Business context and reporting period
The Manitowoc Company, Inc. designs and sells engineered lifting equipment for the global construction industry, including cranes, aftermarket parts and related services. This unaudited Form 10-Q covers the three months ended March 31, 2018; comparisons are with the first quarter of 2017 unless otherwise noted. The company reports Americas, Europe and Africa (EURAF), and Middle East and Asia Pacific (MEAP) segments. Dollar amounts are in millions, except per-share data.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $386.1 | $305.8 |
| Gross profit / margin | $68.4 / 17.7% | $51.9 / 17.0% |
| Operating income (loss) | $1.7 | ($21.8) |
| Net loss | ($10.0) | ($36.0) |
| Loss per diluted share | ($0.28) | ($1.03) |
| Net cash used for operating activities | ($173.0) | ($109.3) |
Revenue increased 26.3%, driven by higher crane shipments across all regions; foreign exchange added $26.2 to sales. Adjusted EBITDA, a non-GAAP measure, was $17.1 versus $1.1; adjusted operating income was $8.0 versus an adjusted operating loss of $9.5. Management attributed improved operating results mainly to greater volume, lower manufacturing costs and charges, lower ES&A expense, and reduced restructuring costs. Gross margin was approximately 17.7%, compared with 17.0%.
Orders rose 9.8% to $536.0. Backlog was $756.6 at quarter-end, up 24.7% from December 31, 2017 and 49.4% from March 31, 2017. Segment sales and operating income (loss): Americas $162.9 and $2.7 (prior $120.5 and loss of $18.5); EURAF $154.2 and $3.4 (prior $125.3 and loss of $3.8); MEAP $69.0 and $7.9 (prior $60.0 and $8.7). MEAP earnings declined due mainly to unfavorable product mix.
Cash, cash equivalents and restricted cash totaled $99.4 at March 31, down $23.6 from year-end; cash and cash equivalents excluding restricted cash were $95.0. The company reported total liquidity of $212.7, including $132.1 of revolver borrowing capacity and no revolver borrowings. Total debt was $273.7, including $252.5 carrying value of the 12.75% senior secured second-lien notes due 2021. The company reported compliance with debt covenants. Current assets were $818.0 and current liabilities $484.3.
Operating cash outflow reflected working-capital needs, including increases in receivables and inventory, prior-year incentive compensation payments and debt interest. The company also reported $148.6 of cash receipts on sold receivables in investing activities. On a company-defined adjusted basis that adds those receipts back, operating cash flow was negative $24.4, versus negative $32.5 in Q1 2017. Capital expenditures were $6.4. These cash-flow comparisons are affected by receivables-securitization accounting and classification.
Material changes, outlook and notable items
- All three segments reported higher sales. The Americas and EURAF returned to segment operating profit; MEAP segment operating income decreased.
- Restructuring expense declined to $6.2 from $11.7. Q1 2018 costs chiefly related to executive severance, training associated with transferring crawler production to Shady Grove, Pennsylvania, and European headcount reductions.
- Other income included a $1.7 gain on the sale of the Manitowoc, Wisconsin corporate headquarters. Foreign-exchange effects also benefited reported results.
- The company adopted ASC 606 revenue guidance on January 1, 2018 using the modified retrospective method; no opening retained-earnings adjustment was recorded. Most product revenue continues to be recognized upon shipment or transfer of control.
- Management stated that liquidity and expected operating cash flows should meet foreseeable working-capital, capital-expenditure and ongoing operating needs, and that it expected to comply with debt and securitization covenants over the next twelve months. The filing provides no specific earnings or sales guidance.
- Risks include construction-equipment demand and order conversion, foreign exchange and commodity costs, execution of restructuring and manufacturing transfers, cash generation and working-capital management, leverage, customer financing, product quality and warranty claims, and possible goodwill or intangible-asset impairment.
- Product-liability reserves were $22.4; warranty reserves were $35.2. Residual-value guarantees and buyback commitments outstanding were $26.9, expiring through 2021. The company said existing legal matters were not expected to have a material adverse effect, while noting estimates may change and potential changes cannot reliably be quantified.
- The company disclosed an approximately $8.8 balance-sheet classification error at December 31, 2017: other current assets had been overstated and property, plant and equipment understated. It determined the error was not material and did not amend its prior filing.
Important facts for investors to verify
- Whether order growth and the $756.6 backlog convert to shipments and sustainable margins, and how much reported growth reflects foreign exchange.
- Working-capital cash use, inventory levels, receivables-securitization proceeds and the company’s liquidity under seasonal cash requirements.
- Debt-service capacity, the 12.75% notes, revolver availability, covenant headroom and continuing covenant compliance.
- Progress and remaining costs from restructuring, the Shady Grove production transfer and other manufacturing changes.
- Potential exposure from warranties, product liability, guarantees and buybacks, tax positions and deferred-tax valuation allowances, and impairment-sensitive goodwill and intangible assets.