Business context and reporting period
Hyster-Yale Materials Handling, Inc. designs, manufactures, sells and services lift trucks and aftermarket parts under the Hyster and Yale brands, and operates Nuvera, a fuel-cell technology business. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016. Bolzoni, a manufacturer of lift-truck attachments, was acquired in April 2016; the company acquired the remaining interest in July and began reporting Bolzoni as a separate segment.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $629.3 million | $652.1 million | $1,879.1 million | $1,933.1 million |
| Gross profit / margin | $104.6 million / 16.6% | $106.7 million / 16.4% | $316.5 million / 16.8% | $320.2 million / 16.6% |
| Operating profit / margin | $5.4 million / 0.9% | $29.0 million / 4.4% | $26.5 million / 1.4% | $77.3 million / 4.0% |
| Net income attributable to stockholders | $12.3 million | $20.9 million | $30.6 million | $57.5 million |
| Diluted earnings per share | $0.75 | $1.28 | $1.86 | $3.52 |
| Operating cash flow | Not presented quarterly | $22.9 million | $31.3 million |
At September 30, 2016, cash was $84.8 million, versus $155.1 million at year-end 2015. Current assets were $848.1 million and current liabilities $582.6 million. Total debt was $152.8 million, compared with $53.1 million at year-end; debt to total capitalization rose to 23% from 10%. The $240 million revolving facility had $54.0 million drawn and $168.9 million available after letters of credit and other restrictions; the company reported covenant compliance. Nine-month capital expenditures were $28.3 million.
Material changes versus the prior comparable period
- Q3 revenue fell 3.5%; nine-month revenue fell 2.8%. The lift-truck business declined, primarily from lower shipments, less favorable pricing and product mix, and currency effects. Bolzoni contributed $36.2 million of Q3 and $75.1 million of nine-month revenue.
- Operating profit fell sharply: Q3 to $5.4 million from $29.0 million, and nine-month to $26.5 million from $77.3 million. Lower lift-truck gross profit, higher selling, general and administrative costs, and greater Nuvera losses were key factors. Nine-month lift-truck shipments declined 4.3% to 61,900 units.
- Net income attributable to stockholders declined 41% in Q3 and 47% for the nine-month period. Tax benefits partly offset weaker operating results, including a $3.2 million release of an Italian deferred-tax valuation allowance and other discrete tax benefits.
- Operating cash flow declined by $8.4 million year over year for the first nine months. Investing cash outflow rose to $126.5 million, largely reflecting $107.7 million in net acquisition spending. Cash declined $70.3 million from year-end.
- The Bolzoni purchase accounting remains preliminary. The filing reports $54.2 million of preliminary acquisition goodwill at the acquisition date and subsequent valuation adjustments, including increased depreciation and amortization and $2.2 million of inventory-related cost of sales attributable to Q2.
Outlook, commentary and risks
Management expected global lift-truck markets to increase slightly in Q4 2016 and remain broadly comparable in 2017. It forecast Q4 lift-truck operating profit below Q4 2015, with lower pricing and higher operating expenses outweighing anticipated revenue growth. For 2017, management expected lift-truck revenue and operating profit to rise on market-share gains, but net income to decline modestly because of a higher effective tax rate and nonrecurring 2016 tax benefits.
Nuvera had begun shipping fuel-cell systems and management reported stronger-than-expected customer interest, while warning that production ramp-up, manufacturing costs and inventory adjustments would continue to weigh on results. It expected a moderately lower 2017 net loss than in 2016, with quarterly operating break-even targeted sometime in 2018. Bolzoni’s Q4 operating profit and net income were expected to be accretive, excluding acquisition, integration and purchase-accounting costs.
Key risks include changes in global demand, pricing and customer financing; currency and political or economic uncertainty, including in Europe and Brazil; raw-material, labor and supplier costs; product liability, warranty and litigation exposure; successful integration of Bolzoni; and commercialization and market acceptance of Nuvera technology. The company also disclosed $322.3 million of total exposure related to guarantees at September 30, including recourse or repurchase obligations and its incremental guarantee related to HYGFS financing. Management said anticipated losses were not significant and collateral supported the obligations. Legal proceedings were described as ordinary-course matters, with no material excess costs expected beyond recorded accruals.
Important facts for investors to verify
- Whether pricing, shipment volumes and product mix stabilize, and whether the forecast market-share gains translate into stronger revenue and operating margins.
- Bolzoni’s final purchase-price allocation, integration costs, expected synergies and contribution to earnings and cash flow.
- Nuvera’s sales conversion, unit economics, inventory adjustments and progress toward the stated 2018 quarterly break-even objective.
- Cash generation and borrowing needs following the acquisition, including debt maturities, revolving-facility availability and covenant headroom.
- Exposure to HYGFS guarantees and customer recourse obligations, alongside collateral values and any change in anticipated losses.
- Whether 2016 discrete tax benefits recur; management expected their absence and a higher effective tax rate to weigh on 2017 net income.