Hyster-Yale Misses on Q1 Earnings, Shares Fall - Analyst Blog

Shares of Hyster-Yale Materials Handling, Inc. HY have dropped 4% since the company reported an 11% decline in its first-quarter 2014 earnings to $1.31 per share on Apr 30. Results also fell below the Zacks Consensus Estimate of $1.49 by 12%.

Benefits from higher gross profit and reduced interest expense due to lower debt levels and lower interest rates during the quarter were largely offset by higher employee-related expenses attributable to increased headcount in marketing and engineering to support the company's five strategic initiatives. Higher income tax in 2014 as a result of a higher effective income tax rate and the absence of favorable tax adjustments from changes in certain U.S. and foreign tax laws recognized in the prior year resulted in a reduction in earnings.

Operational Update

Revenues in the quarter increased 5% year over year to $676 million. Increase in sales of higher-priced lift trucks in all market segments, the favorable 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 fleet services and parts volume in the Americas led to the increase. However, a slight decrease in unit volume and unfavorable currency movements (due to the weakening of the Brazilian real and the Australian dollar, which was partially offset by the strengthening of the euro against the U.S. dollar) were a minor offset. Revenues were in line with the Zacks Consensus Estimate.

Revenues grew 9% year over year to $457 million in the Americas. Sales in Europe decreased 3% to $169 million from $175 million in the year-ago quarter. However, revenues in the Asia-Pacific region were $50 million, down from $52 million in the year-ago quarter.

Cost of sales was $564 million in the reported quarter compared with $536 million in the prior-year quarter. Gross profit increased 2% year over year to $112 million. Gross margin contracted 40 basis points (bps) to 16.5% year over year.

Selling, general and administrative expenses increased 4% to $80 million on a year-over-year basis. The rise was primarily due to higher marketing and engineering expenses to support the company's five strategic initiatives. Operating profit in the reported quarter dipped 2% year over year to $31.6 million.

Backlog

Worldwide backlog was around 28,900 units as of Mar 31, 2014 compared with 27,500 units as of Mar 31, 2013. In the first quarter of 2014, worldwide new unit shipments were 20,600 units compared with 20,800 units in the year-earlier quarter.

Financial Update

Hyster-Yale ended the quarter with cash and cash equivalents of $107 million, down from $176 million as of 2013 end. Cash flow used in operations was $16.9 million in the quarter compared with $0.4 million in the prior-year quarter.

Outlook

Hyster-Yale expects the global market for forklift trucks to grow slightly in 2014. Strength in certain developed western markets is expected to be partially offset by some weakness in the developing markets. Market growth and a strong backlog in exiting the first quarter of 2014 will aid unit shipments and parts volumes increment. The Americas is expected to contribute a major part of the increase, with smaller increases in the Asia-Pacific unit shipments.

The company anticipates sales to improve moderately in 2014. Material costs are however, expected to be higher in 2014 compared with 2013. Operating profit is also expected to increase on the back of favorable effects of strategic initiatives and product enhancements. A lower estimate for equity incentive compensation is also projected to contribute toward a higher operating profit.

Net income will improve moderately in 2014 compared with 2013 as improved operating profit as well as lower interest expense are expected to be partially offset by a higher expected effective income tax rate. The higher effective income tax rate in 2014 is mainly due to the effect of higher United Kingdom income taxes due to the 2013 valuation allowance release, combined with an anticipated increase in income in the Americas operations, which have a higher tax rate.

Cash flow for 2014 is expected to decline primarily due to increase in capital expenditures resulting from the construction of a new plant in Brazil.

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. However, material costs as well as marketing and employee costs are expected to increase further in 2014.

Notably, the company anticipates demand in Europe to remain weak, given the stressed macroeconomic conditions there. Increase in capital expenditures, largely due to information technology improvement in Brazil will also hurt growth. Moreover, volatility in foreign exchange rates and an overall uncertain economic environment are other headwinds.

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 Columbus McKinnon Corporation CMCO, Altra Industrial Motion Corp. AIMC and The Babcock & Wilcox Company BWC. All of these have a Zacks Rank #2 (Buy).