance at end of period		$	68,849		$	33,069

 

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

 

4

 

THE MANITOWOC COMPANY, INC.
Consolidated Statements of Comprehensive Loss
For the Three Months Ended March 31, 2005 and 2004
(Unaudited)
(In thousands)

		Three Months Ended March 31,
		2005				2004
Net earnings		$		6,452		$	5,767
Other comprehensive loss:
Derivative instrument fair market value adjustment - net of income taxes		(3,509			)	(825			)
Foreign currency translation adjustments		(18,097			)	(5,058			)
Total other comprehensive loss		(21,606			)	(5,883			)
Comprehensive loss		$	(15,154		)	$		(116	)

 

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 Months Ended March 31, 2005 and 2004

 

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, cash flows and comprehensive loss for the three months ended March 31, 2005 and 2004 and the financial position at March 31, 2005 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, 2004.  The consolidated balance sheet as of December 31, 2004 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 thousands of dollars throughout the tables included in these notes unless otherwise indicated.

 

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

 

2. Discontinued Operations

 

During the second quarter of 2004, the company completed the sale of its wholly-owned subsidiary, Delta Manlift SAS (Delta), to JLG Industries, Inc.  Headquartered in Tonneins, France, Delta manufactures the Toucan brand of vertical mast lifts, a line of aerial work platforms distributed throughout Europe for use principally in industrial and maintenance operations.  The company received $9.0 million for Delta and certain other assets of the company’s Aerial Work Platform (AWP) businesses.  As a result of the sale and additional reserves for the closures of the other AWP businesses, the company recorded a $1.5 million pre-tax gain ($1.2 million net of taxes).  This gain was recorded in gain (loss) on sale or closure of discontinued operations, net of income taxes in the Consolidated Statements of Operations in the second quarter of 2004.  Delta was acquired in August 2002 as part of the acquisition of Grove Investors Inc. (Grove).  During December 2003, the company completed plans to restructure its AWP businesses.  The restructuring included the closure of the Potain GmbH (Liftlux) facility in Dillingen, Germany and discontinuation of U.S. Manlift production at the Shady Grove, Pennsylvania facility.  With the sale of Delta and the closure of the Liftlux and U.S. Manlift operations, the company no longer participates in the aerial work platform market, other than providing aftermarket parts and service support.  The sale of Delta, the closure of Liftlux and the discontinuation of the U.S. Manlift production represent discontinued operations under Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  Results of these companies have been classified as discontinued to exclude the results from continuing operations.

 

The following selected financial data of the AWP businesses for the three months ended March 31, 2004 is presented for informational purposes only and does not necessarily reflect what the results of operations would have been had the businesses operated as a stand-alone entity.   There was no activity related to the AWP businesses during the three months ended March 31, 2005.  There were no general corporate expenses or interest expense allocated to discontinued operations.

 

6

 

		Three Months Ended March 31, 2004
Net sales		$	10,559
Pretax loss from discontinued operations		$	(1,167	)
Benefit for taxes on loss		(320		)
Net loss from discontinued operations		$	(847	)

 

During the fourth quarter of 2003 the company terminated its distributor agreement with North Central Crane & Excavator Sales Corporation (North Central Crane), a wholly-owned crane distributor.  The company entered into a new distributor agreement with an independent third party for the area previously covered by North Central Crane.  The termination of North Central Crane represents a discontinued operation under SFAS No. 144, as this was the company’s only wholly-owned domestic crane distributor.  Results of this company have been classified as discontinued to exclude the results from continuing operations.

 

The following selected financial data of North Central Crane for the three months ended March 31, 2004 is presented for informational purposes only and does not necessarily reflect what the results of operations would have been had the business operated as a stand-alone entity.  There was no activity related to North Central Crane during the three months ended March 31, 2005.  There were no general corporate expenses or interest expense allocated to discontinued operations.

 

		Three Months Ended March 31, 2004
Net sales		$	1,476
Pretax loss from discontinued operations		$	(174	)
Benefit for taxes on loss		(50		)
Net loss from discontinued operations		$	(124	)

 

3. Inventories

 

The components of inventory at March 31, 2005 and December 31, 2004 are summarized as follows:

 

		March 31, 2005			December 31, 2004
Inventories - gross:
Raw materials		$	122,596		$	111,400
Work-in-process		109,185			87,825
Finished goods		156,389			144,480
Total inventories - gross		388,170			343,705
Excess and obsolete inventory reserve		(39,643		)	(38,132		)
Net inventories at FIFO cost		348,527			305,573
Excess of FIFO costs over LIFO value		(18,543		)	(18,537		)
Inventories - net		$	329,984		$	287,036

 

7

 

Inventory is carried at lower of cost or market using the first-in, first-out (FIFO) method for 87% and 90% of total inventory at March 31, 2005 and December 31, 2004, respectively. The remainder of the inventory is costed using the last-in, first-out (LIFO) method.

 

4. Stock-Based Compensation

 

The company accounts for its stock options under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations.  No stock-based employee compensation cost related to stock options is reflected in earnings.  The company recognized approximately $0.1 million of compensation expense related to restricted stock which was issued during 2002 for both the three months ended March 31, 2005 and 2004.  The following table illustrates the effect on net earnings and earnings per share if the company had applied the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” to stock based employee compensation for the three months ended March 31, 2005 and 2004.

 

		Three Months Ended March 31,
		2005			2004
Reported net earnings		$	6,452		$	5,767
Deduct: Total stock option-based employee compensation expense determined under fair value based method for all stock option awards, net of income taxes		(890		)	(1,099		)
Pro forma net earnings		$	5,562		$	4,668
Earnings per share:
Basic - as reported		$	0.22		$	0.22
Basic - pro forma		$	0.19		$	0.18
Diluted - as reported		$	0.21		$	0.21
Diluted - pro forma		$	0.18		$	0.17

 

5.  Contingencies and Significant Estimates

 

The company has been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act (CERLA) 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.  Estimates indicate that the total costs to clean up this site are approximately $30 million.  However, the ultimate allocations of costs for this site are not yet final.  Although liability is joint and several, the company’s share of the liability is estimated to be 11% of the total cost.  Prior to December 31, 1996, the company accrued $3.3 million in connection with this matter.  Remediation work at the site has been substantially completed, with only long-term pumping and treating of groundwater and site maintenance remaining.  The company’s remaining estimated liability for this matter, included in other current liabilities in the Consolidated Balance Sheet at March 31, 2005 is $0.6 million.  Based on the size of the company’s current allocation of liabilities at this site, the existence of other viable potential 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.

 

At certain of the company’s other facilities, the company has identified potential contaminants in soil and groundwater.  The ultimate cost of any remediation required will depend upon the results of future investigation.  Based upon available information, the company does not expect that the ultimate costs 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.

 

8

 

As of March 31, 2005, various product-related lawsuits were pending.  To the extent permitted under applicable law, all of these are insured with self-insurance retention levels.  The company’s self-insurance retention levels vary by business, and have fluctuated over the last five years.  The range of the company’s self-insured retention levels is $0.1 million to $3.0 million per occurrence.  The high-end of the company’s self-insurance retention level is a legacy product liability insurance program inherited in the Grove Investors, Inc. acquisition in 2002 for cranes manufactured in the United States for occurrences from 2000 through October 2002.  As of March 31, 2005, the largest self-insured retention level currently maintained by the company is $2.0 million per occurrence and applies to product liability for cranes manufactured in the United States.

 

Product liability reserves in the Consolidated Balance Sheet at March 31, 2005, were $30.2 million; $6.9 million reserved specifically for cases and $23.3 million for claims incurred but not reported which were estimated using actuarial methods.  Based on the company’s experience in defending product liability claims, management believes the current reserves are adequate for estimated case resolutions on aggregate self-insured claims and insured claims.  Any recoveries from insurance carriers are dependent upon the legal sufficiency of claims and solvency of insurance carriers.

 

At March 31, 2005 and December 31, 2004, the company had reserved $44.9 million and $46.5 million, respectively, for warranty claims included in product warranties and other non-current liabilities in the Consolidated Balance Sheets.  Certain of these warranties and other related claims involve matters in dispute that ultimately are resolved by negotiations, arbitration, or litigation.

 

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

 

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

 

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

 

Currently, the company is in negotiations with one of its major Marine customers due to cost overruns from change orders on a contract.  The company estimates its overruns have been approximately $10.0 million.  The company has assumed this recovery in accounting for this long-term contract, as it believes that the claim will result in additional contract revenue and the amount can be reliably estimated.  If negotiations are unsuccessful, the impact on the company’s Consolidated Statement of Operations in a future period could be material.

 

During the first quarter of 2004, the company reached a settlement agreement with a third party and recorded a $2.3 million gain, net of legal and settlement costs, in other income (expense) in the Consolidated Statement of Operations.

 

At March 31, 2005, the company is contingently liable under open standby letters of credit issued by the company’s bank in favor of third parties totaling $32.7 million.  The open standby letters of credit primarily related to business in the Marine segment.

 

6. Loss on Debt Extinguishment

 

In December 2004, the company sold, pursuant to an underwritten public offering, approximately 3.0 million shares of its common stock at a price of $36.25 per share.   Net cash proceeds from this offering, after deducting underwriting discounts and commissions, were $104.9 million.  In addition to underwriting discounts and commissions, the company estimated it would incur approximately $0.8 million of accounting, legal and other expenses related to the offering that were charged to additional paid-in capital. The company used a portion of the proceeds to redeem approximately $61.3 million of the 10 ½% senior subordinated notes due 2012 and to pay the prepayment premium to the note holders of $6.4 million.  The company used the balance of the proceeds for general corporate purposes.

 

9

 

On January 10, 2005, the company completed the redemption of $61.3 million of the 10 ½% senior subordinated notes due 2012.  As a result of this redemption, the company incurred a charge of approximately $8.3 million ($5.4 million net of income taxes) for the early extinguishment of debt related to the prepayment premium paid to the note holders of $6.4 million, and the partial write-off of debt issuance costs of $1.9 million.  The charge was recorded in loss on debt extinguishment in the Consolidated Statement of Operations.

 

During the first quarter of 2004, the company recorded a charge of $0.6 million ($0.4 million net of income taxes) related to the partial prepayment of its Term Loan B portion of its senior credit facility.  The loss relates to the write-off of unamortized financing fees and partial unwinding of the company’s floating-to-fixed interest rate swap.  The charge was recorded in loss on debt extinguishment in the Consolidated Statement of Operations.

 

7.  Earnings Per Share

 

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

		Three Months Ended March 31,
		2005		2004
Basic weighted average common shares outstanding		29,994,069		26,673,710
Effect of dilutive securities - stock options and restricted stock		617,117		447,315
Diluted weighted average common shares outstanding		30,611,186		27,121,025

 

For both the three months ended March 31, 2005 and 2004, 0.2 million common shares issuable upon the exercise of stock options were anti-dilutive and were excluded from the calculation of diluted earnings per share.

 

During the first quarter of 2005, the company paid a quarterly dividend of $2.1 million dollars.  At its February 2005 meeting, the board of directors approved changing to a quarterly dividend from an annual dividend beginning in the first quarter of 2005.  At that meeting the board approved a first quarter 2005 dividend of $0.07 per share of common stock.

 

8. Guarantees

 

The company periodically enters into transactions with customers that provide for residual value guarantees and buyback commitments.  These transactions are recorded as operating leases for all significant residual value guarantees and for all buyback commitments.  These initial transactions are recorded as deferred revenue and are amortized to income on a straight-line basis over a period equal to that of the customer’s third party financing agreement.  The deferred revenue included in other current liabilities and long-term deferred revenue at March 31, 2005 and December 31, 2004 was $123.9 million and $124.1 million, respectively.  The total amount of residual value guarantees and buyback commitments given by the company and outstanding at March 31, 2005 was $117.8 million.  This amount is not reduced for amounts the company may recover from repossessing and subsequent resale of the units.

 

The residual value guarantees and buyback commitments expire at various times through 2009.

 

During the three months ended March 31, 2005 and the twelve months ended December 31, 2004, the company sold $0.9 million and $25.8 million, respectively, of its long term notes receivable to third party financing companies. The company fully guarantees collection of the notes to the financing companies.  The company has accounted for the sales of the notes as a financing of receivables.  The receivables remain on the company’s Consolidated Balance Sheet, net of payments made, in other non-current assets and the company has recognized an obligation equal to the net outstanding balance of the notes in other non-current liabilities in the Consolidated Balance Sheet.  The cash flow benefit of these transactions, net of payments made by the customer, are reflected as financing activities in the Consolidated Statement of Cash Flows.  During the three months ended March 31, 2005 the customers have paid $1.2 million of the notes to the third party financing companies.  As of March 31, 2005, the outstanding balance of the notes receivables guaranteed by the company was $23.0 million.

 

The company also has an accounts receivable factoring arrangement with a bank.  Under this arrangement, the company is required to repurchase from the bank the first $1.0 million and amounts greater than $1.5 million of the aggregate uncollected receivables during a twelve-month period.  The company’s contingent factoring liability, net of cash collected from customers, was $31.4 million and $39.4 million at March 31, 2005 and December 31, 2004, respectively.

 

10

 

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 months to 60 months.  If a product fails to comply with the company’s warranty, the company may be obligated, at its expense, to correct any defect by repairing or replacing such defective products.  The company provides for an estimate of costs that may be incurred under its warranty at the time product revenue is recognized.  These costs primarily include labor and materials, as necessary, associated with repair or replacement.  The primary factors that affect the company’s warranty liability include the number of units shipped and historical and anticipated warranty claims.  As these factors are impacted by actual experience and future expectations, the company assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary.  Below is a table summarizing the warranty activity for the three months ended March 31, 2005 and 2004.

 

		2005			2004
Balance at beginning of period		$	46,509		$	41,770
Accruals for warranties issued during the period		8,870			4,493
Settlements made (in cash or in kind) during the period		(9,227		)	(7,340		)
Currency translation		(1,218		)	(417		)
Balance at end of period		$	44,934		$	38,506

 

9. Plant Consolidations and Restructuring

 

During the second quarter of 2002, the company finalized the purchase accounting for the acquisition of Potain SA (Potain), which included recording an $8.1 million liability associated with certain restructuring and integration activities.  To achieve reductions in operating costs and to integrate the operations of Potain, the company recorded an $8.1 million liability related primarily to employee severance benefits for workforce reductions.  Approximately 135 hourly and salaried positions were eliminated.  To date the company has utilized approximately $4.7 million of this liability.  The remainder of this reserve will be utilized through 2006 based upon the underlying contractual arrangements.

 

During the fourth quarter of 2002, the company completed certain integration activities related to the Grove acquisition and other restructuring activities in the Crane segment.  The total amount recognized by the company for these integration and restructuring activities was $12.1 million.  Of this amount $4.4 million was recorded in the opening balance sheet of Grove and $7.7 million was recorded as a charge to earnings during the fourth quarter of 2002.  These actions were taken in an effort to achieve reductions in operating costs, integrate and consolidate certain operations and functions within the segment and to utilize available capacity.  The $4.4 million recorded in Grove’s opening balance sheet related to severance and other employee related costs for headcount reductions at various Grove facilities.  The $7.7 million charge included $4.0 million related to severance and other employee related costs for headcount reductions at various Manitowoc and Potain facilities, $2.7 million related to the write-down of certain property, plant and equipment, and $1.0 million related to lease termination costs.  In total, approximately 600 hourly and salaried positions were eliminated and four facilities were consolidated into other Crane operations.  To date, the company has utilized approximately $9.6 million of the total $12.1 million reserve which includes $2.7 million non-cash write-down of property, plant and equipment, and $6.9 million cash paid to employees for severance.  The remaining $2.5 million reserve is recorded in accounts payable and accrued expenses in the Consolidated Balance Sheet and will be utilized by the company during the remainder of 2005.

10. 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, 2005 and 2004 are as follows:

 

11

 

		Three Months Ended March 31, 2005									Three Months Ended March 31, 2004
		U.S. Pension Plans			Non - U.S. Pension Plans			Postretirement Health and Other Plans			U.S. Pension Plans			Non - U.S. Pension Plans			Postretirement Health and Other Plans
Service cost - benefits earning during the period		$	—		$	300		$	225		$	—		$	285		$	221
Interest cost of projected benefit obligations		1,599			1,031			833			1,582			958			868
Expected return on plan assets		(1,609		)	(768		)	—			(1,548		)	(696		)	—
Amortization of transition obligations		3			—			—			3			—			—
Amortization of prior service costs		1			(9		)	—			1			—			—
Amortization of actuarial net (gain) loss		98			(13		)	16			21			(16		)	18
Net periodic benefit costs		$	92		$	541		$	1,074		$	59		$	531		$	1,107
Weighted average assumptions:
Discount rate		5.75		%	4.75		%	5.75		%	6.25		%	5.25		%	6.25		%
Expected return on plan assets		8.25		%	5.25		%	N/A			8.50		%	5.25		%	N/A
Rate of compensation increase		N/A			3.50		%	N/A			N/A			3.50		%	N/A

 

11.  Goodwill and Other Intangible Assets

 

The changes in carrying amount of goodwill by reportable segment for the year ended December 31, 2004 and three months ended March 31, 2005 are as follows:

 

		Cranes and Related Products			Foodservice Equipment			Marine			Total
Balance January 1, 2004		$	205,022		$	186,486		$	47,417		$	438,925
Tax adjustments related to purchase accounting		950			(360		)	—			590
Foreign currency impact		12,353			—			—			12,353
Balance as of December 31, 2004		218,325			186,126			47,417			451,868
Foreign currency impact		(7,099		)	—			—			(7,099		)
Balance as of March 31, 2005		$	211,226		$	186,126		$	47,417		$	444,769

 

The gross carrying amount and accumulated amortization of the company’s intangible assets other than goodwill were as follows as of March 31, 2005 and December 31, 2004.

 

		March 31, 2005									December 31, 2004
		Gross Carrying Amount			Accumulated Amortization			Net Book Value			Gross Carrying Amount			Accumulated Amortization			Net Book Value
Trademarks and tradenames		$	97,095		$	—		$	97,095		$	99,224		$	—		$	99,224
Patents		28,836			(6,106		)	22,730			30,899			(5,542		)	25,357
Engineering drawings		10,180			(2,776		)	7,404			11,053			(2,519		)	8,534
Distribution network		20,771			—			20,771			21,227			—			21,227
		$	156,882		$	(8,882	)	$	148,000		$	162,403		$	(8,061	)	$	154,342

 

12. Recent Accounting Changes and Pronouncements

 

In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 seeks to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) in the determination of inventory carrying costs. The statement requires such costs to be treated as a current period expense. This statement is effective for the company on January 1, 2006.  The company does not believe the adoption of SFAS No. 151 will have a material impact on its Consolidated Financial Statements.

 

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During December 2004, the FASB revised SFAS No. 123, “Accounting for Stock Based Compensation.” SFAS No. 123-Revised supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and will require all companies to estimate the fair value of incentive stock options granted and then amortize that estimated fair value to expense over the options’ vesting period. SFAS No. 123-Revised is effective for all annual periods beginning after June 15, 2005. The company currently accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, and related interpretations. No employee or outside director compensation costs related to stock option grants are currently reflected in net earnings. The company is required to adopt SFAS No. 123-Revised on January 1, 2006. See Note 4, “Stock-Based Compensation,” for pro forma information if the company had elected to adopt the requirements of the previously issued SFAS No. 123.

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29.” This statement addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for the company on July 1, 2005. We do not believe the adoption of SFAS No. 153 will have a material impact on our Consolidated Financial Statements.

 

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13. Subsidiary Guarantors of Senior Subordinated Notes due 2011 and 2012 and Senior Notes due 2013

 

The following tables present condensed consolidating financial information for (a) the parent company, The Manitowoc Company, Inc. (Parent); (b) on a combined basis, the guarantors of the Senior Subordinated Notes due 2011 and 2012 and Senior Notes due 2013, which include substantially all of the domestic wholly owned subsidiaries of the company (Subsidiary Guarantors); and (c) on a combined basis, the wholly and partially owned foreign subsidiaries of the company , which do not guarantee the Senior Subordinated Notes due 2011 and 2012 and Senior Notes due 2013 (Non-Guarantor Subsidiaries). Separate financial statements of the Subsidiary Guarantors are not presented because the guarantors are fully and unconditionally, jointly and severally liable under the guarantees.

 

The Manitowoc Company, Inc.
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2005
(In thousands)

 

		Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Net sales		$	—		$	337,379		$	254,718		$	(55,178	)	$	536,919
Costs and expenses:
Cost of sales		—			282,111			211,270			(55,178		)	438,203
Engineering, selling and administrative  expense		5,253			35,077			28,293			—			68,623
Amortization expense		—			171			650			—			821
Total costs and expenses		5,253			317,359			240,213			(55,178		)	507,647
Earnings (loss) from operations		(5,253		)	20,020			14,505			—			29,272
Other income (expense):
Interest expense		(11,908		)	(691		)	(912		)	—			(13,511		)
Loss on debt extinguishment		(8,275		)	—			—			—			(8,275		)
Management fee income (expense)		6,048			(6,048		)	—			—			—
Other income (expense), net		9,666			(5,863		)	(2,071		)	—			1,732
Total other expense		(4,469		)	(12,602		)	(2,983		)	—			(20,054		)
Earnings (loss) from continuing operations before taxes on income (loss) and equity in earnings of subsidiaries		(9,722		)	7,418			11,522			—			9,218
Provision (benefit) for taxes on income		(3,326		)	2,538			3,554			—			2,766
Earnings (loss) from continuing operations before equity in earnings of subsidiaries		(6,396		)	4,880			7,968			—			6,452
Equity in earnings of subsidiaries		12,848			—			—			(12,848		)	—
Net earnings		$	6,452		$	4,880		$	7,968		$	(12,848	)	$	6,452

 

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The Manitowoc Company, Inc.
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2004
(In thousands)

 

		Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Net sales		$	—		$	264,906		$	189,057		$	(42,137	)	$	411,826
Costs and expenses:
Cost of sales		—			211,548			151,098			(42,137		)	320,509
Engineering, selling and administrative  expense		5,271			34,311			28,410			—			67,992
Amortization expense		—			170			620			—			790
Total costs and expenses		5,271			246,029			180,128			(42,137		)	389,291
Earnings (loss) from operations		(5,271		)	18,877			8,929			—			22,535
Other income (expense):
Interest expense		(11,967		)	(498		)	(1,083		)	—			(13,548		)
Loss on debt extinguishment		(555		)	—			—			—			(555		)
Management fee income (expense)		4,809			(4,809		)	—			—			—
Other income (expense), net		10,200			(3,398		)	(5,743		)	—			1,059
Total other income (expense)		2,487			(8,705		)	(6,826		)	—			(13,044		)
Earnings (loss) from continuing operations before taxes on income (loss), equity in earnings of subsidiaries, and  discontinued operations		(2,784		)	10,172			2,103			—			9,491
Provision (benefit) for taxes on income		(1,083		)	3,958			(122		)	—			2,753
Earnings (loss) from continuing operations before equity in earnings of subsidiaries and discontinued operations		(1,701		)	6,214			2,225			—			6,738
Equity in earnings of subsidiaries		7,468			—			—			(7,468		)	—
Loss from discontinued operations, net of income taxes		—			(588		)	(383		)	—			(971		)
Net earnings		$	5,767		$	5,626		$	1,842		$	(7,468	)	$	5,767

 

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The Manitowoc Company, Inc.
Condensed Consolidating Balance Sheet
as of March 31, 2005
(In thousands)

 

		Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current Assets:
Cash and cash equivalents		$	22,742		$	2,607		$	43,500		$	—		$	68,849
Marketable securities		2,262			—			—			—			2,262
Accounts receivable - net		341			116,777			159,569			—			276,687
Inventories - net		—			137,328			192,656			—			329,984
Deferred income taxes		42,705			—			16,972			—			59,677
Other current assets		530			51,679			21,575			—			73,784
Total current assets		68,580			308,391			434,272			—			811,243
Property, plant and equipment - net		11,600			162,113			178,518			—			352,231
Goodwill		5,434			246,537			192,798			—			444,769
Other intangible assets - net		—			41,445			106,555			—			148,000
Deferred income taxes		18,373			—			30,095			—			48,468
Other non-current assets		28,313			18,733			15,752			—			62,798
Investment in affiliates		459,560			91,304			189,313			(740,177		)	—
Total assets		$	591,860		$	868,523		$	1,147,303		$	(740,177	)	$	1,867,509
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses		$	32,521		$	195,859		$	311,856		$	—		$	540,236
Short-term borrowings		—			—			9,811			—			9,811
Product warranties		—			18,263			18,396			—			36,659
Product liabilities		—			27,893			2,277			—			30,170
Total current liabilities		32,521			242,015			342,340			—			616,876
Non-Current Liabilities:
Long-term debt, less current portion		488,915			—			8,036						496,951
Pension obligations		19,848			14,991			31,596						66,435
Postretirement health and other benefit obligations		54,461			—			—			—			54,461
Intercompany		(528,038		)	(13,863		)	187,380			354,521			—
Long-term deferred revenue		—			30,955			52,144			—			83,099
Other non-current liabilities		19,146			18,128			7,406			—			44,680
Total non-current liabilities		54,332			50,211			286,562			354,521			745,626
Stockholders’ equity		505,007			576,297			518,401			(1,094,698		)	505,007
Total liabilities and stockholders’ equity		$	591,860		$	868,523		$	1,147,303		$	(740,177	)	$	1,867,509

 

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