Hyster-Yale Materials Handling, Inc. — Q3 2014 Form 10-Q
Business and period: The company designs, manufactures, sells and services lift trucks and aftermarket parts globally, primarily under the Hyster and Yale brands. This unaudited filing covers the three and nine months ended September 30, 2014, compared with the same 2013 periods.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $695.8 million | $643.9 million | $2,056.5 million | $1,948.4 million |
| Gross profit | $111.3 million | $111.6 million | $330.3 million | $335.1 million |
| Operating profit | $36.3 million | $31.3 million | $115.6 million | $99.3 million |
| Net income attributable to stockholders | $28.4 million | $23.5 million | $83.4 million | $84.3 million |
| Diluted EPS | $1.70 | $1.40 | $4.97 | $5.02 |
| Operating cash flow | Not reported quarterly | $41.2 million | $88.8 million |
- Margins: Q3 gross margin declined to 16.0% from 17.3%. Nine-month gross margin was approximately 16.1%, versus 17.2% in 2013. Operating profit improved in both periods; Q3 growth reflected lower SG&A, while the nine-month result included a $17.7 million gain on the sale of a Brazil facility.
- Cash and liquidity: Cash was $97.9 million at September 30, down from $175.7 million at year-end 2013. Current assets were $888.2 million and current liabilities $573.8 million. Operating cash flow fell year over year, principally due to working-capital use, the noncash adjustment for the Brazil asset-sale gain and the absence of affiliate dividends received in 2013.
- Debt and capital: Total debt was $38.3 million, down from $69.5 million at December 31, 2013; debt to total capitalization was 7%, versus 13%. The $220 million secured revolving facility had no borrowings outstanding and $214.4 million of excess availability, after letters of credit. The company reported compliance with its covenants.
- Other measures: Nine-month capital expenditures were $31.9 million, with a further $23.5 million estimated for the rest of 2014. Dividends were $0.275 per share in Q3 and $0.80 per share for the nine months. The company repurchased 431,357 shares for $33.3 million during the first nine months.
Material changes and notable items
- Q3 revenue rose 8.1%, reflecting higher unit volumes and product mix, parts sales and currency translation, partly offset by lower pricing. Worldwide shipments increased to 21,721 from 21,176 units.
- Nine-month revenue increased 5.5%, while gross profit fell 1.4%. Operating profit rose 16.4%, including the Brazil sale gain; excluding that gain, operating profit was below the prior-year period.
- Nine-month net income was slightly lower despite higher operating profit, mainly because 2013 included a $12.8 million tax benefit from releasing U.K. deferred-tax valuation allowances. The 2014 effective tax rate was 28.7%, versus 11.5%.
- Foreign currency translation contributed a $22.4 million loss to other comprehensive income for the nine months. The U.K. defined benefit pension plan was frozen in Q3; expected 2014 contributions to non-U.S. pension plans increased to approximately $8.1 million from the previously projected $3.7 million.
- New lift-truck product introductions and upgrades continued during Q3. Backlog at September 30 was approximately 26,800 units, or $710 million, versus 28,400 units/$705 million a year earlier and 28,800 units/$745 million at June 30; substantially all was expected to ship within 12 months.
Outlook, risks and contingencies
- Management expected only modest global forklift-market growth for the rest of 2014 and 2015. It anticipated modest increases in shipments, parts volumes and sales, with weakness in Latin America, Brazil and some European markets, including Russia.
- Management expected moderate Q4 2014 operating-profit growth and improved Q4 net income year over year. For 2015, it expected operating profit to be similar to 2014 after excluding the Brazil sale gain, and net income to decline moderately, primarily due to higher interest expense.
- Cash flow before financing was expected to decline significantly in 2014, mainly due to higher capital spending for the Brazil plant and increased working capital, and to improve in 2015. The Brazil facility construction was expected to be largely completed in 2014, with completion anticipated in early 2015.
- Key risks cited include lift-truck demand, customer and dealer financing, political and economic uncertainty in Eastern Europe and Brazil, pricing acceptance, material and labor costs, foreign exchange, supplier and delivery disruptions, product acceptance and liability, competition, regulation, and delays or cost increases in the Brazil plant project.
- Guarantees included $169.7 million of customer/dealer recourse or repurchase obligations and a $137.1 million incremental obligation related to the GECC guarantee of NFS debt; total reported guarantee exposure was $275.4 million. Management said anticipated recourse losses were not significant and collateral was estimated at $186.5 million. The company also cited ordinary-course legal and regulatory claims, with no material excess costs expected beyond recorded accruals.
Important facts for investors to verify
- Whether operating performance excluding the one-time $17.7 million Brazil sale gain supports management’s 2015 outlook.
- Whether working capital, capital spending and the Brazil facility transition affect cash generation as forecast.
- How pricing, product mix, warranty costs, foreign exchange and material costs affect gross margins.
- Whether guarantee exposure, particularly obligations connected with NFS and GECC, or customer credit conditions change materially.
- Whether the stated backlog converts to shipments and revenue on the expected schedule.