Hyster-Yale Materials Handling, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing identifies the registrant as Hyster-Yale Materials Handling, Inc., which conducts business through NMHG; it designs, manufactures, sells and services lift trucks and aftermarket parts, principally under the Hyster and Yale brands.
Financial performance
- Revenue: Q2 revenue was $684.7 million, up 3.8% year over year; first-half revenue was $1,360.7 million, up 4.3%. Higher unit volumes, pricing and parts sales contributed to growth.
- Profit: Q2 operating profit was $47.7 million versus $35.9 million, including a $17.7 million gain on the sale of a Brazilian facility. Excluding that gain, operating profit was $30.0 million, below the prior-year quarter. First-half operating profit was $79.3 million versus $68.0 million, or $61.6 million excluding the sale gain.
- Net income and EPS: Q2 net income attributable to stockholders was $32.9 million versus $36.2 million; diluted EPS was $1.95 versus $2.16. First-half net income was $55.0 million versus $60.8 million; diluted EPS was $3.26 versus $3.62.
- Margins: Q2 gross margin declined to 15.7% from 17.3%, reflecting lower-margin sales mix, higher health-care and warranty costs, and currency effects. First-half gross profit fell 2.0% to $219.0 million despite revenue growth.
- Cash flow: First-half operating cash flow was negative $13.6 million, compared with positive $40.1 million a year earlier, principally due to working-capital use, including inventory growth. Capital expenditures were $16.9 million; cash flow before financing activities was negative $23.0 million.
- Liquidity and debt: Cash was $98.6 million at June 30, down from $175.7 million at year-end. Total debt was $41.7 million versus $69.5 million; debt to total capitalization declined to 8% from 13%. The company reported $213.4 million of availability under its $220 million revolving facility and $30.0 million of availability under other foreign lines; it was in covenant compliance.
- Balance sheet: Total assets were $1,142.3 million and total equity was $498.5 million at June 30, compared with $1,161.3 million and $450.9 million, respectively, at December 31, 2013.
Changes and notable items
- Q2 shipments rose to 21,719 units from 20,858; first-half shipments increased to 42,360 from 41,614. Europe and the Americas contributed to revenue growth, while Asia-Pacific shipments increased sharply but segment operating results weakened.
- The $17.7 million Brazilian property and facility sale gain lifted reported operating profit. The company received $8.2 million of sale proceeds in Q2; proceeds are expected to help fund a replacement Brazilian facility. A further $0.9 million held in escrow is subject to environmental remediation completion.
- Q2 and first-half net income declined despite higher reported operating profit. A key comparison was the absence of the prior-year $12.8 million UK deferred-tax valuation-allowance release. The 2014 effective tax rates were 32.2% for Q2 and 31.4% for the first half, versus (4.9)% and 6.7% in 2013.
- Q2 operating results excluding the sale gain were pressured by lower gross profit, unfavorable mix and currency movements, and higher health-care and warranty expense; lower interest expense and SG&A partly offset these pressures.
Outlook, risks and contingencies
- Management expected moderate global forklift-market growth for the rest of 2014, led by developed Western markets and China, partially offset by weakness in certain developing markets. It anticipated higher shipments, parts volumes and sales.
- Management forecast a significant increase in second-half operating profit versus the prior year, exceeding the sales growth rate, with most improvement expected in Q4. Expected benefits from volume, parts and product initiatives, and lower estimated equity incentive compensation were subject to offsets from currency, employee-benefit and strategic-investment costs. Second-half net income was also expected to improve.
- Full-year 2014 capital expenditures were expected to include an additional $43.2 million, primarily for the new Brazilian facility, manufacturing improvements, product development and IT. Management expected 2014 cash flow before financing activities to decline from 2013.
- Customer financing guarantees and recourse or repurchase obligations totaled $284.9 million, including $146.9 million of incremental exposure under a guarantee of NFS debt. Management said anticipated losses were not significant and identified collateral supporting these obligations; future risk could increase. The company also reported ordinary-course legal, product-liability and environmental claims, with no material excess over recorded accruals expected by management.
- Key risks include demand and financing conditions, foreign exchange and commodity volatility, pricing and competition, product acceptance and warranty claims, supplier or delivery disruptions, regulatory changes, and delays or added costs in Brazil construction. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Underlying operating performance and margins excluding the one-time Brazilian sale gain.
- Whether backlog of approximately 28,800 units, valued at about $745 million, converts to sales as expected; substantially all was expected to ship in fiscal 2014.
- Inventory and working-capital trends, and the company’s ability to restore positive operating cash flow while funding planned capital expenditures.
- Progress, costs and timing of the Brazilian replacement facility, including release of the environmental-remediation escrow.
- Exposure and collateral coverage for NFS-related guarantees, dealer financing obligations, warranty liabilities and other contingencies.