The Manitowoc Company, Inc. — Q3 2017 Form 10-Q
Business context and period: The company supplies engineered lifting equipment for the global construction industry and reports one segment, Cranes. This filing covers the quarter and nine months ended September 30, 2017. The 2016 comparisons reflect the foodservice business as discontinued operations following its March 2016 spin-off.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $399.4 million | $349.8 million | $1,099.8 million | $1,234.9 million |
| Gross profit | $72.5 million | $40.8 million | $200.7 million | $207.8 million |
| Gross margin | 18.2% | 11.7% | 18.3% | 16.8% |
| Operating income (loss) | $7.9 million | $(134.2) million | $(5.9) million | $(129.5) million |
| Net income (loss) | $9.6 million | $(140.7) million | $(25.9) million | $(342.4) million |
| Diluted EPS | $0.07 | $(1.02) | $(0.18) | $(2.49) |
- Revenue and operating results: Q3 sales increased 14.2%, driven by higher crane shipments in the U.S. and Europe; approximately 40% of unit revenue came from products introduced since the company became a stand-alone crane business. Nine-month sales declined 10.9%, primarily because large crawler crane shipments in the Americas during 2016 did not recur.
- Margins and costs: Q3 gross profit increased $31.7 million, mainly from higher volume, reduced manufacturing costs and the non-recurrence of certain 2016 charges. ES&A fell 16.6% for the quarter and 15.6% year to date, primarily due to lower headcount-related costs, professional fees and discretionary spending. Restructuring expense was $3.7 million for Q3 and $21.3 million year to date.
- Cash flow: Continuing-operations operating cash use was $33.9 million for the nine months; total operating cash use, including discontinued operations, was $34.2 million. Capital expenditures were $17.0 million. Cash decreased $40.6 million to $29.3 million.
- Debt and liquidity: Total debt was $287.6 million, compared with $281.5 million at year-end 2016. Debt included $251.4 million of secured second-lien notes due 2021 and $10.0 million drawn on the revolving facility. Reported liquidity was $166.0 million, down from $213.9 million, including $161.1 million of revolver capacity before subtracting borrowings and letters of credit. The company reported covenant compliance.
- Balance sheet: Current assets were $777.4 million and current liabilities $442.1 million. Inventories rose to $482.2 million from $429.0 million at year-end. Shareholders’ equity was $627.9 million.
Material changes, outlook and risks
- Q3 operating results improved substantially versus 2016, which included a $96.9 million asset impairment charge and other charges related to inventory reserves, used-crane values and product improvement. Year-to-date comparisons also reflect a $76.3 million 2016 debt-extinguishment loss and a $106.4 million non-cash tax valuation allowance charge.
- Backlog was $467.9 million at September 30, up 32.3% from September 2016 and 44.5% from year-end 2016. The filing does not provide a quantified revenue or earnings forecast. Management said liquidity and expected operating cash flows should cover foreseeable operating, working-capital and capital needs and expected covenant compliance over the following 12 months.
- Q3 included a $13.7 million discrete tax benefit, primarily from resolution of an IRS matter for tax years 2012–2014. Management said French deferred-tax valuation allowances could potentially decrease by up to €35.0 million within 12 months if sufficient positive evidence emerges; timing and realization are uncertain.
- The Manitowoc, Wisconsin manufacturing closure was completed in Q2 2017; management said material related charges had been incurred by September 30. Restructuring also included the Passo Fundo, Brazil closure and North American headcount reductions.
- Risks highlighted include uncertain construction and crane markets, customer capital-spending decisions, converting backlog into sales, restructuring execution, working-capital and cash generation, leverage, foreign exchange, commodity costs, and potential goodwill or intangible-asset impairment. Management noted that trademarks for Grove and Potain India had limited valuation cushions in its October 2016 review and remain exposed to adverse market developments.
- Warranty reserves were $32.3 million and product-liability reserves $22.8 million. The company also disclosed product-related and asbestos-related lawsuits, residual-value guarantees and buyback commitments totaling $28.4 million; management did not expect the described legal matters to have a material adverse effect, but estimates may change.
Important facts for investors to verify
- Whether backlog converts into shipments and revenue on expected timing and margins.
- Whether inventory growth and working-capital needs ease enough to improve operating cash flow and liquidity.
- Debt service, revolver availability and continued compliance with financing covenants.
- Progress on cost reductions and restructuring, and whether market weakness triggers further impairment charges.
- Tax valuation allowance developments, warranty and legal exposures, and the terms and potential cash impact of guarantees and buyback commitments.