The Manitowoc Company, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Manitowoc reported its Crane business as continuing operations after completing the tax-free spin-off of its foodservice business (MFS) on March 4, 2016; prior periods were reclassified to present MFS as discontinued operations. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $349.8 million | $438.2 million | $1,234.9 million | $1,322.6 million |
| Gross profit | $41.5 million | $69.9 million | $211.6 million | $240.2 million |
| Gross margin | 11.9% | 16.0% | 17.1% | 18.2% |
| Operating loss | $(133.5) million | $(8.2) million | $(125.7) million | $(2.3) million |
| Loss from continuing operations | $(138.2) million | $(29.6) million | $(346.6) million | $(59.3) million |
| Net income (loss), including discontinued operations | $(140.0) million | $4.8 million | $(352.4) million | $19.7 million |
| Diluted loss per share | $(1.01) | $0.04 | $(2.56) | $0.14 |
Cash flow: For the first nine months, continuing-operations operating cash flow was $(164.0) million, versus $(76.8) million used in 2015. Total operating cash flow, including discontinued operations, was $(229.5) million. Capital expenditures were $34.8 million. Cash and temporary investments were $42.9 million at September 30, compared with $31.5 million at December 31, 2015.
Debt and liquidity: Total debt was $308.3 million, including $293.0 million long-term debt, versus $1,397.6 million total debt at year-end 2015. The company reported total liquidity of $188.5 million, including cash and net revolver availability; the ABL facility had $20.0 million drawn and $16.7 million of letters of credit outstanding. Manitowoc said it was in compliance with debt covenants and expected to remain compliant over the following 12 months.
Material changes and drivers
- Q3 sales fell 20.2% year over year; nine-month sales declined 6.6%. Management attributed the weakness primarily to soft mobile-crane demand, particularly in the U.S. and Middle East, associated with lower oil prices and falling used-equipment prices. The stronger U.S. dollar also reduced sales by $1.5 million in Q3 and $3.6 million year to date.
- Backlog was $353.6 million at September 30, down 10.1% from June 30 and 44.6% from September 30, 2015. Management cited stronger Western European tower-crane demand as partially offsetting mobile-crane weakness.
- Q3 operating results included $96.9 million of asset impairment expense. This included $58.6 million to write off SAP implementation work, $18.6 million for SAP and other IT assets, and $13.8 million for Manitowoc, Wisconsin facility assets. The company stopped further implementation of the SAP ERP platform.
- Nine-month interest expense declined to $29.6 million from $71.3 million, reflecting lower average debt, partly offset by higher average interest rates. The company recorded $76.3 million of debt-extinguishment losses in the first nine months, chiefly from redeeming prior notes and terminating its prior credit facility and interest-rate swaps.
- Nine-month income tax expense was $116.9 million, compared with a $17.3 million benefit in 2015. The 2016 charge primarily reflected a $113.1 million non-cash valuation allowance against domestic deferred tax assets; the company said it had reserved all domestic net deferred tax assets.
- Comparisons of net income are also affected by the spin-off: MFS contributed $34.4 million of discontinued-operations income in Q3 2015, while 2016 discontinued-operations results included only post-spin-off activity and separation-related items.
Outlook, risks, and contingencies
- The filing provides no specific revenue or earnings guidance. Management said liquidity and expected operating cash flows should cover working capital, capital expenditures, and ongoing needs, while also noting the company had not generated operating cash in the current period.
- The company planned to close its Manitowoc, Wisconsin manufacturing facility in 2017 and relocate operations to Shady Grove, Pennsylvania. Estimated related costs were $10–$15 million of cash severance and other employment benefits, $10–$15 million of capital expenditures, and $15–$20 million of other costs. The ABL facility was amended in October 2016 to accommodate certain asset transfers, sales, or impairments associated with the relocation.
- Management cited construction-industry cyclicality, oil prices, used-equipment demand, customer access to financing, foreign exchange, execution of restructuring and facility changes, and leverage and covenant compliance among the risks that could affect results. Weaker assumptions or market conditions could also lead to further impairment charges.
- Contingencies include product-liability and asbestos-related litigation, warranty obligations, and customer residual-value guarantees and buyback commitments. Management did not expect currently known legal matters to have a material adverse effect, but noted estimates and outcomes could change.
- The company disclosed immaterial prior-period financial statement corrections and revisions, including a reclassification of a note receivable previously reported as restricted cash. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether mobile-crane demand and the steep backlog decline stabilize, and whether tower-crane growth can offset weakness.
- Whether the Manitowoc-to-Shady Grove relocation stays within disclosed cost and timing ranges, and whether expected operating efficiencies materialize.
- How much additional cash the business consumes, including working-capital needs, capital expenditures, and debt service; reconcile reported liquidity with borrowing-base availability and letters of credit.
- Whether tax valuation allowances, impairment assumptions, or later tax developments produce further material charges.
- Whether the company remains compliant with ABL, receivables-securitization, and note covenants as operating performance evolves.