Hyster-Yale Materials Handling, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
Global manufacturer of lift trucks and related parts and services, operating through the Americas, EMEA and JAPIC lift-truck segments, plus Bolzoni attachments and Nuvera fuel-cell products. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $766.0 million | $783.9 million | $2,457.0 million | $2,338.3 million |
| Gross profit / margin | $135.0 million / 17.6% | $117.7 million / 15.0% | $400.6 million / 16.3% | $375.1 million / 16.0% |
| Operating profit / margin | $19.5 million / 2.5% | $12.2 million / 1.6% | $45.8 million / 1.9% | $42.2 million / 1.8% |
| Net income attributable to stockholders | $12.8 million | $15.4 million | $32.4 million | $35.9 million |
| Diluted EPS | $0.76 | $0.93 | $1.94 | $2.16 |
- For nine months, operating cash flow was negative $17.3 million, versus positive $92.3 million in 2018. Working-capital outflows were $93.0 million, and dividends from unconsolidated affiliates fell to $5.1 million from $22.2 million.
- Capital expenditures were $31.4 million; cash flow before financing activities was negative $41.8 million. Cash declined to $62.8 million from $83.7 million at December 31, 2018.
- At September 30, current assets were $1,158.1 million and current liabilities $838.7 million. Total debt was $351.1 million, up from $301.5 million; debt to total capitalization rose to 39% from 35%.
- The $240 million revolving facility had $57.8 million drawn and $177.5 million available, after letters of credit and other restrictions. Additional availability under other non-U.S. revolvers was $39.8 million. The company reported compliance with debt covenants.
Material changes versus prior periods
- Q3 revenue fell 2.3%, mainly from lower shipments/product mix and unfavorable currency effects; higher pricing and other revenue partly offset the decline. Nine-month revenue rose 5.1%, supported by pricing, attachments and the inclusion of Hyster-Yale Maximal for a fuller period.
- Q3 operating profit increased to $19.5 million, primarily on improved lift-truck gross profit, including $8.7 million of tariff-related recoveries, partly offset by higher SG&A. Nine-month operating profit rose to $45.8 million, while stockholder net income declined, reflecting the absence of the prior-year tax benefit and higher interest expense.
- Unit shipments fell 8.2% in Q3 to 23,500; nine-month shipments rose 1.6% to 75,500. Ending backlog was 43,400 units, with an approximate sales value of $1.13 billion, versus 42,300 units and $1.09 billion a year earlier.
- Bolzoni’s North American attachment manufacturing moved from Homewood, Illinois, to Sulligent, Alabama. Restructuring charges were $2.5 million for the first nine months. The company adopted the new lease standard, recognizing approximately $82.7 million of additional net lease assets and $80.8 million of net lease liabilities at adoption.
Outlook, management commentary and risks
- Management expected consolidated operating profit and net income in Q4 and full-year 2019 to increase significantly over 2018, excluding the prior-year $5.5 million tax benefit; it also expected substantial improvement in 2020. These are forward-looking expectations, not guarantees.
- Management targeted a 7% operating margin for Lift Truck and Bolzoni over the planning period. Nuvera’s break-even target was Q4 2020, contingent in part on engine validation and shipment ramp-up for a key China customer; delays could push the target out.
- Management said supplier shortages were expected to ease substantially in Q4 and be resolved by year-end. It expected 2019 cash flow before financing activities to decline significantly versus 2018 excluding the 2018 acquisition, with significant improvement expected in 2020.
- Market demand had softened, and management forecast strong but lower lift-truck market levels for the remainder of 2019 and 2020. Risks include cyclical demand, supplier constraints, tariffs and possible changes to exclusions, foreign exchange, Brexit and other geopolitical developments, execution of product and cost programs, and Nuvera commercialization.
- Tariff exclusions for certain Chinese components were retroactive and set to extend through April 2020. The company recorded $11.8 million of tariff recoveries for the first nine months, including $8.7 million in Q3. Management noted that significant Section 232 and Section 301 costs remained.
- A Brazilian tax case produced a final favorable court decision on historical overpayments: estimated gross credits were about $25 million, but the company recorded a net realizable value of only $2 million, expected to be realized over one to five years. Amount and timing remain subject to administrative, tax-liability and legislative uncertainties.
- Guarantee exposure totaled $365.6 million, including $218.4 million of incremental exposure tied to a guarantee for Wells Fargo financing of HYGFS. Management said anticipated losses on customer recourse/repurchase obligations were not significant and it was not aware of circumstances likely to cause HYGFS default.
Important facts for investors to verify
- Whether working capital and operating cash flow improve as management expected, and whether inventory and supplier constraints ease.
- Whether pricing, tariff recoveries and cost improvements offset lower volumes, tariff costs and product-mix pressure; confirm the duration and scope of tariff exclusions.
- Progress toward Lift Truck and Bolzoni margin targets, and Nuvera’s validation, shipment and break-even milestones.
- Debt, revolver availability and covenant headroom, together with the scale and potential realization of guarantee exposures.
- The timing and amount of recoveries from the Brazilian tax credits, given the difference between gross estimated credits and the $2 million net amount recorded.