The Manitowoc Company, Inc. — Q2 2020 Form 10-Q
Business and reporting period: Manitowoc designs, manufactures, sells and supports cranes and provides aftermarket services. This filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Results were materially affected by the COVID-19 pandemic.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $328.3 million | $504.7 million | $657.5 million | $922.7 million |
| Gross profit / margin | $48.4 million / 14.7% | $95.2 million / 18.9% | $111.6 million / 17.0% | $175.4 million / 19.0% |
| Operating income (loss) | $(1.6) million | $41.9 million | $4.1 million | $58.1 million |
| Net income (loss) | $(12.7) million | $46.0 million | $(20.5) million | $19.3 million |
| Diluted EPS | $(0.37) | $1.29 | $(0.59) | $0.54 |
- Sales and demand: Q2 revenue fell 35.0%; first-half revenue fell 28.7%. Crane sales declined across all three segments. Q2 orders decreased 36.1% to $237.8 million, and backlog at June 30 was down 23.3% year over year to $430.5 million.
- Segment performance, Q2: Americas sales were $149.6 million, down 43.5%, and operating income was $4.8 million versus $35.7 million. EURAF sales were $135.5 million, down 25.8%, and the segment recorded a $4.4 million operating loss. MEAP sales were $43.2 million, down 24.9%, while operating income increased to $6.6 million from $5.1 million.
- Cash flow: First-half operating cash flow was a use of $98.7 million, versus a use of $235.4 million in 2019. Inventory growth of $73.4 million and working-capital needs were key drivers. Investing cash flow was a use of $7.9 million, including $8.0 million of capital expenditures. Financing cash flow provided $36.6 million. The company reported non-GAAP free cash flow of negative $106.7 million.
- Liquidity and debt: Cash was $128.3 million at June 30, down from $199.3 million at year-end 2019. Reported total liquidity was $374.8 million, including $260.8 million of revolver capacity, $38.7 million of other debt availability, and cash, net of borrowings and letters of credit. Total debt was $361.2 million, including $300 million of 9% second-lien notes due 2026 and $50 million drawn on the asset-based revolver. The filing says the company was in compliance with debt covenants and expected to remain compliant over the following 12 months.
- Other metrics: Q2 adjusted EBITDA, a non-GAAP measure, was $7.8 million, down from $53.3 million; adjusted EBITDA margin was 2.4% versus 10.6%. The company repurchased $12.0 million of stock in the first half, then suspended repurchases to preserve liquidity.
Material changes and unusual items
- COVID-related lower shipment volumes and underutilized manufacturing capacity drove lower gross profit and margins. Consolidated sales were also adversely affected by foreign exchange ($4.4 million in Q2 and $9.6 million in the first half).
- Management recorded a $2.5 million net discrete tax benefit in Q2, primarily related to CARES Act tax planning. It also reported $22.6 million of unrecognized tax benefits at June 30, including $10.9 million associated with uncertainty over certain CARES Act strategies.
- Prior-year comparisons included a $25.0 million first-half 2019 debt-extinguishment charge and a $24.7 million net legal-settlement gain in Q2 2019. Neither item recurred in 2020.
- Goodwill impairment testing in Q1 2020 found reporting-unit fair values above carrying values; no new impairment trigger was identified in Q2. Management cautioned that a prolonged or more severe pandemic could lead to future impairment or other estimate changes.
Outlook, commentary and risks
- Management expected reduced demand, especially in the Americas, and production slowdowns to adversely affect second-half 2020 results. It noted that renewed outbreaks or government restrictions could disrupt operations; the supply chain had recovered to meet current demand, but future impacts remained uncertain.
- The company provided no specific sales, earnings or cash-flow guidance in the filing. Management said liquidity and expected operating cash flows should cover working capital, capital expenditures and other operating needs for the next 12 months. Actions included a preemptive $50 million revolver draw, lower discretionary spending and capital expenditures, suspended buybacks, eliminated base salary increases, and use of available government support programs.
- Key risks include pandemic duration and effects on demand and suppliers, execution of cost and restructuring initiatives, working-capital and cash generation, customer financing and order conversion, foreign exchange, high leverage, covenant compliance, and possible impairment. Legal exposures include product-liability, asbestos and warranty claims; management said accrued reserves were adequate and did not expect the pending matters to have a material adverse effect.
- Subsequent to quarter-end, on August 5, 2020, Aaron H. Ravenscroft became CEO and a director, succeeding Barry L. Pennypacker. Pennypacker’s separation agreement provides $4.0 million in severance over 24 months, a potential pro rata 2020 bonus, partial accelerated equity vesting and a $175,000 deferred-compensation contribution.
Important facts for investors to verify
- Whether backlog, orders and crane demand stabilize, particularly in the Americas, and how quickly manufacturing utilization recovers.
- Whether working capital—especially elevated inventory—and operating cash use improve; monitor cash and available revolver capacity.
- Debt, interest burden and covenant headroom, including the effect of the 9% notes and revolver borrowings.
- Potential future tax adjustments related to CARES Act planning and unrecognized tax benefits.
- Any subsequent impairment indicators, warranty or legal reserve changes, or material supply-chain and COVID-related disruptions.