MANITOWOC CO INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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, 2023, 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, high interest rates and recessionary concerns, as well as continuing global supply chain constraints, labor constraints, logistics constraints and cost pressures such as changes in raw material and commodity costs, have had, and may continue to have, a negative impact on Manitowoc’s ability to convert backlog into revenue which could, and has, impacted its 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 conflicts in Ukraine and in the Middle East, 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), raw material and component costs, energy prices, inflation, consumer behavior, supply chain, and credit and capital markets, and could result in the impairment of assets; • 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; • the ability to convert backlog, orders and order activity into sales and the timing of those sales; • failure to comply with regulatory requirements related to the products and aftermarket services 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 Company’s ability to attract and retain qualified personnel; • changes in the capital and financial markets; 20 • 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, 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 and service 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 and services 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 2023 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 Supply Chain and Logistics Constraints The Company continues to actively monitor global supply chain and logistics constraints which had a negative impact on the Company’s ability to timely source parts, complete and ship units, and service cranes for the three months ended March 31, 2024. 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 21 supply chain and logistics constraints may have a material adverse impact on the Company’s financial condition, results of operations, or cash flows. Results of Operations for the three months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 2023 Percentage Change Orders $ 554.1 $ 524.8 5.6 % Backlog 971.3 1,075.7 (9.7 )% Net sales 495.1 508.3 (2.6 )% Gross profit 92.5 106.3 (13.0 )% Gross profit % 18.7 % 20.9 % Engineering, selling, and administrative expenses 76.0 75.1 1.2 % Interest expense 9.2 8.1 13.6 % Provision for income taxes 1.9 4.2 (54.8 )% *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, 2024 increased 5.6% to $554.1 million from $524.8 million for the same period in 2023. The increase was primarily attributable to higher demand in the EURAF segment, mainly in the Company’s mobile product offering. Orders were favorably impacted by $2.0 million from changes in foreign currency exchange rates. As of March 31, 2024, total backlog was $971.3 million, a 5.9% increase from the December 31, 2023 backlog of $917.2 million, and a 9.7% decrease from the March 31, 2023 backlog of $1,075.7 million. The decrease in backlog from March 31, 2023 is primarily attributable to higher shipments due to continuing easing of supply chain and logistics constraints. Backlog was unfavorably impacted by $7.6 million and $1.7 million from December 31, 2023 and March 31, 2023, respectively, from changes in foreign currency exchange rates. Net Sales Consolidated net sales for the three months ended March 31, 2024 decreased 2.6% to $495.1 million from $508.3 million for the same period in 2023. This decrease was primarily attributable to lower new and non-new machine sales in the EURAF segment, partially offset by higher new and non-new machine sales in the Americas and MEAP segments. Net sales were favorably impacted by $2.3 million from changes in foreign currency exchange rates. Gross Profit Gross profit for the three months ended March 31, 2024 was $92.5 million, a decrease of $13.8 million compared to $106.3 million for the same period in 2023. The decrease was primarily attributable to lower net sales, unfavorable product mix, and lower absorbed costs due to lower manufacturing volume in EURAF. Gross profit was favorably impacted by $0.3 million from changes in foreign currency exchange rates. Engineering, Selling, and Administrative Expenses 22 Engineering, selling, and administrative expenses were $76.0 million for the three months ended March 31, 2024 compared to $75.1 million for the same period in 2023. Engineering, selling and administrative expenses were unfavorably impacted by $0.4 million from changes in foreign currency exchange rates. Interest Expense Interest expense for the three months ended March 31, 2024 totaled $9.2 million compared to $8.1 million for the same period in 2023. Interest expense increased year-over-year primarily due to higher debt and interest rates on borrowings from the Company’s ABL revolving credit facility. Provision for Income Taxes For the three months ended March 31, 2024 and 2023, the Company recorded a provision for income taxes of $1.9 million and $4.2 million, respectively. The decrease in the Company’s provision for income taxes for the three months ended March 31, 2024 compared to the prior year is due to lower year-to-date income partially offset by a change in jurisdictional mix. 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. 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 16, “Segments,” to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Three Months Ended March 31, 2024 2023 Dollar Change Percentage Change Net Sales Americas $ 283.2 $ 264.4 $ 18.8 7.1 % EURAF 143.0 178.2 (35.2 ) (19.8 )% MEAP 68.9 65.7 3.2 4.9 % Segment Operating Income (Loss) Americas $ 29.5 $ 28.5 $ 1.0 3.5 % EURAF (11.8 ) 3.6 (15.4 ) * MEAP 8.2 8.6 (0.4 ) (4.7 )% *Measure not meaningful Americas Americas segment net sales increased 7.1% for the three months ended March 31, 2024 to $283.2 million from $264.4 million for the same period in 2023. The increase was primarily attributable to higher new machine sales, favorable product mix and pricing actions. Non-new machine sales were relatively flat year-over-year. Americas segment operating income increased 3.5% for the three months ended March 31, 2024 to $29.5 million from $28.5 million for the three months ended March 31, 2023. The increase was primarily due to higher net sales. EURAF EURAF segment net sales decreased 19.8% for the three months ended March 31, 2024 to $143.0 million from $178.2 million for the same period in 2023. The decrease was primarily due to lower new machine sales in the Company's tower product offering and lower non-new machine sales. Segment net sales was favorably impacted by $2.2 million from changes in foreign currency exchange rates. EURAF segment operating loss was $11.8 million for the three months ended March 31, 2024 compared to operating income of $3.6 million for the same period in 2023. The change was primarily due to lower net sales, unfavorable product mix, and higher 23 labor costs in engineering, selling and administrative expenses. Segment operating income was unfavorably impacted by $0.1 million from changes in foreign currency exchange rates. MEAP MEAP segment net sales increased 4.9% for the three months ended March 31, 2024 to $68.9 million from $65.7 million for the same period in 2023. The increase was primarily attributable to higher non-new machine sales. MEAP segment net sales was unfavorably impacted by $0.2 million from changes in foreign currency exchange rates. MEAP segment operating income decreased 4.7% for the three months ended March 31, 2024 to $8.2 million from $8.6 million for the same period in 2023. The decrease was primarily due to unfavorable product mix. Segment operating income was favorably impacted by $0.1 million from changes in foreign currency exchange rates. Financial Condition Cash Flows A summary of cash flows for the three months ended March 31, 2024 and 2023 are as follows: Three Months Ended March 31, 2024 2023 Net cash provided by (used for) operating activities $ (30.6 ) $ 15.4 Net cash used for investing activities (12.0 ) (8.6 ) Net cash provided by (used for) financing activities 40.2 (15.1 ) Cash and cash equivalents 31.5 56.5 C ash Flows From Operating Activities Net cash used for operating activities of $30.6 million for the three months ended March 31, 2024 increased $46.0 million from net cash provided by operating activities of $15.4 million for the same period in 2023. The increase in net cash used for operating activities was primarily due to lower net income adjusted for non-cash items, and higher use of cash driven by an increase in accounts receivable, and a decrease in accrued expenses and other liabilities. This was partially offset by a decrease in cash used for inventories. Cash Flows From Investing Activities Net cash used for investing activities of $12.0 million for the three months ended March 31, 2024 increased $3.4 million from net cash used for investing activities of $8.6 million for the same period in 2023. The increase in net cash used for investing activities is due to $1.6 million of additional capital expenditures and a $1.8 million reduction in proceeds from sale of property, plant, and equipment. Cash Flows From Financing Activities Net cash provided by financing activities of $40.2 million for the three months ended March 31, 2024 increased $55.3 million from net cash used for financing activities of $15.1 million for the same period in 2023. The increase is primarily driven by proceeds of $29.7 million and $14.0 million on the Company’s overdraft facilities and ABL revolving credit facility, respectively, as compared to payments of $11.9 million in the prior year. Liquidity and Capital Resources The Company’s liquidity position as of March 31, 2024 and December 31, 2023 is summarized as follows: March 31, 2024 December 31, 2023 Cash and cash equivalents $ 31.5 $ 34.4 Revolver borrowing capacity 275.0 275.0 Other debt availability 44.1 45.2 Less: Borrowings on revolver (74.0 ) (60.0 ) Less: Borrowings on other debt (40.5 ) (11.2 ) Less: Outstanding letters of credit (3.4 ) (3.4 ) Total liquidity $ 232.7 $ 280.0 24 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 senior secured second lien notes due on April 1, 2026 (the "2026 Notes") and the related guarantees. The ABL Revolving Credit Facility has a maturity date of May 19, 2027 (with a springing maturity date of December 30, 2025 if the 2026 Notes have not been repaid in full or refinanced prior to December 30, 2025), 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 €37.0 million and one denominated in Chinese Yuan totaling ¥30.0 million. Total U.S. dollar availability as of March 31, 2024 for the six overdraft facilities is $44.1 million, with $40.5 million outstanding. Debt Outstanding debt as of March 31, 2024 and December 31, 2023 is summarized as follows: March 31, 2024 December 31, 2023 Borrowing under senior secured asset based revolving credit facility $ 74.0 $ 60.0 Senior secured second lien notes due 2026 300.0 300.0 Other debt 42.7 13.7 Deferred financing costs (1.5 ) (1.6 ) Total debt 415.2 372.1 Short-term borrowings and current portion of long-term debt (42.5 ) (13.4 ) Long-term debt $ 372.7 $ 358.7 Both the ABL Revolving Credit Facility and 2026 Notes include customary covenants and events of default. Refer to Note 10, “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, adjusted operating income, Adjusted ROIC 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 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. Adjusted ROIC Adjusted ROIC measures how efficiently the Company uses invested capital in its operations. Adjusted ROIC is not a measure defined by GAAP and the Company’s methodology for determining Adjusted ROIC may vary from the methodology used by 25 other companies. Management and the Board of Directors use Adjusted ROIC as a measure to assess operational performance and capital allocation. The Company believes this information is useful to investors as it provides a measure of value creation as a percentage of capital invested. Adjusted ROIC is determined by dividing adjusted net operating profit after tax (“Adjusted NOPAT”) for the trailing twelve-months ended by the five-quarter average of invested capital. Adjusted NOPAT is calculated for each quarter by taking operating income plus the addback of amortization of intangible assets and the addback or subtraction of restructuring expenses, certain other non-recurring items - net and provision for income taxes, which is determined using a 15% tax rate. Invested capital is defined as net total assets less cash and cash equivalents and income tax assets/liabilities - net plus short-term and long-term debt. Income taxes are defined as income tax payables/receivables, net deferred tax assets/liabilities, and uncertain tax positions. The Company’s Adjusted ROIC as of March 31, 2024 was 9.5%. Below is the calculation of Adjusted ROIC as of March 31, 2024. Three Months Ended March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 Trailing Twelve Months Operating income $ 15.2 $ 9.8 $ 18.0 $ 34.4 $ 77.4 Amortization of intangible assets 0.7 0.8 0.7 0.7 2.9 Restructuring expense 0.6 0.3 0.7 0.3 1.9 Other non-recurring items - net 1 0.1 10.8 0.2 10.8 21.9 Adjusted operating income 16.6 21.7 19.6 46.2 104.1 Provision for income taxes (2.5 ) (3.3 ) (2.9 ) (6.9 ) (15.6 ) Adjusted NOPAT $ 14.1 $ 18.4 $ 16.7 $ 39.3 $ 88.5 March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 5-Quarter Average Total assets $ 1,780.6 $ 1,706.7 $ 1,692.2 $ 1,701.1 $ 1,691.1 1,714.3 Total liabilities (1,184.6 ) (1,103.4 ) (1,119.2 ) (1,121.7 ) (1,138.3 ) (1,133.4 ) Net total assets 596.0 603.3 573.0 579.4 552.8 580.9 Cash and cash equivalents (31.5 ) (34.4 ) (40.0 ) (25.9 ) (56.5 ) (37.7 ) Short-term borrowings and current portion of long-term debt 42.5 13.4 30.3 6.7 7.9 20.2 Long-term debt 372.7 358.7 368.5 380.7 369.5 370.0 Income tax (assets) liabilities - net (3.4 ) (2.6 ) (4.3 ) (2.1 ) 6.3 (1.2 ) Invested capital $ 976.3 $ 938.4 $ 927.5 $ 938.8 $ 880.0 $ 932.2 Adjusted ROIC 9.5 % (1) Other non-recurring items - net for the three months ended March 31, 2024 relate to $0.1 million of one-time costs. Other non-recurring items – net for the trailing twelve months relate to $21.2 million of costs associated with a legal matter with the U.S. EPA and $0.7 million of one-time costs. Refer to the Company’s previously filed Form 10-K and Form 10-Qs for a description of other non-recurring items - net for the three months ended December 31, 2023, September 30, 2023, and June 30, 2023. EBITDA and Adjusted EBITDA 26 The Company defines EBITDA as net income before interest, taxes, depreciation, and amortization. The Company defines adjusted EBITDA as EBITDA plus the addback or subtraction of restructuring expense, other income (expense) - net, and certain other non-recurring items. The reconciliation of net income to EBITDA, and further to adjusted EBITDA for the three months ended March 31, 2024 and 2023, are summarized as follows: Three Months Ended March 31, Trailing Twelve 2024 2023 Months Net income $ 4.5 $ 16.5 $ 27.2 Interest expense and amortization of deferred financing fees 9.5 8.4 36.3 Provision for income taxes 1.9 4.2 2.7 Depreciation expense 14.7 13.9 57.4 Amortization of intangible assets 0.7 1.0 2.9 EBITDA 31.3 44.0 126.5 Restructuring expense 0.6 — 1.9 Other non-recurring items - net (1) 0.1 — 21.9 Other (income) expense - net (2) (0.7 ) 1.1 11.2 Adjusted EBITDA $ 31.3 $ 45.1 $ 161.5 Adjusted EBITDA margin percentage 6.3 % 8.9 % 7.3 % (1) Other non-recurring items - net for the three months ended March 31, 2024 relate to $0.1 million of one-time costs. Other non-recurring items - net for the trailing twelve months relate to $21.2 million of costs associated with a legal matter with the U.S. EPA and $0.7 million of one-time costs. (2) Other (income) 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, 2024 and the three months ended March 31, 2023. Other (income) expense – net for the trailing twelve months includes a $9.3 million write-off of non-cash foreign currency translation adjustments from the curtailment of operations in Russia. Free Cash Flows Free cash flows is defined as net cash provided by (used for) operating activities less cash outflow from investment in capital expenditures. The reconciliation of net cash provided by (used for) operating activities to free cash flows for the three months ended March 31, 2024 and 2023 are summarized as follows: Three Months Ended March 31, 2024 2023 Net cash provided by (used for) operating activities $ (30.6 ) $ 15.4 Capital expenditures (12.2 ) (10.6 ) Free cash flows $ (42.8 ) $ 4.8 Critical Accounting Policies The Company’s critical accounting policies have not materially changed since the 2023 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, 2023 for information about the Company’s policies, methodology and assumptions related to critical accounting policies. Item 3. Quantitative and Qualita tive Disclosure about Market Risk The Company’s market risk disclosures have not materially changed since the 2023 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, 2023. 27