Hyster-Yale Misses on Q2 Earnings, Shares Fall on Y/Y Drop

Shares of Hyster-Yale Materials Handling, Inc. (HY) dropped 12% after the company reported a 9% decline in its second-quarter 2014 adjusted earnings to $1.27 per share on Jul 30. Results fell short of the Zacks Consensus Estimate of $1.57 by 19%. Decrease in operating profit, partially offset by reduced interest expense, resulting from lower debt levels and lower interest rates led to the decline.

The second quarter 2014 earnings excludes a gain on the sale of assets of 68 cents per share from the sale of the company's Brazil facility that was finalized, earlier than anticipated, in the second quarter of 2014. The year-ago quarter excluded a tax benefit of 76 cents per share, from the release of certain portions of previously recorded income tax valuation allowances related to the company's United Kingdom operations. Including these items, Hyster-Yale’s second-quarter earnings stood at $1.95 per share, down 10% from $2.16 per share in the year-ago quarter.

Operational Update

Revenues in the quarter increased 4% year over year to $685 million, but fell short of the Zacks Consensus Estimate of $692 million. The year-over-year improvement was led by increase in unit volumes, mainly in North America and Europe, partially offset by declines in Latin America and Brazil. Favorable foreign currency movement due to strengthening of the euro against the U.S. dollar was partially offset by the effect of the weakening Brazilian real and Australian dollar. Effect of unit price increases implemented in 2013 (primarily in the Americas to offset the impact of weakness in the Brazilian real), and an increase in parts volume also aided the improvement.

Global new unit shipments increased to approximately 21,700 units in the reported quarter from 20,900 units in the second quarter of 2013 and approximately 20,600 units in the first quarter of 2014.

Revenues grew 2% year over year to $441 million in the Americas. Sales in Europe increased 8% to $184 million from $171 million in the year-ago quarter. Revenues in the Asia-Pacific region were $60 million, up from $55 million in the year-ago quarter.

Cost of sales was $577 million in the reported quarter compared with $545 million in the prior-year quarter. Gross profit decreased 6% year over year to $107 million. Gross margin contracted 160 basis points (bps) to 15.7% year over year. The decline resulted from a shift in sales mix to units with lower average profit margins in all geographic regions, higher U.S. health care costs, unfavorable foreign currency movements and increased warranty expenses as favorable adjustments in the second quarter of 2013 did not recur in 2014.

Selling, general and administrative expenses decreased 1% to $77 million on a year-over-year basis. Lower incentive compensation estimates compared with the year-ago quarter was largely offset by an increase in other employee-related expenses as a result of higher U.S. health care costs, normal inflationary increases and increased headcount in marketing and engineering to support the company's five strategic initiatives. Operating profit including one-time items increased 33% year over year to $47.7 million in the quarter. Adjusted operating income however dipped 16% year over year to $30 million.

Backlog

Worldwide backlog was around 28,800 units (or $745 million) as of Jun 30, 2014 compared with 29,300 units ($700 million) as of Jun 30, 2013.

Financial Update

Hyster-Yale ended the quarter with cash and cash equivalents of $99 million, down from $176 million as of 2013 end. Cash flow used in operations was $13.6 million in the first half of fiscal 2014 compared with cash inflow of $33.6 million in the prior-year comparable period. As of Jun 30, 2013, debt stood at $41.7 million, down from $69.5 million as of December 31, 2013.

During the first half of fiscal 2014, Hyster-Yale has purchased 66,766 shares for an aggregate purchase price of $5.6 million. Under its authorized $50 million share repurchase program, Hyster-Yale has so far purchased 170,385 shares for an aggregate purchase price of $10.8 million.

Outlook

Hyster-Yale expects the global market for forklift trucks to grow at a moderate pace in the second half of 2014. Strength in certain developed western markets and China is expected to be partially offset by weakness in the developing markets. This growth along with increase in market share will aid unit shipments and parts volumes increment. North Americas and Europe will contribute to a major part of the increase, with smaller increases in the Asia-Pacific.

Material costs will remain comparable in the second half of 2014 with the second half of 2013. Hyster-Yale expects operating profit to increase significantly during the second half of 2014, in excess of the rate of the sales increase helped by growth unit volumes, increased parts volume and product enhancements. Furthermore, lower estimated equity incentive compensation is expected to contribute to the improved operating profit in the second half of 2014. However, this will be offset by rise in marketing and employee costs, associated with the investments in strategic initiatives, made over the course of 2013 and the first half of 2014, unfavorable foreign currency movements in the Americas and Asia-Pacific and anticipated higher employee benefit costs, primarily health care expenses.

In the second half, net income will be higher year over year driven by increased operating profit as well as lower interest expense due to lower debt outstanding and lower interest rates under the Company's new revolving credit agreement, which are expected to be partially offset by a higher effective income tax rate.

Hyster-Yale expects cash flow before financing activities for 2014 to be lower than 2013 mainly due to an increase in capital expenditures, largely related to the construction of a new plant in Brazil. These capital expenditures will be partially offset by the final cash payment received during the second quarter of 2014 when the sale of the current facility was finalized.

Our View

Hyster-Yale will benefit from new programs and platforms that are expected to be developed and launched over the next few years based on longer-term segment needs or technological change opportunities. The company also remains focused on improving margins in its internal combustion engine business through the execution of its five strategic initiatives.

Cleveland, OH-based Hyster-Yale engages in the design, engineering, manufacture, sale and servicing of a comprehensive line of lift trucks and aftermarket parts. At present, it has a Zacks Rank #4 (Sell).

However, some better-ranked stocks in the same industry include The Babcock & Wilcox Company (BWC), Blount International Inc. (BLT) and IDEX Corporation (IEX). While Babcock & Wilcox and Blount International sport a Zacks Rank #1 (strong Buy), IDEX Corporation carries a Zacks Rank #2 (Buy).