Hyster-Yale Materials Handling, Inc. — Q2 2016 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2016. Hyster-Yale designs, manufactures, sells and services lift trucks and aftermarket parts, primarily under the Hyster and Yale brands. It also operates Nuvera, a fuel-cell technology business. Bolzoni, a manufacturer of lift-truck attachments, forks and lift tables, was consolidated from April 1; Hyster-Yale acquired its remaining shares on July 6, 2016.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $645.6 | $658.7 | $1,249.8 | $1,281.0 |
| Gross profit | $114.0 | $110.6 | $211.9 | $213.5 |
| Gross margin | 17.7% | 16.8% | 17.0% | 16.7% |
| Operating profit | $11.4 | $27.3 | $21.1 | $48.3 |
| Operating margin | 1.8% | 4.1% | 1.7% | 3.8% |
| Net income attributable to stockholders | $8.3 | $22.7 | $18.3 | $36.6 |
| Diluted EPS | $0.51 | $1.39 | $1.12 | $2.24 |
- Cash flow: For the first half, operating activities used $22.9, investing activities used $116.2 (including $107.7 for acquisitions, net of cash acquired), and financing activities provided $31.0. Cash fell $103.6 to $51.5.
- Debt and liquidity: Total debt was $150.6 at June 30, versus $53.1 at year-end 2015; cash was $51.5, leaving net debt of about $99.1. The $240.0 secured revolving facility had $43.0 drawn and $185.5 available; other non-U.S. lines had $52.7 available. The company reported covenant compliance.
- Other measures: Total assets were $1,267.6 and total equity $501.4. Dividends were $0.295 per share in Q2. Six-month lift-truck shipments were 41,600 units, down 1.7%; ending backlog was 30,500 units, with substantially all expected to ship within 12 months.
Changes versus prior comparable periods
- Q2 revenue declined 2.0%, while first-half revenue declined 2.4%. Lift-truck revenue was pressured by lower volume, less favorable product mix, pricing and currency; Bolzoni added $38.9 of Q2 revenue.
- Q2 operating profit fell 58.2% and first-half operating profit fell 56.3%. Lower lift-truck gross profit and higher SG&A were major factors. Material-cost deflation partly offset pricing, mix, manufacturing variance, currency and higher U.S. health-care costs.
- Q2 earnings also reflected $1.6 of discrete tax expense related to non-deductible acquisition costs; the prior-year quarter included a $3.7 tax benefit. First-half 2016 included a $4.0 tax benefit from changing the reinvestment assertion for European earnings.
- Bolzoni contributed $0.7 of operating profit, including $1.9 of post-acquisition expenses related to acquired intangibles. Nuvera’s operating loss widened to $8.3 in Q2 and $14.4 for the first half.
Outlook, commentary and risks
- Management expected full-year 2016 revenue to be modestly below 2015. Second-half operating profit and net income were expected below the comparable 2015 periods, particularly in Q3; management cited lower-margin mix, higher operating expenses and unfavorable manufacturing variances. Second-half cash flow before financing was expected to remain positive but decline substantially year over year.
- Management expected the Americas market and results to weaken in the second half, while EMEA shipments and revenue were expected to grow but EMEA operating profit to decline substantially. JAPIC shipments, revenue and operating profit were expected to improve, particularly in Q4.
- Bolzoni’s second-half revenue was expected to be comparable to its second half of 2015. Excluding acquisition costs, estimated integration costs and non-recurring purchase-accounting adjustments, management expected the acquisition to be earnings-accretive. Purchase-price allocation remained preliminary and could change significantly.
- Nuvera began shipping its first Class 1 and Class 3 PowerEdge fuel-cell units in July 2016; Class 2 shipments were expected later in Q3. Management forecast a second-half operating loss of approximately $14–$16 and targeted quarterly operating break-even by late 2017 or early 2018, subject to commercialization and volume ramp-up.
- Key uncertainties include global lift-truck demand, pricing and product mix, Brazil and European conditions, foreign exchange and trade policy, commodity volatility, warranty costs, Bolzoni integration and valuation estimates, and Nuvera’s ability to commercialize its technology. The company disclosed $307.7 of total guarantee exposure, including recourse/repurchase obligations and an incremental guarantee relating to HYGFS; management said anticipated losses were not significant and noted collateral support.
- In August 2016, after quarter-end, the company received an Italian tax ruling and expected to release a $3.0–$3.5 valuation allowance in Q3. Disclosure controls were assessed as effective, but Bolzoni was excluded from the assessment while integration proceeded; Bolzoni represented 18% of total assets at June 30.
Important facts for investors to verify
- Whether projected second-half margin and earnings pressure materialized, particularly in the Americas and EMEA.
- Actual post-acquisition results, integration costs and final Bolzoni purchase-price allocation.
- Nuvera’s shipment ramp, unit economics, cash needs and progress toward its stated break-even target.
- Operating cash conversion, working-capital requirements, debt levels and availability under credit facilities.
- Realization and timing of the expected Italian deferred-tax valuation-allowance release, and developments in guarantee exposure and warranty claims.