The Manitowoc Company, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Manitowoc designs, manufactures and supports cranes and provides aftermarket parts and services. Its reportable segments are Americas, Europe and Africa (EURAF), and Middle East and Asia Pacific (MEAP). Unless otherwise noted, financial amounts are in millions of dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $329.2 | $418.0 | Down 21.2% |
| Gross profit / margin | $63.2 / 19.2% | $80.2 / 19.2% | Profit down $17.0; margin flat |
| Operating income | $5.7 | $16.2 | Down $10.5 |
| Net loss | $(7.8) | $(26.7) | Loss narrowed |
| Basic and diluted loss per share | $(0.22) | $(0.75) | Improved |
| Cash used for operating activities | $(78.6) | $(267.3) | Use decreased |
| Capital expenditures | $3.6 | $4.4 | Down $0.8 |
Sales fell across all segments. The company attributed approximately $37.0 million of the year-over-year sales decline to COVID-19-related shipping disruption; lower Americas shipments also reflected a smaller shippable backlog entering the year. Gross margin held at 19.2%, which management attributed to favorable product mix. Operating income was also affected by lower volume and higher ConExpo trade-show costs. Interest expense declined to $7.2 million from $10.9 million, principally reflecting the prior-year refinancing and lower average borrowing costs. The 2019 net loss included a $25.0 million debt-extinguishment charge, so the year-over-year improvement in net loss is not solely a measure of operating performance.
Segment sales and operating income were: Americas $156.2 and $9.1 (versus $206.1 and $15.2); EURAF $122.9 and $(0.4) (versus $154.2 and $3.4); and MEAP $50.1 and $6.3 (versus $57.7 and $7.3). EURAF sales and earnings were particularly affected by pandemic-related shipment reductions and underused manufacturing facilities.
Cash, debt and liquidity
- Cash and cash equivalents were $103.6 at March 31, down from $199.3 at December 31, 2019. Cash decreased $95.8 during the quarter.
- Operating cash use of $78.6 primarily reflected an $83.6 increase in working capital, including an $88.5 inventory build for the Northern Hemisphere construction season and incentive-compensation payments.
- Investing cash use was $3.5; financing cash use was $12.4, including $12.0 of share repurchases. Q1 2019 cash flows are not directly comparable: investing inflows included collections on receivables previously sold, and financing included debt refinancing activity.
- Total debt, net of deferred financing costs, was $311.8, versus $312.2 at year-end; this included $300.0 principal of 9.0% senior secured second-lien notes due 2026. No ABL revolver borrowings were outstanding.
- Reported total liquidity was $382.0, down from $444.5 at year-end, comprising $103.6 cash and $244.2 revolver capacity, less $4.0 of letters of credit, plus $38.2 of other debt availability. The company reported compliance with debt covenants at quarter-end and expected to remain compliant over the following 12 months.
Changes, outlook and risks
- Orders declined 15.0% year over year to $375.0. Backlog was $520.9 at March 31: up 9.6% from December 31, 2019, but down 24.9% from March 31, 2019.
- COVID-19 disrupted manufacturing and support operations; major European facilities closed in mid-March. The German factory reopened April 20, with the remaining factories in France, Italy and Portugal expected to reopen in early May. Management expected closures, supply constraints and absenteeism to adversely affect Q2 results, alongside weaker product demand.
- The company withdrew its 2020 financial guidance on March 27 and did not issue revised guidance because of economic uncertainty. Management said liquidity and expected operating cash flows should meet foreseeable working-capital, capital-expenditure and operating needs, while emphasizing that pandemic impacts remained highly uncertain.
- Liquidity-preservation measures included reducing discretionary spending and capital expenditures, suspending share repurchases, eliminating base-salary increases, and deferring employer Social Security tax payments under the CARES Act.
- COVID-19-related economic deterioration triggered a goodwill and indefinite-lived intangible asset assessment. No impairment was recorded at March 31, but management warned that a longer or more severe downturn could lead to a future non-cash impairment charge.
- Other key risks include demand and supply-chain disruption, customers’ ability to obtain financing or pay on time, foreign-exchange movements, high leverage, and potential impairment. The company reported ordinary-course litigation, product-related and asbestos claims, warranty obligations, and buyback commitments; management did not expect the legal matters to have a material adverse effect, but estimates could change.
Important facts for investors to verify
- Subsequent filings and results for evidence of COVID-19’s effect on demand, shipments, plant utilization, supply availability and Q2 performance.
- Cash conversion, inventory levels and liquidity, including continued availability under the asset-based revolver and other facilities.
- Orders and backlog trends, and whether backlog converts to shipments and revenue.
- Debt covenant headroom, cash interest obligations on the 9.0% notes, and the company’s ability to comply with covenants.
- Goodwill impairment assumptions and changes in market conditions, as well as warranty, product-liability and other contingency estimates.
- Repurchase activity after the program suspension; the company had repurchased 1.1 million shares for $12.0 million in the quarter and reported $10.6 million remaining under the authorization at March 31.