(EDGAR Online via COMTEX) -- Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Manitex International, Inc., through its wholly owned subsidiaries: Manitex, Badger, PM Group, Valla, Sabre, C&M and C&M Leasing, designs, manufactures and distributes a diverse group of products that serve different functions and are used in a variety of industries.
Manitex is located in Georgetown, Texas and markets a comprehensive line of boom trucks, truck cranes and sign cranes.
Badger is located in Winona, Minnesota and manufactures specialized rough terrain cranes and material handling products.
PM Group is a leading Italian manufacturer of truck mounted hydraulic knuckle boom cranes and a product range spanning more than 50 models. Through its consolidated subsidiaries, PM Group has locations in Modena, Italy; Iberica, Spain; Arad, Romania; Chassieu, France; Buenos Aires, Argentina; Santiago, Chile; London, UK and Mexico City, Mexico.
Valla is located in Piacenza, Italy and produces a line of industrial pick and carry cranes using electric, diesel and hybrid power options with lifting capacity that ranges from 2 to 90 tons.
Sabre, which is located in Knox, Indiana, manufactures a comprehensive line of specialized mobile tanks for liquid and solid storage and containment solutions with capacities from 8,000 to 21,000 gallons.
C&M and C&M Leasing are located in Bridgeview, Illinois. C&M is a distributor of new and used Manitex branded products as well as Terex rough terrain and truck cranes. C&M also provides repair services in Chicago and supplies repair parts for a wide variety of medium to heavy duty construction equipment. C&M Leasing rents equipment that is manufactured by the Company as well as a limited amount of equipment manufactured by third parties.
Impact of COVID-19
We are closely monitoring the impact of the outbreak of COVID-19 on all aspects of our business, including how it will impact our customers, employees, supply chain, and distribution network, as well as the demand for our products in the industries and markets that we serve. Our first priority is to the health and safety of our employees, customers, and business partners and we believe that we have taken every necessary step to keep our facilities clean and safe during the COVID-19 pandemic. While COVID-19 did not have a material adverse effect on our reported results for our first quarter, we are unable to predict the ultimate impact that it may have on our business, future results of operations, financial position or cash flows. The extent to which our operations may be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the ultimate severity and duration of the outbreak and actions by government authorities to contain the outbreak or treat its impact. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown. See Part II, Item 1A, Risk Factors, for an additional discussion of risks related to COVD-19.
In the first quarter of 2020, the Company experienced a temporary reduction of its manufacturing and operating capacity in Italy as a result of government-mandated actions to control the spread of COVID-19 which impacted revenues by approximately $3 million. Further, the Company has experienced, and may continue to experience, disruptions or delays in its supply chain as a result of such actions, which has resulted in higher supply chain costs to the Company in order to maintain the supply of materials and components for its products. In addition, the Company has modified its business practices (including practices regarding employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences).
The Company has experienced a recent decline in demand and volumes in its global businesses as a result of the impact of efforts to contain the spread of COVID-19. In addition, the Company's customers may choose to delay or abandon projects on which the Company provides products and/or services.
On May 17, 2017, the Company began accounting for its investment in ASV under the equity method as the Company sold shares of ASV that reduced its ownership percentage from 51% to 21.2%. From February 26 to 28, 2018, the Company sold an additional 1,000,000 shares of ASV stock, which reduced its ownership percentage to approximately 11.0%. In September 2019, the Company received cash merger consideration for its remaining 1,080,000 shares of ASV and no longer has an investment in ASV.
Factors Affecting Revenues and Gross Profit
The Company derives most of its revenue from purchase orders from dealers and distributors. The demand for the Company's products depends upon the general economic conditions of the markets in which the Company competes. The Company's sales depend in part upon its customers' replacement or repair cycles. Adverse economic conditions, including a decrease in commodity prices, may cause customers to forego or postpone new purchases in favor of repairing existing machinery.
Gross profit varies from period to period. Factors that affect gross profit include product mix, production levels and cost of raw materials. Margins tend to increase when production is skewed towards larger capacity cranes.
PM Group remains a very bright spot in our portfolio, and we have made notable progress towards our goal of achieving higher levels of penetration in the global articulating cranes market. As we announced in our annual update in March, we started 2020 with robust demand for PM products, but unfortunately with the outbreak of COVID-19 in Italy, we were forced to temporarily halt production at our Italian facilities on March 21, 2020, with employees being told to stay home. After a 30-day hiatus, we reopened and resumed production on April 21, 2020. Even with these limitations, we delivered higher revenues and improved Adjusted EBITDA, both sequentially and year over year, and the backlog, at approximately $28 million, gives us visibility, all things equal, for a year of solid growth for PM, with healthy double-digit Adjusted EBITDA margins that approach our long-term targets.
In our North American operations, we had a slower start to the year and were able to make up some of the shortfall in March. Our North American operations have thus far remained opened during the pandemic, which has allowed us to deliver on our backlog. Thus far, we have not experienced any COVID-19 cases in our North American facilities. Manitex straight mast crane delivered during the quarter March 31, 2020 in line with our expectations, despite being tempered by lower unit volume/shipments that have trended throughout the industry, and we do see some slowing in orders in stick boom cranes and industrial products, as we look into 2020.
The Company's backlog is $57.0 million and $65.3 million at March 31, 2020 and December 31, 2019, respectively.
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Net (loss) income from continuing operations for the three-month periods ended March 31, 2020 and 2019
For the three months ended March 31, 2020 the Company had net loss of $7.0 million compared to net income of $1.3 million, respectively.
For the three months ended March 31, 2020, the net loss of $7.0 million consisted of revenue of $48.7 million, cost of sales of $38.5 million, research and development costs of $0.7 million, selling, general and administrative ("SG&A") expenses of $8.0 million, impairment charges of $6.7 million, interest expense of $1.1 million, interest income of $0.1 million, a foreign currency loss of $0.4 million and income tax expense of $0.4 million.
For the three months ended March 31, 2019, the net income of $1.3 million consisted of revenue of $54.4 million, cost of sales of $42.4 million, research and development costs of $0.7 million, SG&A expenses of $9.1 million, interest expense of $1.1 million, interest income of $0.1 million, a gain in change in fair value of securities held of $0.8 million, a foreign currency loss of $0.4 million, and income tax expense of $0.2 million.
Net revenues and gross profit -For the three months ended March 31, 2020, net revenues and gross profit were $48.7 million and $10.2 million, respectively. Gross profit as a percent of revenues was 21.0% for the three months ended March 31, 2020. For the three months ended March 31, 2019, net revenues and gross profit were $54.4 million and $12.0 million, respectively. Gross profit as a percent of revenues was 22.0% for the three months ended March 31, 2019.
Net revenues decreased $5.7 million or 10.5% to $48.7 million for the three months ended March 31, 2020 from $54.4 million for the comparable period in 2019. The decrease in revenues is primarily due to decreases in sales of straight mast offset by increases in knuckle boom cranes. The revenues for the three months ended March 31, 2020 were also unfavorably impacted by $0.7 million in foreign currency translation adjustments resulting from a weaker Euro.
Our gross profit decreased $1.8 million to $10.2 million for the three months ended March 31, 2020 from $12.0 million for the comparable period in 2019. The decrease in gross profit is attributable to decreases in revenues and product mix which caused a 1.0% decline in gross profit percentage. The decline in the gross profit percentage is primarily due to a decrease in the gross margin percentage generated on the sale of straight mast offset by increases in gross margin on knuckle boom cranes.
Research and development -Research and development expense was $0.7 million for the three months ended March 31, 2020 compared with $0.7 million for the same period in 2019. The Company's research and development spending reflects our continued commitment to develop and introduce new products that give the Company a competitive advantage.
Selling, general and administrative expense -SG&A expense for the three months ended March 31, 2020 was $14.8 million compared to $9.1 million for the comparable period in 2019, an increase of $5.7 million. The increases are primarily related to impairment charges of $6.7 million of intangibles during the three months ended March 31, 2020 and $0.5 million incurred to participate in the Conexpo held in March 2020. The Conexpo show, which is held every three years, was held in Las Vegas in March of this year. This show is an international gathering place for the construction industries. It is estimated that 130,000 professionals, from around the world, attended the show. These increases were partially offset by cost savings from various cost reduction initiatives and a net favorable exchange rate impact.
Operating (loss) income-For the three months ended March 31, 2020 and 2019, the Company had operating loss of $5.2 million compared to operating income of $2.2 million for the comparable period in 2019. Operating income decreased due to changes in revenue, cost of sales and operating expenses as explained above.
Interest expense -Interest expense was $1.1 million for the three months ended March 31, 2020 and 2019. The decrease in debt partially offset by higher interest rates resulted in no change to interest expense.
Foreign currency transaction losses -For the three months ended March 31, 2020, the Company had foreign currency loss of $0.4 million compared to loss of $0.4 million for the comparable period in 2019. As previously stated, the Company attempts to purchase forward currency exchange contracts such that the exchange gains and losses on the assets and liabilities denominated in a currency other than the reporting units' functional currency will be offset by the changes in the market value of the forward currency exchange contracts it holds. Currency risks can be reduced but not eliminated in part because the Company has not been able to identify a strategy to effectively hedge the currency risks related to the Argentinian peso. The Company records at the balance sheet date the forward currency exchange contracts at their market value with any associated gain or loss being recorded in current earnings as a currency gain or loss.
Income tax - On March 27, 2020, the "Coronavirus Aid, Relief and Economic Security (CARES) Act" was enacted. The CARES Act, among other things, includes provisions relating to net operating loss carrybacks, alternative minimum tax credit refunds, a modification to the net interest deduction limitations and a technical correction to tax depreciation methods for qualified improvement property. The CARES Act did not have a material impact on the Company's consolidated financial statements for the three months ended March 31, 2020.
For the three months ended March 31, 2020, the Company recorded an income tax provision of $0.4 million, which includes a discrete income tax benefit of $0.3 million. The calculation of the overall income tax provision for the three months ended March 31, 2020 primarily consists of foreign income taxes offset by a discrete income tax benefit related to the expiration of the statute of limitations for various state and foreign jurisdictions, and the settlement of the Romanian tax audit for 2017 and 2018, which includes a partial reduction in the valuation allowance caused by the indirect effects of uncertain tax positions embedded in foreign net operating loss carryforwards. For the three months ended March 31, 2019, the Company recorded an income tax provision of $0.2 million, which includes a discrete income tax provision of $0.01 million for the accrual of taxes and interest related to unrecognized tax benefits.
The effective tax rate for the three months ended March 31, 2020 was an income tax provision of -6.08% on pretax loss of $6.6 million compared to an income tax provision of 13.10% on a pretax income of $1.5 million in the comparable prior period. The effective tax rate for the three months ended March 31, 2020 differs from the U.S. statutory rate of 21% primarily due to the mix of domestic and foreign earnings, nondeductible foreign permanent differences and a decrease in unrecognized tax benefits related to the expiration of the statute of limitations for various state and foreign jurisdictions, and the tax effects of settling the Romanian tax audit for 2017 and 2018.
Change in fair value of securities held- For the three months ended March 31, 2020, the Company held no marketable securities. For the three months ended March 31, 2019 the Company had a gain of $0.8 million. The gain for the three months ended March 31, 2019 was due to a change in the fair value of securities held in ASV (see Notes 2 and 8).
Net (loss) income from continuing operations- For the three months ended March 31, 2020 and 2019, the Company had a net loss of $7.0 million compared to a net income of $1.3 million, respectively. The change is explained above.
Liquidity and Capital Resources
The ultimate duration and severity of the COVID-19 pandemic is highly uncertain at this time. Accordingly, its impact on the global economy generally and our customers and suppliers specifically, as well as the potential negative financial impact to our results of operations and liquidity position cannot be reasonably estimated at this time, but could be material. In the context of these uncertain conditions, we are actively managing the business to maintain cash flow and ensure that we have sufficient liquidity for a variety of scenarios. We believe that such strategy will allow us to meet our anticipated funding requirements.
On April 14, 2020, the Company and its United States subsidiaries received the PPP Loans under the PPP which is part of the recently enacted CARES Act administered by the U.S. Small Business Administration. The Company received total proceeds of $3.7 million from the PPP Loans. In accordance with the requirements of the PPP, the Company intends to use proceeds from the PPP Loans primarily for payroll costs.
Cash, cash equivalents and restricted cash were $22.3 million at March 31, 2020 compared to $23.6 million at December 31, 2019. In addition, the Company has a U.S. revolving credit facility with a maturity date of July 20, 2023. At March 31, 2020, the Company had approximately $23.6 million available to borrow under its revolving credit facility.
At March 31, 2020, the PM Group had established working capital facilities with five Italian, one Spanish and nine South American banks. Under these facilities, the PM Group can borrow $22.9 million against orders, invoices and letters of credit. At March 31, 2020, the PM Group had received advances of $15.2 million. Future advances are dependent on having available collateral.
Our subsidiary in Argentina ("PM Argentina") began accounting for their operations as highly inflationary effective July 1, 2018, as required by GAAP. Under highly inflationary accounting, PM Argentina's functional currency became the Euro (its parent company reporting currency), and its income statement and balance sheet have been measured in Euros using both current and historical rates of exchange. The effect of changes in exchange rates on peso-denominated monetary assets and liabilities has been reflected in earnings in other (income) and expense, net and was not material. As of March 31, 2020, PM Argentina had a small net peso monetary position. Net sales of PM Argentina were less than 5 percent of our consolidated net sales for the three months ended March 31, 2020 and 2019.
On June 26, 2019, ASV entered into an Agreement and Plan of Merger. The Company's investment in ASV common stock was converted into $7.05 per share in cash. The Company received approximately $7.6 million in cash in September of 2019.
Change in Debt
During the three months ended March 31, 2020, total debt decreased by $0.5 million to $64.3 million at March 31, 2020 from $64.8 million at December 31, 2019.
The following is a summary of the net decrease in our indebtedness from December 31, 2019 to March 31, 2020:
Facility Increase/(decrease) U.S. Revolver $ 6.0 million Note payable-bank (insurance premiums) 0.1 million Capital leases-equipment (0.2 ) million Convertible note-Terex 0.1 million Convertible note-Perella (6.9 ) million PM 0.3 million Valla note payable (0.1 ) million Valla working capital borrowings 0.1 million $ (0.6 ) million Debt issuance costs 0.1 million $ (0.5 ) million
(1) The amounts on the above table are calculated by determining the differences between the U.S. dollar amounts, or in case of foreign debt, the difference in U.S. amount of local currency debt for March 31, 2020 and December 31, 2019 converted at the exchange rate as of the two respective balance sheet dates. The net change on the above tables agrees to the change in debt that appears on the face of the Company's balance sheet.
The total change on the above tables differs significantly from the amounts that appear in the financing section of the Company's Statement of Cash Flow. This occurs as the changes for Cash Flow statements are calculated in local currency and then converted to dollars at an average exchange rate. The impact of exchange rate fluctuations is, therefore, isolated and is included in separate line on the cash flow statement.
The following is a summary of our outstanding borrowings at March 31, 2020:
Outstanding Interest Balance Interest Rate Paid Principal Payment U.S. Revolver $ 6.0 N/A Monthly July 20, 2023 maturity Convertible Semi-Annual January 1, 2021 maturity note-Terex 7.4 7.5% Convertible Semi-Annual January 7, 2021 maturity note-Perella 8.0 7.5% Capital Monthly January 13, 2021 maturity lease-cranes for sale 0.1 5.5% Capital Monthly $0.06 million monthly lease-Georgetown payment includes facility interest. April 30, 2028 4.8 12.5% maturity Note payable-Winona Monthly $0.01 million monthly Facility 0.3 8.0% PM unsecured Semi-Annual Variable semi-annual borrowings starting December 11.3 3.5% 2019 through December 2025 PM Autogru term Monthly $0.01 million monthly loan #1 through 0.1 3.00% October 2020 PM Autogru term Monthly $0.01 monthly through loan #2 0.2 2.50% September 2020 PM Autogru term Monthly Monthly through June 2023 loan #3 0.2 2.75% PM term loans with Semi-Annual Annual installments related starting December accrued interest, 2019 and a balloon payment interest in December rate swaps and 2026 FMV adjustments 10.2 0 to 3.5% PM short-term Monthly Upon payment of invoice working capital borrowings 15.2 1.75 to 65.0% Valla note payable 0.1 4.38% Quarterly Over 14 quarterly payments Valla short-term Monthly Upon payment of invoice or working letter of credit capital borrowings 0.5 4.50 to 4.75% $ 64.4 Debt issuance costs (0.1 ) Debt net of issuance costs $ 64.3
Future availability under credit facilities
As stated above, the Company had cash of $22.3 million and approximately $23.6 million available to borrow under its credit facility at March 31, 2020.
PM Group has its own working capital facilities. As stated above, any future advances against the Italian facilities are dependent on having available collateral. Additionally, the Company is permitted to make limited advances to the Italian operations under the Company's credit facilities. Additional funds can be advanced to the Italian operations provided that the funds come from the sales of the marketable equity security referenced above.
The Company needs cash to fund normal working capital needs and to make scheduled debt payments as shown in the above table. The U.S. credit facilities are asset based. The maximum the Company may borrow under either facility is the lower of the credit line or the available collateral, as defined in the credit agreements. Collateral under the agreements consists of stated percentages of eligible accounts receivable and inventory.
Under the collateral formulas in the credit facilities accounts receivable collateral is equal to a stated percent of eligible accounts receivable (generally 85%), while inventory collateral is equal to a stated percent of eligible inventory (generally 50%) and caps total borrowing against our inventory. If our revenues were to increase significantly in the future, the provision limiting borrowing against accounts receivable and inventory would limit future borrowings. If this were to occur, we would attempt to negotiate higher inventory caps with our banks. There is, however, no assurance that the banks would agree to increase the caps. With the current cash position and additional borrowing capacity, this presently is not viewed to be a significant concern.
The Company expects cash flows from operations and existing availability under the current revolving credit facilities will be adequate to fund future operations. If in the future, we were to determine that additional funding is necessary, we believe that it would be available. There is, however, no assurance that such financing will be available or, if available, on acceptable terms.
We will likely need to raise additional capital through debt or equity financings to fund any future significant acquisitions. There is no assurance that such financing will be available or, if available, on acceptable terms.
Cash flows for the three-month periods ended March 31, 2020 compared to three-months ended March 31, 2019
Operating Activities - For the first three months of 2020, cash used for operating activities decreased by $1.0 million compared to the same period in the prior year. The decrease reflected a decrease of $1.9 million in cash consumed for working capital primarily driven by effective accounts receivable and accounts payable management in the first three months of 2020 compared to the same period in the prior year.
Investing Activities - Cash used by investing activities was $0.4 million in the first three months of 2020, compared to $0.8 million in the same period a year ago. Cash used in both the three-month periods were related to cash payments for plant, property and equipment.
Financing Activities - Cash used by financing activities was a slight outflow for the three months ended March 31, 2020 which included an increase in working capital borrowing of $1.2 million, repayments of the convertible debt of $7.0 million and borrowings on the revolving credit facility of $6.0 million. Cash from financing activities was an inflow of $1.4 million for the three months ended March 31, 2019, which included working capital borrowing of $1.2 million.
Related Party Transactions
See Note 18, Transactions between the Company and Related Parties, in the accompanying Condensed Consolidated Financial Statements for a description of the Company's related party transactions.
Critical Accounting Policies
The existing guidance related to marketable equity securities first became relevant to the Company during the quarter ended March 31, 2018. See Note 2 in the accompanying Condensed Consolidated Financial Statements which describes the Company's policy related to marketable equity securities.
See Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition, in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 for a discussion of the Company's other critical accounting policies.
Impact of Recently Issued Accounting Standards
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May 08, 2020
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