Hyster-Yale Materials Handling, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company designs, manufactures, sells and services lift trucks and aftermarket parts, and operates Bolzoni (attachments) and Nuvera (fuel-cell technology). Results include Maximal from its June 1, 2018 acquisition.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $765.6 million | $685.5 million | $1,553.8 million | $1,398.6 million |
| Gross profit | $126.2 million | $121.7 million | $258.3 million | $247.8 million |
| Operating profit | $10.8 million | $17.5 million | $30.0 million | $40.1 million |
| Net income attributable to stockholders | $5.6 million | $16.4 million | $20.5 million | $34.5 million |
| Diluted EPS | $0.34 | $0.99 | $1.24 | $2.09 |
| Operating cash flow | — | — | $52.0 million | $140.3 million |
Revenue rose 11.7% in Q2 and 11.1% year to date. Approximate gross margin was 16.5% for Q2 versus 17.8% a year earlier, and 16.6% year to date versus 17.7%. Operating margin was 1.4% versus 2.6% in Q2 and 1.9% versus 2.9% year to date. Profitability declined despite higher sales, principally because of increased selling, general and administrative expenses, material and manufacturing cost inflation, and unfavorable currency movements. Higher interest and income tax expense and an unfavorable mark-to-market adjustment on an equity investment also weighed on net income. Q2’s reported tax rate was 40.0%; the six-month rate was 29.7%.
Cash, debt and liquidity
- Cash was $152.4 million at June 30, down $67.7 million from year-end 2017. Six-month cash flow before financing activities was negative $37.5 million.
- Operating cash flow declined by $88.3 million year over year, mainly reflecting working-capital changes; inventory used $48.2 million of cash, while accounts receivable provided $38.2 million.
- Investing cash outflow was $89.5 million, including $74.3 million for the Maximal acquisition; capital expenditures were $16.0 million.
- Total debt was $273.1 million, compared with $290.7 million at December 31, 2017; debt to total capitalization was 32%, down from 34%. The $200 million term loan had $190 million principal outstanding and a 5.34% interest rate. The revolving facility had no borrowings and $195.4 million available; an additional $43.7 million was available under other non-U.S. lines.
- The company reported compliance with its debt covenants and said available cash, credit facilities and operating cash flows should meet operating needs and commitments for the next 12 months.
Material developments and outlook
- Lift-truck unit shipments rose 7.7% in Q2 and 7.0% for the first half. Unit backlog was 41,700 trucks at June 30, versus 35,300 a year earlier; substantially all was expected to ship within 12 months.
- Maximal: acquired a 75% interest for an initial purchase price of $90 million; the acquisition cash outflow was $74.3 million net of cash acquired. Preliminary goodwill was $78.3 million, and purchase accounting remained subject to valuation and other adjustments. Maximal was 10% of consolidated assets at June 30.
- Management expected 2018 consolidated operating profit to increase over 2017, primarily from improved Bolzoni results and a lower Nuvera operating loss, partly offset by a modest full-year decline in lift-truck operating profit. Consolidated net income was expected to increase substantially, mainly because 2017 included $18.4 million of unfavorable tax adjustments related to U.S. tax reform.
- Management expected full-year cash flow before financing activities to decline significantly versus 2017, excluding the Maximal purchase and the prior-year supplier-payment timing effect, due to anticipated working-capital needs and higher capital spending. Planned 2018 capital expenditures totaled $60.1 million.
- Risks and operating pressures include commodity and material-cost inflation, tariffs, foreign-exchange movements, and higher strategic-investment expenses. EMEA profit was expected to decline; JAPIC results were expected to be pressured by Maximal integration and purchase-accounting effects. Management cited political tensions and sanctions in Russia as a potential material risk.
- Nuvera’s full-year operating loss was expected to be lower than in 2017, but its net loss was expected to be comparable. Management targeted break-even by late 2019, dependent on sales volumes. An agreement finalized early in Q3 provided for licensed production in China of fuel-cell engines, with minimum initial purchases of 500 stacks subject to successful testing.
Other notable items, risks and contingencies
- Q2 comprehensive loss attributable to stockholders was $38.4 million, chiefly reflecting foreign-currency translation and cash-flow hedge losses.
- Customer/dealer recourse and repurchase obligations totaled $173.7 million. The company also disclosed $208.3 million of incremental guarantee exposure related to HYGFS financing; total reported guarantee exposure was $352.3 million. Management said anticipated losses were not significant and collateral supported the obligations.
- Management said ordinary-course legal and regulatory claims were not expected to result in costs materially above recorded accruals. No material changes to previously disclosed risk factors were reported.
- The company adopted the new revenue standard using the modified-retrospective method; its reported effect on 2018 net income was not material. The company expected the 2019 lease-accounting standard to materially affect the balance sheet and require systems and process changes.
Key facts for investors to verify
- Whether pricing actions and product mix offset continuing material inflation, tariffs and higher operating expenses, particularly in the Americas.
- Maximal’s final purchase-price allocation, integration costs, contribution to JAPIC performance and the resulting goodwill and noncontrolling interest.
- Conversion of the elevated backlog into shipments and cash, and the trajectory of inventory, working capital and full-year cash flow.
- Progress against Nuvera’s sales, cost-reduction and late-2019 break-even objectives, including execution of the China agreement.
- Actual exposure and performance under customer/dealer guarantees and HYGFS financing arrangements, and any changes in collateral or credit quality.
- Final tax-reform accounting, tariff impacts, currency effects and the company’s ability to deliver its full-year outlook.