MANITOWOC COMPANY, INC. — Form 10-Q Summary
Reporting period: First quarter ended March 31, 2016. On March 4, 2016, Manitowoc completed the tax-free spin-off of its foodservice business, Manitowoc Foodservice (MFS). The continuing company reports its Crane business as its sole segment; MFS is presented as discontinued operations.
Key financial results
- Revenue: Continuing-operations net sales were $427.4 million, up 5.1% from $406.7 million in Q1 2015. Management cited tower-crane strength, improving construction trends and new products, partly offset by mobile-crane softness and currency headwinds. Comparisons reflect the changed business following the spin-off.
- Profitability: Gross profit was $81.9 million versus $75.4 million; gross margin was approximately 19.2% versus 18.5%. Operating income was $3.0 million, compared with an $8.3 million operating loss. Continuing-operations net loss was $200.8 million, or $1.47 per diluted share, versus $25.5 million, or $0.19 per share. The 2016 loss included $72.0 million of debt-extinguishment losses and $122.3 million of income tax expense.
- Discontinued operations: MFS reported a $3.2 million loss through the spin-off date, versus $17.1 million of income in the prior-year quarter. Q1 2016 MFS results included $26.9 million in separation costs.
- Cash flow: Continuing-operations operating cash use was $147.1 million, compared with $74.1 million in Q1 2015. Total operating cash use, including discontinued operations, was $210.1 million. Continuing-operations investing cash use was $9.8 million, including $10.9 million of capital expenditures. Continuing-operations financing provided $244.3 million, principally reflecting debt issuance and spin-off-related cash flows.
- Debt and liquidity: Total debt was $303.0 million at March 31, down from $1,393.8 million at December 31, 2015; the company also replaced its prior credit facility with a $225 million asset-based revolver. No borrowings were outstanding under the new revolver at quarter-end, and reported availability was approximately $160.1 million. Cash was $87.2 million; total liquidity, including revolver availability and after letters of credit, was $221.0 million, down from $525.8 million at year-end.
- Balance sheet: Total assets were $1,820.4 million, compared with $3,535.9 million at year-end, principally reflecting removal of MFS assets after the spin-off. Equity was $767.9 million. Inventories were $498.9 million, up from $452.6 million at year-end.
- Backlog: $502.2 million at March 31, down 2.0% from year-end and 34.8% from March 31, 2015.
Material changes and unusual items
- The $72.0 million debt-extinguishment loss arose from redemption of the 2020 and 2022 notes and termination of the prior credit facility. Manitowoc issued $260 million of 12.75% secured second-lien notes due 2021 and redeemed the prior notes at premiums.
- A $121.1 million non-cash valuation allowance against domestic deferred tax assets, recorded in connection with the spin-off, drove most of the quarter’s $122.3 million tax expense. The filing says the company reserved all domestic net deferred tax assets and may adjust the valuation allowance as circumstances change.
- Restructuring expense was $4.4 million, compared with $0.2 million in Q1 2015, related to workforce reductions at two North American facilities.
- Q1 2016 included a $6.2 million out-of-period deferred-tax-asset adjustment relating to prior periods; management stated it was not material to the quarter or comparative periods.
- Continuing-operations interest expense declined to $9.7 million from $23.3 million, mainly due to lower average debt, partly offset by a higher average interest rate.
Outlook, risks and contingencies
- No specific full-year revenue or earnings guidance is provided. Management said liquidity and expected operating cash flows should cover working capital, capital expenditures and ongoing needs, and expects to comply with debt covenants over the next twelve months.
- Management described seasonal working-capital needs ahead of expected summer sales increases. It cited tower-crane strength and ongoing mobile-crane weakness, particularly in the U.S. amid lower oil prices.
- Key risks include construction-industry cyclicality, oil prices, demand for cranes and used equipment, foreign-exchange movements, leverage and debt-covenant compliance, customer financing, execution of restructuring and manufacturing plans, and effects of the MFS separation and transition services.
- Product-liability reserves were $22.0 million and warranty reserves were $43.9 million. The company also disclosed residual-value guarantees and buyback commitments totaling $41.5 million, expiring at various times through 2018. Management did not expect environmental, asbestos-related or other disclosed legal matters to have a material adverse effect, but noted estimates could change.
Important facts for investors to verify
- How post-spin-off Crane revenue, margins and backlog develop, given the substantial year-over-year backlog decline and differing business scope in the comparisons.
- Whether operating cash use improves as seasonal working-capital investment unwinds, and how much of reported liquidity is available under facility borrowing-base and covenant conditions.
- The effect of the 12.75% notes and refinancing on future interest expense, debt service and covenant headroom.
- Whether the domestic deferred-tax valuation allowance is maintained, increased or released, and the resulting effect on reported earnings.
- Costs, obligations and operational effects arising from the spin-off, separation agreements, transition services and product-liability or warranty claims.