Business context and reporting period
The Manitowoc Company, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. Manitowoc is a global manufacturer of engineered lifting equipment and reports one segment, Cranes. Results are presented after the 2016 spin-off of its foodservice business; that business is classified as discontinued operations.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $394.6 million | $457.7 million | $700.4 million | $885.1 million |
| Gross profit / margin | $76.3 million / 19.3% | $87.3 million / 19.1% | $128.2 million / 18.3% | $167.0 million / 18.9% |
| Operating income (loss) / margin | $9.9 million / 2.5% | $3.9 million / 0.9% | $(13.8) million / (2.0)% | $4.7 million / 0.5% |
| Net income (loss) | $0.5 million | $(5.8) million | $(35.5) million | $(201.7) million |
| Adjusted EBITDA | $25.2 million | $25.3 million | $24.4 million | $44.8 million |
Q2 diluted earnings per share were $0.00, compared with a loss of $0.04; six-month diluted loss per share was $0.25, compared with $1.47. The 2016 six-month loss included a $76.3 million debt-extinguishment loss and a $106.4 million non-cash deferred-tax valuation allowance charge.
For the first six months of 2017, cash used in continuing operations was $44.4 million; capital expenditures were $11.9 million. Total cash decreased $43.6 million to $26.3 million. At June 30, total debt was $289.1 million, including $250.9 million of 12.75% senior secured notes due 2021. Total liquidity was $170.5 million, including $144.2 million of excess ABL availability. The current ratio was approximately 1.7x (current assets of $786.5 million versus current liabilities of $459.7 million).
Material changes versus comparable periods
- Sales fell 13.8% in Q2 and 20.9% in the first half. Management attributed the declines mainly to unusually high large crawler-crane shipments in the Americas in the first half of 2016, ongoing weakness in the Americas and Middle East, and unfavorable currency effects.
- Q2 operating income improved despite lower sales, supported by lower engineering, selling and administrative expenses and reduced restructuring expense. First-half operating results moved to a loss, with restructuring expense rising to $17.6 million from $13.2 million.
- Backlog was $491.2 million at June 30, up 51.7% from December 31, 2016 and 24.8% year over year.
- Cash use reflected seasonal inventory and working-capital build. Accounts receivable and inventories increased from year-end by $47.2 million and $47.2 million, respectively.
Outlook, commentary, risks and unusual items
Management provided no specific revenue or earnings guidance in the supplied filing text. It said liquidity and expected operating cash flows should meet foreseeable working-capital, capital-expenditure and general operating needs, and expected covenant compliance for the next 12 months. Management noted that near-term market growth previously anticipated was no longer expected, amid lower oil prices, deferred customer capital spending and macroeconomic uncertainty. Europe showed year-over-year sales growth.
Restructuring related primarily to closures in Manitowoc, Wisconsin and Passo Fundo, Brazil. For the Wisconsin closure, the company expected total cash severance and related employment charges of about $4.2 million, capital expenditures of $10.7–$11.0 million, and other costs of $17.0–$18.4 million. It expected non-cash charges of $17.0–$20.0 million; $17.0 million had been recorded. Management expected all related cash and non-cash charges to be recognized by year-end 2017.
Goodwill and certain trademarks remain sensitive to assumptions about margins, sales growth and discount rates; the filing identifies the Grove and Potain India trademarks as particularly exposed to potential impairment if markets weaken further. Other risks include foreign exchange, customer demand, restructuring execution, leverage, supplier availability, and warranty and product-liability claims. The company reported $29.6 million of warranty reserves, $22.3 million of product-liability reserves, and $29.1 million of outstanding residual-value guarantees and buyback commitments. Management did not expect pending litigation or environmental matters to have a material adverse effect, while noting estimates may change.
A possible release of French deferred-tax valuation allowances of up to €35.0 million within 12 months was described as reasonably possible, not assured. The company was in compliance with debt and receivables-securitization covenants at quarter-end. The filing also reports that Manitowoc adopted a change from LIFO to FIFO for certain inventory in 2016 and retrospectively adjusted the 2016 comparison figures.
Important facts for investors to verify
- Whether the higher backlog converts into shipments and revenue, and how sales and margins develop in the Americas, Middle East and Europe.
- Cash generation and working-capital needs, particularly inventory levels, receivables and ongoing reliance on revolving-credit availability.
- Progress and final costs of the facility closures and restructuring, including completion of charges by year-end 2017.
- Debt-service capacity and covenant headroom, especially given the 12.75% notes and negative trailing-twelve-month EBITDA of $124.6 million; trailing adjusted EBITDA was also negative at $2.2 million.
- Potential goodwill or trademark impairment and any changes to deferred-tax valuation allowances, including the uncertain potential French allowance release.