Business context and reporting period
The Manitowoc Company, Inc. filed this Form 10-K for the fiscal year ended December 31, 2016. Following the March 4, 2016 tax-free spin-off of its Foodservice business (MFS), Manitowoc’s continuing business is a single reportable segment focused on cranes and aftermarket support. Prior-period MFS results are presented as discontinued operations, so comparisons should be made using continuing operations.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $1,613.1 million | $1,865.7 million |
| Gross profit / margin | $253.3 million / 15.7% | $332.2 million / 17.8% |
| Operating income (loss) | $(153.3) million | $(12.4) million |
| Net income (loss) | $(375.8) million | $65.5 million |
| Cash from continuing operating activities | $(122.4) million | $(25.5) million |
| Capital expenditures | $45.9 million | $54.9 million |
| Total debt | $281.5 million | $1,397.6 million |
| Cash and cash equivalents | $69.9 million | $63.4 million, including discontinued operations |
Continuing-operations net loss was $368.6 million, or $2.68 per diluted share; discontinued operations contributed a further $7.2 million loss. Adjusted EBITDA, a non-GAAP measure, was $18.2 million versus $65.9 million; adjusted operating loss was $27.4 million.
Year-end liquidity was reported at $213.9 million: $69.9 million cash plus $160.4 million revolver capacity, less $16.4 million of letters of credit. The $225 million asset-based revolving facility had no borrowings outstanding at year-end. The company reported compliance with debt covenants and expected to remain compliant over the following 12 months. Debt includes $260 million face amount of 12.75% secured second-lien notes due 2021; scheduled debt maturities are concentrated in 2021.
Material changes versus prior comparable period
- Sales fell 13.5%, primarily from weaker mobile-crane demand in the Americas and Middle East; foreign exchange reduced sales by approximately $9.5 million.
- Gross profit declined 23.8%, with lower volume and unfavorable manufacturing absorption outweighing cost-reduction initiatives.
- Operating loss included $96.9 million of impairment charges, versus $15.3 million in 2015, and $23.4 million of restructuring expense, versus $9.4 million.
- The impairment included $58.6 million of SAP construction-in-progress and $18.6 million of SAP and other IT assets written off after the company stopped the SAP implementation; it also included a $13.8 million write-down of Manitowoc, Wisconsin facility assets.
- Interest expense declined to $39.6 million from $95.6 million after the spin-off-related debt restructuring. A $76.3 million debt-extinguishment loss reflected redemption premiums, financing-fee write-offs and swap termination costs.
- The $100.5 million income-tax provision was driven principally by deferred-tax-asset valuation allowances; the filing cites a $187 million increase in valuation allowances in 2016. The effective tax rate was negative 37.5%.
- Backlog fell to $323.8 million at year-end from $513.0 million, compared with $738.0 million in 2014. Fourth-quarter 2016 sales were $378.2 million, versus $543.1 million in fourth-quarter 2015; quarterly figures reflect the retrospective inventory-costing adjustment described below.
Outlook, management commentary, risks and unusual items
Management said crane demand remained historically weak and did not anticipate a meaningful global recovery in 2017. Guidance called for sales down 8%–10% from 2016, adjusted EBITDA of approximately $41–$59 million, adjusted operating income margin of approximately 0%–1%, depreciation of $40–$45 million, intangible amortization of $2–$2.5 million and capital expenditures of approximately $30 million. The company did not provide comparable GAAP guidance or a reconciliation, citing unreasonable effort.
Management noted that a large portion of 2016 backlog consisted of previously booked high-capacity crawler cranes shipped in the first half and not expected to recur in 2017. It cited surplus underutilized cranes, weak energy-related demand absent sustained higher oil prices, a strong U.S. dollar, uncertain trade policy and unpredictable end markets. Infrastructure spending could support demand, but timing and realization were uncertain. Crane Care’s installed base of approximately 140,000 cranes provides recurring aftermarket revenue.
- Planned manufacturing consolidations: Manitowoc, Wisconsin operations to Shady Grove, Pennsylvania, and Fanzeres, Portugal operations to Baltar, Portugal. The Wisconsin closure was expected by mid-2017. Estimated Wisconsin consolidation costs included $10–$15 million cash severance, $10–$15 million capital expenditures, $15–$20 million other costs and $20–$25 million non-cash charges; most cash charges were expected to be settled by the end of 2017.
- Workforce reductions brought year-end headcount to approximately 4,900, down approximately 1,500 from year-end 2015. Management reported 17 new crane model launches during 2016 and said three U.S. Army test cranes were undergoing evaluation.
- Goodwill and other intangible assets totaled $413.7 million, approximately 27% of assets. Annual tests found no impairment, but management identified Grove and Potain India trademarks as more exposed to future impairment if markets weaken or assumptions deteriorate.
- Other exposures include product warranties and liability, environmental remediation, pension obligations, residual-value guarantees and buyback commitments of $32.8 million, foreign-currency and commodity risks, and tax audits. Management did not expect disclosed legal, environmental or asbestos matters to have a material adverse effect, based on information available.
- The company changed the costing method for certain U.S. inventory from LIFO to FIFO in fourth-quarter 2016 and retrospectively adjusted prior periods. It also disclosed corrections to certain previously issued quarterly financial data that it determined were not material and did not require amended filings. The auditor reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether demand, backlog and manufacturing utilization stabilize sufficiently to support the 2017 sales and adjusted EBITDA outlook.
- Whether the Wisconsin and Portugal consolidations meet expected timing, costs and savings, and whether further impairment charges arise.
- Debt-service capacity, including the 12.75% notes due 2021, covenant headroom and access to the asset-based revolver as liquidity declines.
- The cash conversion and working-capital outlook, given negative continuing operating cash flow in 2016 and reliance on receivables securitization.
- The effect of tax valuation allowances, future taxable income and tax-audit outcomes on reported earnings and cash taxes.
- The assumptions supporting goodwill and trademark valuations, and the possible exposure from guarantees, warranties, product-liability claims and pension obligations.