The Manitowoc Company, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Manitowoc designs, manufactures and supports lifting equipment, including mobile, tower and crawler cranes. Its reportable segments are Americas, Europe and Africa (EURAF), and Middle East and Asia Pacific (MEAP). Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $418.0 million | $386.1 million |
| Gross profit / margin | $80.2 million / 19.2% | $68.4 million / 17.7% |
| Operating income | $16.2 million | $1.7 million |
| Net loss | $26.7 million | $10.0 million |
| Diluted loss per share | $0.75 | $0.28 |
| Net cash used for operating activities | $267.3 million | $168.4 million |
| Capital expenditures | $4.4 million | $6.4 million |
Sales rose 8.3%, supported by growth and pricing in the Americas and pricing and volume gains in EURAF, partly offset by lower MEAP shipments and a $16.3 million unfavorable foreign-exchange impact. Gross margin improved with better aftermarket margins, favorable mix, pricing and cost reductions. Segment operating income was $25.9 million versus $14.0 million; consolidated operating income also reflects corporate and other costs.
Operating cash use increased, driven largely by working-capital needs, including receivables and inventory, prior-year incentive compensation payments and the timing and classification of receivable-securitization cash flows. The company’s non-GAAP adjusted operating cash flow was negative $141.0 million, compared with negative $24.4 million. This measure adds cash receipts on sold receivables to GAAP operating cash flow.
Orders, segments and balance sheet
- Orders fell 17.7% to $441.0 million, primarily because of weaker commercial-construction demand in EURAF and continued weakness in energy and commercial construction in MEAP. Backlog was $693.6 million: up 3.4% from December 31, 2018, but down 8.3% year over year.
- Americas sales rose 26.5% to $206.1 million and segment operating income increased to $15.2 million from $2.7 million. EURAF sales and operating income were flat at $154.2 million and $3.4 million. MEAP sales fell 16.4% to $57.7 million and operating income declined to $7.3 million from $7.9 million.
- Cash, cash equivalents and restricted cash declined to $49.0 million from $140.3 million at year-end. Total reported liquidity was $270.3 million, including $49.0 million cash, after revolver borrowings and letters of credit.
- Total debt was $347.9 million, net of deferred financing costs, versus $273.1 million at year-end. Stockholders’ equity declined to $575.8 million from $601.3 million. Inventory increased to $538.1 million from $453.1 million at year-end.
Debt refinancing and other notable items
On March 25, 2019, Manitowoc issued $300 million of senior secured second-lien notes due 2026 with a 9.0% coupon and entered a five-year, asset-based revolving facility with commitments of up to $275 million. Proceeds and revolver borrowings funded redemption of the prior 12.75% notes due 2021, repayment of the former ABL and receivables-securitization facilities, and related costs. The refinancing generated a $25.0 million debt-extinguishment charge, including a $16.6 million call premium. The company reported compliance with debt covenants at quarter-end and expected to remain compliant over the following 12 months.
Adjusted EBITDA, a non-GAAP measure, was $29.6 million versus $17.1 million; GAAP net loss was $26.7 million. Restructuring expense was $4.5 million, mainly for headcount reductions in Europe and North America. Operating lease accounting adoption added $49.1 million of right-of-use assets and $50.0 million of lease liabilities at quarter-end.
Outlook, risks and contingencies
The filing provides no specific full-year financial guidance. Management stated that available liquidity and expected operating cash flows should cover foreseeable working-capital, capital-expenditure and other operating needs. Demand weakness in certain end markets and the reduction in orders are relevant indicators for future sales; forward-looking results remain subject to broad economic, industry, execution, foreign-exchange, commodity, customer-financing and leverage risks.
Management reported that ordinary-course legal matters were not expected to have a material adverse effect, but noted a legal settlement agreed to on March 19, 2019, with terms expected to be finalized in Q2. Product-liability reserves were $16.8 million; warranty reserves were $37.2 million. Outstanding buyback commitments totaled $30.3 million and expire through 2025. The company cautioned that future goodwill or asset impairment charges could result if assumptions or market conditions deteriorate. On May 6, 2019, after quarter-end, the board authorized repurchases of up to $30 million of common stock; none had been repurchased under that authorization.
The company also disclosed a prior-period cash-flow classification error: Q1 2018 investing cash flow had been overstated and operating cash use understated by approximately $4.6 million. It was deemed immaterial, was reflected in this filing, and did not require amendment of the earlier report.
Important facts for investors to verify
- Whether the order decline and lower year-over-year backlog translate into reduced shipments or pricing pressure in coming quarters.
- How the substantial Q1 working-capital cash outflow develops, including receivables, inventory and receivables-financing arrangements.
- Refinancing costs, the 9.0% notes’ cash interest burden, revolver availability and continued covenant compliance.
- Progress and cash or earnings effects of restructuring, the disclosed legal settlement, and warranty and buyback obligations.
- Any subsequent use of the $30 million repurchase authorization and the effect on liquidity.