The Manitowoc Company, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The company designs, manufactures and supports cranes and provides related aftermarket parts and services. Results reflect the crane business; the former foodservice business is reported as discontinued operations.
Business context and results
Manitowoc sells crawler, tower and mobile telescopic cranes, boom trucks, and aftermarket services under brands including Manitowoc, Grove, Potain and National Crane. It reported three geographic segments: Americas, Europe and Africa (EURAF), and Middle East and Asia Pacific (MEAP). About 57% of 2018 sales were outside the United States.
- Orders increased 3% to $1.91 billion; year-end backlog rose to $670.6 million from $606.6 million. The backlog increase was driven mainly by mobile hydraulic products in the Americas, partly offset by softer demand in EURAF and MEAP.
- Net sales were $1.847 billion, up 16.8% from $1.581 billion. Higher crane shipments across all regions drove the increase; favorable foreign exchange contributed approximately $27 million.
- Crane sales were $1.510 billion; aftermarket parts and other revenue was $336.9 million.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Gross profit | $328.1 million | $281.9 million |
| Gross margin | 17.8% | 17.8% |
| Operating income (loss) | ($19.3) million | $8.4 million |
| Continuing operations income (loss) | ($66.9) million | $10.0 million |
| Net income (loss) | ($67.1) million | $9.4 million |
| Diluted earnings (loss) per share | ($1.89) | $0.26 |
| Adjusted EBITDA (non-GAAP) | $116.2 million | $74.7 million |
| Adjusted operating income (non-GAAP) | $80.1 million | $36.6 million |
Gross profit rose with sales, while margin was unchanged as strategic price increases offset higher raw-material costs. GAAP operating results included an $82.2 million non-cash goodwill impairment in EURAF. The fourth quarter recorded a $62.0 million operating loss and a $78.3 million loss from continuing operations; the filing attributes the annual impairment primarily to EURAF and does not separately quantify its quarterly allocation.
- Segments: Americas sales increased 27.3% to $882.7 million and operating income rose to $58.8 million. EURAF sales increased 8.2% to $680.6 million, but the segment reported a $68.2 million operating loss, including the goodwill charge. MEAP sales increased 9.5% to $283.5 million; operating income declined to $31.5 million.
- Cash flow: Cash used in operating activities was $513.0 million, versus $324.9 million used in 2017. The company separately reported $553.1 million of collections on sold receivables as investing cash flow under its accounting presentation. Its non-GAAP adjusted operating cash flow, which adds those collections back, was positive $40.1 million, down from $77.9 million.
- Cash and liquidity: Cash, cash equivalents and restricted cash were $140.3 million. Reported total liquidity was $236.8 million, including $107.8 million of revolver capacity less $11.3 million of letters of credit.
- Debt: Total debt was $273.1 million, compared with $274.9 million a year earlier. The company had no year-end borrowings on its $225 million asset-based revolving facility. Its $260 million face-value senior secured second-lien notes bear 12.75% interest and mature in August 2021; scheduled 2021 debt maturities were $269.4 million. Interest expense was $39.1 million.
- Investment and distributions: Capital expenditures were $31.7 million; depreciation was $36.1 million. No cash dividends were declared or paid in 2018 or 2017.
Material changes, outlook and risks
- Compared with 2017, sales and gross profit improved, but GAAP operating and net results moved from profit to loss, largely because of the EURAF goodwill impairment. Adjusted EBITDA increased, while operating cash use worsened, principally amid higher accounts receivable and inventory.
- Restructuring expense was $12.9 million, down from $27.2 million. Costs included executive severance, training associated with transferring crawler production to Pennsylvania, and European headcount reductions.
- The company gave no specific 2019 revenue or earnings guidance in the supplied filing text. Management said it expected to meet debt and securitization covenants over the subsequent 12 months and believed cash, revolver availability and future operating cash would fund foreseeable requirements.
- Key risks include cyclical construction and crane demand; slowing demand in EURAF and MEAP; steel and other input costs; foreign exchange exposure; execution of restructuring and manufacturing changes; customer financing availability; and leverage. A further goodwill impairment remains possible if performance or valuation assumptions weaken.
- Other notable exposures include $30.9 million of outstanding crane buyback commitments, $38.5 million of warranty reserves, and pension and postretirement obligations whose aggregate unfunded status was reported at approximately $108.1 million. Management did not expect ordinary-course litigation, including asbestos-related claims, to have a material adverse effect, but stated estimates could change.
PricewaterhouseCoopers issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2018.
Most important facts for investors to verify
- How much of the reported operating loss and quarterly loss reflects the $82.2 million EURAF goodwill impairment, and whether further impairment indicators have emerged.
- Whether working-capital investment and receivables securitization support sustainable cash generation; reconcile reported operating cash use with the $40.1 million non-GAAP adjusted operating cash flow.
- Progress in converting the $670.6 million backlog into shipments and cash, particularly if demand in EURAF or MEAP continues to slow.
- Capacity to refinance or repay the substantial 2021 debt maturities, and compliance with facility covenants as availability changes.
- Potential effects of raw-material inflation, foreign exchange, customer financing conditions, and buyback or warranty claims on margins and liquidity.