The Manitowoc Company, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Manitowoc designs, manufactures and supports mobile, tower and crawler cranes and related services, reporting across the Americas, Europe and Africa (EURAF), and Middle East and Asia Pacific (MEAP).
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $448.0m | $450.1m | $1,370.7m | $1,331.5m |
| Gross profit / margin | $88.4m / 19.7% | $80.0m / 17.8% | $263.8m / 19.2% | $238.9m / 17.9% |
| Operating income | $32.5m | $16.9m | $90.6m | $42.7m |
| Net income | $18.1m | $11.5m | $37.3m | $11.2m |
| Diluted EPS | $0.51 | $0.32 | $1.05 | $0.31 |
- Q3 sales edged down 0.5%; nine-month sales rose 2.9%, primarily on higher crane shipments in the Americas. Currency movements reduced sales by $8.7m in Q3 and $38.7m year to date.
- Operating performance improved as pricing supported gross margin and lower engineering, selling and administrative expenses helped results. Nine-month segment operating income increased to $110.7m from $73.1m.
- By segment, Q3 sales were $251.0m in the Americas, $139.2m in EURAF and $57.8m in MEAP. Americas growth and profitability contrasted with weaker EURAF and MEAP sales. Nine-month Americas sales increased 17.5%, while EURAF declined 4.5% and MEAP declined 21.0%.
- Interest expense was $7.2m in Q3 and $25.6m for nine months, down from $9.9m and $29.3m, respectively, reflecting lower borrowing costs after refinancing.
Cash flow, debt and liquidity
- Nine-month operating cash flow was negative $197.9m, investing cash flow positive $121.1m and financing cash flow positive $5.1m. Cash fell $72.8m from year-end 2018 to $67.5m.
- Working-capital investment and the termination of the receivables securitization program weighed on reported cash flow. Management’s non-GAAP adjusted operating cash flow was $3.4m and adjusted free cash flow was negative $19.0m for the nine months. Q3 adjusted free cash flow was positive $24.9m.
- At September 30, total debt was $313.4m, including $300.0m of 9.0% senior secured second-lien notes due 2026 and $18.1m of other debt, net of deferred financing costs. Cash was $67.5m. The company had no ABL revolver borrowings at quarter-end.
- The new $275m asset-based revolver had approximately $249.8m of excess availability after outstanding letters of credit. Reported total liquidity was $354.4m, including cash and other debt availability. The company reported compliance with debt covenants and believed liquidity and expected operating cash flows would meet foreseeable needs.
Material changes, outlook and risks
- Orders and backlog weakened: Q3 orders fell 23.0% to $352.8m, primarily due to the Americas. Backlog was $466.5m at September 30, down 33.4% from $700.2m a year earlier. The filing provides no numerical full-year guidance.
- Refinancing: In March 2019, Manitowoc issued $300m of 9.0% notes due 2026 and entered a new five-year ABL facility, using proceeds to redeem its 12.75% notes due 2021 and repay prior facilities. The refinancing generated a $25.0m extinguishment charge during the first nine months.
- Unusual gains and adjustments: A legal settlement produced a net $24.4m gain in the first half ($15.5m in other income and $8.9m in lower selling and administrative expense). The company also recognized a $3.5m gain on sale of its Manitowoc, Wisconsin manufacturing property and a $2.0m favorable prior-period accrual adjustment, primarily in cost of sales. These items affect comparability.
- Management attributed margin improvement to favorable pricing, mix and aftermarket margins, while citing lower commercial-construction crane shipments in EURAF and lower energy-market shipments in MEAP. It warned that demand, order conversion, foreign exchange, commodity costs, manufacturing execution, restructuring, customer financing and high leverage could affect results.
- Product warranty reserves were $39.5m; buyback commitments and other guarantees totaled $27.9m. Management said ordinary-course legal matters were not expected to have a material adverse effect, but estimates for warranty, product liability, environmental, asbestos and other claims may change.
- Foreign-currency translation contributed a $15.2m loss to comprehensive income for the nine months. The company had $78.3m notional of foreign-exchange forward contracts outstanding at quarter-end.
Important facts for investors to verify
- Whether the sharp decline in orders and backlog signals sustained demand weakness, particularly in the Americas and MEAP.
- How much of improved earnings reflects recurring pricing, mix and cost performance versus the legal settlement, property-sale gain and prior-period adjustment.
- Whether working-capital requirements and the end of receivables securitization continue to constrain cash generation; reconcile GAAP cash flow with management’s adjusted measures.
- The company’s ability to service 9.0% notes, maintain covenant compliance and preserve liquidity if operating conditions soften.
- Potential changes in tax valuation allowances, warranty and guarantee exposures, and foreign-exchange effects.