Hyster-Yale Materials Handling, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited consolidated results. The company designs, manufactures, sells and services lift trucks and aftermarket parts under the Hyster and Yale brands, and operates Nuvera, a fuel-cell technology business.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $604.2 million | $622.3 million |
| Gross profit / margin | $97.9 million / 16.2% | $102.9 million / 16.5% |
| Operating profit / margin | $9.7 million / 1.6% | $21.0 million / 3.4% |
| Net income attributable to stockholders | $10.0 million | $13.9 million |
| Diluted earnings per share | $0.61 | $0.85 |
| Net cash used for operating activities | $18.3 million | $3.4 million |
| Capital expenditures | $6.6 million | $9.8 million |
Revenue fell 2.9%, operating profit fell 53.8%, and stockholder net income fell 28.1% year over year. The effective tax rate was not meaningful in Q1 2016 because the company recorded a tax benefit.
Balance sheet and liquidity: At March 31, cash was $138.5 million, down from $155.1 million at year-end 2015. Current assets were $835.1 million and current liabilities were $494.4 million. Total debt was approximately $63.0 million; debt-to-total capitalization was 11%. There were no borrowings under the $220 million revolving facility and $214.0 million of availability after letters of credit. The company reported compliance with facility covenants and said available cash, credit and operating cash flows should meet needs for the next 12 months.
Performance drivers and material changes
- Management attributed the revenue decline mainly to the strong U.S. dollar, lower deal-specific pricing and a shift toward lower-priced trucks; higher unit volume and parts revenue partly offset these factors.
- Operating profit was pressured by higher SG&A, including acquisition-related costs, a $2.8 million estimated loss on recovery of assets for recourse obligations, and higher employee-related expenses. Lower gross profit reflected unfavorable manufacturing variances, currency effects, lower-margin product mix and pricing. Material-cost deflation of $10.5 million provided a partial offset.
- Regional operating profit was $15.4 million in the Americas versus $17.2 million, $2.0 million in EMEA versus $8.7 million, and a $1.6 million JAPIC loss versus $1.1 million profit. Nuvera recorded a $6.1 million operating loss, compared with $6.0 million.
- Lift-truck shipments increased 3.0% to 20,500 units, while bookings were 23,500 units. Ending backlog was 29,900 units, valued at approximately $670 million, versus $730 million a year earlier; substantially all backlog was expected to ship within 12 months.
- Operating cash outflow widened chiefly because of working-capital movements, including higher receivables from payment timing and a recourse-related receivable, partly offset by lower inventory. Investing cash flow included $8.4 million of asset-sale proceeds, including $8.3 million associated with sales-leaseback financing for facility improvements.
- Net income included a $4.0 million discrete tax benefit related to the Bolzoni acquisition and a change in the company’s assertion that European earnings are permanently reinvested, eliminating a previously recorded deferred tax liability.
Outlook, transactions and risks
- 2016 outlook: Management expected modestly lower full-year revenue, operating profit and net income versus 2015. Unit and parts volumes were expected to improve later in the year, but not fully offset the first-quarter revenue shortfall. First-half operating profit was expected to be substantially lower, with improvement anticipated in the second half.
- Regional expectations: Americas shipments and revenue were expected to decline modestly, including substantially reduced Brazil volumes. EMEA shipments and revenue were expected to grow, but operating profit to fall substantially because of currency, mix and pricing. JAPIC full-year operating results were expected to be comparable with 2015 despite weaker first-half results.
- Commodity costs, particularly steel, were expected to remain favorable but volatile. Cash flow before financing, excluding Bolzoni, was forecast to be positive but substantially lower than in 2015.
- Nuvera: Management forecast a 2016 operating loss of approximately $24–$27 million. PowerEdge fuel-cell unit shipments were expected to begin in the first half of 2016, with production ramping through the year. Nuvera targeted quarterly operating break-even by the end of 2017 or early 2018, dependent on production volumes and target margins. The potential 30% U.S. federal energy credit for customers was scheduled to expire at year-end 2016, and extension was uncertain.
- Bolzoni acquisition, subsequent event: On April 1, 2016, the company acquired Penta Holding for approximately €53.5 million ($60.9 million), giving it an indirect 50.43% interest in Bolzoni. On April 26 it acquired an additional 11.96%, reaching 62.39%. A mandatory tender offer for remaining shares was initiated; the maximum additional consideration was €41.9 million. Completion of a 100% acquisition was not assured. The offer was expected to be funded with cash and credit-facility borrowings.
- Contingencies and risks: Recourse or repurchase obligations totaled $159.3 million; estimated losses were not significant, and collateral was estimated at $200.0 million. Total reported guarantee exposure was $309.7 million, including an incremental $177.8 million obligation related to the company’s guarantee of HYGFS debt. Management said it was unaware of circumstances indicating HYGFS default, but future risk could change. Ordinary-course legal claims were disclosed; management considered material costs beyond recorded accruals remote. Key risks include global demand, currency movements, pricing and competition, supplier and manufacturing disruptions, Brazil and other market conditions, product liability and warranty claims, Nuvera commercialization, and Bolzoni integration and tender-offer execution.
Investor verification priorities
- Assess whether the forecast second-half recovery and expected full-year performance remain achievable, particularly given the lower backlog value and regional profit declines.
- Track pricing, product mix, manufacturing variances, currency effects and whether material-cost deflation continues to offset cost pressures.
- Review post-quarter Bolzoni tender-offer progress, total acquisition funding and integration costs; the reported Q1 statements do not include the acquisition’s post-close results.
- Monitor operating cash conversion and receivables, as well as available revolver capacity and covenant compliance after acquisition funding.
- Evaluate the company’s recourse and HYGFS guarantee exposures, including collateral values, customer credit conditions and any changes in estimated losses.
- Compare Nuvera’s actual shipments, losses and production ramp with its stated break-even objective, including the status of the customer energy credit.