MANITOWOC CO INC annual report, FY2017

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The Manitowoc Company, Inc. — FY2017 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; it also provides unaudited fourth-quarter results. Manitowoc designs, manufactures and supports cranes under the Manitowoc, Grove, Potain and National Crane brands, with recurring aftermarket parts and services through Crane Care. The former foodservice business was spun off in March 2016, and its results are reported as discontinued operations. In Q4 2017, Manitowoc reorganized reporting into Americas, Europe and Africa (EURAF), and Middle East and Asia Pacific (MEAP). Amounts below are in U.S. dollars.

Financial performance and liquidity

  • FY2017 revenue and margins: Net sales were $1,581.3 million, down 2.0% from $1,613.1 million. Gross profit rose to $281.9 million from $253.3 million; gross margin improved to 17.8% from 15.7%, primarily reflecting manufacturing cost reductions. Operating income was $1.1 million, compared with an operating loss of $153.3 million in 2016.
  • Profit: Continuing operations earned $10.0 million in 2017, versus a $368.6 million loss in 2016. Net income attributable to Manitowoc was $9.4 million, or $0.26 per diluted share, compared with a $375.8 million net loss, or $10.91 per diluted share, in 2016. The 2017 result included a $49.5 million income tax benefit; the company cautions that its effective tax rate is not a meaningful measure of cash tax position or business performance.
  • Cash flow and investment: Cash from continuing operating activities was $78.5 million, versus cash used of $122.4 million in 2016. Capital expenditures were $28.9 million, down from $45.9 million. Cash flow from continuing operations less capital expenditures was approximately $49.6 million. Cash and cash equivalents ended the year at $119.2 million, up from $69.9 million.
  • Debt and liquidity: Total consolidated debt was $274.9 million, compared with $281.5 million a year earlier. The balance included $251.9 million of 12.75% senior secured second-lien notes due 2021 and $26.1 million of other debt; the ABL revolver had no year-end borrowings. Reported total liquidity was $222.9 million, including cash and revolver availability net of letters of credit. Scheduled debt maturities include $266.2 million in 2021. The company reported compliance with debt and receivables-securitization covenants at year-end.
  • Backlog: Unfilled orders were $606.6 million at year-end, up from $323.8 million in 2016 and $512.6 million in 2015. The company attributed the increase primarily to stronger mobile hydraulic crane demand across regions and higher European demand for top-slewing cranes.

Material changes and fourth-quarter performance

  • Full-year sales fell 2.0%, but segment trends diverged: Americas sales declined 5.8% to $693.6 million; EURAF increased 12.2% to $628.9 million; and MEAP fell 18.2% to $258.8 million. Favorable currency movements added approximately $18.4 million to consolidated sales.
  • FY2017 segment operating results improved in the Americas to $6.8 million income from a $37.1 million loss, and in EURAF to $2.3 million income from a $36.5 million loss. MEAP operating income declined to $32.9 million from $44.8 million.
  • Fourth-quarter net sales were $481.5 million, versus $378.2 million in Q4 2016. Operating income was $7.0 million, compared with an operating loss of $23.8 million; income from continuing operations was $35.6 million, compared with a $32.0 million loss. Q4 net income was $35.3 million, versus a $33.4 million loss. The quarter included a $40.2 million tax benefit, so the earnings comparison reflects significant tax effects as well as operating improvement.
  • Restructuring expense increased to $27.2 million from $23.4 million, primarily for workforce reductions and manufacturing rationalization. The company completed the relocation of crawler crane manufacturing from Manitowoc, Wisconsin, to Shady Grove, Pennsylvania. FY2017 impairment expense was $0.1 million, versus $96.9 million in 2016, which included write-offs related to the abandoned SAP implementation and Wisconsin facility assets.
  • Management’s non-GAAP adjusted EBITDA was $67.4 million, versus $18.2 million in 2016; adjusted operating income was $29.3 million, versus an adjusted operating loss of $27.4 million. These measures exclude specified items and should be considered with GAAP results.

Outlook, commentary and risks

  • 2018 guidance: Adjusted EBITDA of approximately $96–$116 million, depreciation expense of approximately $39 million, and capital expenditures of approximately $25–$30 million. The company did not provide comparable GAAP guidance or a reconciliation, citing factors outside its control and unreasonable effort.
  • Management described improving demand in some end markets, including petrochemical, utilities, and commercial and residential construction, particularly in the Americas. It cited order improvement in the second half of 2017 but characterized market forecasting as challenging and expressed only cautious optimism about potential U.S. infrastructure initiatives.
  • Regional outlook was mixed: Western European residential and commercial construction was growing; Australia showed a broad-based crane-market recovery, offset by South Korean investment pullback and oversupply; and Middle East demand remained uncertain amid expected investment pullback.
  • Key risks include cyclical construction and crane demand, customers’ access to financing, steel and component costs and supply, foreign exchange, competition, and execution of restructuring and capacity changes. International sales represented approximately 61% of FY2017 sales. Management also highlighted leverage and covenant constraints, product warranty and liability exposure, pension funding, and potential impairment of goodwill and intangible assets. Goodwill and other intangible assets totaled $443.4 million, approximately 28% of total assets; the 2017 annual impairment test indicated no impairment.
  • Debt includes high-coupon 2021 notes and restrictive covenants; a covenant breach could accelerate debt and trigger cross-defaults. The company reported $28.2 million of outstanding buyback and residual-value commitments, plus $14.4 million of letters of credit. It also disclosed product-related and asbestos litigation, while stating that currently known matters were not expected to have a material adverse effect.
  • Tax reform accounting was provisional at year-end. The company recorded a provisional $54.0 million tax expense for deemed repatriated earnings and a $6.5 million net benefit from revaluing deferred taxes; it expected no U.S. cash tax impact for the deemed repatriation after use of net operating losses. Final accounting was expected in Q4 2018, and the GILTI and BEAT provisions were still under evaluation.
  • The company reported effective internal control over financial reporting, and the independent auditor issued an unqualified opinion on the financial statements and internal controls.

Investor verification priorities

  1. Review the quality and sustainability of the 2017 earnings improvement, especially the large tax benefit, restructuring costs, and the gap between GAAP operating income and adjusted EBITDA.
  2. Track whether the $606.6 million backlog converts into shipments, sales and cash, and whether the 2018 adjusted EBITDA guidance is achieved amid uneven regional demand.
  3. Assess the refinancing and repayment implications of the $266.2 million scheduled 2021 debt maturity, including the 12.75% coupon, revolver availability, and covenant headroom.
  4. Verify working-capital and receivables-securitization trends, including the increase in receivables and reliance on trade-receivable sales for liquidity.
  5. Monitor final Tax Cuts and Jobs Act accounting, valuation allowances, and cash-tax consequences, as well as warranty accruals, buyback guarantees, pension contributions and litigation contingencies.
  6. Consider that the report’s 2016 comparison includes substantial impairment charges and debt-extinguishment losses, and that the 2017 segment reporting structure changed.