Shares of Hyster-Yale Materials Handling, Inc. (HY) gained around 7.8% and closed at $80.10 on Oct 30, a day after the company reported its third-quarter 2014 results. Earnings improved 21% year over year to $1.70 per share driven by increased sales and lower selling, general and administrative expenses. Results also surpassed the Zacks Consensus Estimate of $1.48 per share by 15%.
Operational Update
Revenues in the quarter increased 8% year over year to $696 million, beating the Zacks Consensus Estimate of $670 million. The year-over-year improvement was led by shift in sales to higher price lift trucks, higher part revenues and an increase in unit shipments. In addition, growth in parts revenue and favorable foreign currency movement contributed to revenues.
Global new unit shipments increased to approximately 21,700 units in the reported quarter primarily due to an increase in North America and Europe.
Revenues grew 6.8% year over year to $479 million in the Americas. Sales in Europe increased 11% to $163.5 million from $147 million in the year-ago quarter. Revenues in the Asia-Pacific region were $53 million, up from $48 million in the year-ago quarter.
Cost of sales was $584.5 million in the reported quarter compared with $532 million in the prior-year quarter. Gross profit declined marginally by 0.3% year over year to $111.3 million. Gross margin contracted 100 basis points (bps) to 16% year over year. Benefits from higher unit and parts volumes were more than offset by unfavorable foreign currency movements, lower earnings on remarketing of used trucks and increase in warranty expenses as favorable adjustments in the third quarter of 2013 did not recur in 2014.
Selling, general and administrative expenses decreased 6.5% to $75 million on a year-over-year basis. Lower incentive compensation estimates compared with the year-ago quarter and absence of a non-cash charge related to pension settlement accounting recorded in the prior-year comparable period were partially offset by unfavorable foreign currency movement. Operating profit increased 16% year over year to $36 million in the quarter.
Backlog
Worldwide backlog was around 26,800 units (or $710 million) as of Sep 30, 2014 compared with 28,400 units ($705 million) as of Sep 30, 2013.
Financial Update
Hyster-Yale ended the quarter with cash and cash equivalents of $98 million, down from $176 million as of 2013-end. Cash flow from operations was $41 million in the first nine months ended Sep 30, 2014 as against $89 million in the prior-year comparable period. As of Sep 30, 2013, debt stood at $38 million, down from $69.5 million as of Dec 31, 2013.
During the first nine months of fiscal 2014, Hyster-Yale purchased 431,357 shares for an aggregate price of $33.3 million. Under its authorized $50 million share repurchase program, Hyster-Yale has so far purchased 534,976 shares for an aggregate purchase price of $38.5 million.
Outlook
Hyster-Yale expects the global market for forklift trucks to grow at a moderate pace during the remainder of 2014 and in 2015. Strength in certain developed western markets and China is expected to be partially offset by weakness in the developing markets. The company anticipates modest increase in unit shipments and parts volumes. North America will contribute a major part of the increase, with smaller increase in the Asia-Pacific.
Material costs in the fourth quarter of 2014 are expected to be comparable with the prior-year period. Hyster-Yale expects operating profit to increase modestly during the quarter , based on considerably lower estimated incentive compensation, anticipated increase in unit volumes, a shift in sales mix to higher-margin units and product enhancements. However, these positive factors might be offset by anticipated pricing pressures, higher manufacturing costs and continued investments in strategic initiatives.
In the fourth quarter, net income will be higher year over year driven by increased operating profit as well as lower interest expense due to reduced debt outstanding and drop in interest rates under the company's revolving credit agreement, in addition to the absence of pre-tax write-off of deferred financing fees, 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 decrease significantly from 2013 mainly due to an increase in capital expenditures, largely related to the construction of a new plant in Brazil and increase in working capital. In addition, cash flow before financing activities is expected to improve in 2015 compared with 2014 due to moderated working capital requirements and decline in capital expenditures.
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 is also focused on improving margins in its internal combustion engine business through the execution of its five strategic initiatives.
However, pricing pressures, higher manufacturing costs, volatile metal prices and unfavorable foreign currency movements remain headwinds for Hyster-Yale.
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 #3 (Hold).
Some better-ranked stocks in the industrial products sector include Apogee Enterprises, Inc. (APOG), Advanced Emissions Solutions, Inc. (ADES) and AO Smith Corp. (AOS). All these stocks carry a Zacks Rank #2 (Buy).
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