Manitowoc Co Inc: Form 10-Q for the period ended Mar 31, 2023

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, including the financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations therein, and the interim condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q.

All dollar amounts are in millions throughout the tables included in Management’s Discussion and Analysis of Financial Conditions and Results of Operations unless otherwise indicated.

Cautionary Statements Regarding Forward-Looking Information

All of the statements in this Quarterly Report on Form 10-Q, other than historical facts, are forward-looking statements, including, without limitation, the statements made in the “Management's Discussion and Analysis of Financial Condition and Results of Operations.” As a general matter, forward-looking statements are those focused upon anticipated events or trends, expectations and beliefs relating to matters that are not historical in nature. The words “could,” “should,” “may,” “feel,” “anticipate,” “aim,” “preliminary,” “expect,” “believe,” “estimate,” “intend,” “intent,” “plan,” “will,” “foresee,” “project,” “forecast,” or the negative thereof or variations thereon, and similar expressions identify forward-looking statements.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for these forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that forward-looking statements are subject to known and unknown risks, uncertainties and other factors relating to the Company's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company. These known and unknown risks, uncertainties and other factors could cause actual results to differ materially from those matters expressed in, anticipated by or implied by such forward-looking statements. These risks, uncertainties, and other factors include, but are not limited to:

• Macroeconomic conditions, including inflation, rising interest rates, recessionary concerns and distress in global credit markets, as well as ongoing global supply chain constraints, labor availability and cost pressures such as changes in raw material and commodity costs, and logistics constraints, have had, and may continue to have, a negative impact on Manitowoc’s business, financial condition, cash flows, and results of operations (including future uncertain impacts);
• actions of competitors;
• changes in economic or industry conditions generally or in the markets served by Manitowoc;
• geopolitical events, including the ongoing conflict between Russia and Ukraine, other political and economic conditions and risks and other geographic factors, has had and may continue to lead to market disruptions, including volatility in commodity prices (including oil and gas), energy prices, inflation, consumer behavior, supply chain, and credit and capital markets, and could result in the impairment of assets and result in higher than expected charges to curtail the Company's operations in Russia;
• changes in customer demand, including changes in global demand for high-capacity lifting equipment, changes in demand for lifting equipment in emerging economies and changes in demand for used lifting equipment including changes in government approval and funding of projects;
• failure to comply with regulatory requirements related to the products the Company sells;
• the ability to capitalize on key strategic opportunities and the ability to implement Manitowoc’s long-term initiatives;
• impairment of goodwill and/or intangible assets;
• changes in revenues, margins and costs;
• the ability to increase operational efficiencies across Manitowoc and to capitalize on those efficiencies;
• the ability to generate cash and manage working capital consistent with Manitowoc’s stated goals;
• work stoppages, labor negotiations, labor rates and labor costs;
• the ability to convert backlog, orders and order activity into sales and the timing of those sales;
• the Company’s ability to attract and retain qualified personnel;
• changes in the capital and financial markets;
• the ability to complete and appropriately integrate acquisitions, strategic alliances, joint ventures or other significant transactions;
• issues associated with the availability and viability of suppliers;
• the ability to significantly improve profitability;
• realization of anticipated earnings enhancements, cost savings, strategic options and other synergies, and the anticipated timing to realize those savings, synergies and options;
• the ability to focus on customers, new technologies and innovation;
• uncertainties associated with new product introductions, the successful development and market acceptance of new and innovative products that drive growth;
• the replacement cycle of technologically obsolete products;
• risks associated with high debt leverage;
• foreign currency fluctuation and its impact on reported results;
• the ability of Manitowoc's customers to receive financing;
• risks associated with data security and technological systems and protections;
• the ability to direct resources to those areas that will deliver the highest returns;
• risks associated with manufacturing or design defects;
• natural disasters, other weather events, epidemics, pandemics, and other public health crises disrupting commerce in one or more regions of the world;
• issues relating to the ability to timely and effectively execute on manufacturing strategies, general efficiencies and capacity utilization of the Company’s facilities;
• the ability to focus and capitalize on product quality and reliability;
• issues associated with the quality of materials, components and products sourced from third parties and the ability to successfully resolve those issues;
• issues related to workforce reductions and potential subsequent rehiring;
• changes in laws throughout the world, including governmental regulations on climate change;
• the inability to defend against potential infringement claims on intellectual property rights;
• the ability to sell products through distributors and other third parties;
• issues affecting the effective tax rate for the year;
• acts of terrorism; and
• other risk factors detailed in Manitowoc's 2022 Annual Report on Form 10-K, as such may be amended or supplemented in Manitowoc’s subsequently filed Quarterly Reports on 10-Q (including this report), and its other filings with the United States Securities and Exchange Commission.

These statements reflect the current views and assumptions of management with respect to future events. Except to the extent required by the federal securities laws, the Company does not undertake, and hereby disclaims, any duty to update these forward-looking statements, even though its situation and circumstances may change in the future. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. The inclusion of any statement in this report does not constitute an admission by the Company or any other person that the events or circumstances described in such statement are material.

Current Events

Inflation and Interest Rate Environment

The Company was negatively impacted by inflation in wages, logistics, energy, raw material and component costs for the three months ended March 31, 2023. The Company has implemented price increases and provisional pricing strategies to mitigate the impact of cost inflation on margins and continues to actively monitor costs. There is a delay, however, in the realization of pricing due to long lead times of orders in the backlog, exacerbated by global supply chain and logistics constraints. In response to high inflation, the U.S. Federal Reserve and other central banks around the globe, increased interest rates throughout 2022 and in the first quarter of 2023. While the pace of interest rate increases began to slow in the first quarter of 2023, elevated interest rates along with global macroeconomic uncertainty could impact our customer's decisions to purchase cranes. Further inflationary pressure could increase our input costs and negatively impact our margins if we cannot obtain a corresponding increase in the pricing of our products. Furthermore, persistent inflation may prompt additional governmental monetary policy response, such as continued interest rate increases by central banks, that in combination with higher pricing could negatively impact customer demand for our products. Continuing or worsening inflation may have a material adverse impact on the Company's financial condition, results of operations or cash flows.

Supply Chain, Labor and Logistics Constraints

The Company continues to actively monitor global supply chain, labor and logistics constraints which had a negative impact on the Company's ability to timely source parts and complete and ship units for the three months ended March 31, 2023. While the Company has experienced some relief of the supply chain and logistics constraints, supply chains for certain key components remain distressed. The Company continues to actively monitor and manage supply chain constraints through alternative sourcing of parts and adapting production to limit waste and inefficiencies in the facilities. Continuing or worsening supply chain, labor and logistics constraints may have a material adverse impact on the Company's financial condition, results of operations or cash flows.

Curtailment of Operations in Russia

As of March 31, 2023, the Company's operations in Russia have been substantially curtailed. The Company expects future charges of $5.0 million to $10.0 million related to the non-cash write-off of foreign currency adjustments recorded in accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets.

Segment Operating Performance

The Company manages its business primarily on a geographic basis. The Company has three reportable segments: the Americas segment, EURAF segment, and MEAP segment. Further information regarding the Company’s reportable segments can be found in Note 17, “Segments,” to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

*Measure not meaningful

Americas

Americas segment net sales increased 22.5% for three months ended March 31, 2023 to $264.4 million from $215.9 million for the three months ended March 31, 2022. The increase was primarily attributable to higher new machine sales, non-new machine sales and pricing actions. While backlog was higher year-over-year, supply chain constraints impacted the Company's ability to produce and ship certain products.

Americas segment operating income increased $22.7 million for the three months ended March 31, 2023 to $28.5 million from $5.8 million for the three months ended March 31, 2022. The increase was primarily due to higher net sales, favorable product mix and the impact of pricing actions.

EURAF

EURAF segment net sales decreased 0.6% for the three months ended March 31, 2023 to $178.2 million from $179.2 million for the three months ended March 31, 2022. The decrease was primarily due to lower new machine sales, partially offset by higher non-new machine sales and pricing actions. EURAF segment net sales was unfavorably impacted by $8.0 million from changes in foreign currency exchange rates.

EURAF segment operating income decreased 68.4% for the three months ended March 31, 2023 to $3.6 million from $11.4 million for the three months ended March 31, 2022. The decrease was primarily due to unfavorable new machine product mix and higher material and transportation costs, as well as higher labor costs in cost of sales and engineering, selling and administrative expenses. EURAF segment operating income was unfavorably impacted by $0.1 million from changes in foreign currency exchange rates.

MEAP

MEAP segment net sales increased 2.8% for the three months ended March 31, 2023 to $65.7 million from $63.9 million for the three months ended March 31, 2022. MEAP segment net sales was unfavorably impacted by $3.2 million from changes in foreign currency exchange rates.

MEAP segment operating income decreased 34.4% for the three months ended March 31, 2023 to $8.6 million from $13.1 million for the three months ended March 31, 2022. The decrease was primarily due to higher labor and administrative costs and $4.8 million of income recorded in the prior year related to the partial recovery of the previously written-off long-term note receivable from the 2014 divestiture of the Company's Chinese joint venture, partially offset by higher net sales. MEAP segment operating income was unfavorably impacted by $0.4 million from changes in foreign currency exchange rates.

Results of Operations for the three months ended March 31, 2023 and 2022:

*Measure not meaningful

Orders and Backlog

Backlog represents the dollar value of orders which are expected to be recognized in net sales in the future. Orders are included in backlog when an executed binding contract with a price that has a floor has been received but has not been recognized in net sales. Orders and backlog are not measures defined by accounting principles generally accepted in the United States of America (“GAAP”) and our methodology for determining orders and backlog may vary from the methodology used by other companies. Management uses orders and backlog for capacity and resource planning. We believe this information is useful to investors to provide an indication of our future revenues.

Orders for the three months ended March 31, 2023 increased 9.0% to $524.8 million from $481.5 million for the three months ended March 31, 2022. The increase was primarily attributable to higher demand in the Americas segment, partially offset by softening demand in the EURAF segment as a result of macroeconomic conditions and geopolitical uncertainty. Orders were unfavorably impacted by $8.5 million from changes in foreign currency exchange rates.

As of March 31, 2023, total backlog was $1,075.7 million, a 1.9% increase from the December 31, 2022 backlog of $1,056.0 million, and a 4.1% increase from the March 31, 2022 backlog of $1,033.4 million. The increase in backlog from March 31, 2022 is primarily related to higher demand in the Americas segment, partially offset by softening demand in the EURAF segment. Backlog was favorably impacted by $4.3 million and unfavorably impacted by $7.5 million from December 31, 2022 and March 31, 2022, respectively, from changes in foreign currency exchange rates.

Net Sales

Consolidated net sales for the three months ended March 31, 2023 increased 10.7% to $508.3 million from $459.0 million for the three months ended March 31, 2022. This increase was primarily attributable to higher new machine sales in the Americas segment, pricing actions and higher non-new machine sales in the Americas and EURAF segments. This was partially offset by lower new machine sales in the EURAF segment. Net sales were unfavorably impacted by $11.2 million from changes in foreign currency exchange rates.

Gross Profit

Gross profit for the three months ended March 31, 2023 was $106.3 million, an increase of $21.3 million compared to $85.0 million for the three months ended March 31, 2022. The increase was primarily attributable to higher net sales, favorable product mix and pricing actions. This was partially offset by higher material, transportation and labor costs. Gross profit was unfavorably impacted by $2.1 million from changes in foreign currency exchange rates.

Engineering, Selling, and Administrative Expenses

Engineering, selling, and administrative expenses increased 12.9% to $75.1 million for the three months ended March 31, 2023 compared to $66.5 million for the three months ended March 31, 2022. The increase was primarily attributable to higher employee related costs and $4.8 million of benefit recorded in the prior year from the partial recovery of the previously written-off long-term note receivable from the 2014 divestiture of the Company's Chinese joint venture. Engineering, selling and administrative expenses was favorably impacted by $1.6 million from changes in foreign currency exchange rates.

Interest Expense

Interest expense for the three months ended March 31, 2023 totaled $8.1 million compared to $7.4 million for the three months ended March 31, 2022. Interest expense increased year-over-year primarily due to higher interest rates on borrowings from the Company's ABL revolving credit facility. See further detail at Note 11, “Debt” to the Condensed Consolidated Financial Statements.

Other Expense – Net

Other expense – net for the three months ended March 31, 2023 was $1.1 million. Other expense – net was primarily composed of $1.5 million of net pension costs, partially offset by $0.4 million of foreign currency exchange gains.

Other expense – net for three months ended March 31, 2022 was $0.2 million. Other expense – net was primarily composed of $0.7 million of foreign currency exchange losses and $0.1 million of net pension costs, partially offset by $0.6 million of interest income.

Provision for Income Taxes

Provision for income taxes for the three months ended March 31, 2023 was $4.2 million compared to $6.5 million for the three months ended March 31, 2022. The decrease relates primarily to a change in the jurisdictional mix of income compared to the previous year. In addition, the Company’s effective tax rate varies from the U.S. federal statutory rate of 21% due to results of foreign operations that are subject to income taxes at different statutory rates and losses in both the U.S. and foreign jurisdictions where no tax benefit can be realized.

Financial Condition

Cash Flows

A summary of cash flows for the three months ended March 31, 2023 and 2022 are as follows:

Cash Flows From Operating Activities

Net cash provided by operating activities of $15.4 million for the three months ended March 31, 2023 increased $9.8 million from net cash provided by operating activities of $5.6 million for the three months ended March 31, 2022. The increase in net cash provided by operating activities was primarily due to higher net income. This was partially offset by lower depreciation and higher working capital driven by an increase in inventory due to cost inflation, supply chain and logistics constraints, and increased stocking of inventory due to higher demand.

Cash Flows From Investing Activities

Net cash used for investing activities of $8.6 million for the three months ended March 31, 2023 decreased $0.1 million from net cash used for investing activities of $8.7 million for the three months ended March 31, 2022. The decrease in net cash used for investing activities is due to $2.0 million of proceeds from the sale of one of the Company's Brazilian subsidiaries in the first quarter of 2023, partially offset by higher capital expenditures of $1.9 million.

Cash Flows From Financing Activities

Net cash used for financing activities of $15.1 million for the three months ended March 31, 2023 decreased $5.6 million from net cash used for financing activities of $20.7 million for the three months ended March 31, 2022. The decrease in net cash used for financing activities is primarily due to $10.0 million of lower payments on the Company's ABL revolving credit facility. This was partially offset by $1.1 million of higher proceeds from other debt and $3.5 million of common stock repurchases.

Liquidity and Capital Resources

The Company’s liquidity position as of March 31, 2023 and December 31, 2022 is summarized as follows:

The Company believes its liquidity and expected cash flows from operations are sufficient to meet expected working capital, capital expenditure, and other general ongoing operational needs in the subsequent twelve months.

Cash Sources

The Company has historically relied primarily on cash flows from operations, borrowings under revolving credit facilities, issuances of notes, and other forms of debt financing as its sources of cash.

The maximum availability under the Company’s current ABL Revolving Credit Facility is $275.0 million. The borrowing capacity under the ABL Revolving Credit Facility is based on the value of inventory, accounts receivable and certain fixed assets of the Loan Parties. The Loan Parties’ obligations under the ABL Revolving Credit Facility are secured on a first-priority basis, subject to certain exceptions and permitted liens, by substantially all of the personal property and fee-owned real property of the Loan Parties. The liens securing the ABL Revolving Credit Facility are senior in priority to the second-priority liens securing the obligations under the 2026 Notes and the related guarantees. The ABL Revolving Credit Facility has a term of 5 years and includes a $75.0 million letter of credit sub-facility, $10.0 million of which is available to the Company’s German subsidiary that is a borrower under the ABL Revolving Credit Facility.

In addition to the ABL Revolving Credit Facility, the Company has access to non-committed overdraft facilities to fund working capital in Europe and China. There are six facilities, of which five are denominated in Euros totaling €36.0 million and one denominated in Chinese Yuan totaling ¥30.0 million. Total U.S. dollar availability as of March 31, 2023 for the six overdraft facilities is $43.4 million, with $6.1 million outstanding.

Debt

Outstanding debt as of March 31, 2023 and December 31, 2022 is summarized as follows:

Both the ABL Revolving Credit Facility and 2026 Notes include customary covenants and events of default. Refer to Note 11, “Debt,” to the Condensed Consolidated Financial Statements for additional discussions of the covenants for the ABL Revolving Credit Facility and the 2026 Notes. Based upon management’s current plans and outlook, the Company believes it will be able to comply with these covenants during the subsequent twelve months. From time to time, the Company seeks to opportunistically raise capital in the debt capital markets and bank credit markets.

Non-GAAP Measures

The Company uses EBITDA, adjusted EBITDA, and free cash flows, which are financial measures that are not prepared in accordance with GAAP, as additional metrics to evaluate the Company’s performance. The Company believes these non-GAAP measures provide important supplemental information to readers regarding business trends that can be used in evaluating its results of operations because these financial measures provide a consistent method of comparing financial performance and are commonly used by investors to assess performance. These non-GAAP financial measures should be considered together with, and are not substitutes for, the GAAP financial information provided herein.

EBITDA and Adjusted EBITDA

The Company defines EBITDA as net income (loss) before interest, taxes, depreciation, and amortization. The Company defines adjusted EBITDA as EBITDA plus the addback or subtraction of restructuring, other income (expense), and certain other non-recurring items - net.

The reconciliation of net income (loss) to EBITDA, and further to adjusted EBITDA for the three months ended March 31, 2023 and 2022 and trailing twelve months, are summarized as follows:

(1) The adjustment for the trailing twelve months represents non-cash goodwill and indefinite-lived intangible asset impairment charges.

(2) Other non-recurring items - net for the three months ended March 31, 2022 primarily relate to $4.8 million of income from the partial recovery of the previously written off long-term note receivable from the 2014 divestiture of the Company's Chinese joint venture, partially offset by $0.9 million of fair value step up on rental fleet assets sold during the period that was expensed within cost of sales, and $0.5 million of other one-time costs associated with the acquired businesses. Other non-recurring items - net for the trailing twelve months relate to $2.1 million of fair value step up on rental fleet assets sold during the period that was expensed within cost of sales, $0.1 million of other one-time costs associated with the acquired businesses, and $0.2 million of other one-time charges.

(3) Other expense - net includes net foreign currency (gains) losses, other components of net periodic pension costs, and other items in the three and trailing twelve months ended March 31, 2023 and the three months ended March 31, 2022. Other income - net for the trailing twelve months includes net foreign currency (gains) losses, other components of net periodic pension costs, a $0.5 million write-off of other debt related charges, and other items.

Free Cash Flows

Free cash flows is defined as net cash provided by operating activities less cash outflow from investment in capital expenditures. The reconciliation of net cash provided by operating activities to free cash flows for the three months ended March 31, 2023 and 2022 are summarized as follows:

Critical Accounting Policies

The Company's critical accounting policies have not materially changed since the 2022 Annual Report on Form 10-K was filed. Refer to the Critical Accounting Policies in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Annual Report on Form 10-K for the year ended December 31, 2022 for information about the Company’s policies, methodology and assumptions related to critical accounting policies.

The Company’s market risk disclosures have not materially changed since the 2022 Annual Report on Form 10-K was filed. The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference from Part II, Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Disclosure Controls and Procedures: The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.

Changes in Internal Control Over Financial Reporting: The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). During the period covered by this report, the Company made no changes that have materially affected, or that are reasonably likely to materially affect, its internal control over financial reporting.

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission on February 24, 2023.