Hyster-Yale Materials Handling, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial figures are in millions unless noted. The company designs, manufactures, sells and services lift trucks and aftermarket parts, and operates Bolzoni (attachments) and Nuvera (fuel-cell technology). It acquired a 75% interest in Chinese manufacturer Maximal on June 1, 2018.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $782.9 | $691.1 | $2,336.7 | $2,089.7 |
| Gross profit | $117.9 | $121.4 | $376.2 | $369.2 |
| Gross margin | 15.1% | 17.6% | 16.1% | 17.7% |
| Operating profit | $12.2 | $18.1 | $42.2 | $58.2 |
| Operating margin | 1.6% | 2.6% | 1.8% | 2.8% |
| Net income attributable to stockholders | $15.4 | $16.5 | $35.9 | $51.0 |
| Diluted EPS | $0.93 | $1.00 | $2.16 | $3.09 |
| Operating cash flow | Not provided for quarter | $92.3 | $157.3 |
- Revenue rose 13.3% in Q3 and 11.8% year to date, driven by higher unit and parts volumes, pricing, favorable currency effects over nine months, and Maximal.
- Q3 gross profit fell despite higher revenue; management cited material and manufacturing cost inflation, supplier-related inefficiencies, and $4.0 of unfavorable Maximal purchase-accounting adjustments. Nine-month operating profit declined 27.5%, largely from higher selling, general and administrative expenses and lower lift-truck gross profit.
- Cash and equivalents were $121.9 at September 30, down from $220.1 at year-end 2017. Current assets were $1,147.5 and current liabilities $770.0. Total debt was approximately $296.5; debt-to-total capitalization was 33%, versus 34% at year-end.
- Nine-month investing cash use was $97.3, including $78.0 for acquisitions, net of cash acquired; financing cash use was $88.3. Working-capital changes were a net use of cash, including an $87.4 inventory increase.
- The company had $196.0 available under its $200.0 revolving facility, no borrowings outstanding under that facility, and another $41.0 available on non-U.S. revolvers. It reported compliance with debt covenants and expects available liquidity and operating cash flows to meet needs for the next 12 months.
Material changes and unusual items
- Maximal’s acquisition increased JAPIC scale but added integration and purchase-accounting effects. The preliminary allocation included $53.1 of goodwill; the company said valuations remained subject to change and expected to complete the allocation by Q2 2019.
- Q3 included a $5.5 discrete tax benefit, primarily from finalizing 2017 tax-return estimates, including a $4.8 favorable adjustment to provisional U.S. transition-tax amounts. This helped offset lower operating profit. The nine-month 2018 tax provision was $4.0, compared with $7.3 in 2017.
- The company recognized a $5.5 loss on a third-party equity investment for the first nine months, including $2.5 in Q3.
- Revenue-standard adoption had an immaterial effect on earnings. The company deferred $6.1 of revenue for battery-box replacement units because it could not yet reasonably estimate all future costs, including warranty costs.
- Foreign-currency translation reduced nine-month other comprehensive income by $26.7. Foreign-currency forward contracts had a net liability fair value of $17.9 at September 30.
Outlook, commentary and risks
- Q4 2018: Management expected consolidated operating profit to decline versus Q4 2017, but net income to increase significantly, largely because the prior-year quarter included $18.4 of unfavorable tax adjustments and 2018 benefits from U.S. tax reform. Cash flow before financing was expected to be a significant use of cash due to working capital and higher capital spending.
- Lift trucks: Unit shipments and revenue were expected to increase, but gross profit and operating profit were expected to decline substantially. Price realization was expected to lag cost increases; tariffs, supplier shortages, manufacturing inefficiencies, lower-margin mix, and higher operating expenses were key pressures. The company announced a tariff surcharge for units booked in Q4.
- 2019: The company’s preliminary base perspective was for revenue, operating profit and net income to improve over 2018. It identified tariffs and supplier constraints as significant uncertainties, and noted that planned cost-saving opportunities were not yet fully calibrated.
- Nuvera: Management expected lower Q4 losses and substantially moderated losses during 2019, while reassessing its previous late-2019 break-even target. Fuel-cell commercialization, partner execution and production ramp-up remain important uncertainties.
- Other risks include cyclical lift-truck demand, commodity and freight costs, pricing acceptance, foreign exchange, geopolitical and regulatory changes, product liability and warranty claims, and successful integration of Maximal. The company reported ordinary-course legal and regulatory matters and said it did not expect costs materially above recorded accruals; estimated losses under customer financing guarantees were not significant.
Key facts for investors to verify
- Whether announced price increases and tariff surcharges recover material-cost and tariff inflation, and how quickly supplier shortages and manufacturing inefficiencies ease.
- Q4 cash conversion, inventory levels, and the effect of working-capital needs and capital spending on liquidity.
- Maximal’s post-acquisition performance, integration costs, purchase-price allocation, and realization of expected benefits.
- Nuvera’s contracts, production ramp, commercial demand and revised path toward profitability.
- The sustainability of reported earnings apart from discrete tax benefits and mark-to-market investment losses, and the company’s exposure under customer financing guarantees.