Manitowoc Co. Inc. (MTW) has delivered an adjusted EPS of 1 cent in its third quarter ended September 30, 2010, falling short of the Zacks Consensus Estimate by 12 cents, but was a penny ahead of break-even results in the year-ago quarter. Strong results in the Foodservice segment were offset by a lackluster performance at Crane.

The reported quarter’s EPS excluded special items viz. restructuring expenses, loss on early extinguishment of debt, loss on sale of operations and a benefit from prior-period tax adjustment. The year-ago quarter’s EPS excluded the loss from discontinued operations, loss on sale of discontinued operations and restructuring items. Netting these items, the company reported EPS of 1 cent (at par with the adjusted EPS) in the quarter compared with a loss per share of 10 cents in the year-ago quarter.

Revenues suffered a year-over-year dip of 0.4% to notch $877.8 million, missing the Zacks Consensus Estimate of $905 million. The year-over-year decline can be attributed to the 22% drop at the Crane segment. However, strength in key emerging markets and higher demand in the Foodservice segment mitigated some of the decline.

Cost and Margin Performance 

Cost of sales improved 2% to $669 million in the quarter, and based on revenues; it improved 80 basis points to 76.3%. Consequently, gross profit upped 3% year over year to $208 million and gross margin expanded 80 basis points to 23.7%.

Engineering, selling and administrative expenses, however, increased 5% to $138.8 million in the quarter and, based on revenues, increased 70 basis points year over year. Manitowoc’s adjusted operating income increased marginally by 1% to $69.5 million with operating margin expanding a meager 10 basis points to 7.9%. Including restructuring and other charges, operating income was $56.2 million, an 18% year-over-year increase and operating margin surged 100 basis points to 6.4%.

Segment Performance

The Foodservice segment enjoyed a revenue growth of 9% to reach $439 million driven by the company’s continued focus on innovation, introduction of new products, improved demand in North America as well as emerging markets. The segment’s operating income increased 9% year over year to $64 million. However, operating margin of 14.6% reflected a 10-basis point contraction hurt by material cost increases and ramp-up costs for a new product launch.

However, the Crane segment’s results continued to suffer due to the challenging economic environment with revenues declining 8% year over year to $438.8 million. The segment’s operating income dropped 22% to $16 million and operating margin decreased 60 basis points to 3.7% due to higher engineering and prototype costs, expected seasonality in Europe, as well as factory consolidation in France.

As of September 30, 2010, the segment’s backlog dropped 15.6% from the sequentially preceding quarter to $448 million affected by geographic and end-market weakness and a $6.8 million currency impact.

Financial Position

As of September 30, 2010, Manitowoc had cash and cash equivalents of $115.9 million, down from $117.6 million as of June 30, 2010. During the quarter, the company generated operating cash flows of $39.3 million, substantially down from $205.4 million in the year-ago quarter.

As of September 30, 2010, the debt-to-capitalization ratio marginally improved to 79.2% from 81.2% as of June 30, 2010. Management remains focused on improving its balance sheet and remains committed to its debt reduction goal of $200 million in fiscal 2010 driven by diligent management of working capital.

Outlook

For fiscal 2010, the company expects the Foodservice segment’s revenues and operating margin to be above 2009 levels. The company expects the Crane segment results to decline year over year in 2010, but at a more modest rate compared with last year. Operating margin at the Crane segment in fiscal 2010 is expected to remain above the 3.5% trough margin that was experienced in 2003.

The company also maintains its projection of $50 million for capital expenditures and of $140 million for depreciation and amortization for fiscal 2010.

Our Take

Manitowoc holds a strong market position in the cranes business. However, the segment has not seen a revenue increase since the third quarter of 2008.

Even though we foresee significant growth potential in this market over the long term, driven by an increase in global energy consumption and the need for infrastructure upgrade in both the developed as well as developing nations, the short-term outlook remains challenging. We do not expect any significant turnaround in the segment’s performance in fiscal 2010.

Furthermore, Manitowoc’s high debt level remains a point of concern. We currently have a Zacks #5 Rank (short-term Strong Sell recommendation) on the stock.

Manitowoc is a multi-industry, capital goods manufacturer with over 100 manufacturing and service facilities in 26 countries. It is one of the world’s largest providers of lifting equipment for the global construction industry. It is also a leading manufacturer of commercial foodservice equipment serving the ice, beverage, refrigeration, food preparation and cooking needs of restaurants, convenience stores, hotels, healthcare and institutional applications.

 
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