The Manitowoc Company, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Manitowoc designs and manufactures lifting equipment for the global construction industry and reports one segment: Crane. The comparison with Q1 2016 is affected by the March 2016 spin-off of its foodservice business; that business is presented as discontinued operations in the prior-period statements.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $305.8 million | $427.4 million |
| Gross profit / margin | $51.9 million / 17.0% | $79.7 million / 18.6% |
| Operating income (loss) | $(23.7) million | $0.8 million |
| Net income (loss) | $(36.0) million | $(195.9) million |
| Diluted loss per share | $(0.26) | $(1.43) |
| Cash used for operating activities | $(32.5) million | $(210.2) million |
Sales fell 28.5%, primarily from lower mobile-crane shipments, including minimal crawler-crane shipments versus a high volume of large crawler cranes in Q1 2016. North America and the Middle East were weak; Europe grew. Foreign exchange reduced sales by $6.4 million in Q1 2017. Backlog was $506.3 million at quarter-end, up 56.4% from December 31, 2016 and 0.8% from March 31, 2016.
Gross profit declined mainly with lower sales. Selling, engineering and administrative expense decreased 12.6% to $63.3 million, reflecting lower wages and benefits, professional fees and discretionary spending, partly offset by ConExpo costs. Restructuring expense increased to $11.7 million from $4.4 million.
Q1 2017 operating cash use reflected inventory and accrued-expense movements, lower sales, and seasonal inventory building ahead of the Northern Hemisphere construction season. Capital expenditures were $3.8 million; cash and equivalents fell $33.8 million from year-end to $36.1 million.
Balance sheet, debt and liquidity
- Total debt was $281.5 million, including $250.3 million carrying value of second-lien notes due 2021 and $34.9 million of other debt; the notes bear 12.75% interest. Current debt and short-term borrowings were $12.9 million.
- The company had no ABL revolver borrowings at March 31. Revolver capacity was $166.3 million, with $10.4 million of U.S. letters of credit and approximately $155.9 million of excess availability. Reported total liquidity, including cash, was $192.0 million.
- Current assets were $735.5 million and current liabilities $427.7 million. Inventory was $461.3 million, up from $429.0 million at year-end.
- Management reported compliance with debt and receivables-securitization covenants and expected to remain compliant over the following 12 months. It stated liquidity and expected operating cash flows should meet foreseeable needs.
Period comparison and unusual items
The prior-year net loss included a $76.3 million debt-extinguishment loss and a $106.5 million noncash tax valuation-allowance charge associated with the foodservice spin-off; neither item recurred in Q1 2017. Q1 2016 also included $3.2 million of discontinued-operation losses. Accordingly, the smaller net loss in 2017 does not indicate improved underlying sales or operating income. Q1 2016 comparative figures reflect retrospective inventory-costing changes to FIFO and previously disclosed revisions.
Adjusted EBITDA was a loss of $0.8 million in Q1 2017, versus income of $19.5 million in Q1 2016; these are non-GAAP measures. Trailing-12-month Adjusted EBITDA was a loss of $2.1 million, while covenant-defined trailing EBITDA was $54.2 million. These measures use different definitions and should not be treated as interchangeable.
Outlook, risks and contingencies
- No specific revenue, earnings or cash-flow guidance is provided. Management described weak North American demand, low oil prices and currency pressure in the Middle East, and European construction strength.
- The company was closing manufacturing operations in Manitowoc, Wisconsin and Passo Fundo, Brazil. For the Manitowoc closure, expected cash charges included $7–$10 million of severance and benefits, $10–$12 million of capital expenditures and $15–$20 million of other costs. Noncash charges were expected at $15–$20 million; $17 million had been recorded by quarter-end. Management expected all charges by year-end 2017.
- Management identified potential goodwill and intangible-asset impairment exposure if markets weaken or projected margins disappoint. Grove and Potain India trademarks had estimated valuation cushions of approximately 25% and 10%, respectively, at the October 2016 test.
- Other exposures include warranty reserves of $26.6 million, product-liability reserves of $23.7 million, environmental matters, asbestos-related claims, other litigation, and $27.2 million of outstanding residual-value guarantees and buyback commitments. Management did not expect these matters to have a material adverse effect, but estimates may change.
- Forward-looking risks include execution of plant closures and restructuring, converting backlog to sales, weak demand, leverage, foreign exchange, commodity costs, customer financing, and possible asset impairments. The company stated that risk-factor disclosures had not materially changed since its 2016 Form 10-K.
Important facts for investors to verify
- Whether the larger backlog converts to shipments and revenue, particularly given the sharp year-over-year sales decline.
- Cash generation and working-capital requirements as inventory builds; liquidity and revolver availability should be monitored.
- Progress, remaining costs and expected benefits of the plant closures and restructuring program.
- Debt-service capacity, covenant headroom and the implications of the 12.75% second-lien notes.
- Whether weaker market conditions or margin assumptions trigger goodwill or trademark impairments.
- Potential changes in tax valuation allowances and exposure from guarantees, product claims and other contingencies.