Hyster-Yale Materials Handling, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Figures are in U.S. dollars; financial statements are unaudited. The company designs, manufactures, sells and services lift trucks and parts, and also operates Bolzoni (attachments) and Nuvera (fuel-cell technology).
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $685.5m | $645.6m | $1,398.6m | $1,249.8m |
| Gross profit | $121.7m | $114.0m | $247.8m | $211.9m |
| Operating profit | $18.3m | $11.4m | $41.7m | $21.1m |
| Net income attributable to stockholders | $16.4m | $8.3m | $34.5m | $18.3m |
| Diluted EPS | $0.99 | $0.51 | $2.09 | $1.12 |
| Gross margin | 17.8% | 17.7% | 17.7% | 17.0% |
| Operating margin | 2.7% | 1.8% | 3.0% | 1.7% |
- Q2 revenue rose 6.2%; six-month revenue rose 11.9%. Growth reflected higher lift-truck shipments and product mix, pricing and parts sales. Six-month revenue also benefited from a longer Bolzoni contribution: $83.5m in 2017 versus $38.9m in the comparable period, which included Bolzoni only from its April 2016 acquisition.
- Q2 operating profit increased 60.5%, primarily on higher lift-truck gross profit from pricing and volume, partly offset by material cost increases and a larger Nuvera loss. Six-month operating profit nearly doubled, chiefly on lift-truck gross profit and production efficiencies.
- Segment contrasts: Americas improved strongly; EMEA operating profit declined; JAPIC remained loss-making; Nuvera’s operating loss widened to $10.5m in Q2 and $20.0m for six months. Bolzoni’s Q2 operating profit declined modestly year over year.
- Q2 diluted EPS increased 94.1%. The period included a net discrete tax benefit, including a $4.4m benefit related to an internal subsidiary sale and a $1.6m valuation allowance against China deferred tax assets. The filing also reports a 10.4% Q2 effective tax rate versus 29.7% a year earlier.
Cash flow, liquidity and debt
- Six-month operating cash flow was $140.3m, compared with cash use of $22.9m in 2016. The swing was driven substantially by working capital, particularly a $103.9m increase in accounts payable; management attributed this in part to supplier payments returning to normalized levels after an unusual acceleration in December 2016.
- Investing cash use was $22.7m, including $16.9m of capital expenditures and $5.6m for an equity investment. Financing provided $76.0m. Cash increased $196.7m to $239.9m.
- Total debt was approximately $300.4m at June 30, 2017, versus $211.2m at year-end 2016; cash was $239.9m, implying net debt of about $60.5m. Debt-to-total capitalization increased to 36% from 31%.
- The company entered a $200m secured term loan maturing May 2023, with a 5.23% weighted-average rate at quarter-end, and amended its $200m revolving facility, extended to April 2022. No borrowings were outstanding under that facility; reported excess availability was $194.0m, plus $43.6m under other non-U.S. lines. The company reported compliance with debt covenants and believes available cash, facilities and operating cash flow will meet needs for the next twelve months.
- Planned 2017 capital expenditures total $51.9m, including $35.0m planned for the remainder of the year.
Changes, outlook and key risks
- Lift-truck bookings were 25,300 units in Q2 versus 21,700; backlog reached 35,300 units, up from 30,500 a year earlier. Backlog’s estimated sales value was $820m versus $715m; substantially all was expected to ship within twelve months.
- Management expects full-year 2017 net income to increase modestly over 2016. Second-half lift-truck shipments and revenue are expected to rise year over year, but operating profit is expected to fall, with a significant anticipated Q3 decline as higher costs and material inflation outweigh volume and pricing benefits. Americas second-half operating profit is expected to be comparable to the prior-year period; EMEA is expected to post a second-half operating loss that offsets first-half income; JAPIC results are expected to improve, particularly in Q4.
- Bolzoni expects higher second-half revenue and operating profit, excluding $2.6m of one-time purchase accounting adjustments recorded in Q3 2016. Nuvera’s losses are expected to decrease progressively in the second half and in 2018. Management targets quarterly Nuvera break-even in 2018, but will reassess in Q3 whether 2019 is more realistic; success depends on cost reductions, higher volumes and commercialization.
- Nuvera made no Q2 battery-box replacement shipments because of a supplier-component hold; shipments were expected to begin in Q3 after the issue was resolved. The company cited ongoing development, commercialization and cost challenges.
- Key risks include cyclical lift-truck demand, customer and dealer financing, raw-material and supplier costs, pricing and product mix, foreign exchange and trade-policy changes, execution of new products and cost programs, warranty/product-liability claims, and successful commercialization of Nuvera technology. The company also identifies potential effects of the U.K.’s exit from the EU. Legal proceedings were described as ordinary-course matters; management considered material costs beyond recorded accruals remote.
- Other notable exposure: guarantees and recourse/repurchase obligations totaled $290.4m, including an incremental $168.2m HYGFS-related guarantee exposure. Management stated anticipated losses were not significant and cited collateral, but acknowledged risk could increase.
Important facts for investors to verify
- Whether operating cash flow remains strong after the unusually favorable accounts-payable working-capital movement.
- Whether Q3 and second-half margin pressure, especially in EMEA and the lift-truck business, aligns with management’s forecast.
- Debt service, floating-rate exposure, covenant headroom and the impact of the new term loan on liquidity and future interest expense.
- Whether Nuvera resolves supplier, cost and commercialization challenges, and whether its break-even target remains achievable.
- How warranty estimates, guarantee exposure and changes in material costs, pricing, currencies and market demand evolve.
- The expected financial impact of adopting the new revenue-recognition standard was not yet estimable; management planned adoption in 2018 using the modified retrospective approach.