The Manitowoc Company, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Manitowoc manufactures engineered lifting equipment, including cranes, and reports Americas, Europe and Africa (EURAF), and Middle East and Asia Pacific (MEAP) segments. Dollar amounts are in millions unless noted.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $450.1 | $399.4 | $1,331.5 | $1,099.8 |
| Gross profit | $80.0 | $72.5 | $238.9 | $200.7 |
| Gross margin | 17.8% | 18.2% | 17.9% | 18.2% |
| Operating income (loss) | $16.9 | $9.8 | $42.7 | $(0.1) |
| Net income (loss) | $11.5 | $9.6 | $11.2 | $(25.9) |
| Diluted EPS | $0.32 | $0.27 | $0.31 | $(0.74) |
Q3 orders rose 21.8% to $458.1; backlog at September 30 was $700.2, up 49.6% year over year. For the first nine months, company-defined adjusted EBITDA was $85.1 versus $51.0, and adjusted operating income was $57.9 versus $21.9.
Cash flow, debt and liquidity
- Cash, cash equivalents and restricted cash were $90.6 at September 30, down $32.4 from year-end 2017. Total reported liquidity was $212.5, including $136.3 of revolver capacity and after $14.4 of letters of credit.
- Nine-month operating cash flow was a use of $441.1; investing cash flow provided $412.7. These figures were heavily affected by the receivables securitization program and the classification of collections on sold receivables. Manitowoc’s non-GAAP adjusted operating cash flow was a use of $19.2, compared with a use of $34.2 in 2017.
- Total debt was $271.4, including $253.6 carrying value of the 12.75% senior secured second-lien notes due 2021. No revolver borrowings were outstanding at quarter-end. The company reported compliance with debt and securitization covenants.
- Capital expenditures were $21.4 for the nine months. Current assets were $816.6 and current liabilities $466.5; the filing does not provide a specific liquidity ratio.
Changes and management commentary
- Nine-month sales increased 21.1%, driven by higher crane shipments across regions. Q3 sales increased 12.7%; currency movements reduced Q3 sales by $4.7, while they increased nine-month sales by $36.5.
- Gross profit increased, but gross margin declined in both comparison periods, primarily reflecting higher raw-material costs. Nine-month raw-material costs increased approximately $11.1.
- Operating performance improved with higher volume and lower restructuring costs. Restructuring expense was $11.0 for the nine months, versus $21.3 in 2017.
- Segment sales rose across all regions. In the first nine months, Americas operating income improved to $35.2 from a $3.3 loss, EURAF rose to $13.1 from $2.3, while MEAP declined to $24.8 from $26.2, primarily due to mix, costs, and a receivable loss.
- Management said liquidity and expected operating cash flows should cover foreseeable working-capital, capital-expenditure, and operating needs, and expects to comply with covenants over the next 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
Unusual items, risks and accounting matters
- Q3 included a $4.5 non-cash pension settlement charge after transferring $18.6 of pension obligations for 622 retirees and beneficiaries to an insurer. Payments administered by the insurer were scheduled to begin December 1, 2018, with no change to monthly benefit amounts.
- The company recorded a $3.6 loss on the long-term note receivable from the 2014 sale of its Chinese joint venture and wrote the note down to the anticipated collection amount. The filing does not state a clear revised balance for that note separately.
- A $13.2 Q3 discrete tax benefit was recorded, primarily from a partial release of the valuation allowance against U.K. tax attributes; the filing specifies a $12.3 million partial release. The company retains significant U.S. and German valuation allowances, and future changes could materially affect results.
- Risks highlighted include cyclical demand and market conditions, raw-material costs, foreign exchange, execution of restructuring and manufacturing changes, working-capital and cash-generation needs, leverage, customer financing, and possible goodwill impairment. Management reported market capitalization above book value at September 30, but warned a continued decline could lead to impairment.
- Outstanding buyback commitments were $25.8, expiring at various times through 2026. The company also disclosed ordinary-course legal matters and product-liability exposure; management did not expect their resolution to have a material adverse effect based on current assessments.
- Revenue standard Topic 606 was adopted January 1, 2018 using the modified retrospective method, with no opening retained-earnings adjustment. A prior balance-sheet classification error of approximately $8.8 was deemed not material and was not corrected by amending the prior filing.
Important facts for investors to verify
- Whether the substantial backlog converts to shipments and cash, and the durability of order growth.
- Whether raw-material inflation and unfavorable product mix continue to pressure gross margins, particularly in MEAP.
- Receivables-securitization terms, advance rates, covenant headroom, and the difference between reported and adjusted operating cash flow.
- Collection prospects for the Chinese joint-venture note and the final impact of tax valuation-allowance changes.
- Progress and costs of restructuring and production transfers, plus any pension, warranty, legal, or goodwill impairment developments.