Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One) | ||
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2017 | ||
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File No. 000-54799
HYSTER-YALE MATERIALS HANDLING, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 31-1637659 (I.R.S. Employer Identification No.) | |
5875 Landerbrook Drive, Suite 300, Cleveland, Ohio (Address of principal executive offices) | 44124-4069 (Zip Code) | |
Registrant's telephone number, including area code: (440) 449-9600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Class A Common Stock, Par Value $0.01 Per Share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock, Par Value $0.01 Per Share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | Emerging growth company o | ||||
(Do not check if a smaller reporting company) | ||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES o NO x
Aggregate market value of Class A Common Stock and Class B Common Stock held by non-affiliates as of June 30, 2017 (the last business day of the registrant's most recently completed second fiscal quarter): $783,867,203
Number of shares of Class A Common Stock outstanding at February 23, 2018: 12,566,715
Number of shares of Class B Common Stock outstanding at February 23, 2018: 3,899,006
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 2018 annual meeting of stockholders are incorporated herein by reference in Part III of this Form 10-K.
HYSTER-YALE MATERIALS HANDLING, INC.
TABLE OF CONTENTS
PAGE | |||
PART I
Item 1. BUSINESS
General
Hyster-Yale Materials Handling, Inc. ("Hyster-Yale" or the "Company") and its subsidiaries, including its operating company Hyster-Yale Group, Inc. ("HYG"), is a leading, globally integrated, full-line lift truck manufacturer. The Company offers a broad array of solutions aimed at meeting the specific materials handling needs of its customers, including attachments and hydrogen fuel cell power products, telematics, automation and fleet management services, as well as a variety of other power options for its lift trucks. The Company, headquartered in Cleveland, Ohio, through HYG designs, engineers, manufactures, sells and services a comprehensive line of lift trucks, attachments and aftermarket parts marketed globally primarily under the Hyster® and Yale® brand names, mainly to independent Hyster® and Yale® retail dealerships. Lift trucks and component parts are manufactured in the United States, Northern Ireland, Mexico, the Netherlands, Italy, Vietnam, the Philippines, Japan, Brazil and China. Hyster-Yale was incorporated as a Delaware corporation in 1999.
The Company operates Bolzoni S.p.A. ("Bolzoni"). Bolzoni is a leading worldwide producer of attachments, forks and lift tables marketed under the Bolzoni Auramo® and Meyer® brand names. Bolzoni products are manufactured in Italy, China, Germany, Finland and the United States. Through the design, production and distribution of a wide range of attachments, Bolzoni has a strong presence in the market niche of lift-truck attachments and industrial material handling.
The Company operates Nuvera Fuel Cells, LLC ("Nuvera"). Nuvera is an alternative-power technology company focused on fuel cell stacks and engines. Nuvera also supports on-site hydrogen production and dispensing systems that are designed to deliver clean energy solutions to customers.
The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports available, free of charge, through its website, www.hyster-yale.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).
Business Segments
The Company operates five reportable segments: the Americas, EMEA, JAPIC, Bolzoni and Nuvera. See Note 3 to the consolidated financial statements in this Annual Report on Form 10-K for further discussion.
Manufacturing and Assembly
The Company manufactures components, such as frames, masts and transmissions, and assembles lift trucks in the market of sale whenever practical to minimize freight cost and balance currency mix. In some instances, however, it utilizes one worldwide location to manufacture specific components or assemble specific lift trucks. Additionally, components and assembled lift trucks are exported when it is advantageous to meet demand in certain markets. The Company operates twelve lift truck manufacturing and assembly facilities worldwide with five plants in the Americas, three in EMEA and four in JAPIC, including joint venture operations. In addition, the Company operates seven Bolzoni manufacturing facilities worldwide.
Sales of lift trucks represented approximately 77% of the Company’s annual revenues in 2017 (approximately 48% internal combustion engine units and approximately 29% electric units), and 77% and 82% in 2016 and 2015, respectively. Service, rental and other revenues were approximately 5% in 2017, 6% in 2016 and 5% in 2015. Bolzoni's revenues were approximately 5% in 2017 and 4% in 2016.
During 2017, the Company’s retail shipments of lift trucks in North America by end market were approximately 23% to the food and beverage market, approximately 14% to the logistics market, approximately 14% to the natural resource and materials market, approximately 13% to the consumer and business trade market, approximately 13% to the manufacturing market, approximately 12% to the rental market and approximately 11% to the durable goods market.
Aftermarket Parts
The Company offers a line of aftermarket parts to service its large installed base of lift trucks currently in use in the industry. The Company offers online technical reference databases specifying the required aftermarket parts to service lift trucks and an aftermarket parts ordering system. Aftermarket parts sales represented approximately 13% of the Company’s annual revenues in each of 2017, 2016 and 2015.
The Company sells Hyster®- and Yale®-branded aftermarket parts to dealers for Hyster® and Yale® lift trucks. The Company also sells aftermarket parts under the UNISOURCE™ and PREMIER™ brands to Hyster® and Yale® dealers for the service of
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competitor lift trucks. The Company has a contractual relationship with a third-party, multi-brand, aftermarket parts wholesaler in the Americas and EMEA whereby orders from the Company's dealers for parts for lift trucks are fulfilled by the third party who then pays the Company a commission.
Marketing
The Company’s marketing organization is structured in three regional divisions: the Americas; EMEA, which includes Europe, the Middle East and Africa; and JAPIC, which includes Japan, Asia, Pacific, India and China. In each region, certain marketing support functions for the Hyster® and Yale® brands are carried out by shared-services teams. These activities include sales and service training, information systems support, product launch coordination, specialized sales material development, help desks, order entry, marketing strategy and field service support.
Patents, Trademarks and Licenses
The Company relies on a combination of trade secret protection, trademarks, copyrights, and patents to establish and protect the Company's proprietary rights. These intellectual property rights may not have commercial value or may not be sufficiently broad to protect the aspect of the Company's technology to which they relate or competitors may design around the patents. The Company is not materially dependent upon patents or patent protection; however, as materials handling equipment has become more technologically advanced, the Company and its competitors have increasingly sought patent protection for inventions incorporated into their respective products. The Company owns the Hyster®,Yale®, Bolzoni Auramo®, Meyer® and Nuvera® trademarks and believes these trademarks are material to its business.
Distribution Network
The Company distributes lift trucks and attachments primarily through two channels: independent dealers and a National Accounts program. In addition, the Company distributes aftermarket parts and service for its lift trucks through its independent dealers. The Company’s end-user base is diverse and fragmented, including, among others, light and heavy manufacturers, trucking and automotive companies, rental companies, building materials and paper suppliers, lumber, metal products, warehouses, retailers, food distributors, container handling companies and U.S. and non-U.S. governmental agencies.
Independent Dealers
The Company’s dealers, located in 129 countries, are generally independently owned and operated. As of December 31, 2017, Hyster® had 20 independent dealers and Yale® had 32 independent dealers in the Americas. Hyster® had 66 independent dealers and Yale® had 94 independent dealers in EMEA and Hyster® had 43 independent dealers and Yale® had 13 independent dealers in JAPIC. As of December 31, 2017, the Company had 26 dual-branded dealers in the Americas, four in EMEA and three in JAPIC.
National Accounts
The Company operates a National Accounts program for both Hyster® and Yale®. The National Accounts program focuses on large customers with centralized purchasing and geographically dispersed operations in multiple dealer territories. The National Accounts program accounted for 17%, 17% and 16% of new lift truck unit volume in 2017, 2016 and 2015, respectively. The independent dealers support the National Accounts program by providing aftermarket parts and service on a local basis. Dealers receive a commission for the support they provide in connection with National Accounts sales and for the preparation and delivery of lift trucks to customer locations. In addition to selling new lift trucks, the National Accounts program markets services, including full maintenance leases and fleet management.
Financing of Sales
The Company is engaged in a joint venture with Wells Fargo Financial Leasing, Inc. (“WF”) to provide dealer and customer financing of new lift trucks in the United States. The Company owns 20% of the joint venture entity, HYG Financial Services, Inc. ("HYGFS"), and receives fees and remarketing profits under a joint venture agreement. This agreement has a base term of five years and automatically renews for additional one-year terms unless written notice is given by either party at least 180 days prior to termination. The expiration of the base term is December 2018. The Company accounts for its ownership of HYGFS using the equity method of accounting.
Under the joint venture agreement with HYGFS, the Company’s dealers and certain customers are extended credit for the purchase of lift trucks to be placed in the dealer’s floor plan inventory or the financing of lift trucks that are sold or leased to customers. For some of these arrangements, the Company provides recourse or repurchase obligations to HYGFS or to others. In substantially all of these transactions, a perfected security interest is maintained in the lift trucks financed, so that in the event of a default, the Company has the ability to take title to the assets financed and sell it through the Hyster® or Yale® dealer
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network. Furthermore, the Company has established reserves for exposures under these agreements when required. In addition, the Company has an agreement with WF to limit its exposure to losses at certain eligible dealers. Under this agreement, losses related to guarantees for these certain eligible dealers are limited to 7.5% of their original loan balance. See Notes 17 and 18 to the Consolidated Financial Statements in this Annual Report on Form 10-K for further discussion.
Backlog
The following table outlines the Company's backlog of unfilled orders placed with its manufacturing and assembly operations for new lift trucks:
December 31, 2017 | September 30, 2017 | December 31, 2016 | ||||||||||
Units (in thousands) | 33.8 | 35.1 | 30.7 | |||||||||
Backlog, approximate sales value (in millions) | $ | 860 | $ | 860 | $ | 740 | ||||||
As of December 31, 2017, the Company expects substantially all of its backlog of unfilled orders placed with its manufacturing and assembly operations for new lift trucks to be sold during fiscal 2018. Backlog represents unfilled lift truck orders placed with the Company’s manufacturing and assembly facilities from dealers and National Account customers. In general, unfilled orders may be canceled at any time prior to the time of sale; however, the Company can assess cancellation penalties on dealer orders within a certain period prior to initiating production. The dollar value of backlog is calculated using the current unit backlog and the forecasted average sales price per unit.
Key Suppliers and Raw Materials
At times, the Company has experienced significant increases in material costs, primarily as a result of global price increases in industrial metals including steel, lead and copper and other commodity products, such as rubber, as a result of increased demand and limited supply. While the Company attempts to pass these increased costs along to its customers in the form of higher prices for its products, it may not be able to fully offset the increased costs of industrial metals and other commodities, due to overall market conditions and the lag time involved in implementing price increases for its products.
A significant raw material required by the Company's manufacturing operations is steel, which is generally purchased from steel producing companies in the geographic area near each of the Company's manufacturing facilities. Other significant components for the Company's lift trucks are axles, brakes, transmissions, batteries and chargers. These components are available from numerous sources in quantities sufficient to meet the Company's requirements. The Company depends on a limited number of suppliers for some of the Company's crucial components, including diesel and gasoline engines, which are supplied by, among others, Power Solutions International, Inc., Kubota Corp., and Cummins Inc., and cast-iron counterweights used to counter balance some lift trucks, which are obtained from, among others, North Vernon Industry Corp. and Eagle Quest International Ltd. Some of these critical components are imported and subject to regulations, such as customary inspection by the U.S. Customs and Border Protection under the auspices of the U.S. Department of Homeland Security, as well as the Company's own internal controls and security procedures. The Company believes comparable alternatives are available for all suppliers.
Competition
The Company is one of the leaders in the lift truck industry with respect to market share in the Americas and worldwide. Competition in the materials handling industry is intense and based primarily on strength and quality of dealers, brand loyalty, customer service, new lift truck sales prices, availability of products and aftermarket parts, comprehensive product line offerings, product performance, product quality and features and the cost of ownership over the life of the lift truck. The Company competes with several global lift truck manufacturers that operate in all major markets, as well as other niche companies. The lift truck industry also competes with alternative methods of materials handling, including conveyor systems and automated guided vehicles and systems.
The Company's aftermarket parts offerings compete with parts manufactured by other lift truck manufacturers, as well as companies that focus solely on the sale of generic parts.
The use of fuel-cell technology in industrial and commercial applications is a relatively new development. Companies implementing such technology face competitors that integrate more traditional energy technologies into their product lines, as well as competitors that have implemented or are implementing alternatives to traditional energy technologies, such as lithium batteries, fuel additives and other high efficiency or “renewable” technologies.
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Cyclical Nature of Lift Truck Business
The Company’s lift truck business historically has been cyclical. Fluctuations in the rate of orders for lift trucks, attachments and fuel-cell technology reflect the capital investment decisions of the Company’s customers, which depend to a certain extent on the general level of economic activity in the various industries the lift truck customers serve. During economic downturns, customers tend to delay new lift truck and parts purchases. Consequently, the Company has experienced, and in the future may continue to experience, significant fluctuations in its revenues and net income.
Research and Development
The Company’s lift truck research and development capability is organized around four major engineering centers, all coordinated on a global basis by the Company’s global executive administrative center. Products are designed for each brand concurrently and generally each center is focused on the global requirements for a single product line. The Company’s counterbalanced development center, which has global design responsibility for several classes of lift trucks for a highly diverse customer base, is located in Fairview, Oregon. The Company’s big truck development center is located in Nijmegen, the Netherlands, adjacent to a dedicated global big truck assembly facility. Big trucks are primarily used in handling shipping containers and other specialized heavy lifting applications, including steel, concrete and energy-related industries. Warehouse trucks, which are primarily used in distribution applications, are designed based on regional differences in stacking and storage practices. The Company designs warehouse equipment for sale in the Americas market in Greenville, North Carolina, adjacent to the Americas manufacturing and assembly facility. The Company designs warehouse equipment for the European market in Masate, Italy adjacent to its manufacturing and assembly facility for warehouse equipment. The Company also has an engineering Concept Center in the United Kingdom to support advanced design activities and an engineering office in India to support its global design activities for its four major engineering centers.
The Company’s lift truck engineering centers utilize a three-dimensional CAD/CAM system and are interconnected, with each of the Company’s manufacturing and assembly facilities and certain suppliers. This allows for collaboration in technical engineering designs and collaboration with these suppliers. Additionally, the Company solicits customer feedback throughout the design phase to improve product development efforts. The Company invested $80.8 million, $74.1 million and $69.1 million on lift truck product and attachment design and development activities in 2017, 2016 and 2015, respectively.
Nuvera has two research and development locations. In the U.S., Billerica, Massachusetts is the primary location for design, development and testing of fuel-cell stacks and engines. In Europe, the operations at San Donato, Italy are primarily focused on fuel-cell systems integration and testing. The Company invested $23.7 million, $32.9 million and $19.2 million on product design and development activities at Nuvera in 2017, 2016 and 2015, respectively.
Sumitomo-NACCO Joint Venture
The Company has a 50% ownership interest in Sumitomo NACCO Forklift Co., Ltd. (“SN”), a limited liability company that was formed in 1970 primarily to manufacture and distribute Sumitomo-branded lift trucks in Japan and export Hyster®- and Yale®-branded lift trucks and related components and service parts outside of Japan. Sumitomo Heavy Industries, Ltd. owns the remaining 50% interest in SN. Each stockholder of SN is entitled to appoint directors representing 50% of the vote of SN’s board of directors. All matters related to policies and programs of operation, manufacturing and sales activities require mutual agreement between the Company and Sumitomo Heavy Industries, Ltd. prior to a vote of SN’s board of directors. As a result, the Company accounts for its ownership in SN using the equity method of accounting. The Company purchases Hyster®- and Yale®-branded lift trucks and related component and aftermarket parts from SN for sale outside of Japan under agreed-upon terms. The Company also contracts with SN for engineering design services on a cost plus basis and charges SN for technology used by SN but developed by the Company. During 2017, SN sold approximately 6,900 lift trucks.
Employees
As of January 31, 2018, the Company had approximately 6,800 employees. Certain employees in the Danville, Illinois parts depot operations are unionized. The Company’s contract with the Danville union expires in June 2018. Employees at the facilities in Berea, Kentucky; Sulligent, Alabama; and Greenville, North Carolina are not represented by unions. In Brazil, all employees are represented by a union. The Company’s contracts with the Brazilian unions expire annually at which time salaries and certain benefits are negotiated for the following year. In Mexico, certain employees are unionized. The Company’s contract with the Mexico union expires annually in March, at which time salaries are negotiated for the following year. Benefits in Mexico are negotiated every other year.
In Europe, certain employees in the Helsinki, Finland; Salzgitter, Germany; Craigavon, Northern Ireland; Masate, Italy; Piacenza, Italy; San Donato, Italy; and Nijmegen, the Netherlands facilities are unionized. All of the European employees are part of works councils that perform a consultative role on business and employment matters.
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The Company believes its current labor relations with both union and non-union employees are generally satisfactory. However, there can be no assurances that the Company will be able to successfully renegotiate its union contracts without work stoppages or on acceptable terms. A prolonged work stoppage at a unionized facility could have a material adverse effect on the Company’s business and results of operations.
Environmental Matters
The Company’s manufacturing operations are subject to laws and regulations relating to the protection of the environment, including those governing the management and disposal of hazardous substances. The Company’s policies stress compliance, and the Company believes it is currently in substantial compliance with existing environmental laws. If the Company fails to comply with these laws or its environmental permits, it could incur substantial costs, including cleanup costs, fines and civil and criminal sanctions. In addition, future changes to environmental laws could require the Company to incur significant additional expense or restrict operations. Based on current information, the Company does not expect compliance with environmental requirements to have a material adverse effect on the Company’s financial condition or results of operations.
The Company’s products may also be subject to laws and regulations relating to the protection of the environment, including those governing vehicle exhaust. Regulatory agencies in the United States and Europe have issued or proposed various regulations and directives designed to reduce emissions from spark-ignited engines and diesel engines used in off-road vehicles, such as industrial lift trucks. These regulations require the Company and other lift truck manufacturers to incur costs to modify designs and manufacturing processes and to perform additional testing and reporting. While there can be no assurance, the Company believes the impact of the additional expenditures to comply with these requirements will not have a material adverse effect on its business.
The Company is investigating or remediating historical contamination at some current and former sites caused by its operations or those of businesses it acquired. While the Company is not currently aware that any material outstanding claims or obligations exist with regard to these sites, the discovery of additional contamination at these or other sites could result in significant cleanup costs that could have a material adverse effect on the Company’s financial conditions and results of operations.
In connection with any acquisition made by the Company, the Company could, under some circumstances, be held financially liable for or suffer other adverse effects due to environmental violations or contamination caused by prior owners of businesses the Company has acquired. In addition, under some of the agreements through which the Company has sold businesses or assets, the Company has retained responsibility for certain contingent environmental liabilities arising from pre-closing operations. These liabilities may not arise, if at all, until years later and could require the Company to incur significant additional expenses.
Government and Trade Regulations
In the past, the Company’s business has been affected by trade disputes between the United States and Europe. In the future, to the extent the Company is affected by trade disputes with other foreign jurisdictions, and increased tariffs are levied on its goods, its results of operations may be materially adversely affected.
Item 1A. RISK FACTORS
The lift truck business is cyclical. Any downturn in the general economy could result in significant decreases in the Company's revenue and profitability and an inability to sustain or grow the business.
The Company's lift truck business historically has been cyclical. Fluctuations in the rate of orders for lift trucks, attachments and fuel-cell technology reflect the capital investment decisions of the Company's customers, which depend to a certain extent on the general level of economic activity in the various industries the lift truck customers serve. During economic downturns, customers tend to delay new lift truck and parts purchases. Consequently, the Company has experienced, and in the future may continue to experience, significant fluctuations in revenues and net income. If there is a downturn in the general economy, or in the industries served by lift truck customers, the Company's revenue and profitability could decrease significantly, and the Company may not be able to sustain or grow the business.
The cost of raw materials used by the Company's products has fluctuated and may continue to fluctuate, which could materially reduce the Company's profitability.
At times, the Company has experienced significant increases in materials costs, primarily as a result of global increases in industrial metals including steel, lead and copper and other commodity prices, such as rubber, as a result of increased demand and limited supply. The Company manufactures products that include raw materials that consist of steel, rubber, copper, lead, castings and counterweights. The Company also purchases parts provided by suppliers that are manufactured from castings and steel or contain lead. The cost of these parts is affected by the same economic conditions that impact the cost of the parts the
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Company manufactures. The cost to manufacture lift trucks and related service parts has been and will continue to be affected by fluctuations in prices for these raw materials. If costs of these raw materials increase, the Company's profitability could be materially reduced.
The pricing and costs of the Company's products have been and may continue to be impacted by currency fluctuations, which could materially increase costs, and result in material exchange losses and reduce operating margins.
Because the Company conducts transactions in various currencies, including euros, U.S. dollars, Japanese yen, British pounds, Swedish kroner, Mexican peso, Brazilian real and Chinese renminbi, lift truck pricing is subject to the effects of fluctuations in the value of these currencies and fluctuations in the related currency exchange rates. As a result, the Company's sales have historically been affected by, and may continue to be affected by, these fluctuations. In addition, exchange rate movements between currencies in which the Company purchases materials and components and manufactures certain products and the currencies in which the Company sells those products have been affected by and may continue to result in exchange losses that could materially reduce operating margins. Furthermore, the Company's hedging contracts may not fully offset risks from changes in currency exchange rates.
The Company is subject to risks relating to its non-U.S. operations.
Non-U.S. operations represent a significant portion of the Company's business. The Company expects revenue from non-U.S. markets to continue to represent a significant portion of total revenue. The Company owns or leases manufacturing facilities in Brazil, Italy, Mexico, the Netherlands, Northern Ireland, Finland, Germany and China, and owns interests in joint ventures with facilities in Japan, the Philippines and Vietnam. The Company also sells U.S. produced products to non-U.S. customers and sells non-U.S. produced products to U.S. customers. The Company's non-U.S. operations are subject to additional risks, which include:
• | potential political, economic and social instability in the non-U.S. countries in which the Company operates; |
• | currency risks, including those risks set forth under, “The pricing and costs of the Company's products have been and may continue to be impacted by currency fluctuations, which could materially increase costs and result in material exchange losses and reduce operating margins”; |
• | imposition of or increases in currency exchange controls; |
• | potential inflation in the applicable non-U.S. economies; |
• | imposition of or increases in import duties and other tariffs on products; |
• | imposition of or increases in non-U.S. taxation of earnings and withholding on payments received; |
• | regulatory changes affecting non-U.S. operations; and |
• | stringent labor regulations. |
Part of the strategy to expand worldwide market share is strengthening the Company's non-U.S. distribution network. A part of this strategy also includes decreasing costs by sourcing basic components in lower-cost countries. Implementation of this part of the strategy may increase the impact of the risks described above and there can be no assurance that such risks will not have an adverse effect on the Company's revenues, profitability or market share.
The Company operates in various taxing jurisdictions around the world in which the tax laws, regulations and administrative practices are often subject to interpretation as well as to change. Although the Company has sought to reduce this uncertainty by obtaining rulings from the tax authorities in certain cases, the Company's positions may still be subject to challenge. If the Company were to become subject to a challenge, the outcome could have a significant negative effect on the Company's operating results and financial condition.
Economic and political conditions in the United States and abroad may lead to significant changes in tax rules and regulations and/or lead to the adoption of restrictions on international trade. For example, recent measures to reform U.S. tax laws and proposals to reform non-U.S. tax laws or other regulations could significantly impact how multinational corporations are taxed. Although the Company cannot predict the final form of any regulation, if adopted at all, such regulations could, if enacted, have a material adverse impact on the Company's profitability.
The Company relies primarily on its network of independent dealers to sell lift trucks and aftermarket parts and the Company has no direct control over sales by those dealers to customers. Ineffective or poor performance by these independent dealers could result in a significant decrease in revenues and profitability and the inability to sustain or grow the business.
The Company relies primarily on independent dealers for sales of lift trucks and aftermarket parts. Sales of the Company's products are therefore subject to the quality and effectiveness of the dealers, who are not subject to the Company's direct control. As a result, ineffective or poorly performing dealers could result in a significant decrease in revenues and profitability and the Company may not be able to sustain or grow its business.
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The Company depends on a limited number of suppliers for specific critical components.
The Company depends on a limited number of suppliers for some of its critical components, including diesel, gasoline and alternative fuel engines and cast-iron counterweights used to counterbalance some lift trucks. Some of these critical components are imported and subject to regulation, primarily with respect to customary inspection of such products by the U.S. Customs and Border Protection under the auspices of the U.S. Department of Homeland Security. The results of operations could be adversely affected if the Company is unable to obtain these critical components, or if the costs of these critical components were to increase significantly, due to regulatory compliance or otherwise, and the Company was unable to pass the cost increases on to its customers.
The Company may not be successful in commercializing Nuvera’s technology, which success would depend, in part, on the Company’s ability to protect Nuvera’s intellectual property.
The Company may not be able to commercialize Nuvera’s fuel-cell technologies on economically efficient terms. Unforeseen difficulties, such as delays in development due to design defects or changes in specifications and insufficient research and development resources or cost overruns, may hinder the Company’s ability to incorporate Nuvera’s technologies into its product lines on an economically favorable basis or at all.
Furthermore, Nuvera’s commercial success will depend largely on the Company’s ability to maintain patent and other intellectual property protection covering certain of Nuvera’s technologies. Nuvera’s fuel-cell technology may not be economically viable if the Company is unable to prevent others from infringing or successfully challenging the validity of certain patents and other intellectual property rights attributable to Nuvera.
If the Company's strategic initiatives, including the introduction of new products, do not prove effective, revenues, profitability and market share could be significantly reduced.
Changes in the timing of implementation of the Company's current strategic initiatives may result in a delay in the expected recognition of future costs and realization of future benefits. In addition, if future industry demand levels are lower than expected, the actual annual cost savings could be lower than expected. If the Company is unable to successfully implement these strategic initiatives, revenues, profitability and market share could be significantly reduced.
Failure to compete effectively within the Company's industry could result in a significant decrease in revenues and profitability.
The Company experiences intense competition in the sale of lift trucks and aftermarket parts. Competition in the lift truck industry is based primarily on strength and quality of dealers, brand loyalty, customer service, new lift truck sales prices, availability of products and aftermarket parts, comprehensive product line offerings, product performance, product quality and features and the cost of ownership over the life of the lift truck. The Company competes with several global manufacturers that operate in all major markets. These manufacturers may have lower manufacturing costs and greater financial resources than the Company, which may enable them to commit larger amounts of capital in response to changing market conditions. If the Company fails to compete effectively, revenues and profitability could be significantly reduced.
If the global capital goods market declines, the cost saving efforts the Company has implemented may not be sufficient to achieve the benefits expected.
If the global economy or the capital goods market declines, revenues could decline. If revenues are lower than expected, the programs the Company has implemented may not achieve the benefits expected. Furthermore, the Company may be forced to take additional cost saving steps that could result in additional charges that materially adversely affect the ability to compete or implement the Company's current business strategies.
The Company is subject to recourse or repurchase obligations with respect to the financing arrangements of some of its customers.
Through arrangements with WF and others, dealers and other customers are provided financing for new lift trucks in the United States and in major countries of the world outside of the United States. Through these arrangements, the Company's dealers and certain customers are extended credit for the purchase of lift trucks to be placed in the dealer’s floor plan inventory or the financing of lift trucks that are sold or leased to customers. For some of these arrangements, the Company provides recourse or repurchase obligations such that it would become obligated in the event of default by the dealer or customer. Total amounts subject to these types of obligations were $203.5 million and $149.3 million at December 31, 2017 and 2016 , respectively. Generally, the Company maintains a perfected security interest in the assets financed such that, in the event that the Company becomes obligated under the terms of the recourse or repurchase obligations, it may take title to the assets financed. The Company cannot be certain, however, that the security interest will equal or exceed the amount of the recourse or repurchase
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obligations. In addition, the Company cannot be certain that losses under the terms of the recourse or repurchase obligations will not exceed the reserves that have been set aside in the consolidated financial statements. The Company could incur a charge to earnings if reserves prove to be inadequate, which could have a material adverse effect on results of operations and liquidity for the period in which the charge is taken.
Actual liabilities relating to pending lawsuits may exceed the Company's expectations.
The Company is a defendant in pending lawsuits involving, among other things, product liability claims. The Company cannot be sure that it will succeed in defending these claims, that judgments will not be rendered against the Company with respect to any or all of these proceedings or that reserves set aside or insurance policies will be adequate to cover any such judgments. The Company could incur a charge to earnings if reserves prove to be inadequate or the average cost per claim or the number of claims exceed estimates, which could have a material adverse effect on results of operations and liquidity for the period in which the charge is taken and any judgment or settlement amount is paid.
Other products may be introduced to the market by competitors, making the Nuvera technology less marketable.
The use of fuel-cell technology in industrial and commercial applications is a relatively new development. Companies implementing such technology face competition from competitors that integrate more traditional energy technologies into their product lines, as well as competitors that have implemented or are implementing alternatives to traditional energy technologies, such as lithium batteries, fuel additives and other high efficiency or “renewable” technologies. Any of these technologies may have more established or otherwise more attractive manufacturing, distribution and operating cost features, which could negatively impact customers’ preferences for product lines that incorporate fuel-cell technology and, as a result, diminish the marketability of products incorporating Nuvera technology.
Actual liabilities relating to environmental matters may exceed the Company's expectations.
The Company's manufacturing operations are subject to laws and regulations relating to the protection of the environment, including those governing the management and disposal of hazardous substances. If the Company fails to comply with these laws or the Company's environmental permits, then the Company could incur substantial costs, including cleanup costs, fines and civil and criminal sanctions. In addition, future changes to environmental laws could require the Company to incur significant additional expenses or restrict operations.
The Company's products may also be subject to laws and regulations relating to the protection of the environment, including those governing vehicle exhausts. Regulatory agencies in the United States and Europe have issued or proposed various regulations and directives designed to reduce emissions from spark-ignited engines and diesel engines used in off-road vehicles, such as industrial lift trucks. These regulations require the Company and other lift truck manufacturers to incur costs to modify designs and manufacturing processes and to perform additional testing and reporting.
The Company is investigating or remediating historical contamination at some current and former sites caused by its operations or those of businesses it acquired. While the Company is not currently aware that any material outstanding claims or obligations exist with regard to these sites, the discovery of additional contamination at these or other sites could result in significant cleanup costs that could have a material adverse effect on its financial condition and results of operations.
In connection with any acquisition the Company has made, it could, under some circumstances, be held financially liable for or suffer other adverse effects due to environmental violations or contamination caused by prior owners of businesses the Company acquired. In addition, under some of the agreements through which the Company has sold businesses or assets, it has retained responsibility for certain contingent environmental liabilities arising from pre-closing operations. These liabilities may not arise, if at all, until years later and could require the Company to incur significant additional expenses, which could materially adversely affect the results of operations and financial condition.
The Company is subject to import and export controls, which could subject the Company to liability or impair the Company's ability to compete in international markets.
Due to the international scope of the Company's operations, the Company is subject to a complex system of import- and export-related laws and regulations, including U.S. export control and customs regulations and customs regulations of other countries. These regulations are complex and vary among the legal jurisdictions in which the Company operates. Obtaining the necessary authorizations, including any required license, for a particular transaction may be time-consuming, is not guaranteed, and may result in the delay or loss of sales opportunities. Furthermore, U.S. export control laws and economic sanctions laws prohibit certain transactions with U.S. embargoed or sanctioned countries, governments, persons and entities. Any alleged or actual failure to comply with such laws and regulations may subject the Company to government scrutiny, investigation, and civil and criminal penalties, and may limit the Company's ability to import or export products or to provide services outside the United States. Depending on severity, any of these penalties could have a material impact on the Company's business, financial
8
condition and results of operations. There can be no assurance that laws and regulations will not be changed in ways which will require the Company to modify its business models and objectives or affect the Company's returns on investments by restricting existing activities and products, subjecting them to escalating costs or prohibiting them outright.
The Company may become subject to claims under non-U.S. laws and regulations, which may require expensive, time consuming and distracting litigation.
Because the Company has employees, property and business operations outside of the United States, it is subject to the laws and the court systems of many jurisdictions. The Company may become subject to claims outside the United States based in non-U.S. jurisdictions for violations of their laws with respect to the Company's non-U.S. operations. In addition, these laws may be changed or new laws may be enacted in the future. Non-U.S. litigation is often expensive, time consuming and distracting. As a result, any of these risks could significantly reduce profitability and the Company's ability to operate its businesses effectively.
The Company may be subject to risks relating to increasing cash requirements of certain employee benefits plans which may affect its financial position.
The expenses recorded for, and cash contributions required to be made to, the Company's defined benefit pension plans are dependent on changes in market interest rates and the value of plan assets, which are dependent on actual investment returns. Significant changes in market interest rates, decreases in the value of plan assets or investment losses on plan assets may require the Company to increase the cash contributed to defined benefit plans which may affect its financial position.
The Company is dependent on key personnel, and the loss of these key personnel could significantly reduce profitability.
The Company is highly dependent on the skills, experience and services of key personnel, and the loss of key personnel could have a material adverse effect on its business, operating results and financial condition. Employment and retention of qualified personnel is important to the successful conduct of the Company's business. Therefore, the Company's success also depends upon its ability to recruit, hire, train and retain additional skilled and experienced management personnel. The Company's inability to hire and retain personnel with the requisite skills could impair its ability to manage and operate its business effectively and could significantly reduce profitability.
Certain members of the Company’s extended founding family own a substantial amount of its Class A and Class B common stock and, if they were to act in concert, could control the outcome of director elections and other stockholder votes on significant corporate actions.
The Company has two classes of common stock: Class A common stock and Class B common stock. Holders of Class A common stock are entitled to cast one vote per share and, as of December 31, 2017, accounted for approximately 24 percent of the voting power of the Company. Holders of Class B common stock are entitled to cast ten votes per share and, as of December 31, 2017, accounted for the remaining voting power of the Company. As of December 31, 2017, certain members of the Company’s extended founding family held approximately 27 percent of the Company’s outstanding Class A common stock and approximately 85 percent of the Company’s outstanding Class B common stock. On the basis of this common stock ownership, certain members of the Company’s extended founding family could have exercised 71 percent of the Company’s total voting power. Although there is no voting agreement among such extended family members, in writing or otherwise, if they were to act in concert, they could control the outcome of director elections and other stockholder votes on significant corporate actions, such as certain amendments to the Company’s certificate of incorporation and sales of the Company or substantially all of its assets. Because certain members of the Company’s extended founding family could prevent other stockholders from exercising significant influence over significant corporate actions, the Company may be a less attractive takeover target, which could adversely affect the market price of its common stock.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
9
Item 2. PROPERTIES
The following table presents the principal assembly, manufacturing, distribution and office facilities that the Company owns or leases:
Segment | Facility Location | Owned/Leased | Function(s) | |||
Lift Truck | ||||||
Americas | Berea, Kentucky | Owned | Assembly of lift trucks and manufacture of component parts | |||
Charlotte, North Carolina | Leased | Customer experience and training center | ||||
Cleveland, Ohio | Leased | Global headquarters | ||||
Danville, Illinois | Owned | Americas parts distribution center | ||||
Fairview, Oregon | Owned | Global executive administrative center; counterbalanced development center for design and testing of lift trucks, prototype equipment and component parts | ||||
Greenville, North Carolina | Owned | Divisional headquarters and marketing and sales operations for Hyster® and Yale® in Americas; Americas warehouse development center; assembly of lift trucks and manufacture of component parts | ||||
Itu, Brazil | Owned | Assembly of lift trucks and parts distribution center | ||||
Ramos Arizpe, Mexico | Owned | Manufacture of component parts for lift trucks | ||||
Sulligent, Alabama | Owned | Manufacture of component parts for lift trucks | ||||
EMEA | Craigavon, Northern Ireland | Owned | Manufacture of lift trucks and cylinders; frame and mast fabrication for EMEA | |||
Frimley, Surrey, United Kingdom | Leased | Divisional headquarters and marketing and sales operations for Hyster® and Yale® in EMEA | ||||
Irvine, Scotland | Leased | European administrative center | ||||
Masate, Italy | Leased | Assembly of lift trucks; European warehouse development center | ||||
Nijmegen, The Netherlands | Owned | Big trucks development center; manufacture and assembly of big trucks and component parts; European parts distribution center | ||||
JAPIC | Shanghai, China | Owned | Assembly of lift trucks by Shanghai Hyster joint venture, sale of parts and marketing operations of China | |||
Sydney, Australia | Leased | Divisional headquarters and sales and marketing for JAPIC; JAPIC parts distribution center | ||||
Pune, India | Leased | Engineering design services | ||||
Bolzoni | Helsinki, Finland | Leased | Manufacture and distribution of Bolzoni products | |||
Heibei, China | Owned | Manufacture and distribution of Bolzoni products | ||||
Homewood, Illinois | Owned | Manufacture and distribution of Bolzoni products | ||||
Piacenza, Italy | Owned | Bolzoni headquarters; manufacture and distribution of Bolzoni products | ||||
Prato, Italy | Owned | Manufacture and distribution of Bolzoni products | ||||
Salzgitter, Germany | Owned | Manufacture and distribution of Bolzoni products | ||||
Wuxi, China | Owned | Manufacture and distribution of Bolzoni products | ||||
Nuvera | Billerica, Massachusetts | Leased | Nuvera research and development laboratory | |||
San Donato, Italy | Leased | Nuvera integration and testing | ||||
SN’s operations are supported by three facilities. SN’s headquarters are located in Obu, Japan at a facility owned by SN. The Obu facility also has assembly and distribution capabilities for lift trucks and parts. In Cavite, the Philippines and Hanoi, Vietnam, SN owns facilities for the manufacture of components for SN and the Company's products.
Item 3. LEGAL PROCEEDINGS
The Company is, and will likely continue to be, involved in a number of legal proceedings which the Company believes generally arise in the ordinary course of the business, given its size, history and the nature of its business and products. The Company is not a party to any material legal proceeding.
Item 4. MINE SAFETY DISCLOSURES
None.
10
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following tables set forth the name, age, current position and principal occupation and employment during the past five years of the Company’s executive officers.
Name | Age | Current Position | Other Positions | ||||
Alfred M. Rankin, Jr. | 76 | Chairman, President and Chief Executive Officer of Hyster-Yale (from prior to 2013), Chairman of HYG (from prior to 2013). | |||||
Colin Wilson | 63 | President and Chief Executive Officer, HYG of Hyster-Yale (from September 2014), President and Chief Executive Officer of HYG (from September 2014). | President and Chief Operating Officer of HYG (from November 2013 to September 2014), President, Americas of HYG (from prior to 2013 to September 2014), Vice President and Chief Operating Officer of HYG (from prior to 2013 to November 2013). | ||||
Gregory J. Breier | 52 | Vice President, Tax of Hyster-Yale (from May 2014), Vice President, Tax of HYG (from prior to 2013). | |||||
Brian K. Frentzko | 57 | Vice President, Treasurer of Hyster-Yale (from prior to 2013), Vice President, Treasurer of HYG (from prior to 2013). | |||||
Amy E. Gerbick | 46 | Associate General Counsel, Director of Corporate Compliance and Assistant Secretary of Hyster-Yale (from May 2014), Associate General Counsel, Director of Corporate Compliance and Assistant Secretary of HYG (from May 2014). | Associate, Jones Day (a law firm) (from prior to 2013 to May 2014). | ||||
Jennifer M. Langer | 44 | Vice President, Controller of Hyster-Yale (from February 2013), Vice President, Controller of HYG (from February 2013). | Controller of Hyster-Yale (from prior to 2013 to February 2013), Controller of HYG (from prior to 2013 to February 2013). | ||||
Lauren E. Miller | 63 | Senior Vice President, Chief Marketing Officer of Hyster-Yale (from January 2015), Senior Vice President, Chief Marketing Officer of HYG (from January 2015). | Senior Vice President, Marketing and Consulting of Hyster-Yale (from prior to 2013 to January 2015), Senior Vice President, Marketing and Consulting of HYG (from prior to 2013 to January 2015). | ||||
Charles F. Pascarelli | 58 | Senior Vice President, President, Americas of HYG (from January 2015) | President, Sales and Marketing, Americas of HYG (from March 2013 to January 2015), President, Sales and Marketing, The Raymond Corporation (an electrical materials handling company) (from prior to 2013 to March 2013). | ||||
Rajiv K. Prasad | 54 | Chief Product and Operations Officer of HYG (from February 2018). | Senior Vice President, Global Product Development, Manufacturing and Supply Chain Strategy of HYG (from September 2014 to February 2018). Vice President, Global Product Development and Manufacturing of HYG (from prior to 2013 to September 2014). | ||||
Anthony J. Salgado | 47 | Senior Vice President, JAPIC of HYG (from January 2016). | Vice President, Corporate Officer, UniCarriers Corporation (an industrial company) (from April 2014 to January 2016), President, UniCarriers Americas Corporation (from October 2013 to January 2016), Vice President, Manufacturing Operations, UniCarriers Americas Corporation (from prior to 2013 to October 2013). | ||||
Harry Sands | 66 | Senior Vice President, Managing Director, Europe, Middle East and Africa of HYG (from June 2015). | Vice President, Manufacturing EMEA of HYG (from prior to 2013 to June 2015). | ||||
Kenneth C. Schilling | 58 | Senior Vice President and Chief Financial Officer of Hyster-Yale (from September 2014), Senior Vice President and Chief Financial Officer of HYG (from September 2014). | Vice President and Chief Financial Officer of Hyster-Yale (from prior to 2013 to September 2014), Vice President and Chief Financial Officer of HYG (from prior to 2013 to September 2014). | ||||
Gopichand Somayajula | 61 | Vice President, Global Product Development of HYG (from May 2013) | Vice President, Counterbalanced Engineering of HYG (from prior to 2013 to May 2013). | ||||
Suzanne S. Taylor | 55 | Senior Vice President, General Counsel and Secretary of Hyster-Yale (from May 2016), Senior Vice President, General Counsel and Secretary of HYG (from May 2016). | Vice President, Deputy General Counsel and Assistant Secretary of Hyster-Yale (from February 2013 to May 2016), Vice President, Deputy General Counsel and Assistant Secretary of HYG (from February 2013 to May 2016), Deputy General Counsel and Assistant Secretary of Hyster-Yale (from prior to 2013 to February 2013), Deputy General Counsel and Assistant Secretary of HYG (from prior to 2013 to February 2013). | ||||
Mark H. Trivett | 48 | Vice President Finance, Europe, Middle East and Africa of HYG (from prior to 2013). | |||||
Raymond C. Ulmer | 54 | Vice President Finance, Americas of HYG (from prior to 2013). | |||||
The information under this Item is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K.There exists no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was elected. Each executive officer serves until his or her successor is elected and qualified.
11
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Class A common stock is traded on the New York Stock Exchange under the ticker symbol “HY.” For the Company's Class B common stock, due to transfer restrictions, no trading market has developed, or is expected to develop. The Class B common stock is convertible into Class A common stock on a one-for-one basis. The high and low market prices for the Class A common stock and dividends per share for both classes of common stock for each quarter are presented in the tables below:
2017 | |||||||||||
Market Price | |||||||||||
High | Low | Cash Dividend | |||||||||
First quarter | $ | 69.00 | $ | 54.07 | $ | 0.2950 | |||||
Second quarter | $ | 76.50 | $ | 53.50 | $ | 0.3025 | |||||
Third quarter | $ | 77.07 | $ | 62.62 | $ | 0.3025 | |||||
Fourth quarter | $ | 93.90 | $ | 76.10 | $ | 0.3025 | |||||
2016 | |||||||||||
Market Price | |||||||||||
High | Low | Cash Dividend | |||||||||
First quarter | $ | 68.21 | $ | 44.41 | $ | 0.2850 | |||||
Second quarter | $ | 70.19 | $ | 55.80 | $ | 0.2950 | |||||
Third quarter | $ | 66.43 | $ | 47.25 | $ | 0.2950 | |||||
Fourth quarter | $ | 68.75 | $ | 49.84 | $ | 0.2950 | |||||
At December 31, 2017, there were approximately 846 Class A common stockholders of record and approximately 891 Class B common stockholders of record.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Issuer Purchases of Equity Securities | |||||
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of the Publicly Announced Program | (d) Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Program | |
Month #1 (October 1 to 31, 2017) | — | $— | — | $0 | |
Month #2 (November 1 to 30, 2017) | — | $— | — | $0 | |
Month #3 (December 1 to 31, 2017) | — | $— | — | $0 | |
Total | — | $— | — | $0 | |
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Item 6. SELECTED FINANCIAL DATA
Year Ended December 31 | |||||||||||||||||||
2017 (1) | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
(In millions, except per share data) | |||||||||||||||||||
Operating Statement Data: | |||||||||||||||||||
Revenues | $ | 2,885.2 | $ | 2,569.7 | $ | 2,578.1 | $ | 2,767.2 | $ | 2,666.3 | |||||||||
Operating profit | $ | 76.0 | $ | 34.9 | $ | 103.5 | $ | 148.8 | $ | 134.3 | |||||||||
Net income | $ | 48.9 | $ | 42.3 | $ | 75.1 | $ | 110.2 | $ | 110.2 | |||||||||
Net (income) loss attributable to noncontrolling interest | (0.3 | ) | 0.5 | (0.4 | ) | (0.4 | ) | (0.2 | ) | ||||||||||
Net income attributable to stockholders | $ | 48.6 | $ | 42.8 | $ | 74.7 | $ | 109.8 | $ | 110.0 | |||||||||
Basic earnings per share attributable to stockholders: | $ | 2.95 | $ | 2.61 | $ | 4.58 | $ | 6.61 | $ | 6.58 | |||||||||
Diluted earnings per share attributable to stockholders: | $ | 2.94 | $ | 2.61 | $ | 4.57 | $ | 6.58 | $ | 6.54 | |||||||||
Balance Sheet Data at December 31: | |||||||||||||||||||
Total assets | $ | 1,647.9 | $ | 1,287.1 | $ | 1,095.9 | $ | 1,120.8 | $ | 1,161.3 | |||||||||
Long-term debt | $ | 216.2 | $ | 82.2 | $ | 19.6 | $ | 12.0 | $ | 6.7 | |||||||||
Stockholders' equity | $ | 565.5 | $ | 463.8 | $ | 460.8 | $ | 454.5 | $ | 449.8 | |||||||||
Cash Flow Data: | |||||||||||||||||||
Provided by (used for) operating activities | $ | 164.7 | $ | (48.9 | ) | $ | 89.4 | $ | 100.0 | $ | 152.9 | ||||||||
Used for investing activities | $ | (47.3 | ) | $ | (145.1 | ) | $ | (31.3 | ) | $ | (44.4 | ) | $ | (26.1 | ) | ||||
Provided by (used for) financing activities | $ | 53.1 | $ | 77.9 | $ | (7.1 | ) | $ | (110.5 | ) | $ | (104.4 | ) | ||||||
Other Data: | |||||||||||||||||||
Per share data: | |||||||||||||||||||
Cash dividends | $ | 1.2025 | $ | 1.1700 | $ | 1.1300 | $ | 1.0750 | $ | 1.0000 | |||||||||
Market value at December 31 | $ | 85.16 | $ | 63.77 | $ | 52.45 | $ | 73.20 | $ | 93.16 | |||||||||
Stockholders' equity at December 31 | $ | 34.35 | $ | 28.30 | $ | 28.23 | $ | 27.98 | $ | 26.91 | |||||||||
Actual shares outstanding at December 31 | 16.462 | 16.391 | 16.324 | 16.241 | 16.714 | ||||||||||||||
Basic weighted average shares outstanding | 16.447 | 16.376 | 16.307 | 16.607 | 16.725 | ||||||||||||||
Diluted weighted average shares outstanding | 16.514 | 16.427 | 16.355 | 16.675 | 16.808 | ||||||||||||||
Total employees at December 31(2) | 6,800 | 6,500 | 5,400 | 5,400 | 5,100 | ||||||||||||||
(1) | During 2017, the Company recognized $19.8 million of equity income from HYGFS and $38.2 million of income tax expense as a result of the Tax Cuts and Jobs Act (the “Tax Reform Act”), which was signed into law on December 22, 2017. Further information on the impacts of the Tax Reform Act is discussed in Note 6 to the consolidated financial statements. |
(2) | Excludes temporary employees. |
13
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
OVERVIEW
Hyster-Yale Materials Handling, Inc. ("Hyster-Yale" or the "Company") and its subsidiaries, including its operating company Hyster-Yale Group, Inc. ("HYG"), is a leading, globally integrated, full-line lift truck manufacturer. The Company offers a broad array of solutions aimed at meeting the specific materials handling needs of its customers, including attachments and hydrogen fuel cell power products, telematics, automation and fleet management services, as well as an array of other power options for its lift trucks. The Company, through HYG designs, engineers, manufactures, sells and services a comprehensive line of lift trucks, attachments and aftermarket parts marketed globally primarily under the Hyster® and Yale® brand names, mainly to independent Hyster® and Yale® retail dealerships. The materials handling business historically has been cyclical because the rate of orders for lift trucks fluctuates depending on the general level of economic activity in the various industries its customers serve.
The Company also operates Bolzoni S.p.A. ("Bolzoni"). Bolzoni is a leading worldwide producer of attachments, forks and lift tables marketed under the Bolzoni Auramo® and Meyer® brand names. Through the design, production and distribution of a wide range of attachments, Bolzoni has a strong presence in the market niche of lift-truck attachments and industrial material handling.
The Company also operates Nuvera Fuel Cells, LLC ("Nuvera"). Nuvera is an alternative-power technology company focused on fuel-cell stacks and engines. Nuvera also supports on-site hydrogen production and dispensing systems that are designed to deliver clean energy solutions to customers.
Competition in the materials handling industry is intense and is based primarily on strength and quality of distribution, brand loyalty, customer service, new lift truck sales prices, availability of products and aftermarket parts, comprehensive product line offerings, product performance, product quality and features and the cost of ownership over the life of the lift truck. The Company competes with several global lift truck manufacturers that operate in all major markets, as well as other niche companies. The lift truck industry also competes with alternative methods of materials handling, including conveyor systems and automated guided vehicle systems. The Company's aftermarket parts offerings compete with parts manufactured by other lift truck manufacturers, as well as companies that focus solely on the sale of generic parts.
The Company's mission is to be a leading, globally integrated designer, manufacturer and marketer of a complete range of lift-truck solutions by leveraging its high-quality, application-tailored lift trucks, attachments and power solutions to offer the lowest cost of ownership and the best overall value. The Company’s core competency is lift truck manufacturing, but its goal is to become the lift truck solutions partner to the materials handling market, one customer and one industry at a time.
The Company’s objective is to provide a wide-range of solutions to its customers to generate profitable growth through increasing volumes, which in turn are expected to generate market share gains and drive improved margins. The Company plans to accomplish these objectives by implementing its core strategic initiatives to: be the leader in the delivery of industry- and customer-focused solutions; provide the lowest cost of ownership, while enhancing productivity for customers; be the leader in independent distribution; grow in emerging markets; be the leader in the attachments business and be a leader in fuel cells and their applications.
Critical Accounting Policies and Estimates
The discussion and analysis of financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities, if any. On an ongoing basis, the Company evaluates its estimates based on historical experience, actuarial valuations and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.
The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.
14
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
Revenue recognition: Revenues are recognized based upon the terms of contracts with customers, which is generally when title transfers and risk of loss passes as customer orders are completed and shipped. For the Company's National Account customers, revenue is recognized upon customer acceptance. National Account customers are large customers with centralized purchasing and geographically dispersed operations in multiple dealer territories. Reserves for discounts and returns are maintained for anticipated future claims. The accounting policies used to develop these product discounts and returns include:
Product discounts: The Company records estimated reductions to revenues for customer programs and incentive offerings, including special pricing agreements, price competition, promotions and other volume-based incentives. Lift truck sales revenue is recorded net of estimated discounts. The estimated discount amount is based upon historical trends for each lift truck model. In addition to standard discounts, dealers can also request additional discounts that allow them to offer price concessions to customers. From time to time, the Company offers special incentives to increase market share or dealer stock and offers certain customers volume rebates if a specified cumulative level of purchases is obtained. If estimates of customer programs and incentives were one percent higher than the levels offered during 2017, the reserves for product discounts would increase and revenue would be reduced by $4.7 million. The Company's past results of operations have not been materially affected by a change in the estimate of product discounts and although there can be no assurances, the Company is not aware of any circumstances that would be reasonably likely to materially change its estimates in the future.
Product returns: Products generally are not sold with the right of return with the exception of a small percentage of aftermarket parts. Based on historical experience, a portion of these aftermarket parts are estimated to be returned which, subject to certain terms and conditions, the Company will agree to accept. The Company records estimated reductions to revenues at the time of sale based on this historical experience and the limited right of return provided to certain customers. If future trends were to change significantly from those experienced in the past, incremental reductions to revenues may result based on this new experience. If the estimate of average return rates for these aftermarket parts were to increase by one percent over historical levels, the reserves for product returns would increase and revenues would be reduced by $0.2 million. The Company's past results of operations have not been materially affected by a change in the estimate of product returns and although there can be no assurances, the Company is not aware of any circumstances that would be reasonably likely to materially change its estimates in the future.
Product warranties: The Company provides for the estimated cost of product warranties at the time revenues are recognized. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, the warranty obligation is affected by product failure rates, labor costs and replacement component costs incurred in correcting a product failure. If actual product failure rates, labor costs or replacement component costs differ from the Company's estimates, which are based on historical failure rates and consideration of known trends, revisions to the estimate of the cost to correct product failures would be required. If the estimate of the cost to correct product failures were to increase by one percent over 2017 levels, the reserves for product warranties would increase and additional expense of $0.2 million would be incurred. The Company's past results of operations have not been materially affected by a change in the estimate of product warranties and although there can be no assurances, the Company is not aware of any circumstances that would be reasonably likely to materially change the estimates in the future.
Retirement benefit plans: The Company maintains various defined benefit pension plans that provide benefits based on years of service and average compensation during certain periods. Pension benefits are frozen for all employees other than certain employees in the Netherlands. All other eligible employees, including employees whose pension benefits are frozen, receive retirement benefits under defined contribution retirement plans. The Company's policy is to periodically make contributions to fund the defined benefit pension plans within the range allowed by applicable regulations. The defined benefit pension plan assets consist primarily of publicly traded stocks and government and corporate bonds. There is no guarantee the actual return on the plans’ assets will equal the expected long-term rate of return on plan assets or that the plans will not incur investment losses.
The expected long-term rate of return on defined benefit plan assets reflects management’s expectations of long-term rates of return on funds invested to provide for benefits included in the projected benefit obligations. In establishing the expected long-term rate of return assumption for plan assets, the Company considers the historical rates of return over a period of time that is consistent with the long-term nature of the underlying obligations of these plans as well as a forward-looking rate of return. The historical and forward-looking rates of return for each of the asset classes used to determine the Company's estimated rate
15
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
of return assumption were based upon the rates of return earned or expected to be earned by investments in the equivalent benchmark market indices for each of the asset classes.
Expected returns for most of the Company's pension plans are based on a calculated market-related value of assets. Under this methodology, asset gains and losses resulting from actual returns that differ from expected returns are recognized in the market-related value of assets ratably over three years.
The basis for the selection of the discount rate for each plan is determined by matching the timing of the payment of the expected obligations under the defined benefit plans against the corresponding yield of high-quality corporate bonds of equivalent maturities.
The following illustrates the sensitivity of the net periodic benefit cost and projected benefit obligation to a 1% change in the discount rate or return on plan assets (in millions):
Assumption | Change | Increase (decrease) 2018 net pension expense | Increase (decrease) 2017 projected benefit obligation | |||
Discount rate | 1% increase | $0.1 | $(6.1) | |||
1% decrease | (0.3) | 6.7 | ||||
Return on plan assets | 1% increase | (1.0) | N/A | |||
1% decrease | 1.0 | N/A | ||||
Long-lived assets, goodwill and intangible assets: Net property, plant and equipment, goodwill and net intangible assets at December 31, 2017 were $265.4 million, $59.1 million and $56.1 million, respectively. The Company makes estimates and assumptions in preparing the consolidated financial statements for which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed in the business, including assets of acquired businesses. These estimates and assumptions are closely monitored and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or an impairment recorded based on a change in the expected use of the asset or performance of the related asset group.
The Company periodically evaluates long-lived assets, including intangible assets with finite lives, for impairment when changes in circumstances or the occurrence of certain events indicate the carrying amount of an asset may not be recoverable. Upon identification of indicators of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets or liabilities. The asset group would be considered impaired when the estimated future undiscounted cash flows generated by the asset group are less than carrying value. If the carrying value of an asset group is considered impaired, an impairment charge is recorded for the amount that the carrying value of the asset group exceeds its fair value. Fair value is estimated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The determination of asset groups and the underlying cash flows requires the use of significant judgment.
The Company has intangible assets, including customer and contractual relationships, patents and technology, and trademarks. Intangible assets with a definite life are amortized over a period ranging from one to thirteen years on a systematic and rational basis (generally straight line) that is representative of the asset’s use. Costs related to internally developed intangible assets, such as patents, are expensed as incurred and included in selling, general and administrative expenses.
During the fourth quarter of 2017, in connection with the preparation of the Company's annual operating plan for 2018 and longer-term forecast, the Company identified indicators of impairment at Nuvera due to the extension of time expected to commercialize Nuvera's products and the related length of time needed to achieve break-even operating results and positive cash flows. Accordingly, the Company performed an impairment analysis during the fourth quarter of 2017 of Nuvera's long-lived assets, including property, plant and equipment and intangible assets with finite lives. Based on this analysis, it was determined that the fair value of these assets was less than the respective carrying amounts of such assets, and accordingly, the Company recognized an impairment charge of $4.9 million in the Nuvera segment, which is included in selling, general and administrative expenses in the consolidated statement of operations. The impairment charge reduced property, plant, and
16
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
equipment by $3.7 million and intangible assets by $1.2 million. See Note 11 and Note 12 to the consolidated financial statements in this Annual Report on Form 10-K for further discussion of the impairment charge.
Intangible assets with an indefinite life, including certain trademarks, are not amortized. Indefinite-lived intangible assets are tested for impairment annually, and are tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired. An impairment loss generally would be recognized when the fair value is less than the carrying value of the indefinite-lived intangible asset.
Of the $56.1 million of net intangible assets, $18.0 million relates to indefinite-lived trademarks, related to the acquisition of Bolzoni. The primary valuation technique used in estimating the fair value of indefinite-lived intangible assets is the present value of discounted cash flows. Specifically, a relief of royalty rate is applied to estimated sales, with the resulting amounts discounted using an appropriate discount rate of a market participant. The relief of royalty rate is the estimated royalty rate a market participant would pay to acquire the right to market and produce the product. If the resulting discounted cash flows are less than book value of the indefinite-lived intangible asset, an impairment exists and the asset would be adjusted to fair value. Based on impairment testing as of May 1, 2017, no impairment was identified.
Goodwill is tested for impairment annually as of May 1 and is tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. The Company completed the annual testing of impairment of goodwill as of May 1, 2017 at the reporting unit level for the related goodwill. The Company uses either a qualitative or quantitative analysis to determine whether fair value exceeds carrying value. An estimate of the fair value of the reporting unit is determined through a combination of comparable market values for similar businesses and discounted cash flows. These estimates can change significantly based on such factors as the reporting unit's financial performance, economic conditions, interest rates, growth rates, pricing, changes in business strategies and competition. Based on this testing, the fair value of each reporting unit was in excess of its carrying value and no impairment exists.
Factors which could result in future impairment charges include, but are not limited to, changes in worldwide economic conditions, changes in competitive conditions and customer preferences. These risk factors are discussed in Item 1A, "Risk Factors," of this Form 10-K. In addition, changes in the weighted average cost of capital could also impact impairment testing results. The Company will continue to monitor its reporting units and asset groups for any indicators of impairment.
Product liabilities: The Company provides for the estimated cost of personal and property damage relating to its products based on a review of historical experience and consideration of any known trends. Reserves are recorded for estimates of the costs for known claims and estimates of the costs of incidents that have occurred but for which a claim has not yet been reported, up to the stop-loss insurance coverage. While the Company engages in extensive product quality reviews and customer education programs, the product liability provision is affected by the number and magnitude of claims of alleged product-related injury and property damage and the cost to defend those claims. In addition, the estimates regarding the magnitude of claims are affected by changes in assumptions regarding medical costs, inflation rates and trends in damages awarded by juries. Changes in the assumptions regarding any one of these factors could result in a change in the estimate of the magnitude of claims. A one percent increase in the estimate of the number of claims or the magnitude of claims would increase the product liability reserve and reduce operating profit by approximately $0.2 million to $0.4 million. Although there can be no assurances, the Company is not aware of any circumstances that would be reasonably likely to materially change the estimates in the future.
Self-insurance liabilities: The Company is generally self-insured for product liability, environmental liability and medical and workers’ compensation claims. For product liability, catastrophic insurance coverage is retained for potentially significant individual claims. An estimated provision for claims reported and for claims incurred but not yet reported under the self-insurance programs is recorded and revised periodically based on industry trends, historical experience and management judgment. In addition, industry trends are considered within management’s judgment for valuing claims. Changes in assumptions for such matters as legal judgments and settlements, legal defense costs, inflation rates, medical costs and actual experience could cause estimates to change in the near term. Changes in any of these factors could materially change the estimates for these self-insurance obligations causing a related increase or decrease in reported net operating results in the period of change in the estimate.
Deferred tax valuation allowances: The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. A valuation allowance has been provided against certain deferred tax assets related
17
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
to non-U.S. and U.S. state jurisdictions including net operating and capital loss carryforwards. Management believes the valuation allowances are adequate after considering future taxable income, allowable carryback and carryforward periods, reversing taxable temporary differences and ongoing prudent and feasible tax planning strategies. In the event the Company was to determine that it would be able to realize the deferred tax assets in the future in excess of the net recorded amount (including the valuation allowance), an adjustment to the valuation allowance would increase income in the period such determination was made. Conversely, should the Company determine that it would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the valuation allowance would be expensed in the period such determination was made. See "Financial Review - Income Taxes" and Note 6 to the Consolidated Financial Statements in this Annual Report on Form 10-K for further discussion of the Company's income taxes.
Inventory reserves: The Company writes down inventory to the lower of cost or net realizable value, which includes an estimate for obsolescence or excess inventory based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Upon a subsequent sale or disposal of the impaired inventory, the corresponding reserve for impaired value is relieved to ensure that the cost basis of the inventory reflects any write-downs. An impairment in value of one percent of net inventories would result in additional expense of approximately $4.1 million.
Allowances for doubtful accounts: The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. These allowances are based on both recent trends of certain customers estimated to be a greater credit risk as well as general trends of the entire customer pool. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. An impairment in value of one percent of net accounts receivable would require an increase in the allowance for doubtful accounts and would result in additional expense of approximately $4.6 million.
CONSOLIDATED FINANCIAL REVIEW
The following table identifies the components of change for 2017 compared with 2016 by segment:
Revenues | Gross Profit | Operating Profit | Net Income Attributable to Stockholders | |||||||||||||
2016 | $ | 2,569.7 | $ | 427.5 | $ | 34.9 | $ | 42.8 | ||||||||
Increase (decrease) in 2017 | ||||||||||||||||
Americas | 158.4 | 46.7 | 35.6 | 8.8 | ||||||||||||
EMEA | 100.1 | 6.2 | 1.4 | (4.1 | ) | |||||||||||
JAPIC | 4.4 | 3.1 | 0.6 | 0.2 | ||||||||||||
Lift truck business | 262.9 | 56.0 | 37.6 | 4.9 | ||||||||||||
Bolzoni | 61.6 | 19.1 | 6.5 | 4.2 | ||||||||||||
Nuvera | 1.2 | 0.6 | (2.4 | ) | (2.9 | ) | ||||||||||
Eliminations | (10.2 | ) | (0.6 | ) | (0.6 | ) | (0.4 | ) | ||||||||
2017 | $ | 2,885.2 | $ | 502.6 | $ | 76.0 | $ | 48.6 | ||||||||
18
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
FINANCIAL REVIEW
The segment and geographic results of operations for the Company were as follows for the year ended December 31:
Favorable / (Unfavorable) % Change | |||||||||||||||||
2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||
Lift truck unit shipments (in thousands) | |||||||||||||||||
Americas | 58.4 | 54.4 | 56.8 | 7.4 | % | (4.2 | )% | ||||||||||
EMEA | 28.9 | 24.6 | 23.8 | 17.5 | % | 3.4 | % | ||||||||||
JAPIC | 6.1 | 5.8 | 6.3 | 5.2 | % | (7.9 | )% | ||||||||||
93.4 | 84.8 | 86.9 | 10.1 | % | (2.4 | )% | |||||||||||
Revenues | |||||||||||||||||
Americas | $ | 1,834.1 | $ | 1,675.7 | $ | 1,775.5 | 9.5 | % | (5.6 | )% | |||||||
EMEA | 715.8 | 615.7 | 606.4 | 16.3 | % | 1.5 | % | ||||||||||
JAPIC | 173.9 | 169.5 | 193.7 | 2.6 | % | (12.5 | )% | ||||||||||
Lift truck business | 2,723.8 | 2,460.9 | 2,575.6 | 10.7 | % | (4.5 | )% | ||||||||||
Bolzoni (1) | 177.2 | 115.6 | — | 53.3 | % | n.m. | |||||||||||
Nuvera | 3.7 | 2.5 | 2.5 | 48.0 | % | n.m. | |||||||||||
Eliminations | (19.5 | ) | (9.3 | ) | — | n.m. | n.m. | ||||||||||
$ | 2,885.2 | $ | 2,569.7 | $ | 2,578.1 | 12.3 | % | (0.3 | )% | ||||||||
Gross profit (loss) | |||||||||||||||||
Americas | $ | 334.6 | $ | 287.9 | $ | 308.1 | 16.2 | % | (6.6 | )% | |||||||
EMEA | 95.7 | 89.5 | 101.3 | 6.9 | % | (11.6 | )% | ||||||||||
JAPIC | 20.2 | 17.1 | 23.2 | 18.1 | % | (26.3 | )% | ||||||||||
Lift truck business | 450.5 | 394.5 | 432.6 | 14.2 | % | (8.8 | )% | ||||||||||
Bolzoni (1) | 54.8 | 35.7 | — | 53.5 | % | n.m. | |||||||||||
Nuvera | (2.1 | ) | (2.7 | ) | (1.8 | ) | (22.2 | )% | n.m. | ||||||||
Eliminations | (0.6 | ) | — | — | n.m. | n.m. | |||||||||||
$ | 502.6 | $ | 427.5 | $ | 430.8 | 17.6 | % | (0.8 | )% | ||||||||
Selling, general and administrative expenses | |||||||||||||||||
Americas | $ | 225.3 | $ | 214.2 | $ | 191.2 | (5.2 | )% | (12.0 | )% | |||||||
EMEA | 86.7 | 81.9 | 88.3 | (5.9 | )% | 7.2 | % | ||||||||||
JAPIC | 26.3 | 23.8 | 25.0 | (10.5 | )% | 4.8 | % | ||||||||||
Lift truck business | 338.3 | 319.9 | 304.5 | (5.8 | )% | (5.1 | )% | ||||||||||
Bolzoni (1) | 48.4 | 35.8 | — | (35.2 | )% | n.m. | |||||||||||
Nuvera | 39.9 | 36.9 | 22.8 | (8.1 | )% | n.m. | |||||||||||
$ | 426.6 | $ | 392.6 | $ | 327.3 | (8.7 | )% | (20.0 | )% | ||||||||
19
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
Favorable / (Unfavorable) % Change | |||||||||||||||||
2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||
Operating profit (loss) | |||||||||||||||||
Americas | $ | 109.3 | $ | 73.7 | $ | 116.9 | 48.3 | % | (37.0 | )% | |||||||
EMEA | 9.0 | 7.6 | 13.0 | 18.4 | % | (41.5 | )% | ||||||||||
JAPIC | (6.1 | ) | (6.7 | ) | (1.8 | ) | 9.0 | % | n.m. | ||||||||
Lift truck business | 112.2 | 74.6 | 128.1 | 50.4 | % | (41.8 | )% | ||||||||||
Bolzoni (1) | 6.4 | (0.1 | ) | — | n.m. | n.m. | |||||||||||
Nuvera | (42.0 | ) | (39.6 | ) | (24.6 | ) | (6.1 | )% | n.m. | ||||||||
Eliminations | (0.6 | ) | — | — | n.m. | n.m. | |||||||||||
$ | 76.0 | $ | 34.9 | $ | 103.5 | 117.8 | % | (66.3 | )% | ||||||||
Interest expense | $ | 14.6 | $ | 6.7 | $ | 4.7 | (117.9 | )% | (42.6 | )% | |||||||
Other income | $ | (32.4 | ) | $ | (10.1 | ) | $ | (5.7 | ) | 220.8 | % | 77.2 | % | ||||
Income before income taxes | $ | 93.8 | $ | 38.3 | $ | 104.5 | 144.9 | % | (63.3 | )% | |||||||
Net income (loss) attributable to stockholders | |||||||||||||||||
Americas | $ | 68.4 | $ | 59.6 | $ | 76.3 | 14.8 | % | (21.9 | )% | |||||||
EMEA | 5.3 | 9.4 | 10.6 | (43.6 | )% | (11.3 | )% | ||||||||||
JAPIC | (1.9 | ) | (2.1 | ) | 2.4 | 9.5 | % | (187.5 | )% | ||||||||
Lift truck business | 71.8 | 66.9 | 89.3 | 7.3 | % | (25.1 | )% | ||||||||||
Bolzoni (1) | 3.9 | (0.3 | ) | — | n.m. | n.m. | |||||||||||
Nuvera | (26.7 | ) | (23.8 | ) | (14.6 | ) | (12.2 | )% | n.m. | ||||||||
Eliminations | (0.4 | ) | — | — | n.m. | n.m. | |||||||||||
$ | 48.6 | $ | 42.8 | $ | 74.7 | 13.6 | % | (42.7 | )% | ||||||||
Diluted earnings per share | $ | 2.94 | $ | 2.61 | $ | 4.57 | 12.6 | % | (42.9 | )% | |||||||
Reported income tax rate | 47.9 | % | n.m. | 28.1 | % | ||||||||||||
(1) Bolzoni was acquired on April 1, 2016 and results of operations have been included since the acquisition date. | |||||||||||||||||
n.m. - not meaningful | |||||||||||||||||
Following is the detail of the Company's unit shipments, bookings and backlog of unfilled orders placed with its manufacturing and assembly operations for new lift trucks, reflected in thousands of units. As of December 31, 2017, substantially all of the Company's backlog is expected to be sold within the next twelve months.
YEAR ENDED | NINE MONTHS ENDED | YEAR ENDED | |||||||
December 31, 2017 | September 30, 2017 | December 31, 2016 | |||||||
Unit backlog, beginning of period | 30.7 | 30.7 | 26.9 | ||||||
Unit shipments | (93.4 | ) | (67.5 | ) | (84.8 | ) | |||
Unit bookings | 96.5 | 71.9 | 88.6 | ||||||
Unit backlog, end of period | 33.8 | 35.1 | 30.7 | ||||||
20
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
The following is the detail of the approximate sales value of the Company's lift truck unit bookings and backlog, reflected in millions of dollars. The dollar value of bookings and backlog is calculated using the current unit bookings and backlog and the forecasted average sales price per unit.
YEAR ENDED | NINE MONTHS ENDED | YEAR ENDED | ||||||||||
December 31, 2017 | September 30, 2017 | December 31, 2016 | ||||||||||
Bookings, approximate sales value | $ | 2,260 | $ | 1,645 | $ | 2,000 | ||||||
Backlog, approximate sales value | $ | 860 | $ | 860 | $ | 740 | ||||||
2017 Compared with 2016
The following table identifies the components of change in revenues for 2017 compared with 2016:
Revenues | ||||||
2016 | $ | 2,569.7 | ||||
Increase (decrease) in 2017 from: | ||||||
Unit volume and product mix | 206.5 | |||||
Bolzoni revenues | ||||||
First quarter 2017 | $ | 41.6 | ||||
Increase in comparable periods | 20.0 | 61.6 | ||||
Parts | 25.7 | |||||
Unit price | 23.1 | |||||
Foreign currency | 12.4 | |||||
Nuvera revenues | 1.2 | |||||
Other | (15.0 | ) | ||||
2017 | $ | 2,885.2 | ||||
Revenues increased 12.3% to $2,885.2 million in 2017 from $2,569.7 million in 2016. The increase was mainly attributable to higher unit and parts volumes and a decrease in deal-specific pricing in the lift truck business in 2017 compared with 2016.
Revenues in the Americas increased in 2017 from 2016 primarily as a result of increased unit shipments of higher-priced trucks. Revenues increased primarily from sales of the Company's new Class 5 internal combustion engine standard truck and increased sales of higher-capacity, 3.5 to 8 ton, Class 5 trucks, as well as Class 1 and Class 2 electric trucks. In addition, a decrease in deal-specific pricing and an increase in parts sales also contributed to the increase in revenues in 2017 compared with 2016.
EMEA's revenues improved in 2017 from 2016 mainly as a result of increased unit shipments primarily related to shipments of the new Class 5 internal combustion engine standard truck and an increase in shipments of Class 1 electric-rider trucks.
The following table identifies the components of change in operating profit for 2017 compared with 2016:
Operating Profit | |||
2016 | $ | 34.9 | |
Increase (decrease) in 2017 from: | |||
Lift truck gross profit | 55.4 | ||
Bolzoni operations | 6.5 | ||
Nuvera operations | (2.4 | ) | |
Lift truck selling, general and administrative expenses | (18.4 | ) | |
2017 | $ | 76.0 | |
21
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
The Company recognized operating profit of $76.0 million in 2017 compared with $34.9 million in 2016. The increase in operating profit was primarily due to higher lift truck gross profit, partially offset by an increase in selling, general and administrative expenses. The increase in the lift truck gross profit was primarily due to higher unit shipments and related production efficiencies as well as improved pricing, net of material cost inflation.
Operating profit in the Americas increased in 2017 compared with 2016 primarily as a result of improved gross profit mainly due to higher unit shipments of higher-priced lift trucks and related production efficiencies, as well as improved pricing, net of material cost inflation. In addition, selling, general and administrative expenses in the Americas increased in 2017 compared with the 2016 primarily due to higher employee-related costs and increased costs for development and marketing of new products, partially offset by lower acquisition-related costs.
Operating profit in EMEA increased in 2017 compared with 2016 as a result of improved gross profit partially offset by higher selling, general and administrative expenses mainly from higher marketing and employee-related costs. Gross profit improved primarily from higher unit shipments and the favorable impact of foreign currency movements of $4.4 million. The improvement was partially offset by material cost inflation.
Bolzoni's operating profit improved in 2017 from 2016 primarily due to the absence of $2.7 million of one-time purchase accounting adjustments recorded in 2016 and higher gross profit from higher sales in the comparable second, third and fourth quarters of 2017 compared with 2016. Operating profit in the first quarter of 2017 was $2.3 million.
During 2017, Nuvera's operating loss increased $2.4 million compared with 2016, mainly due to an impairment charge of $4.9 million recorded in 2017 on Nuvera's long-lived assets. Increased employee-related costs, professional fees and other general operating expenses also contributed to the increase in operating loss. These items were partially offset by lower product development and production start-up expenses. See Note 11 and Note 12 to the consolidated financial statements in this Annual Report on Form 10-K for further discussion of the impairment charge.
The Company recognized net income attributable to stockholders of $48.6 million in 2017 compared with $42.8 million in 2016. The increase was primarily the result of the increase in lift truck operating profit and $19.8 million of favorable HYGFS equity income in 2017 related to the Tax Cuts and Jobs Act (the “Tax Reform Act”), which is reflected in “Income from Unconsolidated Affiliates” in the Consolidated Statement of Operations. These items were partially offset by income tax expense of $38.2 million in 2017 due to the Tax Reform Act. See "Financial Review - Income Taxes" and Note 6 to the consolidated financial statements in this Annual Report on Form 10-K for further discussion of income taxes.
2016 Compared with 2015
The following table identifies the components of change in revenues for 2016 compared with 2015:
Revenues | |||
2015 | $ | 2,578.1 | |
Increase (decrease) in 2016 from: | |||
Unit volume and product mix | (84.1 | ) | |
Unit price | (27.3 | ) | |
Foreign currency | (20.1 | ) | |
Bolzoni revenues | 115.6 | ||
Other | 5.6 | ||
Parts | 1.9 | ||
2016 | $ | 2,569.7 | |
Revenues decreased slightly to $2,569.7 million in 2016 from $2,578.1 million in 2015. The decrease in the lift truck business was mainly due to lower unit volumes, the unfavorable effect of deal-specific selling prices and a shift in sales to lower-priced lift trucks during 2016 compared with 2015. Revenues at non-U.S. locations were also unfavorably affected by the strong U.S.
22
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
dollar during 2016 compared with 2015. The decline in lift truck revenue was partially offset by Bolzoni revenues since the acquisition on April 1, 2016.
Revenues in the Americas declined in 2016 from 2015 primarily as a result of the reduction in unit shipments and the unfavorable effect of deal-specific pricing in North America. In addition, unfavorable currency movements of $4.4 million from the translation of Brazilian sales into U.S. dollars, which strengthened against the Brazilian real, contributed to the decline in revenues.
EMEA's revenues increased in 2016 from 2015 mainly as a result of higher lift truck volumes, partially offset by unfavorable currency movements of $15.5 million from the translation of sales into U.S. dollars.
Revenues in JAPIC declined in 2016 compared with 2015. The decrease was primarily the result of fewer unit shipments, the unfavorable effect of lower pricing of trucks and a shift in sales to lower-priced products in 2016 compared with 2015.
The following table identifies the components of change in operating profit for 2016 compared with 2015:
Operating Profit | |||
2015 | $ | 103.5 | |
Decrease in 2016 from: | |||
Lift truck gross profit | (38.1 | ) | |
Lift truck selling, general and administrative expenses | (15.4 | ) | |
Nuvera operations | (15.0 | ) | |
Bolzoni operations | (0.1 | ) | |
2016 | $ | 34.9 | |
The Company recognized operating profit of $34.9 million in 2016 compared with operating profit of $103.5 million in 2015.
The overall decrease in the lift truck business operating profit was primarily due to lower gross profit and higher selling, general and administrative expenses. Gross profit decreased mainly as a result of the unfavorable effect of lower pricing, reduced sales volumes, which led to higher manufacturing variances, unfavorable foreign currency movements of $15.9 million and increased U.S. health care costs. The decrease in gross profit was partially offset by continued material cost deflation of $28.6 million during 2016 compared with 2015. Selling, general and administrative expenses increased in 2016 compared with 2015 mainly due to acquisition-related costs of $6.6 million, higher product development and marketing-related expenses, and increased U.S. health care costs. Favorable foreign currency movements of $5.5 million and lower incentive compensation estimates partially offset the increase in selling, general and administrative expenses.
Operating profit in the Americas decreased in 2016 compared with 2015 primarily as a result of higher selling, general and administrative expenses mainly from $6.6 million of acquisition-related costs, increased marketing-related expenses, a $3.1 million estimated loss on recovery of assets for recourse obligations, increased product development expenses and increased U.S. health care costs. Gross profit also decreased primarily as a result of the effect of lower product pricing, reduced sales volumes, which led to higher manufacturing variances, and increased U.S. health care costs. The decrease in gross profit was partially offset by continued material cost deflation of $20.5 million and favorable foreign currency movements of $8.3 million during 2016 compared with 2015.
Operating profit in EMEA declined in 2016 compared with 2015 mainly as a result of lower gross profit partially offset by lower selling, general and administrative expenses. Gross profit declined primarily from unfavorable currency movements of $20.3 million, lower product pricing and higher warranty-related expenses. The decrease in gross profit was partially offset by material cost deflation of $8.6 million, a shift in sales to higher-margin products and higher units and parts volumes. Selling, general and administrative expenses decreased primarily due to favorable foreign currency movements of $3.4 million and lower marketing and bad debt expense in 2016 compared with 2015.
The operating loss in JAPIC increased in 2016 compared with 2015 mainly as a result of lower gross profit from unfavorable currency movements of $3.9 million and lower product pricing.
23
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
Nuvera's operating loss increased in 2016 from 2015 primarily due to an increase of $13.7 million in development and production start-up expenses, including unfavorable inventory adjustments to reflect current selling prices. Nuvera's costs associated with producing prototype and early production components at low volumes also contributed to the higher development expenses during 2016. In addition, Nuvera had increased marketing and employee-related costs as it continues transitioning from product development to commercialization and production.
The Company recognized net income attributable to stockholders of $42.8 million in 2016 compared with $74.7 million in 2015. The decrease was primarily the result of the decrease in operating profit, partially offset by a decrease in the reported income tax rate in 2016 compared with 2015. See "Financial Review - Income Taxes" and Note 6 to the consolidated financial statements in this Annual Report on Form 10-K for further discussion of income taxes.
Income taxes
The income tax provision includes U.S. federal, state and local, and non-U.S. income taxes. In determining the effective income tax rate, the Company analyzes various factors, including annual earnings, the laws of taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the ability to use tax credits, net operating loss and capital loss carryforwards, and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, and certain items with respect to valuation allowances or other unusual or non-recurring tax adjustments are reflected in the interim period in which they occur.
Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards on a taxing jurisdiction basis. The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which it expects the temporary differences to be recovered or paid.
The authoritative guidance for income taxes requires a reduction of the carrying amounts of deferred tax assets by recording a valuation allowance if, based on the available evidence, it is more likely than not (defined as a likelihood of more than 50%) such assets will not be realized. The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Company's financial statements or tax returns and future profitability. The Company's accounting for deferred tax consequences represents its best estimate of those future events. Changes in the Company's estimates, due to unanticipated events or otherwise, could have a material effect on its financial condition and results of operations. The Company continually evaluates its deferred tax assets to determine if a valuation allowance is required.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”). The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, repealing the deduction for domestic production activities, allowing the immediate expensing of certain qualified capital expenditures, implementing a territorial tax system and imposing a one-time transition tax on certain unremitted earnings of non-U.S. subsidiaries. As a result of the Tax Reform Act, the Company recorded the provisional tax effects of $38.2 million, comprised of $33.1 million of tax expense due to the transition tax on the unremitted earnings and profits of non-U.S. subsidiaries and $5.1 million of tax expense due to the effects on the Company’s deferred tax assets and liabilities. The final amounts recorded in subsequent financial statements may materially differ from these provisional amounts due to among other things, additional analysis, changes in interpretations of the Tax Reform Act including interpretations by state and local taxing authorities and related assumptions of the Company, and additional regulatory guidance that may be issued which could potentially effect the measurement of these provisional tax amounts. The provisional amounts are expected to be finalized when the U.S. corporate income tax return for 2017 is filed in 2018, but in no event later than one year from the enactment date.
The one-time transition tax is based on the post-1986 unremitted earnings and profits of non-U.S. subsidiaries which have been previously deferred from U.S. income taxes including such earnings through the measurement date as determined by the Tax Reform Act. The amount of transition tax also depends on the amount of earnings and profits held in cash or other specified assets. The Company had an estimated $310 million of undistributed non-U.S. earnings and profits subject to the transition tax and recognized a provisional $33.1 million of income tax expense in the fourth quarter of 2017. After the utilization of existing tax credits, the Company expects to pay cash taxes, including state income taxes, of an estimated $22.5 million with respect to the transition tax payable over eight years. These amounts may change upon the issuance of additional regulatory guidance or when the Company finalizes its calculation of earnings and profits, including the amounts held in cash
24
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
or other specified assets and its calculation of available foreign tax credits. The Company intends that future distributions will be from earnings which would otherwise qualify for the one hundred percent dividends received deduction provided in the Tax Reform Act and earnings which would not result in any significant foreign taxes. As a result, no additional income taxes have been provided for any undistributed foreign earnings not subject to the transition tax, nor any additional outside basis differences inherent in these entities, as these amounts continue to be indefinitely reinvested in non-U.S. operations. See Note 6 to the consolidated financial statements in this Annual Report on Form 10-K for further discussion of income taxes.
A reconciliation of the consolidated federal statutory and reported income tax is as follows for the years ended December 31:
2017 | 2016 | 2015 | ||||||||||
Income before income taxes | $ | 93.8 | $ | 38.3 | $ | 104.5 | ||||||
Statutory taxes at 35% | $ | 32.8 | $ | 13.4 | $ | 36.6 | ||||||
Permanent adjustments: | ||||||||||||
Equity interest earnings | (8.1 | ) | (2.2 | ) | (1.9 | ) | ||||||
Non-U.S. rate differences | (7.8 | ) | (9.0 | ) | (13.3 | ) | ||||||
Federal income tax credits | (1.6 | ) | (1.7 | ) | — | |||||||
State income taxes | 1.1 | 0.1 | 3.4 | |||||||||
Valuation allowance | 3.4 | 2.4 | 9.3 | |||||||||
Other | (0.2 | ) | 0.6 | 1.0 | ||||||||
$ | (13.2 | ) | $ | (9.8 | ) | $ | (1.5 | ) | ||||
Discrete items: | ||||||||||||
Tax Reform Act | 38.2 | — | — | |||||||||
Provision to return adjustments | 0.6 | (1.9 | ) | (0.2 | ) | |||||||
Valuation allowance | (3.3 | ) | (2.6 | ) | (3.4 | ) | ||||||
Sale of non-U.S. investment | (9.1 | ) | (1.9 | ) | (3.7 | ) | ||||||
Other | (1.1 | ) | (1.2 | ) | 1.6 | |||||||
$ | 25.3 | $ | (7.6 | ) | $ | (5.7 | ) | |||||
Income tax provision (benefit) | $ | 44.9 | $ | (4.0 | ) | $ | 29.4 | |||||
Reported income tax rate | 47.9 | % | n.m. | 28.1 | % | |||||||
n.m. - not meaningful | ||||||||||||
The Company's effective income tax rate differs from the U.S. federal statutory tax rate of 35% primarily as a result of equity interest earnings, income taxed in non-U.S. jurisdictions and changes in valuation allowances primarily in non-U.S. jurisdictions.
In addition, the effect of discrete items on the reported income tax rate was as follows:
During 2017, the Company recognized a tax benefit of $9.1 million and a tax expense of $1.4 million for unrecognized tax benefits from an internal sale of a subsidiary between consolidated companies resulting in the repatriation of non-U.S. accumulated earnings taxed at higher rates. In addition, the Company settled various federal obligations in Brazil through the utilization of its federal net operating loss carryforwards for which a valuation allowance was previously provided. As a result of the utilization of the underlying deferred tax assets, the Company released the associated valuation allowance previously provided of $4.7 million. This was partly offset by a $1.6 million valuation allowance provided against deferred tax assets in China where the Company has determined that such deferred tax assets no longer meet the more likely than not standard for realization.
During 2016, the Company received a notice from the Italian Tax Authority approving the transfer of certain tax losses as part of an internal restructuring. As a result, the Company believes it is more likely than not that deferred tax assets for such losses will be realized in the foreseeable future, and has released the valuation allowance previously provided. The Company also recognized tax benefits from provision to return adjustments primarily related to a U.S. tax deduction for manufacturing
25
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
activities and adjustments for the taxation of certain foreign earnings and a tax benefit from an internal sale of a subsidiary between affiliated companies resulting in the repatriation of non-U.S. accumulated earnings which triggered a currency loss for U.S. tax purposes.
Other items during 2016 include a tax benefit of $4.0 million. As a result of the Bolzoni acquisition, the Company changed its previous reinvestment assertion; and consequently, all of the earnings of its European operations are now considered permanently reinvested and the previously provided deferred tax liability is no longer required. In addition, the Company recognized tax expense of $1.6 million related to non-deductible acquisition expenses and tax expense of $2.1 million for net additions for unrecognized tax benefits.
During 2015, a significant downturn was experienced in the Company's Brazilian operations. This significant decrease in operations and actions taken by management to reduce its manufacturing activity to more appropriate levels, coupled with the continued low expectations in the near term for the Brazilian lift truck market and the continuing devaluation of the Brazilian real, caused the Company in 2015 to forecast a three-year cumulative loss for its Brazilian operations. Although the Company projects earnings over the longer term for its Brazilian operations, such longer-term forecasts are not sufficient positive evidence to support the future utilization of deferred tax assets when a three-year loss is determined. Accordingly, in 2015, the Company recorded a valuation allowance adjustment of $1.9 million against its deferred tax assets in Brazil. The Company also recognized $2.7 million, $2.4 million and $5.6 million in 2017, 2016 and 2015, respectively, of valuation allowances related to pre-tax losses in Brazil included in its effective tax rate.
During 2015, the Company came to a tentative agreement in negotiating an Advance Pricing Agreement with the Australian Tax Authority. The terms of the agreement were finalized in 2016 and will extend through 2020. As a result of this agreement, in 2015, the Company released a portion of the valuation allowance of $4.4 million, related to the deferred tax asset that it expected would be utilized in the foreseeable future. In 2015, the Company also recognized a tax benefit from an internal sale of a subsidiary between consolidated companies resulting in the repatriation of non-U.S. accumulated earnings taxed at higher rates.
See Note 6 to the consolidated financial statements in this Annual Report on Form 10-K for further discussion of income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following tables detail the change in cash flow for the years ended December 31:
2017 | 2016 | Change | |||||||||
Operating activities: | |||||||||||
Net income | $ | 48.9 | $ | 42.3 | $ | 6.6 | |||||
Depreciation and amortization | 42.8 | 39.1 | 3.7 | ||||||||
Stock-based compensation | 8.8 | 4.9 | 3.9 | ||||||||
Impairment of long-lived assets | 4.9 | — | 4.9 | ||||||||
Dividends from unconsolidated affiliates | 2.8 | 5.1 | (2.3 | ) | |||||||
Other | 0.7 | (27.7 | ) | 28.4 | |||||||
Working capital changes, excluding the effect of business acquisitions | 55.8 | (112.6 | ) | 168.4 | |||||||
Net cash provided by (used for) operating activities | 164.7 | (48.9 | ) | 213.6 | |||||||
26
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
2017 | 2016 | Change | |||||||||
Investing activities: | |||||||||||
Expenditures for property, plant and equipment | (41.0 | ) | (42.7 | ) | 1.7 | ||||||
Proceeds from the sale of property, plant and equipment | 1.3 | 13.7 | (12.4 | ) | |||||||
Investments in equity securities | (5.6 | ) | — | (5.6 | ) | ||||||
Business acquisitions, net of cash acquired | (1.0 | ) | (116.1 | ) | 115.1 | ||||||
Purchase of noncontrolling interest | (1.0 | ) | — | (1.0 | ) | ||||||
Net cash used for investing activities | (47.3 | ) | (145.1 | ) | 97.8 | ||||||
Cash flow before financing activities | $ | 117.4 | $ | (194.0 | ) | $ | 311.4 | ||||
Net cash provided by operating activities increased $213.6 million in 2017 compared with 2016 primarily as a result of the change in working capital items and other operating activities. The change in working capital was mainly due to accounts payable in the Americas returning to normalized levels during 2017 following an unplanned systems-related acceleration of supplier payments in December 2016, and lower payments of amounts accrued, primarily in the Americas, in 2017 compared with 2016. The change in net cash used for investing activities during 2017 compared with 2016 is mainly the result of the acquisition of Bolzoni in the second quarter of 2016.
2017 | 2016 | Change | |||||||||
Financing Activities: | |||||||||||
Net addition of long-term debt and revolving credit agreements | $ | 78.0 | $ | 99.0 | $ | (21.0 | ) | ||||
Cash dividends paid | (19.8 | ) | (19.2 | ) | (0.6 | ) | |||||
Financing fees paid | (4.7 | ) | (1.7 | ) | (3.0 | ) | |||||
Other | (0.4 | ) | (0.2 | ) | (0.2 | ) | |||||
Net cash provided by financing activities | $ | 53.1 | $ | 77.9 | $ | (24.8 | ) | ||||
Net cash provided by financing activities decreased $24.8 million in 2017 compared with 2016. The decrease in 2017 was due to borrowings under the Term Loan (as defined below), being used to repay borrowings under the Facility (as defined below) during 2017.
Financing Activities
The Company has a $200.0 million secured, floating-rate revolving credit facility (the "Facility”) that expires in April 2022. There were no borrowings outstanding under the Facility at December 31, 2017. The excess availability under the Facility at December 31, 2017 was $195.9 million, which reflects reductions of $4.1 million for letters of credit and other restrictions. The Facility consists of a U.S. revolving credit facility in the amount of $120.0 million and a non-U.S. revolving credit facility in the amount of $80.0 million. The Facility can be increased up to the total aggregate amount of $300.0 million over the term of the agreement in minimum increments of $10.0 million subject to certain conditions. The obligations under the Facility are generally secured by a lien on the working capital assets of the borrowers in the Facility, which include but are not limited to, cash and cash equivalents, accounts receivable and inventory and a second lien on the Term Loan Collateral (defined below). The approximate book value of assets held as collateral under the Facility was $1.0 billion as of December 31, 2017.
Borrowings bear interest at a floating rate based on a base rate or LIBOR, as defined in the Facility, plus an applicable margin. The applicable margins, as of December 31, 2017, for U.S. base rate loans and LIBOR loans were 0.25% and 1.25%, respectively. The applicable margin, as of December 31, 2017, for non-U.S. base rate loans and LIBOR loans was 1.25%. The applicable LIBOR interest rates under the Facility on December 31, 2017 were 2.73% and 1.25%, respectively, for the U.S. and non-U.S. facility including the applicable floating rate margin. The Facility also required the payment of a fee of 0.350% per annum on the unused commitment as of December 31, 2017.
27
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
The Facility includes restrictive covenants, which, among other things, limit additional borrowings and investments of the Company and its subsidiaries subject to certain thresholds, as defined in the Facility, and limits the payment of dividends. If availability for both total and U.S. revolving credit facilities on a pro forma basis, is greater than fifteen percent and less than or equal to twenty percent, the Company may pay dividends subject to achieving a minimum fixed charge coverage ratio of 1.00 to 1.00, as defined in the Facility. If the availability is greater than twenty percent for both total and U.S. revolving credit facilities on a pro forma basis, the Company may pay dividends without any minimum fixed charge coverage ratio requirement. The Facility also requires the Company to achieve a minimum fixed charge coverage ratio in certain circumstances in which total excess availability is less than ten percent of the total commitments under the Facility or excess availability under the U.S. revolving credit facility is less than ten percent of the U.S. revolver commitments, as defined in the Facility. At December 31, 2017, the Company was in compliance with the covenants in the Facility.
During 2017, the Company entered into an agreement for a $200.0 million term loan (the “Term Loan”), which matures in May 2023. The Term Loan requires quarterly principal payments on the last day of each March, June, September and December commencing September 30, 2017 in an amount equal to $2.5 million and the final principal repayment due on the May 30, 2023. The Company may also be required to make mandatory prepayments, in certain circumstances, as provided in the Term Loan. At December 31, 2017, there was $195.0 million of principle outstanding under the Term Loan which has been reduced in the consolidated balance sheet by $4.1 million of discounts and unamortized deferred financing fees.
The obligations under the Term Loan are generally secured by a first priority lien on the present and future shares of capital stock, material real property, fixtures and general intangibles consisting of intellectual property (collectively, the "Term Loan Collateral") and a second priority lien on the remaining collateral of the U.S. borrowers in the Facility. The approximate book value of assets held as collateral under the Term Loan was $710 million as of December 31, 2017.
Borrowings under the Term Loan bear interest at a floating rate, which can be a base rate or Eurodollar rate, as defined in the Term Loan, plus an applicable margin. The applicable margin is based on the consolidated leverage ratio, as provided in the Term Loan, and ranges from 2.75% to 3.00% for U.S. base rate loans and 3.75% to 4.00% for Eurodollar loans. The weighted average interest rate on the amount outstanding under the Term Loan at December 31, 2017 was 5.57%. In addition, the Term Loan includes restrictive covenants, which, among other things, limit additional borrowings and investments of the Company subject to certain thresholds, as provided in the Term Loan. The Term Loan limits the payment of regularly scheduled dividends and other restricted payments to $50.0 million in any fiscal year, unless the consolidated total net leverage ratio, as defined in the Term Loan, does not exceed 1.75 to 1.00 at the time of the payment. At December 31, 2017, the Company was in compliance with the covenants in the Term Loan.
The Company incurred fees and expenses of $4.7 million in 2017 related to the amendment of the Facility and entry into the Term Loan. These fees were deferred and are being amortized as interest expense over the term of the applicable debt agreements. Fees related to the Term Loan are presented as a direct deduction of the corresponding debt.
The Company had other debt outstanding, excluding capital leases, of approximately $80.0 million at December 31, 2017. In addition to the excess availability under the Facility, the Company had remaining availability of $16.8 million related to other non-U.S. revolving credit agreements.
The Company believes funds available from cash on hand, the Term Loan, the Facility, other available lines of credit and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments during the next twelve months and until the expiration of the Facility in April 2022.
28
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
Contractual Obligations, Contingent Liabilities and Commitments
Following is a table summarizing the contractual obligations as of December 31, 2017:
Payments Due by Period | |||||||||||||||||||||||||||
Contractual Obligations | Total | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | ||||||||||||||||||||
Term Loan | $ | 195.0 | $ | 10.0 | $ | 10.0 | $ | 10.0 | $ | 10.0 | $ | 10.0 | $ | 145.0 | |||||||||||||
Variable interest payments on Term Loan | 50.1 | 10.6 | 10.0 | 9.5 | 8.9 | 8.4 | 2.7 | ||||||||||||||||||||
Revolving credit agreements | 6.1 | 6.1 | — | — | — | — | — | ||||||||||||||||||||
Variable interest payments on revolving credit agreements | 0.1 | 0.1 | — | — | — | — | — | ||||||||||||||||||||
Other debt | 73.9 | 52.4 | 21.3 | 0.1 | 0.1 | — | — | ||||||||||||||||||||
Variable interest payments on other debt | 2.7 | 1.8 | 0.6 | 0.2 | 0.1 | — | — | ||||||||||||||||||||
Capital lease obligations including principal and interest | 20.3 | 7.1 | 5.9 | 4.9 | 2.4 | — | — | ||||||||||||||||||||
Operating leases | 74.9 | 20.2 | 13.9 | 10.3 | 7.4 | 6.1 | 17.0 | ||||||||||||||||||||
Tax Reform Act transition tax liability | 22.5 | 2.1 | 1.8 | 1.8 | 1.8 | 1.8 | 13.2 | ||||||||||||||||||||
Purchase and other obligations | 564.3 | 557.8 | 1.0 | 1.0 | 2.0 | — | 2.5 | ||||||||||||||||||||
Total contractual cash obligations | $ | 1,009.9 | $ | 668.2 | $ | 64.5 | $ | 37.8 | $ | 32.7 | $ | 26.3 | $ | 180.4 | |||||||||||||
The Tax Reform Act provides for a one-time transition tax on the deemed repatriation of all of the post-1986 undistributed non-U.S. earnings and profits including such earnings through the measurement date as determined by the Act. The Company had an estimated $310 million of undistributed non-U.S. earnings and profits subject to the transition tax and recognized a provisional $33.1 million of income tax expense in the fourth quarter of 2017. After the utilization of existing tax credits, the Company expects to pay cash taxes, including state income taxes, of $22.5 million with respect to the transition toll tax payable over eight years.
The Company has a long-term liability of approximately $7.8 million for unrecognized tax benefits, including interest and penalties, as of December 31, 2017. At this time, the Company is unable to make a reasonable estimate of the timing of payments due to, among other factors, the uncertainty of the timing and outcome of the Company's audits.
An event of default, as defined in the agreements governing the Facility, the Term Loan, other debt agreements, and in operating and capital lease agreements, could cause an acceleration of the payment schedule. No such event of default has occurred or is anticipated under these agreements.
The Company's interest payments are calculated based upon the anticipated payment schedule and the December 31, 2017 applicable rates and applicable margins as described in the Facility and other debt agreements. A 1/8% increase in the LIBOR rate would increase the Company's estimated total interest payments on debt by $0.2 million.
The purchase and other obligations are primarily for accounts payable, open purchase orders and accrued payroll and incentive compensation.
Pension funding can vary significantly each year due to plan amendments, changes in the market value of plan assets, legislation and the Company's funding decisions to contribute any excess above the minimum legislative funding requirements. As a result, pension funding has not been included in the table above. Pension benefit payments are made from assets of the pension plans. The Company expects to contribute approximately $0.5 million to its non-U.S. pension plans in 2018. No contributions to the Company's U.S. pension plans are expected in 2018.
In addition, the Company has recourse and repurchase obligations with a maximum undiscounted potential liability of $203.5 million at December 31, 2017. Recourse and repurchase obligations primarily represent contingent liabilities assumed by the Company to support financing agreements made between the Company's customers and third-party finance companies for the customer’s purchase of lift trucks from the Company. For these transactions, the Company or a third-party finance company retains a perfected security interest in the lift truck, such that the Company would take possession of the lift truck in the event
29
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
it would become liable under the terms of the recourse and repurchase obligations. Generally, these commitments are due upon demand in the event of default by the customer. The security interest is normally expected to equal or exceed the amount of the commitment. To the extent the Company would be required to provide funding as a result of these commitments, the Company believes the value of its perfected security interest and amounts available under existing credit facilities are adequate to meet these commitments in the foreseeable future.
The amount of the recourse or repurchase obligations changes over time as obligations under existing arrangements expire and new obligations arise in the ordinary course of business. Losses anticipated under the terms of the recourse or repurchase obligations were not significant at December 31, 2017 and reserves have been provided for such losses in the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. See also “Related Party Transactions” below.
Capital Expenditures
The following table summarizes actual and planned capital expenditures:
Planned 2018 | Actual 2017 | Actual 2016 | ||||||||||
Lift truck business | $ | 42.4 | $ | 35.3 | $ | 36.5 | ||||||
Bolzoni | 6.6 | 4.7 | 4.0 | |||||||||
Nuvera | 6.0 | 1.0 | 2.2 | |||||||||
$ | 55.0 | $ | 41.0 | $ | 42.7 | |||||||
Planned expenditures in 2018 are primarily for product development, improvements at manufacturing locations, improvements to information technology infrastructure and manufacturing equipment. The principal sources of financing for these capital expenditures are expected to be internally generated funds and bank financing.
Capital Structure
December 31 | |||||||||||
2017 | 2016 | Change | |||||||||
Cash and cash equivalents | $ | 220.1 | $ | 43.2 | $ | 176.9 | |||||
Other net tangible assets | 527.8 | 531.5 | (3.7 | ) | |||||||
Intangible assets | 56.1 | 56.2 | (0.1 | ) | |||||||
Goodwill | 59.1 | 50.7 | 8.4 | ||||||||
Net assets | 863.1 | 681.6 | 181.5 | ||||||||
Total debt | (290.7 | ) | (211.2 | ) | (79.5 | ) | |||||
Total equity | $ | 572.4 | $ | 470.4 | $ | 102.0 | |||||
Debt to total capitalization | 34 | % | 31 | % | 3 | % | |||||
RELATED PARTY TRANSACTIONS
The Company has a 20% ownership interest in HYGFS, a joint venture with Wells Fargo Financial Leasing, Inc. (“WF”), formed primarily for the purpose of providing financial services to independent Hyster® and Yale® lift truck dealers and National Account customers in the United States. The Company’s ownership in HYGFS is accounted for using the equity method of accounting.
Generally, the Company sells lift trucks through its independent dealer network or directly to customers. These dealers and customers may enter into a financing transaction with HYGFS or other unrelated third parties. HYGFS provides debt financing to dealers and lease financing to both dealers and customers. HYGFS’ total purchases of Hyster® and Yale® lift trucks from dealers, and directly from the Company, such that HYGFS could provide retail lease financing to customers, for the years ended December 31, 2017, 2016 and 2015 were $475.9 million, $438.8 million and $483.2 million, respectively. Of these amounts, $71.1 million, $69.4 million and $78.6 million for the years ended December 31, 2017, 2016 and 2015, respectively, were invoiced directly from the Company to HYGFS so that the customer could obtain operating lease financing
30
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
from HYGFS. Amounts receivable from HYGFS were $10.4 million and $12.1 million at December 31, 2017 and 2016, respectively.
Under the terms of the joint venture agreement with WF, the Company provides recourse for wholesale financing provided by HYGFS to the Company's dealers. Additionally, the credit quality of a customer or concentration issues within WF may require providing recourse or repurchase obligations for lift trucks purchased by customers and financed through HYGFS. At December 31, 2017, approximately $174.2 million of the Company’s total recourse or repurchase obligations of $203.5 million related to transactions with HYGFS. The Company has reserved for losses under the terms of the recourse or repurchase obligations in its consolidated financial statements. Historically, the Company has not had significant losses with respect to these obligations. During 2017, 2016 and 2015, the net losses resulting from customer defaults did not have a material impact on the Company’s results of operations or financial position.
In connection with the joint venture agreement, the Company also provides a guarantee to WF for 20% of HYGFS’ debt with WF, such that the Company would become liable under the terms of HYGFS’ debt agreements with WF in the case of default by HYGFS. At December 31, 2017, loans from WF to HYGFS totaled $1.0 billion. Although the Company's contractual guarantee was $205.9 million, the loans by WF to HYGFS are secured by HYGFS’ customer receivables, of which the Company guarantees $174.2 million. Excluding the $174.2 million of HYGFS receivables guaranteed by the Company from HYGFS’ loans to WF, the Company’s incremental obligation as a result of this guarantee to WF is $179.6 million, which is secured by 20% of HYGFS' customer receivables and other secured assets of $272.3 million. HYGFS has not defaulted under the terms of this debt financing in the past and although there can be no assurances, the Company is not aware of any circumstances that would cause HYGFS to default in future periods.
The following table includes the exposure amounts related to the Company's guarantees at December 31, 2017:
HYGFS | Total | |||||||
Total recourse or repurchase obligations | $ | 174.2 | $ | 203.5 | ||||
Less: exposure limited for certain dealers | 54.3 | 54.3 | ||||||
Plus: 7.5% of original loan balance | 12.0 | 12.0 | ||||||
131.9 | 161.2 | |||||||
Incremental obligation related to guarantee to WF | 179.6 | 179.6 | ||||||
Total exposure related to guarantees | $ | 311.5 | $ | 340.8 | ||||
In addition to providing financing to the Company’s dealers, HYGFS provides operating lease financing to the Company. Operating lease obligations primarily relate to specific sale-leaseback-sublease transactions for certain customers whereby the Company sells lift trucks to HYGFS, leases these lift trucks back under an operating lease agreement and then subleases those lift trucks to customers under an operating lease agreement. Total obligations to HYGFS under the operating lease agreements were $15.8 million and $17.2 million at December 31, 2017 and 2016, respectively. In addition, the Company provides certain subsidies to its dealers that are paid directly to HYGFS. Total subsidies were $3.3 million, $2.8 million and $2.8 million for 2017, 2016 and 2015, respectively.
The Company provides certain services to HYGFS for which it receives compensation under the terms of the joint venture agreement. These services consist primarily of administrative functions and remarketing services. Total income recorded by the Company related to these services was $9.5 million in 2017, $9.8 million in 2016 and $14.6 million in 2015. In addition, in December 2015, the Company received $5.0 million as an amendment fee that was deferred and is being recognized over the remaining term of the agreement, which expires in December 2018.
The Company has a 50% ownership interest in Sumitomo NACCO Forklift Co., Ltd. (“SN”), a limited liability company that was formed in 1970 primarily to manufacture and distribute Sumitomo-branded lift trucks in Japan and export Hyster®- and Yale®-branded lift trucks and related components and service parts outside of Japan. Sumitomo Heavy Industries, Ltd. owns the remaining 50% interest in SN. Each stockholder of SN is entitled to appoint directors representing 50% of the vote of SN’s board of directors. All matters related to policies and programs of operation, manufacturing and sales activities require mutual agreement between the Company and Sumitomo Heavy Industries, Ltd. prior to a vote of SN’s board of directors. As a result, the Company accounts for its ownership in SN using the equity method of accounting. The Company purchases products from SN for sale outside of Japan under agreed-upon terms. In 2017, 2016 and 2015, purchases from SN were $46.8 million, $55.0
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
million and $57.1 million, respectively. Amounts payable to SN at December 31, 2017 and 2016 were $18.1 million and $16.5 million, respectively.
Additionally, the Company recognized income of $0.4 million, $0.5 million and $0.3 million during 2017, 2016 and 2015, respectively, for payments from SN for use of technology developed by the Company.
OUTLOOK
Americas Outlook
In 2018, the Company expects the Americas market to continue to grow but at a more moderate rate than the double digit growth experienced in 2017, primarily as a result of moderate growth in North America and significantly higher growth in the smaller Brazil market as the economic climate in that country is expected to continue to improve. In this market environment, and as share gain initiatives mature, 2018 unit shipments, revenues and parts sales are expected to increase over 2017. Full-year 2018 operating profit is also expected to increase moderately as a result of benefits anticipated from an increase in sales of higher-priced, higher-margin Class 1, Class 2 and Class 5 units, partially offset by higher spending levels as further investment is made to fund growth initiatives. The Company expects to continue to implement pricing actions to help recover anticipated material cost inflation. Operating profit in the first half of 2018 is expected to be modestly lower than the first half of 2017, but is expected to be more than offset by improvements in the second half of the year.
EMEA Outlook
While 2017 growth in EMEA was very strong, the EMEA markets are expected to grow moderately in 2018. As a result of these market conditions, anticipated market share gains and the favorable effect of anticipated price increases and current currency rates, unit shipments, revenues and operating profit are expected to continue to increase in 2018. EMEA expects an increase in shipments of Class 2 and Class 3 warehouse trucks and lower-capacity Class 5 internal combustion engine trucks. Higher operating expenses are expected to partially offset the benefits from the anticipated revenue increase. Results in the first half of 2018 are anticipated to be down from the first half of 2017 due to the timing of pricing and material cost increases, with improvements in operating profit returning in the second half of the year as price increases go into effect.
JAPIC Outlook
In 2018, the JAPIC market is expected to decline moderately, driven by China. However, as a result of the continued implementation of the Company's strategic initiatives, revenues and operating results are expected to improve, with higher employee-related expenses expected to partly offset the improvement in operating results. Operating results in the first half of 2018 are expected to be lower than the first half of 2017, but are expected to be more than offset by improvements in the second half of the year.
Overall Lift Truck Outlook
The Company ended 2017 with strong fourth quarter and full-year operating results, as well as strong bookings and backlog, both of which exceeded the Company's expectations. However, the increase in bookings did not correspond to the unexpectedly large increase in the lift truck market as the Company maintained its focus on a carefully paced ramp up in production and achievement of price goals through sales of a richer product mix, while maintaining a healthy backlog to achieve production efficiencies.
The Company has realigned its sales and marketing teams and is increasing resources to execute more effectively the Company's specific industry strategies. The Company remains focused on increasing unit volumes and market share in its Lift Truck business in 2018 and beyond through the continued implementation of its key strategic initiatives, which include delivering industry- and customer-focused solutions, providing low cost of ownership and enhanced productivity for customers, enhancing independent distribution, growing in emerging markets, maintaining leadership in the attachments business and providing leadership in fuel cells and their applications.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
To meet customer needs, the Company is developing new products in many segments that are expected to support its increased market share objectives. In April 2017, the Company launched its new ReachStacker Big Truck model dedicated solely to container-handling applications in defined markets. This product has been well-received and is gaining traction. In October 2017, production began on a new 11-ton empty container handler Big Truck with a taller mast for higher stacking and double container handling. The Company is also working with a customer to test a 52-ton Big Truck powered by a lithium-ion battery. The Company launched new versions of the Class 3 electric-stacker, warehouse truck in the 2017 third quarter in EMEA, and, in the first half of 2018, expects to introduce new Class 3 warehouse products in the Americas and new Class 1 electric counterbalanced trucks in EMEA. In addition to the lithium-ion-powered Big Truck, the Company is testing an 8-9 ton high-performance, lithium-ion counterbalanced truck in EMEA and has other plans to expand its Big Truck product line. These new products, as well as those recently launched and the introduction of other new products in the pipeline, including trucks with new Nuvera fuel cell battery box replacements ("BBRs"), are expected to contribute to market share gains, improve revenues and enhance operating margins.
After a much stronger than expected market in 2017, which set new industry records in many regions, the overall global lift truck market in 2018 is expected to be comparable to 2017, with an anticipated modest decrease in the China market offset by moderate growth in the Americas, EMEA and Asia-Pacific markets. The Company anticipates that benefits from expected unit and parts revenue increases driven by continued investments in the Company's strategic initiatives will be partially offset by higher operating expenses and moderating material cost inflation, resulting in an increase in operating profit in 2018 compared with 2017. However, net income in 2018 is expected to increase substantially over 2017 as a result of the absence of the tax adjustments made in 2017 for the tax reform legislation. As a result of the U.S. tax reform legislation, the Company expects its global Lift Truck effective income tax rate to be in the range of 21% to 24% in 2018 based on its expected mix of earnings.
The Company anticipates that commodity costs will continue to increase in the beginning of 2018, but will moderate as the year progresses, although these markets, particularly steel, remain volatile and sensitive to changes in the global economy. The Company will continue to monitor these closely and adjust pricing accordingly.
Bolzoni Outlook
The majority of Bolzoni's revenues are generated in the EMEA market, primarily Western and Eastern Europe, and, to a lesser degree, in North America. As a result of anticipated growth in both the Americas and EMEA and the continued implementation of sales enhancement programs, Bolzoni expects revenues in 2018 to increase compared with 2017.
In addition to the anticipated increase in revenues and the expected operating leverage resulting from the sales growth, the continued implementation of several key strategic programs is expected to generate substantial growth in Bolzoni's 2018 operating profit and net income compared with 2017.
Nuvera Outlook
The organizational realignment designed to enhance the overall strategic positioning and operational effectiveness of the fuel cell business, with Nuvera focused on fuel cell stacks, engines and associated components and the Lift Truck business focused on battery box replacements and integrated engine solutions, was complete as of December 31, 2017, with the exception of the transition of manufacturing of current BBRs from Nuvera to the Lift Truck business.
Due to the relatively high cost position and limited product range of currently available BBRs, the Company is taking a measured approach to developing its customer base by building relationships with customers that are willing to pay a premium for the high power density of the current Nuvera BBR solution and the product support now offered through the Lift Truck business. In addition, the federal fuel cell tax credit was recently extended for a five-year term retroactive to January 1, 2017, which makes the economics of fuel cell-driven forklifts more competitive.
During the 2017 fourth quarter, a number of additional units were built for further testing and development by the Lift Truck business, and demand for BBRs continued to increase. The backlog for Nuvera units was just over 300 as of December 31, 2017. Nuvera expects demand to continue to increase in the first quarter of 2018 and gradually grow throughout the year. As the supply chain matures and volumes increase, costs for BBR components are expected to decrease. By early 2019, production is expected to begin at the Lift Truck business' manufacturing plant in Greenville, North Carolina, with a steady
33
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
ramp up in demand anticipated. In addition, in that same time frame, BBR manufacturing at Nuvera's Billerica facility is expected to be phased out and transferred to the Lift Truck business.
With the phase out of BBR production in Billerica, Nuvera will focus on the design, manufacture and sales and marketing of fuel cell stacks and engines. In addition to growing demand for BBR engines, Nuvera is seeing significant interest for its stacks and fuel cell engines for applications outside of the BBR market and believes this could be a significant and profitable growth opportunity.
The Company's current target is to achieve break-even within the next two years, although this target could be achieved earlier or later depending on sales volumes for fuel cell powered lift trucks, as well as sales in other markets. Operating losses in 2018 are expected to modestly decrease compared with 2017, moderating more substantially over 2019. The net loss in 2018 is expected to be comparable to 2017 because a smaller tax benefit is expected to be realized on Nuvera's losses due to a lower effective income tax rate under the new U.S. tax reform legislation.
RECENTLY ISSUED ACCOUNTING STANDARDS
For information regarding recently issued accounting standards refer to Note 2 to the Consolidated Financial Statements in this Form 10-K.
EFFECTS OF FOREIGN CURRENCY
The Company operates internationally and enters into transactions denominated in foreign currencies. As a result, the Company is subject to the variability that arises from exchange rate movements. The effects of foreign currency fluctuations on revenues, operating profit and net income are addressed in the previous discussions of operating results. The Company's use of foreign currency derivative contracts is discussed in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk,” of this Form 10-K.
FORWARD-LOOKING STATEMENTS
The statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere throughout this Annual Report on Form 10-K that are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are made subject to certain risks and uncertainties, which could cause actual results to differ materially from those presented. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Among the factors that could cause plans, actions and results to differ materially from current expectations are, without limitation: (1) reduction in demand for lift trucks, attachments and related aftermarket parts and service on a global basis, (2) the ability of dealers, suppliers and end-users to obtain financing at reasonable rates, or at all, as a result of current economic and market conditions, (3) the political and economic uncertainties in the countries where the Company does business, (4) customer acceptance of pricing, (5) delays in delivery or increases in costs, including transportation costs, of raw materials or sourced products and labor or changes in or unavailability of quality suppliers, (6) exchange rate fluctuations and monetary policies and other changes in the regulatory climate in the countries in which the Company operates and/or sells products, (7) delays in manufacturing and delivery schedules, (8) bankruptcy of or loss of major dealers, retail customers or suppliers, (9) customer acceptance of, changes in the costs of, or delays in the development of new products, (10) introduction of new products by, or more favorable product pricing offered by, competitors, (11) product liability or other litigation, warranty claims or returns of products, (12) the effectiveness of the cost reduction programs implemented globally, including the successful implementation of procurement and sourcing initiatives, (13) changes mandated by federal, state and other regulation, including tax, health, safety or environmental legislation, (14) the successful commercialization of Nuvera's technology, (15) unfavorable effects of geopolitical and legislative developments on global operations, including without limitation, the United Kingdom's exit from the European Union, the entry into new trade agreements and the imposition of tariffs, (16) the ability to obtain governmental approvals of the pending Maximal transaction on the proposed terms and schedule, (17) the possibility that certain conditions to the completion of the Maximal transaction will not be met, (18) the possibility that competing offers may be made for Maximal, (19) conditions affecting the industries in which the Company or Maximal operate may change, (20) the Company
34
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Percentage Data and as Otherwise Noted)
may not be able to successfully integrate Maximal’s operations and employees, and (21) the possibility that the final impact of the U.S. Tax Cuts and Jobs Act on the 2018 financial results could be more unfavorable than current estimates.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company has entered into certain financing arrangements that require interest payments based on floating interest rates. As such, the Company's financial results are subject to changes in the market rate of interest. The Company has entered into interest rate swap agreements to reduce the exposure to changes in the market rate of interest. The Company does not enter into interest rate swap agreements for trading purposes. Terms of the interest rate swap agreements require the Company to receive a variable interest rate and pay a fixed interest rate. See also Note 8 to the Consolidated Financial Statements in this Annual Report on Form 10-K.
For purposes of risk analysis, the Company uses sensitivity analysis to measure the potential loss in fair value of financial instruments sensitive to changes in interest rates. The Company assumes that a loss in fair value is an increase to its liabilities. The fair value of the Company's interest rate swap agreements was a net asset of $0.8 million at December 31, 2017.
A hypothetical 10% decrease in interest rates would cause a decrease in the fair value of interest rate swap agreements and the resulting fair value would be a liability of $0.4 million.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company operates internationally and enters into transactions denominated in foreign currencies. As such, the Company's financial results are subject to the variability that arises from exchange rate movements. The Company uses forward foreign currency exchange contracts to partially reduce risks related to transactions denominated in foreign currencies and not for trading purposes. These contracts generally mature within 36 months and require the companies to buy or sell euros, U.S. dollars, Japanese yen, British pounds, Swedish kroner, Mexican pesos and Australian dollars for its functional currency at rates agreed to at the inception of the contracts. The fair value of these contracts was a net liability of $2.1 million at December 31, 2017. See also Note 8 to the Consolidated Financial Statements in this Annual Report on Form 10-K.
For purposes of risk analysis, the Company uses sensitivity analysis to measure the potential loss in fair value of financial instruments sensitive to changes in foreign currency exchange rates. The Company assumes that a loss in fair value is either a decrease to its assets or an increase to its liabilities. Assuming a hypothetical 10% weakening of the U.S. dollar compared with other foreign currencies at December 31, 2017, the fair value of foreign currency-sensitive financial instruments, which primarily represent forward foreign currency exchange contracts, would be decreased by $19.3 million compared with the fair value at December 31, 2017. It is important to note that the change in fair value indicated in this sensitivity analysis would be somewhat offset by changes in the revaluation of the underlying receivables and payables.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is set forth in the Financial Statements and Supplementary Data contained in Part IV of this Annual Report on Form 10-K and is hereby incorporated herein by reference to such information.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting and financial disclosure for the three-year period ended December 31, 2017.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures: An evaluation was carried out under the supervision and with the participation of the Company's management, including the principal executive officer and the principal financial officer, of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, these officers have concluded that the Company's disclosure controls and procedures were effective.
35
Management's report on internal control over financial reporting: Management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on this evaluation under the framework in Internal Control — Integrated Framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2017. The Company's effectiveness of internal control over financial reporting has been audited by Ernst & Young, LLP, an independent registered public accounting firm, as stated in its report, which is included in Item 15 of this Annual Report on Form 10-K and is incorporated herein by reference.
Changes in internal control: During the fourth quarter of 2017, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B. OTHER INFORMATION
None
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to Directors of the Company will be set forth in the 2018 Proxy Statement under the subheadings “Part Two — Proposals to be Voted on at the 2018 Annual Meeting — Election of Directors (Proposal 1) — Director Nominee Information,” which information is incorporated herein by reference.
Information with respect to the audit review committee and the audit review committee financial expert will be set forth in the 2018 Proxy Statement under the subheading “Part One — Corporate Governance Information — Directors’ Meetings and Committees,” which information is incorporated herein by reference.
Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 by the Company's Directors, executive officers and holders of more than ten percent of the Company's equity securities will be set forth in the 2018 Proxy Statement under the subheading “Part Two — Proposals to be Voted on at the 2018 Annual Meeting — Election of Directors (Proposal 1) — Section 16(a) Beneficial Ownership Reporting Compliance,” which information is incorporated herein by reference.
Information regarding the executive officers of the Company is included in this Annual Report on Form 10-K as Item 4A of Part I as permitted by Instruction 3 to Item 401(b) of Regulation S-K.
Information with respect to compensation committee interlocks and insider participation in compensation decisions will be set forth in the 2018 Proxy Statement under the subheading "Part Three — Executive Compensation Information — Compensation Discussion and Analysis — Compensation Committee Interlocks and Insider Participation," which information is incorporated herein by reference.
The Company has adopted a code of ethics applicable to all Company personnel, including the principal executive officer, principal financial officer, principal accounting officer and controller, or other persons performing similar functions. The code of ethics, entitled the “Code of Corporate Conduct,” is posted on the Company's website at www.hyster-yale.com under “Corporate Governance.” Amendments and waivers of the Company's Code of Corporate Conduct for directors or executive officers of the Company, if any, will be disclosed on the Company's website or on a current report on Form 8-K.
Item 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be set forth in the 2018 Proxy Statement under the subheadings “Part Two — Proposals to be Voted on at the 2018 Annual Meeting — Election of Directors (Proposal 1) — Director Compensation” and “Part Three — Executive Compensation Information,” which information is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information with respect to security ownership of certain beneficial owners and management will be set forth in the 2018 Proxy Statement under the heading “Beneficial Ownership of Class A Common and Class B Common,” which information is incorporated herein by reference.
36
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2017 with respect to our compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance, aggregated as follows:
Plan Category | Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a)) | |||||
Class A Shares: | (a) | (b) | (c) | |||||
Equity compensation plans approved by security holders | — | N/A | 527,910 | |||||
Equity compensation plans not approved by security holders | — | N/A | — | |||||
Total | — | N/A | 527,910 | |||||
Class B Shares: | ||||||||
Equity compensation plans approved by security holders | — | N/A | — | |||||
Equity compensation plans not approved by security holders | — | N/A | — | |||||
Total | — | N/A | — | |||||
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information with respect to director independence, certain relationships and related transactions will be set forth in the 2018 Proxy Statement under the subheading “Part One - Corporate Governance Information — Directors’ Meetings and Committees,” which information is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to principal accountant fees and services will be set forth in the 2018 Proxy Statement under the subheading “Part Two - Proposals to be Voted on at the 2018 Annual Meeting — Confirmation of Appointment of Ernst & Young, LLP, the Independent Registered Public Accounting Firm of the Company, for the Current Fiscal Year (Proposal 2)” which information is incorporated herein by reference.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) The response to Item 15(a)(1) is set forth beginning at page F-1 of this Annual Report on Form 10-K.
(a) (2) The response to Item 15(a)(2) is set forth beginning at page F-45 of this Annual Report on Form 10-K.
(a) (3) Listing of Exhibits — See the exhibit index beginning at page 38 of this Annual Report on Form 10-K.
(b) The response to Item 15(b) is set forth beginning at page 38 of this Annual Report on Form 10-K.
37
EXHIBIT INDEX
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession.
2.1 | ||
2.2 | ||
2.3 | ||
(3) Articles of Incorporation and By-laws.
3.1(i) | ||
3.1(ii) | ||
(4) Instruments defining the rights of security holders, including indentures.
4.1 | ||
4.2 | ||
(10) Material Contracts.
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6 | ||
10.7 | ||
38
10.8 | ||
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 | ||
10.14* | ||
10.15* | ||
10.16* | ||
10.17* | ||
10.18* | ||
10.19* | ||
10.20* | ||
10.21* | ||
10.22* | ||
39
10.23* | ||
10.24* | ||
10.25* | ||
10.26* | ||
10.27* | ||
10.28 | ||
10.29 | ||
10.30 | ||
10.31 | ||
10.32 | ||
10.33 | ||
10.34 | ||
10.35 | ||
10.36 | ||
10.37 | ||
10.38 | ||
10.39 | ||
10.40 | ||
40
10.41 | ||
10.42 | ||
10.43 | ||
10.44 | ||
10.45 | ||
10.46 | ||
10.47 | ||
10.48 | ||
10.49 | ||
10.50 | ||
10.51 | ||
10.52 | ||
10.53 | ||
10.54 | ||
41
10.55 | ||
10.56 | ||
10.57 | ||
(21) Subsidiaries.
(23) Consents of experts and counsel.
(24) Powers of Attorney.
(31) Rule 13a-14(a)/15d-14(a) Certifications.
24.1 | ||
24.2 | ||
24.3 | ||
24.4 | ||
24.5 | ||
24.6 | ||
24.7 | ||
24.8 | ||
24.9 | ||
31(i)(1) | ||
31(i)(2) | ||
(32) | ||
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
* | Management contract or compensation plan or arrangement required to be filed as an exhibit pursuant to Item15(b) of this Annual Report on Form 10-K. | |
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Hyster-Yale Materials Handling, Inc. | ||||
By: | /s/ Kenneth C. Schilling | |||
Kenneth C. Schilling | ||||
Senior Vice President and Chief Financial Officer (principal financial and accounting officer) | ||||
February 27, 2018
43
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Alfred M. Rankin, Jr. | Chairman, President and Chief Executive Officer (principal executive officer), Director | February 27, 2018 | |
Alfred M. Rankin, Jr. | |||
/s/ Kenneth C. Schilling | Senior Vice President and Chief Financial Officer (principal financial and accounting officer) | February 27, 2018 | |
Kenneth C. Schilling | |||
* J.C. Butler, Jr. | Director | February 27, 2018 | |
J.C. Butler, Jr. | |||
* Carolyn Corvi | Director | February 27, 2018 | |
Carolyn Corvi | |||
* John P. Jumper | Director | February 27, 2018 | |
John P. Jumper | |||
* Dennis W. LaBarre | Director | February 27, 2018 | |
Dennis W. LaBarre | |||
* H. Vincent Poor | Director | February 27, 2018 | |
H. Vincent Poor | |||
* Claiborne R. Rankin | Director | February 27, 2018 | |
Claiborne R. Rankin | |||
* John M. Stropki | Director | February 27, 2018 | |
John M. Stropki | |||
* Britton T. Taplin | Director | February 27, 2018 | |
Britton T. Taplin | |||
* Eugene Wong | Director | February 27, 2018 | |
Eugene Wong | |||
* Kenneth C. Schilling, by signing his name hereto, does hereby sign this Annual Report on Form 10-K on behalf of each of the above named and designated directors of the Company pursuant to a Power of Attorney executed by such persons and filed with the Securities and Exchange Commission.
/s/ Kenneth C. Schilling | February 27, 2018 | |
Kenneth C. Schilling, Attorney-in-Fact | ||
44
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 15(a)(1) AND (2)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 2017
HYSTER-YALE MATERIALS HANDLING, INC.
CLEVELAND, OHIO
F-1
FORM 10-K
ITEM 15(a)(1) AND (2)
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Hyster-Yale Materials Handling, Inc. and Subsidiaries are incorporated by reference in Item 8:
The following consolidated financial statement schedule of Hyster-Yale Materials Handling, Inc. and Subsidiaries are included in Item 15(a):
All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable, and therefore have been omitted.
F-2
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Hyster-Yale Materials Handling, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hyster-Yale Materials Handling, Inc. and Subsidiaries (“the Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), cash flows and equity for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP | |||
We have served as the Company’s auditor since 2002. | |||
Cleveland, Ohio | |||
February 27, 2018 | |||
F-3
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Hyster-Yale Materials Handling, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Hyster-Yale Materials Handling, Inc. and Subsidiaries' ("the Company") internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), cash flows and equity for each of the three years in the period ended December 31, 2017 and the related notes and financial statement schedule listed in the Index at Item 15(a) of the Company and our report dated February 27, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management's report on internal control over financial reporting in Item 9A of the Form 10-K. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP | |||
Cleveland, Ohio | |||
February 27, 2018 | |||
F-4
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
(In millions, except per share data) | |||||||||||
Revenues | $ | 2,885.2 | $ | 2,569.7 | $ | 2,578.1 | |||||
Cost of sales | 2,382.6 | 2,142.2 | 2,147.3 | ||||||||
Gross Profit | 502.6 | 427.5 | 430.8 | ||||||||
Operating Expenses | |||||||||||
Selling, general and administrative expenses | 426.6 | 392.6 | 327.3 | ||||||||
Operating Profit | 76.0 | 34.9 | 103.5 | ||||||||
Other (income) expense | |||||||||||
Interest expense | 14.6 | 6.7 | 4.7 | ||||||||
Income from unconsolidated affiliates | (28.0 | ) | (7.1 | ) | (6.1 | ) | |||||
Other, net | (4.4 | ) | (3.0 | ) | 0.4 | ||||||
(17.8 | ) | (3.4 | ) | (1.0 | ) | ||||||
Income Before Income Taxes | 93.8 | 38.3 | 104.5 | ||||||||
Income tax provision (benefit) | 44.9 | (4.0 | ) | 29.4 | |||||||
Net Income | 48.9 | 42.3 | 75.1 | ||||||||
Net (income) loss attributable to noncontrolling interest | (0.3 | ) | 0.5 | (0.4 | ) | ||||||
Net Income Attributable to Stockholders | $ | 48.6 | $ | 42.8 | $ | 74.7 | |||||
Basic Earnings per Share Attributable to Stockholders | $ | 2.95 | $ | 2.61 | $ | 4.58 | |||||
Diluted Earnings per Share Attributable to Stockholders | $ | 2.94 | $ | 2.61 | $ | 4.57 | |||||
See Notes to Consolidated Financial Statements.
F-5
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
(In millions) | |||||||||||
Net Income | $ | 48.9 | $ | 42.3 | $ | 75.1 | |||||
Other comprehensive income (loss) | |||||||||||
Foreign currency translation adjustment | 33.5 | (1.9 | ) | (49.7 | ) | ||||||
Unrealized gain on available-for-sale securities, net of $0.5 tax expense in 2017 | 2.8 | — | — | ||||||||
Current period cash flow hedging activity, net of $8.0 tax expense in 2017, net of $6.5 tax benefit in 2016 and net of $6.4 tax benefit in 2015 | 6.6 | (9.0 | ) | (4.7 | ) | ||||||
Reclassification of hedging activities into earnings, net of $1.6 tax expense in 2017, net of $2.2 tax expense in 2016 and net of $6.0 tax expense in 2015 | 4.1 | 0.8 | 2.7 | ||||||||
Current period pension adjustment, net of $3.7 tax expense in 2017, net of $3.8 tax benefit in 2016 and net of $1.5 tax benefit in 2015 | 13.1 | (17.4 | ) | (3.4 | ) | ||||||
Reclassification of pension into earnings, net of $1.0 tax expense in 2017, net of $0.7 tax expense in 2016 and net of $0.9 tax expense in 2015 | 3.2 | 2.0 | 2.3 | ||||||||
Comprehensive Income | $ | 112.2 | $ | 16.8 | $ | 22.3 | |||||
Other comprehensive income (loss) attributable to noncontrolling interests | |||||||||||
Net (income) loss attributable to noncontrolling interests | (0.3 | ) | 0.5 | (0.4 | ) | ||||||
Foreign currency translation adjustment attributable to noncontrolling interests | (0.9 | ) | 2.2 | — | |||||||
Comprehensive Income Attributable to Stockholders | $ | 111.0 | $ | 19.5 | $ | 21.9 | |||||
See Notes to Consolidated Financial Statements.
F-6
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31 | |||||||
2017 | 2016 | ||||||
(In millions, except share data) | |||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 220.1 | $ | 43.2 | |||
Accounts receivable, net of allowances of $3.7 in 2017 and $10.3 in 2016 | 453.0 | 375.3 | |||||
Inventories, net | 411.9 | 352.2 | |||||
Prepaid expenses and other | 46.4 | 39.3 | |||||
Total Current Assets | 1,131.4 | 810.0 | |||||
Property, Plant and Equipment, Net | 265.4 | 255.1 | |||||
Intangible Assets | 56.1 | 56.2 | |||||
Goodwill | 59.1 | 50.7 | |||||
Deferred Income Taxes | 16.6 | 43.9 | |||||
Investment in Unconsolidated Affiliates | 81.9 | 45.9 | |||||
Other Non-current Assets | 37.4 | 25.3 | |||||
Total Assets | $ | 1,647.9 | $ | 1,287.1 | |||
LIABILITIES AND EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable | $ | 385.8 | $ | 242.4 | |||
Accounts payable, affiliates | 18.1 | 16.5 | |||||
Revolving credit facilities | 6.1 | 79.0 | |||||
Current maturities of long-term debt | 68.4 | 50.0 | |||||
Accrued payroll | 51.7 | 43.7 | |||||
Other current liabilities | 162.3 | 144.9 | |||||
Total Current Liabilities | 692.4 | 576.5 | |||||
Long-term Debt | 216.2 | 82.2 | |||||
Self-insurance Liabilities | 33.5 | 19.7 | |||||
Pension Obligations | 11.1 | 37.2 | |||||
Deferred Income Taxes | 13.0 | 11.4 | |||||
Other Long-term Liabilities | 109.3 | 89.7 | |||||
Total Liabilities | 1,075.5 | 816.7 | |||||
Stockholders’ Equity | |||||||
Common stock: | |||||||
Class A, par value $0.01 per share, 12,562,817 shares outstanding (2016 - 12,466,463 shares outstanding) | 0.1 | 0.1 | |||||
Class B, par value $0.01 per share, convertible into Class A on a one-for-one basis, 3,899,503 shares outstanding (2016 - 3,924,291 shares outstanding) | 0.1 | 0.1 | |||||
Capital in excess of par value | 323.8 | 319.6 | |||||
Treasury stock | (31.5 | ) | (36.9 | ) | |||
Retained earnings | 389.1 | 360.3 | |||||
Accumulated other comprehensive loss | (116.1 | ) | (179.4 | ) | |||
Total Stockholders’ Equity | 565.5 | 463.8 | |||||
Noncontrolling Interest | 6.9 | 6.6 | |||||
Total Equity | 572.4 | 470.4 | |||||
Total Liabilities and Equity | $ | 1,647.9 | $ | 1,287.1 | |||
See Notes to Consolidated Financial Statements.
F-7
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 | |||||||||||
2017 | 2016 | 2015 | |||||||||
(In millions) | |||||||||||
Operating Activities | |||||||||||
Net income | $ | 48.9 | $ | 42.3 | $ | 75.1 | |||||
Adjustments to reconcile net income to net cash provided (used for) by operating activities: | |||||||||||
Depreciation and amortization | 42.8 | 39.1 | 28.9 | ||||||||
Amortization of deferred financing fees | 1.4 | 1.1 | 1.2 | ||||||||
Deferred income taxes | 8.1 | (7.4 | ) | (1.4 | ) | ||||||
Gain on sale of assets | (0.3 | ) | (0.3 | ) | — | ||||||
Stock-based compensation | 8.8 | 4.9 | 2.9 | ||||||||
Long-lived and intangible assets impairment charge | 4.9 | — | — | ||||||||
Dividends from unconsolidated affiliates | 2.8 | 5.1 | 2.5 | ||||||||
Other non-current liabilities | 4.8 | (6.0 | ) | 3.8 | |||||||
Other | (13.3 | ) | (15.1 | ) | 1.0 | ||||||
Working capital changes, excluding the effect of business acquisitions: | |||||||||||
Accounts receivable | (44.0 | ) | (27.5 | ) | 6.2 | ||||||
Inventories | (43.6 | ) | (14.9 | ) | 6.2 | ||||||
Other current assets | (1.0 | ) | (3.2 | ) | (0.6 | ) | |||||
Accounts payable | 125.1 | (53.8 | ) | (39.3 | ) | ||||||
Other liabilities | 19.3 | (13.2 | ) | 2.9 | |||||||
Net cash provided by (used for) operating activities | 164.7 | (48.9 | ) | 89.4 | |||||||
Investing Activities | |||||||||||
Expenditures for property, plant and equipment | (41.0 | ) | (42.7 | ) | (46.6 | ) | |||||
Proceeds from the sale of assets | 1.3 | 13.7 | 14.4 | ||||||||
Investments in equity securities | (5.6 | ) | — | — | |||||||
Business acquisition, net of cash acquired | (1.0 | ) | (116.1 | ) | 0.9 | ||||||
Purchase of noncontrolling interest | (1.0 | ) | — | — | |||||||
Net cash used for investing activities | (47.3 | ) | (145.1 | ) | (31.3 | ) | |||||
Financing Activities | |||||||||||
Additions to long-term debt | 265.6 | 40.1 | 46.4 | ||||||||
Reductions of long-term debt | (75.9 | ) | (56.5 | ) | (35.0 | ) | |||||
Net additions (reductions) to revolving credit agreements | (111.7 | ) | 115.4 | — | |||||||
Cash dividends paid | (19.8 | ) | (19.2 | ) | (18.4 | ) | |||||
Cash dividends paid to noncontrolling interest | (0.3 | ) | (0.2 | ) | — | ||||||
Financing fees paid | (4.7 | ) | (1.7 | ) | — | ||||||
Other | (0.1 | ) | — | (0.1 | ) | ||||||
Net cash provided by (used for) financing activities | 53.1 | 77.9 | (7.1 | ) | |||||||
Effect of exchange rate changes on cash | 6.4 | 4.2 | (7.3 | ) | |||||||
Cash and Cash Equivalents | |||||||||||
Increase (decrease) for the year | 176.9 | (111.9 | ) | 43.7 | |||||||
Balance at the beginning of the year | 43.2 | 155.1 | 111.4 | ||||||||
Balance at the end of the year | $ | 220.1 | $ | 43.2 | $ | 155.1 | |||||
See Notes to Consolidated Financial Statements.
F-8
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||||||||||||
Class A Common Stock | Class B Common Stock | Treasury Stock | Capital in Excess of Par Value | Retained Earnings | Foreign Currency Translation Adjustment | Deferred Gain on AFS Securities | Deferred Gain (Loss) on Cash Flow Hedging | Pension Adjustment | Total Stockholders' Equity | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2015 | $ | 0.1 | $ | 0.1 | $ | (49.1 | ) | $ | 324.1 | $ | 280.4 | $ | (40.4 | ) | $ | — | $ | (2.0 | ) | $ | (58.7 | ) | $ | 454.5 | $ | 1.5 | $ | 456.0 | ||||||||||||||
Stock-based compensation | — | — | — | 2.9 | — | — | — | — | — | 2.9 | — | 2.9 | ||||||||||||||||||||||||||||||
Stock issued under stock compensation plans | — | — | 6.7 | (6.7 | ) | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Purchase of treasury stock | — | — | (0.1 | ) | — | — | — | — | — | — | (0.1 | ) | — | (0.1 | ) | |||||||||||||||||||||||||||
Net income | — | — | — | — | 74.7 | — | — | — | — | 74.7 | 0.4 | 75.1 | ||||||||||||||||||||||||||||||
Cash dividends on common stock | — | — | — | — | (18.4 | ) | — | — | — | — | (18.4 | ) | — | (18.4 | ) | |||||||||||||||||||||||||||
Current period other comprehensive income (loss) | — | — | — | — | — | (49.7 | ) | — | (4.7 | ) | (3.4 | ) | (57.8 | ) | — | (57.8 | ) | |||||||||||||||||||||||||
Reclassification adjustment to net income | — | — | — | — | — | — | — | 2.7 | 2.3 | 5.0 | — | 5.0 | ||||||||||||||||||||||||||||||
Balance, December 31, 2015 | $ | 0.1 | $ | 0.1 | $ | (42.5 | ) | $ | 320.3 | $ | 336.7 | $ | (90.1 | ) | $ | — | $ | (4.0 | ) | $ | (59.8 | ) | $ | 460.8 | $ | 1.9 | $ | 462.7 | ||||||||||||||
Stock-based compensation | — | — | — | 4.9 | — | — | — | — | — | 4.9 | — | 4.9 | ||||||||||||||||||||||||||||||
Stock issued under stock compensation plans | — | — | 5.6 | (5.6 | ) | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Net income | — | — | — | — | 42.8 | — | — | — | — | 42.8 | (0.5 | ) | 42.3 | |||||||||||||||||||||||||||||
Cash dividends | — | — | — | — | (19.2 | ) | — | — | — | — | (19.2 | ) | (0.2 | ) | (19.4 | ) | ||||||||||||||||||||||||||
Current period other comprehensive income (loss) | — | — | — | — | — | (1.9 | ) | — | (9.0 | ) | (17.4 | ) | (28.3 | ) | — | (28.3 | ) | |||||||||||||||||||||||||
Reclassification adjustment to net income | — | — | — | — | — | — | — | 0.8 | 2.0 | 2.8 | — | 2.8 | ||||||||||||||||||||||||||||||
Acquisition of Bolzoni | — | — | — | — | — | — | — | — | — | — | 69.8 | 69.8 | ||||||||||||||||||||||||||||||
Purchase of noncontrolling interest | — | — | — | — | — | — | — | — | — | — | (62.2 | ) | (62.2 | ) | ||||||||||||||||||||||||||||
Foreign currency translation on noncontrolling interest | — | — | — | — | — | — | — | — | — | — | (2.2 | ) | (2.2 | ) | ||||||||||||||||||||||||||||
Balance, December 31, 2016 | $ | 0.1 | $ | 0.1 | $ | (36.9 | ) | $ | 319.6 | $ | 360.3 | $ | (92.0 | ) | $ | — | $ | (12.2 | ) | $ | (75.2 | ) | $ | 463.8 | $ | 6.6 | $ | 470.4 | ||||||||||||||
Stock-based compensation | — | — | — | 8.8 | — | — | — | — | — | 8.8 | — | 8.8 | ||||||||||||||||||||||||||||||
Stock issued under stock compensation plans | — | — | 5.4 | (5.4 | ) | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | 48.6 | — | — | — | — | 48.6 | 0.3 | 48.9 | ||||||||||||||||||||||||||||||
Cash dividends | — | — | — | — | (19.8 | ) | — | — | — | — | (19.8 | ) | (0.3 | ) | (20.1 | ) | ||||||||||||||||||||||||||
Current period other comprehensive income (loss) | — | — | — | — | — | 33.5 | 2.8 | 6.6 | 13.1 | 56.0 | — | 56.0 | ||||||||||||||||||||||||||||||
Reclassification adjustment to net income | — | — | — | — | — | — | — | 4.1 | 3.2 | 7.3 | — | 7.3 | ||||||||||||||||||||||||||||||
Acquisition of business | — | — | — | — | — | — | — | — | — | — | 0.3 | 0.3 | ||||||||||||||||||||||||||||||
Purchase of noncontrolling interest | — | — | — | 0.8 | — | — | — | — | — | 0.8 | (0.9 | ) | (0.1 | ) | ||||||||||||||||||||||||||||
Foreign currency translation on noncontrolling interest | — | — | — | — | — | — | — | — | — | — | 0.9 | 0.9 | ||||||||||||||||||||||||||||||
Balance, December 31, 2017 | $ | 0.1 | $ | 0.1 | $ | (31.5 | ) | $ | 323.8 | $ | 389.1 | $ | (58.5 | ) | $ | 2.8 | $ | (1.5 | ) | $ | (58.9 | ) | $ | 565.5 | $ | 6.9 | $ | 572.4 | ||||||||||||||
See Notes to Consolidated Financial Statements.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
NOTE 1—Principles of Consolidation and Nature of Operations
The consolidated financial statements include the accounts of Hyster-Yale Materials Handling, Inc., a Delaware corporation, and the accounts of Hyster-Yale's wholly owned domestic and international subsidiaries and majority-owned joint ventures (collectively, "Hyster-Yale" or the "Company"). All intercompany accounts and transactions among the consolidated companies are eliminated in consolidation.
The Company, through its wholly owned operating subsidiary, Hyster-Yale Group, Inc. ("HYG"), designs, engineers, manufactures, sells and services a comprehensive line of lift trucks and aftermarket parts marketed globally primarily under the Hyster® and Yale® brand names, mainly to independent Hyster® and Yale® retail dealerships. Lift trucks and component parts are manufactured in the United States, Northern Ireland, Mexico, the Netherlands, Italy, Vietnam, the Philippines, Japan, Brazil and China. The sale of service parts represents approximately 13% of total revenues as reported for each of 2017, 2016 and 2015.
The Company operates Bolzoni S.p.A. ("Bolzoni"). Bolzoni is a leading worldwide producer of attachments, forks and lift tables marketed under the Bolzoni Auramo® and Meyer® brand names. Bolzoni products are manufactured in Italy, China, Germany, Finland and the United States. Through the design, production and distribution of a wide range of attachments, Bolzoni has a strong presence in the market niche of lift-truck attachments and industrial material handling.
The Company operates Nuvera Fuel Cells, LLC ("Nuvera"). Nuvera is an alternative-power technology company focused on fuel-cell stacks and engines. Nuvera also supports on-site hydrogen production and dispensing systems that are designed to deliver clean energy solutions to customers.
Investments in Sumitomo NACCO Forklift Co., Ltd. (“SN”), a 50% owned joint venture, and HYG Financial Services, Inc. ("HYGFS"), a 20% owned joint venture, are accounted for by the equity method. SN operates manufacturing facilities in Japan, the Philippines and Vietnam from which the Company purchases certain components, service parts and lift trucks. Sumitomo Heavy Industries, Ltd. owns the remaining 50% interest in SN. Each stockholder of SN is entitled to appoint directors representing 50% of the vote of SN’s board of directors. All matters related to policies and programs of operation, manufacturing and sales activities require mutual agreement between the Company and Sumitomo Heavy Industries, Ltd. prior to a vote of SN’s board of directors. HYGFS is a joint venture with Wells Fargo Financial Leasing, Inc. (“WF”), formed primarily for the purpose of providing financial services to independent Hyster® and Yale® lift truck dealers and National Account customers in the United States. National Account customers are large customers with centralized purchasing and geographically dispersed operations in multiple dealer territories. The Company’s percentage share of the net income or loss from these equity investments is reported on the line “Income from unconsolidated affiliates” in the “Other income (expense)” portion of the Consolidated Statements of Operations.
NOTE 2—Significant Accounting Policies
Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and judgments. These estimates and judgments affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities (if any) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents include cash in banks and highly liquid investments with original maturities of three months or less.
Accounts Receivable, Net of Allowances: Allowances are maintained against accounts receivable for doubtful accounts. Allowances for doubtful accounts are maintained for estimated losses resulting from the inability of customers to make required payments. These allowances are based on both recent trends of certain customers estimated to be a greater credit risk as well as general trends of the entire customer pool. Accounts are written off against the allowance when it becomes evident collection will not occur.
Self-insurance Liabilities: The Company is generally self-insured for product liability, environmental liability and medical and workers’ compensation claims. For product liability, catastrophic insurance coverage is retained for potentially significant individual claims. An estimated provision for claims reported and for claims incurred but not yet reported under the self-insurance programs is recorded and revised periodically based on industry trends, historical experience and management judgment. In addition, industry trends are considered within management judgment for valuing claims. Changes in assumptions
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
for such matters as legal judgments and settlements, legal defense costs, inflation rates, medical costs and actual experience could cause estimates to change in the near term.
Revenue Recognition: Revenues are recognized based upon the terms of contracts with customers, which is generally when title transfers and risk of loss passes as customer orders are completed and shipped. For National Account customers, revenue is recognized upon customer acceptance.
Products generally are not sold with the right of return with the exception of a small percentage of aftermarket parts. Based on the Company’s historical experience, a portion of these aftermarket parts sold is estimated to be returned and, subject to certain terms and conditions, the Company will agree to accept. The Company records estimated reductions to revenues at the time of the sale based upon this historical experience and the limited right of return provided to the Company’s dealers.
The Company also records estimated reductions to revenues for customer programs and incentive offerings, including special pricing agreements, price competition, promotions and other volume-based incentives. Lift truck sales revenue is recorded net of estimated discounts. The estimated discount amount is based upon historical trends for each lift truck model. In addition to standard discounts, dealers can also request additional discounts that allow them to offer price concessions to customers. From time to time, the Company offers special incentives to increase market share or dealer stock and offers certain customers volume rebates if a specified cumulative level of purchases is obtained. Additionally, the Company provides for the estimated cost of product warranties at the time revenues are recognized.
Advertising Costs: Advertising costs are expensed as incurred. Total advertising expense was $10.8 million, $10.8 million and $11.7 million in 2017, 2016 and 2015, respectively.
Product Development Costs: Expenses associated with the development of new products and changes to existing products are charged to expense as incurred. These costs amounted to $104.5 million, $107.0 million and $88.3 million in 2017, 2016 and 2015, respectively.
Shipping and Handling Costs: Shipping and handling costs billed to customers are recognized as revenue and shipping and handling costs incurred by the Company are included on the line “Cost of sales” within the Consolidated Statements of Operations.
Taxes Collected from Customers and Remitted to Governmental Authorities: The Company collects various taxes and fees as an agent in connection with the sale of products and remits these amounts to the respective taxing authorities. These taxes and fees have been presented on a net basis in the Consolidated Statements of Operations and are recorded as an asset or liability until received by or remitted to the respective taxing authority.
Foreign Currency: Assets and liabilities of non-U.S. operations are translated into U.S. dollars at the fiscal year-end exchange rate. The related translation adjustments are recorded as a separate component of equity, except for the Company’s Mexican operations. The U.S. dollar is considered the functional currency for the Company’s Mexican operations and, therefore, the effect of translating assets and liabilities from the Mexican peso to the U.S. dollar is recorded in results of operations. Revenues and expenses of all non-U.S. operations are translated using average monthly exchange rates prevailing during the year.
Reclassification: Certain amounts in the prior period’s audited consolidated financial statements have been reclassified to conform to the current period’s presentation.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
The following table includes other significant accounting policies that are described in other notes to the consolidated financial statements, including the footnote number:
Significant Accounting Policy | Note | |
Reportable segments | Business Segments (Note 3) | |
Stock-based compensation | Common Stock and Earnings per Share (Note 5) | |
Income taxes | Income Taxes (Note 6) | |
Derivatives and hedging activities | Financial Instruments and Derivative Financial Instruments (Note 8) | |
Fair value of financial instruments | Financial Instruments and Derivative Financial Instruments (Note 8) and Retirement Benefit Plans (Note 9) | |
Pension | Retirement Benefit Plans (Note 9) | |
Inventories | Inventories (Note 10) | |
Property, plant and equipment | Property, Plant and Equipment, Net (Note 11) | |
Impairment or disposal of long-lived assets | Property, Plant and Equipment, Net (Note 11) | |
Goodwill and intangible assets | Goodwill and Intangible Assets (Note 12) | |
Contingencies | Contingencies (Note 16) | |
Recently Issued Accounting Standards
The following table provides a brief description of recent accounting pronouncements adopted January 1, 2017. The adoption of these standards did not have a material effect on the Company's financial position, results of operations, cash flows or related disclosures.
Standard | Description | |
ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory | The guidance requires inventory to be measured at the lower of cost or net realizable value. The guidance defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. | |
ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships | The guidance clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship, provided that all other hedge accounting criteria continue to be met. | |
ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323) | The guidance eliminates the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. In addition, the guidance requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. | |
ASU No. 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting | The guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. | |
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
The following table provides a brief description of recent accounting pronouncements not yet adopted:
Standard | Description | Required Date of Adoption | Effect on the financial statements or other significant matters | |||
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (Subsequent ASUs have been issued in 2015, 2016 and 2017 to update or clarify this guidance) | The new guidance is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. | January 1, 2018 | The Company's evaluation process of the new standard included, but was not limited to, identifying contracts and revenue streams within the scope of the guidance, reviewing and documenting the accounting and identifying and determining the accounting for any related contract costs and variable consideration. The Company has documented this evaluation and has implemented processes and controls for certain revenue streams as warranted by the guidance. The Company adopted the standard on January 1, 2018 using the modified retrospective approach and recorded a cumulative adjustment to retained earnings for open contracts as of January 1, 2018. The adoption of the standard did not have a material impact on the Company's consolidated financial statements. The Company will provide the new disclosures required by the standard in the Company's March 31, 2018 Quarterly Report on Form 10-Q. | |||
ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities | The guidance requires equity investments previously accounted for under the cost method of accounting to be measured at fair value and recognized in net income. In addition, the guidance defines measurement and presentation of financial instruments. | January 1, 2018 | The Company anticipates the adoption will increase the volatility of other (income) expense as a result of applying the guidance. The Company recorded a cumulative adjustment to retained earnings for deferred gains related to equity investments in third-parties as of January 1, 2018 of $3.6 million. Subsequent changes in the fair value of these investments will be recognized directly in earnings. | |||
ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments | The guidance clarifies the classification of certain types of cash receipts and cash payments. In addition, the guidance provides for the application of the predominance principle when certain cash receipts and payments have aspects of more than one class of cash flows. | January 1, 2018 | The adoption of the guidance did not have a material effect on the Company's financial position, results of operations, cash flows or related disclosures. | |||
ASU No. 2016-16, Income Taxes (Topic 740) | The guidance allows for recognition of current and deferred income taxes for an intra-entity transfer of an asset other than inventory. The guidance allows for more accurate representation of the economics of an intra-entity asset transfer which will require income tax consequences of the transfer, including income taxes payable or paid. | January 1, 2018 | The adoption of the guidance did not have a material effect on the Company's financial position, results of operations, cash flows or related disclosures. | |||
ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash | The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. | January 1, 2018 | The adoption of the guidance did not have a material effect on the Company's financial position, results of operations, cash flows or related disclosures. | |||
ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business | The guidance clarifies the definition of a business to assist entities in evaluating whether transactions should be accounted for as acquisitions or disposals of businesses. | January 1, 2018 | The adoption of the guidance did not have a material effect on the Company's financial position, results of operations, cash flows or related disclosures. | |||
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
Standard | Description | Required Date of Adoption | Effect on the financial statements or other significant matters | |||
ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition | The guidance clarifies the scope and accounting of a financial asset that meets the definition of an "in-substance nonfinancial asset" and defines the term, "in-substance nonfinancial asset," in addition to partial sales of nonfinancial assets. | January 1, 2018 | The adoption of the guidance did not have a material effect on the Company's financial position, results of operations, cash flows or related disclosures. | |||
ASU 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement | The guidance requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. | January 1, 2018 | The Company will present the components of net benefit cost, other than service cost, in other (income) expense for its pension plans starting on January 1, 2018. Service cost for the Company's pension plans will continue to be reported in operating profit. | |||
ASU No. 2016-02, Leases (Topic 842)(Subsequent ASUs have been issued in 2017 to update or clarify this guidance) | The guidance requires lessees (with the exception of short-term leases) to recognize, at the commencement date, a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. | January 1, 2019 | The Company's evaluation process of the new standard includes, but is not limited to, evaluating its current lease portfolio, identifying relevant contracts and attributes affected by the standard and determining the required accounting upon adoption. In addition, the Company expects to implement new processes and controls regarding asset financing transactions and financial reporting. The Company continues to evaluate its global leasing portfolio and train relevant personnel. In addition, the Company has started abstraction of key attributes within lease contracts and began to evaluate systems-related requirements for the new standard. This evaluation will continue throughout 2018. While the Company's evaluation of the alternative methods of adoption, practical expedients and the effect on its financial position, results of operations, cash flows and related disclosures is ongoing; the Company anticipates the adoption will materially affect the consolidated balance sheets and will require changes to the Company's systems and processes. | |||
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities | The guidance makes targeted changes to the hedge accounting model intended to facilitate financial reporting that more closely reflects an entity’s risk management activities and to simplify the application of hedge accounting. Changes include expanding the types of risk management strategies eligible for hedge accounting, easing the documentation and effectiveness assessment requirements, changing how ineffectiveness is measured and changing the presentation and disclosure requirements for hedge accounting activities. | January 1, 2019 | The Company is currently evaluating the guidance and the effect on its financial position, results of operations, cash flows and related disclosures. | |||
ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | The guidance provides an election to reclassify the stranded tax effects resulting from the Tax Reform Act from OCI to retained earnings. In addition, the guidance requires new disclosures regarding the election to adopt and the manner in which tax effects remaining in OCI are released. | January 1, 2019 | The Company is currently evaluating the guidance and the effect on its financial position, results of operations, cash flows and related disclosures. | |||
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
Standard | Description | Required Date of Adoption | Effect on the financial statements or other significant matters | |||
ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) | The guidance eliminates the probable initial recognition threshold and requires an entity to reflect its current estimate of all expected credit losses. The guidance also requires additional disclosures in certain circumstances. | January 1, 2020 | The Company is currently evaluating the alternative methods of adoption and the effect on its financial position, results of operations, cash flows and related disclosures. | |||
ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment | The guidance removes the second step of the two-step test for the measurement of goodwill impairment. The guidance allows for early adoption for impairment testing dates after January 1, 2017. | January 1, 2020 | The Company is currently evaluating the timing of adoption and the effect on its current impairment testing process. | |||
NOTE 3—Business Segments
The Company’s reportable segments for the lift truck business include the following three management units: the Americas, EMEA and JAPIC. Americas includes operations in the United States, Canada, Mexico, Brazil, Latin America and its corporate headquarters. EMEA includes operations in Europe, the Middle East and Africa. JAPIC includes operations in the Asia and Pacific regions including China, as well as the equity earnings of SN operations. Certain amounts are allocated to these geographic management units and are included in the segment results presented below, including product development costs, corporate headquarter's expenses and certain information technology infrastructure costs. These allocations among geographic management units are determined by senior management and not directly incurred by the geographic operations. In addition, other costs are incurred directly by these geographic management units based upon the location of the manufacturing plant or sales units, including manufacturing variances, product liability, warranty and sales discounts, which may not be associated with the geographic management unit of the ultimate end user sales location where revenues and margins are reported. Therefore, the reported results of each segment for the lift truck business cannot be considered stand-alone entities as all segments are inter-related and integrate into a single global lift truck business. The Company reports the results of Nuvera as a separate segment.
On April 1, 2016, the Company acquired a majority interest in Bolzoni, which is also reported as a separate segment. Bolzoni's results of operations have been included since the acquisition date. See Note 19 to the consolidated financial statements for additional information.
Financial information for each of the reportable segments is presented in the following table. See Note 1 for a discussion of the Company’s product lines. Refer to Note 2 for a description of the accounting policies of the reportable segments as well as a reference table for the remaining accounting policies described in the accompanying footnotes.
2017 | 2016 | 2015 | |||||||||
Revenues from external customers | |||||||||||
Americas | $ | 1,834.1 | $ | 1,675.7 | $ | 1,775.5 | |||||
EMEA | 715.8 | 615.7 | 606.4 | ||||||||
JAPIC | 173.9 | 169.5 | 193.7 | ||||||||
Lift truck business | 2,723.8 | 2,460.9 | 2,575.6 | ||||||||
Bolzoni | 177.2 | 115.6 | — | ||||||||
Nuvera | 3.7 | 2.5 | 2.5 | ||||||||
Eliminations | (19.5 | ) | (9.3 | ) | — | ||||||
Total | $ | 2,885.2 | $ | 2,569.7 | $ | 2,578.1 | |||||
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
2017 | 2016 | 2015 | |||||||||
Gross profit (loss) | |||||||||||
Americas | $ | 334.6 | $ | 287.9 | $ | 308.1 | |||||
EMEA | 95.7 | 89.5 | 101.3 | ||||||||
JAPIC | 20.2 | 17.1 | 23.2 | ||||||||
Lift truck business | 450.5 | 394.5 | 432.6 | ||||||||
Bolzoni | 54.8 | 35.7 | — | ||||||||
Nuvera | (2.1 | ) | (2.7 | ) | (1.8 | ) | |||||
Eliminations | (0.6 | ) | — | — | |||||||
Total | $ | 502.6 | $ | 427.5 | $ | 430.8 | |||||
Selling, general and administrative expenses | |||||||||||
Americas | $ | 225.3 | $ | 214.2 | $ | 191.2 | |||||
EMEA | 86.7 | 81.9 | 88.3 | ||||||||
JAPIC | 26.3 | 23.8 | 25.0 | ||||||||
Lift truck business | 338.3 | 319.9 | 304.5 | ||||||||
Bolzoni | 48.4 | 35.8 | — | ||||||||
Nuvera | 39.9 | 36.9 | 22.8 | ||||||||
Total | $ | 426.6 | $ | 392.6 | $ | 327.3 | |||||
Operating profit (loss) | |||||||||||
Americas | $ | 109.3 | $ | 73.7 | $ | 116.9 | |||||
EMEA | 9.0 | 7.6 | 13.0 | ||||||||
JAPIC | (6.1 | ) | (6.7 | ) | (1.8 | ) | |||||
Lift truck business | 112.2 | 74.6 | 128.1 | ||||||||
Bolzoni | 6.4 | (0.1 | ) | — | |||||||
Nuvera | (42.0 | ) | (39.6 | ) | (24.6 | ) | |||||
Eliminations | (0.6 | ) | — | — | |||||||
Total | $ | 76.0 | $ | 34.9 | $ | 103.5 | |||||
Interest expense | |||||||||||
Americas | $ | 12.3 | $ | 5.4 | $ | 4.4 | |||||
EMEA | 1.6 | 0.4 | 0.1 | ||||||||
JAPIC | — | 0.1 | 0.2 | ||||||||
Lift truck business | 13.9 | 5.9 | 4.7 | ||||||||
Bolzoni | 0.8 | 0.8 | — | ||||||||
Nuvera | — | — | — | ||||||||
Eliminations | (0.1 | ) | — | — | |||||||
Total | $ | 14.6 | $ | 6.7 | $ | 4.7 | |||||
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
2017 | 2016 | 2015 | |||||||||
Interest income | |||||||||||
Americas | $ | (3.3 | ) | $ | (1.0 | ) | $ | (1.0 | ) | ||
EMEA | — | (0.5 | ) | (0.3 | ) | ||||||
JAPIC | (0.4 | ) | (0.5 | ) | (0.2 | ) | |||||
Lift truck business | (3.7 | ) | (2.0 | ) | (1.5 | ) | |||||
Bolzoni | — | — | — | ||||||||
Nuvera | — | — | — | ||||||||
Eliminations | 0.1 | — | — | ||||||||
Total | $ | (3.6 | ) | $ | (2.0 | ) | $ | (1.5 | ) | ||
Other (income) expense | |||||||||||
Americas | $ | (25.4 | ) | $ | (5.7 | ) | $ | (2.7 | ) | ||
EMEA | 1.1 | 1.0 | 1.0 | ||||||||
JAPIC | (4.5 | ) | (3.2 | ) | (2.5 | ) | |||||
Lift truck business | (28.8 | ) | (7.9 | ) | (4.2 | ) | |||||
Bolzoni | — | (0.2 | ) | — | |||||||
Nuvera | — | — | — | ||||||||
Total | $ | (28.8 | ) | $ | (8.1 | ) | $ | (4.2 | ) | ||
Income tax provision (benefit) | |||||||||||
Americas | $ | 57.3 | $ | 15.4 | $ | 39.9 | |||||
EMEA | 0.9 | (2.7 | ) | 1.6 | |||||||
JAPIC | 1.2 | (0.5 | ) | (2.1 | ) | ||||||
Lift truck business | 59.4 | 12.2 | 39.4 | ||||||||
Bolzoni | 1.0 | (0.4 | ) | — | |||||||
Nuvera | (15.3 | ) | (15.8 | ) | (10.0 | ) | |||||
Eliminations | (0.2 | ) | — | — | |||||||
Total | $ | 44.9 | $ | (4.0 | ) | $ | 29.4 | ||||
Net income (loss) attributable to stockholders | |||||||||||
Americas | $ | 68.4 | $ | 59.6 | $ | 76.3 | |||||
EMEA | 5.3 | 9.4 | 10.6 | ||||||||
JAPIC | (1.9 | ) | (2.1 | ) | 2.4 | ||||||
Lift truck business | 71.8 | 66.9 | 89.3 | ||||||||
Bolzoni | 3.9 | (0.3 | ) | — | |||||||
Nuvera | (26.7 | ) | (23.8 | ) | (14.6 | ) | |||||
Eliminations | (0.4 | ) | — | — | |||||||
Total | $ | 48.6 | $ | 42.8 | $ | 74.7 | |||||
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
2017 | 2016 | 2015 | |||||||||
Total assets | |||||||||||
Americas | $ | 1,146.0 | $ | 831.9 | $ | 680.7 | |||||
EMEA | 615.5 | 462.3 | 412.0 | ||||||||
JAPIC | 138.6 | 127.0 | 140.6 | ||||||||
Eliminations | (304.6 | ) | (185.3 | ) | (130.9 | ) | |||||
Lift truck business | 1,595.5 | 1,235.9 | 1,102.4 | ||||||||
Bolzoni | 239.8 | 206.9 | — | ||||||||
Nuvera | 26.4 | 36.9 | 17.4 | ||||||||
Eliminations | (213.8 | ) | (192.6 | ) | (23.9 | ) | |||||
Total | $ | 1,647.9 | $ | 1,287.1 | $ | 1,095.9 | |||||
Depreciation and amortization | |||||||||||
Americas | $ | 19.9 | $ | 18.5 | $ | 16.2 | |||||
EMEA | 7.1 | 6.5 | 5.9 | ||||||||
JAPIC | 2.6 | 3.1 | 5.2 | ||||||||
Lift truck business | 29.6 | 28.1 | 27.3 | ||||||||
Bolzoni | 11.2 | 9.5 | — | ||||||||
Nuvera | 2.0 | 1.5 | 1.6 | ||||||||
Total | $ | 42.8 | $ | 39.1 | $ | 28.9 | |||||
Capital expenditures | |||||||||||
Americas | $ | 25.5 | $ | 27.6 | $ | 33.5 | |||||
EMEA | 8.6 | 7.3 | 8.7 | ||||||||
JAPIC | 1.2 | 1.6 | 1.7 | ||||||||
Lift truck business | 35.3 | 36.5 | 43.9 | ||||||||
Bolzoni | 4.7 | 4.0 | — | ||||||||
Nuvera | 1.0 | 2.2 | 2.7 | ||||||||
Total | $ | 41.0 | $ | 42.7 | $ | 46.6 | |||||
Cash and cash equivalents | |||||||||||
Americas | $ | 191.2 | $ | 10.4 | $ | 54.2 | |||||
EMEA | 11.6 | 14.4 | 82.2 | ||||||||
JAPIC | 6.6 | 8.2 | 18.5 | ||||||||
Lift truck business | 209.4 | 33.0 | 154.9 | ||||||||
Bolzoni | 10.7 | 10.2 | — | ||||||||
Nuvera | — | — | 0.2 | ||||||||
Total | $ | 220.1 | $ | 43.2 | $ | 155.1 | |||||
Data by Geographic Region
No single country outside of the United States comprised 10% or more of revenues from unaffiliated customers. The “Other” category below includes Canada, Mexico, South America and the Asia and Pacific regions. In addition, no single customer comprised 10% or more of revenues from unaffiliated customers.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
United States | Europe, Africa and Middle East | Other | Consolidated | ||||||||||||
2017 | |||||||||||||||
Revenues from unaffiliated customers, based on the customers’ location | $ | 1,588.8 | $ | 825.8 | $ | 470.6 | $ | 2,885.2 | |||||||
Long-lived tangible assets | $ | 181.6 | $ | 82.3 | $ | 83.4 | $ | 347.3 | |||||||
2016 | |||||||||||||||
Revenues from unaffiliated customers, based on the customers’ location | $ | 1,437.6 | $ | 701.9 | $ | 430.2 | $ | 2,569.7 | |||||||
Long-lived tangible assets | $ | 159.1 | $ | 59.8 | $ | 82.1 | $ | 301.0 | |||||||
2015 | |||||||||||||||
Revenues from unaffiliated customers, based on the customers’ location | $ | 1,575.2 | $ | 606.5 | $ | 396.4 | $ | 2,578.1 | |||||||
Long-lived tangible assets | $ | 126.2 | $ | 39.4 | $ | 61.8 | $ | 227.4 | |||||||
NOTE 4—Quarterly Results of Operations (Unaudited)
A summary of the unaudited results of operations for the year ended December 31 is as follows:
2017 | |||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
Revenues | $ | 713.1 | $ | 685.5 | $ | 691.1 | $ | 795.5 | |||||||
Gross profit | $ | 126.1 | $ | 121.7 | $ | 121.4 | $ | 133.4 | |||||||
Operating profit | $ | 23.4 | $ | 18.3 | $ | 17.9 | $ | 16.4 | |||||||
Net income (loss) | $ | 18.1 | $ | 16.4 | $ | 16.7 | $ | (2.3 | ) | ||||||
Net income (loss) attributable to stockholders | $ | 18.1 | $ | 16.4 | $ | 16.5 | $ | (2.4 | ) | ||||||
Basic earnings (loss) per share | $ | 1.10 | $ | 1.00 | $ | 1.00 | $ | (0.15 | ) | ||||||
Diluted earnings (loss) per share | $ | 1.10 | $ | 0.99 | $ | 1.00 | $ | (0.15 | ) | ||||||
Net income (loss) attributable to stockholders for the fourth quarter of 2017 include the impacts of the Tax Cuts and Jobs Act, which was signed into law December 22, 2017. See Note 6 to the consolidated financial statements for further discussion.
2016 | |||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
Revenues | $ | 604.2 | $ | 645.6 | $ | 629.3 | $ | 690.6 | |||||||
Gross profit | $ | 97.9 | $ | 114.0 | $ | 104.6 | $ | 111.0 | |||||||
Operating profit | $ | 9.7 | $ | 11.4 | $ | 5.4 | $ | 8.4 | |||||||
Net income | $ | 9.9 | $ | 8.3 | $ | 12.0 | $ | 12.1 | |||||||
Net income attributable to stockholders | $ | 10.0 | $ | 8.3 | $ | 12.3 | $ | 12.2 | |||||||
Basic earnings per share | $ | 0.61 | $ | 0.51 | $ | 0.75 | $ | 0.74 | |||||||
Diluted earnings per share | $ | 0.61 | $ | 0.51 | $ | 0.75 | $ | 0.74 | |||||||
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
NOTE 5—Common Stock and Earnings per Share
The Company's Class A common stock is traded on the New York Stock Exchange under the ticker symbol “HY.” Because of transfer restrictions on Class B common stock, no trading market has developed, or is expected to develop, for the Company's Class B common stock. The Class B common stock is convertible into Class A common stock on a one-for-one basis at any time at the request of the holder. The Company's Class A common stock and Class B common stock have the same cash dividend rights per share. The Class A common stock has one vote per share and the Class B common stock has ten votes per share. The total number of authorized shares of Class A common stock and Class B common stock at December 31, 2017 was 125 million shares and 35 million shares, respectively. Treasury shares of Class A common stock totaling 425,787 and 497,353 at December 31, 2017 and 2016, respectively, have been deducted from shares outstanding.
Stock Compensation: The Company has stock compensation plans for certain employees in the U.S. that allow the grant of shares of Class A common stock, subject to restrictions, as a means of retaining and rewarding them for long-term performance and to increase ownership in the Company. Shares awarded under the plans are fully vested and entitle the stockholder to all rights of common stock ownership except that shares may not be assigned, pledged or otherwise transferred during the restriction period. In general, the restriction period ends at the earliest of (i) five years after the participant's retirement date, (ii) ten years from the award date, or (iii) the participant's death or permanent disability. Pursuant to the plans, the Company issued 89,502, 56,002 and 49,185 shares related to the years ended December 31, 2017, 2016 and 2015, respectively. After the issuance of these shares, there were 407,890 shares of Class A common stock available for issuance under these plans. Compensation expense related to these share awards was $7.6 million ($6.0 million net of tax), $3.8 million ($2.3 million net of tax) and $1.9 million ($1.2 million net of tax) for the years ended December 31, 2017, 2016 and 2015, respectively. Compensation expense at the grant date represents fair value based on the market price of the shares of Class A common stock. The Company also has a stock compensation plan for non-employee directors of the Company under which a portion of the non-employee directors’ annual retainer is paid in restricted shares of Class A common stock. For the year ended December 31, 2017, $110,000 of each non-employee director's retainer of $166,000 was paid in restricted shares of Class A common stock. For the year ended December 31, 2016, $102,000 of $158,000 was paid in restricted shares of Class A common stock. For the year ended December 31, 2015, $94,000 of $150,000 was paid in restricted shares of Class A common stock. Shares awarded under the plan are fully vested and entitle the stockholder to all rights of common stock ownership except that shares may not be assigned, pledged or otherwise transferred during the restriction period. In general, the restriction period ends at the earliest of (i) ten years from the award date, (ii) the date of the director's death or permanent disability, (iii) five years (or earlier with the approval of the Board of Directors) after the director's date of retirement from the Board of Directors, or (iv) the date on which the director has both retired from the Board of Directors and reached 70 years of age. Pursuant to this plan, the Company issued 14,480, 15,426 and 13,683 shares related to the years ended December 31, 2017, 2016 and 2015, respectively. In addition to the mandatory retainer fee received in restricted stock, directors may elect to receive shares of Class A common stock in lieu of cash for up to 100% of the balance of their annual retainer, meeting attendance fees, committee retainer and any committee chairman's fees. These voluntary shares are not subject to any restrictions. Total shares issued under voluntary elections were 2,006, 2,352 and 2,150 in 2017, 2016 and 2015, respectively. After the issuance of these shares, there were 27,117 shares of Class A common stock available for issuance under this directors' plan. Compensation expense related to these awards was $1.2 million ($0.9 million net of tax), $1.1 million ($0.7 million net of tax) and $1.0 million ($0.6 million net of tax) for the years ended December 31, 2017, 2016 and 2015, respectively. Compensation expense at the grant date represents fair value based on the market price of the shares of Class A common stock.
Earnings per Share: For purposes of calculating earnings per share, no adjustments have been made to the reported amounts of net income attributable to stockholders. In addition, basic and diluted earnings per share for Class A common stock are the same as Class B common stock. The weighted average number of shares of Class A common stock and Class B common stock outstanding used to calculate basic and diluted earnings per share were as follows:
2017 | 2016 | 2015 | |||||||||
Basic weighted average shares outstanding | 16.447 | 16.376 | 16.307 | ||||||||
Dilutive effect of restricted stock awards | 0.067 | 0.051 | 0.048 | ||||||||
Diluted weighted average shares outstanding | 16.514 | 16.427 | 16.355 | ||||||||
Basic earnings per share | $ | 2.95 | $ | 2.61 | $ | 4.58 | |||||
Diluted earnings per share | $ | 2.94 | $ | 2.61 | $ | 4.57 | |||||
Cash dividends per share | $ | 1.2025 | $ | 1.1700 | $ | 1.1300 | |||||
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
NOTE 6—Income Taxes
The components of income before income taxes and provision for income taxes for the years ended December 31 are as follows:
2017 | 2016 | 2015 | |||||||||
Income before income taxes | |||||||||||
U.S. | $ | 48.3 | $ | (1.2 | ) | $ | 71.2 | ||||
Non-U.S. | 45.5 | 39.5 | 33.3 | ||||||||
$ | 93.8 | $ | 38.3 | $ | 104.5 | ||||||
Income tax provision (benefit) | |||||||||||
Current tax provision: | |||||||||||
Federal | $ | 28.3 | $ | (1.3 | ) | $ | 22.1 | ||||
State | 1.4 | (0.3 | ) | 3.4 | |||||||
Non-U.S. | 7.1 | 5.0 | 5.3 | ||||||||
Total current | $ | 36.8 | $ | 3.4 | $ | 30.8 | |||||
Deferred tax provision (benefit): | |||||||||||
Federal | $ | 10.7 | $ | (5.8 | ) | $ | (0.4 | ) | |||
State | (0.7 | ) | 0.8 | 1.2 | |||||||
Non-U.S. | (1.9 | ) | (2.4 | ) | (2.2 | ) | |||||
Total deferred | $ | 8.1 | $ | (7.4 | ) | $ | (1.4 | ) | |||
$ | 44.9 | $ | (4.0 | ) | $ | 29.4 | |||||
The Company made income tax payments of $14.0 million, $19.3 million and $32.7 million during 2017, 2016 and 2015, respectively. The Company received income tax refunds of $2.2 million, $11.1 million and $0.2 million during 2017, 2016 and 2015, respectively.
A reconciliation of the federal statutory and reported income tax rate for the year ended December 31 is as follows:
2017 | 2016 | 2015 | |||||||||
Income before income taxes | $ | 93.8 | $ | 38.3 | $ | 104.5 | |||||
Statutory taxes at 35.0% | $ | 32.8 | $ | 13.4 | $ | 36.6 | |||||
Tax Reform Act | 38.2 | — | — | ||||||||
State income taxes | 0.2 | (0.6 | ) | 4.1 | |||||||
Valuation allowance | 0.1 | (0.2 | ) | 5.9 | |||||||
Sale of non-U.S. investment | (9.1 | ) | (1.9 | ) | (3.7 | ) | |||||
Equity interest earnings | (8.1 | ) | (2.2 | ) | (1.9 | ) | |||||
Non-U.S. rate differences | (7.2 | ) | (9.6 | ) | (10.5 | ) | |||||
R&D and other federal credits | (1.8 | ) | (1.8 | ) | (1.7 | ) | |||||
Unremitted non-U.S. earnings | (0.4 | ) | (3.9 | ) | 0.1 | ||||||
Tax controversy resolution | — | 2.1 | (0.2 | ) | |||||||
Other | 0.2 | 0.7 | 0.7 | ||||||||
Income tax provision (benefit) | $ | 44.9 | $ | (4.0 | ) | $ | 29.4 | ||||
Reported income tax rate | 47.9 | % | n.m. | 28.1 | % | ||||||
n.m. - not meaningful | |||||||||||
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”). The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, repealing the deduction for domestic production activities, allowing the immediate expensing of certain qualified capital expenditures, implementing a territorial tax system and imposing a one-time transition tax on certain unremitted earnings of non-U.S. subsidiaries. As a result of the Tax Reform Act,
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
the Company recorded the provisional tax effects of $38.2 million, comprised of $33.1 million of tax expense due to the transition tax on the unremitted earnings and profits of non-U.S. subsidiaries and $5.1 million of tax expense due to the effects on the Company’s deferred tax assets and liabilities. The final amounts recorded in subsequent financial statements may materially differ from these provisional amounts due to among other things, additional analysis, changes in interpretations of the Tax Reform Act including interpretations by state and local taxing authorities and related assumptions of the Company, and additional regulatory guidance that may be issued which could potentially effect the measurement of these provisional tax amounts. The provisional amounts are expected to be finalized when the U.S. corporate income tax return for 2017 is filed in 2018, but in no event later than one year from the enactment date.
The one-time transition tax is based on the post-1986 unremitted earnings and profits of non-U.S. subsidiaries which have been previously deferred from U.S. income taxes including such earnings through the measurement date as determined by the Tax Reform Act. The amount of transition tax also depends on the amount of earnings and profits held in cash or other specified assets. The Company had an estimated $310 million of undistributed non-U.S. earnings and profits subject to the transition tax and recognized a provisional $33.1 million of income tax expense in the fourth quarter of 2017. After the utilization of existing tax credits, the Company expects to pay cash taxes, including state income taxes, of an estimated $22.5 million with respect to the transition tax payable over eight years. These amounts may change upon the issuance of additional regulatory guidance or when the Company finalizes its calculation of earnings and profits, including the amounts held in cash or other specified assets and its calculation of available foreign tax credits. The Company intends that future distributions will be from earnings which would otherwise qualify for the one hundred percent dividends received deduction provided in the Tax Reform Act and earnings which would not result in any significant foreign taxes. As a result, no additional income taxes have been provided for any undistributed foreign earnings not subject to the transition tax, nor any additional outside basis differences inherent in these entities, as these amounts continue to be indefinitely reinvested in non-U.S. operations. It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on the remittance of such undistributed foreign earnings.
While the Tax Reform Act provides for a territorial system, beginning in 2018, it includes new anti-deferral and anti-base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return non-U.S. earnings in excess of an allowable return on the Company’s non-U.S. subsidiary’s tangible assets. The Company expects that it will be subject to incremental U.S. tax on GILTI beginning in 2018 due to expense allocations required by the U.S foreign tax credit rules and various adjustments required to determine tangible assets provided in the Tax Reform Act. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI as of December 31, 2017.
The BEAT provisions in the Tax Reform Act create a minimum tax where a lower tax rate is applied to pre-tax income without the benefit of certain base-erosion payments made to related non-U.S. corporations. The Company will only be taxed under this regime if such tax exceeds the regular corporate tax. The Company continues to evaluate whether it will be subject to BEAT provisions.
During 2017, the Company recognized a tax benefit of $9.1 million and tax expense of $1.4 million for unrecognized tax benefits, from an internal sale of a subsidiary between consolidated companies resulting in the repatriation of non-U.S. accumulated earnings taxed at higher rates. In addition, the Company settled various federal obligations in Brazil through the utilization of its federal net operating loss carryforwards for which a valuation allowance was previously provided. As a result of the utilization of the underlying deferred tax assets, the Company released the associated valuation allowance previously provided of $4.7 million. This was partly offset by a $1.6 million valuation allowance provided against deferred tax assets in China where the Company has determined that such deferred tax assets no longer meet the more likely than not standard for realization.
During 2016, the Company received a notice from the Italian Tax Authority approving the transfer of certain tax losses as part of an internal restructuring. As a result, the Company believes it is more likely than not that deferred tax assets for such losses of approximately $3.2 million will be realized in the foreseeable future, and has released the valuation allowance previously provided.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
Other items during 2016 include a tax benefit of $4.0 million. As a result of the Bolzoni acquisition, the Company changed its previous reinvestment assertion; and consequently, all of the earnings of its European operations are now considered permanently reinvested and the previously provided deferred tax liability is no longer required. In addition, the Company recognized tax expense of $1.6 million related to non-deductible acquisition expenses and tax expense of $2.1 million for net additions for unrecognized tax benefits.
The Company continually evaluates its deferred tax assets to determine if a valuation allowance is required. A valuation allowance is required where realization is determined to no longer meet the "more likely than not" standard. During 2014 and 2015, a significant downturn was experienced in the Company's Brazilian operations. This significant decrease in operations and actions taken by management to reduce its manufacturing activity to more appropriate levels, coupled with the continued low expectations in the near term for the Brazilian lift truck market and the continuing devaluation of the Brazilian real, caused the Company in 2015 to forecast a three-year cumulative loss for its Brazilian operations. Although the Company projects earnings over the longer term for its Brazilian operations, such longer-term forecasts are not sufficient positive evidence to support the future utilization of deferred tax assets when a three-year loss is determined. Accordingly, in 2015, the Company recorded a valuation allowance adjustment of $1.9 million against its deferred tax assets in Brazil. The Company also recognized $2.7 million, $2.4 million and $5.6 million in 2017, 2016 and 2015, respectively, of valuation allowances related to pre-tax losses in Brazil and $0.6 million in 2017 due to pre-tax losses in China in its effective tax rate.
A detailed summary of the total deferred tax assets and liabilities in the Consolidated Balance Sheets resulting from differences in the book and tax basis of assets and liabilities follows:
December 31 | |||||||
2017 | 2016 | ||||||
Deferred tax assets | |||||||
Tax attribute carryforwards | $ | 28.3 | $ | 31.6 | |||
Product warranties | 9.1 | 13.7 | |||||
Accrued expenses and reserves | 8.3 | 23.2 | |||||
Accrued product liability | 6.5 | 9.3 | |||||
Other employee benefits | 3.2 | 5.2 | |||||
Accrued pension benefits | 2.2 | 8.2 | |||||
Other | — | 2.2 | |||||
Total deferred tax assets | 57.6 | 93.4 | |||||
Less: Valuation allowance | 31.0 | 29.3 | |||||
26.6 | 64.1 | ||||||
Deferred tax liabilities | |||||||
Depreciation and amortization | 22.2 | 25.4 | |||||
Inventories | 0.5 | 5.8 | |||||
Unremitted earnings | — | 0.4 | |||||
Other | 0.3 | — | |||||
Total deferred tax liabilities | 23.0 | 31.6 | |||||
Net deferred tax asset | $ | 3.6 | $ | 32.5 | |||
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
The following table summarizes the tax carryforwards and associated carryforward periods and related valuation allowances where the Company has determined that realization is uncertain:
December 31, 2017 | |||||||||
Net deferred tax asset | Valuation allowance | Carryforwards expire during: | |||||||
Non-U.S. net operating loss | $ | 21.9 | $ | 13.9 | 2018 - Indefinite | ||||
Non-U.S. capital losses | 6.5 | 6.5 | 2018 - Indefinite | ||||||
State net operating losses and credits | 3.8 | 2.4 | 2018 - 2036 | ||||||
Less: Unrecognized tax benefits | (3.9 | ) | — | ||||||
Total | $ | 28.3 | $ | 22.8 | |||||
December 31, 2016 | |||||||||
Net deferred tax asset | Valuation allowance | Carryforwards expire during: | |||||||
Non-U.S. net operating loss | $ | 25.2 | $ | 15.7 | 2017 - Indefinite | ||||
Non-U.S. capital losses | 5.9 | 5.9 | 2017 - Indefinite | ||||||
State net operating losses and credits | 2.8 | 2.0 | 2017 - 2031 | ||||||
U.S. foreign tax credit | 2.5 | — | 2017 - 2026 | ||||||
U.S. net operating loss | 0.8 | — | 2017 - 2036 | ||||||
Less: Unrecognized tax benefits | (5.6 | ) | — | ||||||
Total | $ | 31.6 | $ | 23.6 | |||||
The establishment of a valuation allowance does not have an impact on cash, nor does such an allowance preclude the Company from using its loss carryforwards or other deferred tax assets in future periods. The tax net operating losses attributable to Brazil and Australia comprise a substantial portion of the deferred tax assets and do not expire under local law.
During 2017 and 2016, the net valuation allowance provided against certain deferred tax assets increased by $1.7 million and $0.7 million, respectively. The change in the total valuation allowance in 2017 and 2016 included a net increase in tax expense of $0.1 million and a net decrease of $0.2 million, respectively, a net change in the overall U.S. dollar value of valuation allowances previously recorded in non-U.S. currencies and amounts recorded directly in equity of a net increase of $1.1 million and $0.9 million in 2017 and 2016, respectively. Additionally in 2017, the change in valuation allowance included a net increase of $0.5 million due to the remeasurement of deferred taxes as a result of the Tax Reform Act.
Based upon a review of historical earnings and trends, forecasted earnings and the relevant expiration of carryforwards, the Company believes the valuation allowances provided are appropriate. At December 31, 2017, the Company had gross net operating loss carryforwards in U.S. state jurisdictions of $19.6 million and non-U.S. jurisdictions of $75.7 million.
The following is a reconciliation of total gross unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in the consolidated financial statements for the years ended December 31, 2017, 2016 and 2015. Approximately $10.9 million, $11.1 million and $3.8 million of these amounts as of December 31, 2017, 2016 and 2015, respectively, relate to permanent items that, if recognized, would impact the reported income tax rate. This amount differs from gross unrecognized tax benefits presented in the table below for December 31, 2016 due to the increase in U.S. federal income taxes which would occur upon the recognition of the state tax benefits included herein.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
2017 | 2016 | 2015 | |||||||||
Balance at January 1 | $ | 11.2 | $ | 3.8 | $ | 4.3 | |||||
Additions (reductions) for business acquisitions | (1.0 | ) | 6.3 | — | |||||||
Additions based on tax positions related to the current year | 2.7 | 2.8 | 0.7 | ||||||||
Additions (reductions) for tax positions of prior years | (1.5 | ) | 0.1 | 0.1 | |||||||
Reductions due to settlements with taxing authorities and the lapse of the applicable statute of limitations | (1.2 | ) | (0.9 | ) | (1.1 | ) | |||||
Other changes in unrecognized tax benefits including foreign currency translation adjustments | 0.7 | (0.9 | ) | (0.2 | ) | ||||||
Balance at December 31 | $ | 10.9 | $ | 11.2 | $ | 3.8 | |||||
The Company records interest and penalties on uncertain tax positions as a component of the income tax provision. The Company recorded a net decrease of $0.1 million during 2017 and a net increase of $0.1 million during 2016 and 2015 in interest and penalties. In addition, during 2016, the balance of accrued interest and penalty was increased for uncertain tax positions related to business acquisitions by $0.5 million. The total amount of interest and penalties accrued was $0.8 million, $0.9 million and $0.3 million as of December 31, 2017, 2016 and 2015, respectively.
The Company expects the amount of unrecognized tax benefits will change within the next twelve months; however, the change in unrecognized tax benefits which is reasonably possible within the next twelve months, is not expected to have a significant effect on the Company's financial position or results of operations. It is reasonably possible the Company will record unrecognized tax benefits within the next twelve months in the range of zero to $0.5 million resulting from the possible expiration of certain statutes of limitation and settlement of audits. If recognized, the previously unrecognized tax benefits will be recorded as discrete tax benefits in the interim period in which the items are effectively settled.
The tax returns of the Company and its non-U.S. subsidiaries are routinely examined by various taxing authorities. The Company has not been informed of any material assessment for which an accrual has not been previously provided and the Company would vigorously contest any material assessment. Management believes any potential adjustment would not materially affect the Company's financial condition or results of operations.
In general, the Company operates in taxing jurisdictions that provide a statute of limitations period ranging from three to five years for the taxing authorities to review the applicable tax filings. The examination of U.S. federal tax returns for all years prior to 2014 have been settled with the Internal Revenue Service or otherwise have essentially closed under the applicable statute of limitations. However, the Company has elected to voluntarily extend the statute of limitations for U.S. federal tax return for 2012 at the request of its prior parent company such that attributes may be adjusted in limited circumstances. The Company is routinely under examination in various state and non-U.S. jurisdictions and in most cases the statute of limitations has not been extended. The Company believes these examinations are routine in nature and are not expected to result in any material tax assessments.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
NOTE 7—Reclassifications from OCI
The following table summarizes reclassifications out of accumulated other comprehensive income (loss) ("OCI") for each year ended December 31 as recorded in the Consolidated Statements of Operations:
Details about OCI Components | Amount Reclassified from OCI | Affected Line Item in the Statement Where Net Income Is Presented | ||||||||||||
2017 | 2016 | 2015 | ||||||||||||
Gain (loss) on cash flow hedges: | ||||||||||||||
Foreign exchange contracts | $ | (5.7 | ) | $ | (3.0 | ) | $ | (8.7 | ) | Cost of sales | ||||
Total before tax | (5.7 | ) | (3.0 | ) | (8.7 | ) | Income before income taxes | |||||||
Tax expense | 1.6 | 2.2 | 6.0 | Income tax provision (benefit) | ||||||||||
Net of tax | $ | (4.1 | ) | $ | (0.8 | ) | $ | (2.7 | ) | Net income | ||||
Amortization of defined benefit pension items: | ||||||||||||||
Actuarial loss | $ | (4.5 | ) | $ | (3.0 | ) | $ | (3.5 | ) | (a) | ||||
Prior service (cost) credit | 0.3 | 0.3 | 0.3 | (a) | ||||||||||
Total before tax | (4.2 | ) | (2.7 | ) | (3.2 | ) | Income before income taxes | |||||||
Tax expense | 1.0 | 0.7 | 0.9 | Income tax provision (benefit) | ||||||||||
Net of tax | $ | (3.2 | ) | $ | (2.0 | ) | $ | (2.3 | ) | Net income | ||||
Total reclassifications for the period | $ | (7.3 | ) | $ | (2.8 | ) | $ | (5.0 | ) | |||||
(a) These OCI components are included in the computation of net pension cost (see Note 9 for additional details).
NOTE 8—Financial Instruments and Derivative Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturities of these instruments. The fair values of revolving credit agreements and long-term debt, excluding capital leases, were determined using current rates offered for similar obligations taking into account company credit risk. This valuation methodology is Level 2 as defined in the fair value hierarchy. At December 31, 2017, the total carrying value and total fair value of revolving credit agreements and long-term debt, excluding capital leases, was $270.9 million and $272.2 million, respectively. At December 31, 2016, the total carrying value and total fair value of revolving credit agreements and long-term debt, excluding capital leases, was $184.5 million.
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable and derivatives. The large number of customers comprising the Company’s customer base and their dispersion across many different industries and geographies mitigates concentration of credit risk on accounts receivable. To further reduce credit risk associated with accounts receivable, the Company performs periodic credit evaluations of its customers, but does not generally require advance payments or collateral. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any one institution.
Derivative Financial Instruments
Financial instruments held by the Company include cash and cash equivalents, accounts receivable, accounts payable, revolving credit agreements, long-term debt, interest rate swap agreements and forward foreign currency exchange contracts. The Company does not hold or issue financial instruments or derivative financial instruments for trading purposes.
The Company uses forward foreign currency exchange contracts to partially reduce risks related to transactions denominated in foreign currencies. These contracts hedge firm commitments and forecasted transactions relating to cash flows associated with sales and purchases denominated in non-functional currencies. The Company offsets fair value amounts related to foreign currency exchange contracts executed with the same counterparty. Changes in the fair value of forward foreign currency exchange contracts that are effective as hedges are recorded in OCI. Deferred gains or losses are reclassified from OCI to the Consolidated Statements of Operations in the same period as the gains or losses from the underlying transactions are recorded and are generally recognized in cost of sales. The ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings and is also generally recognized in cost of sales.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
Certain of the Company's forward foreign currency contracts were designated as net investment hedges of the Company's net investment in its foreign subsidiaries. For derivative instruments that were designated and qualified as a hedge of a net investment in foreign currency, the gain or loss was reported in other comprehensive income as part of the cumulative translation adjustment to the extent it is effective. The Company utilizes the forward-rate method of assessing hedge effectiveness. Any ineffective portion of net investment hedges would be recognized in the Consolidated Statements of Operations in the same period as the change.
The Company periodically enters into foreign currency exchange contracts that do not meet the criteria for hedge accounting. These derivatives are used to reduce the Company’s exposure to foreign currency risk related to forecasted purchase or sales transactions or forecasted intercompany cash payments or settlements. Gains and losses on these derivatives are generally recognized in cost of sales.
During 2017, the Company entered into cross-currency swaps which hedge the variability of expected future cash flows that are attributable to foreign currency risk of certain intercompany loans. These agreements include initial and final exchanges of principal and associated interest payments from fixed euro denominated to fixed U.S.-denominated amounts. Changes in the fair value of cross-currency swaps that are effective as hedges are recorded in OCI. Deferred gains or losses are reclassified from OCI to the Consolidated Statements of Operations in the same period as the gains or losses from the underlying transactions are recorded and are generally recognized in other (income) expense and interest expense. The ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings and is generally recognized in other (income) expense.
The Company uses interest rate swap agreements to partially reduce risks related to floating rate financing agreements that are subject to changes in the market rate of interest. Terms of the interest rate swap agreements require the Company to receive a variable interest rate and pay a fixed interest rate. The Company's interest rate swap agreements and its variable rate financings are predominately based upon the one or three-month LIBOR. Changes in the fair value of interest rate swap agreements that are effective as hedges are recorded in OCI. Deferred gains or losses are reclassified from OCI to the Consolidated Statements of Operations in the same period as the gains or losses from the underlying transactions are recorded and are generally recognized in interest expense. The ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings in other (income) expense.
Cash flows from hedging activities are reported in the Consolidated Statements of Cash Flows in the same classification as the hedged item, generally as a component of cash flows from operations.
The Company measures its derivatives at fair value on a recurring basis using significant observable inputs. This valuation methodology is Level 2 as defined in the fair value hierarchy. The Company uses a present value technique that incorporates yield curves and foreign currency spot rates to value its derivatives and also incorporates the effect of the Company's and its counterparties' credit risk into the valuation.
The Company does not currently hold any nonderivative instruments designated as hedges or any derivatives designated as fair value hedges.
Foreign Currency Derivatives: The Company held forward foreign currency exchange contracts with a total notional amount of $860.2 million at December 31, 2017, primarily denominated in euros, U.S. dollars, Japanese yen, British pounds, Swedish kroner, Mexican pesos and Australian dollars. The Company held forward foreign currency exchange contracts with total notional amounts of $592.9 million at December 31, 2016, primarily denominated in euros, U.S. dollars, Japanese yen, Swedish kroner, British pounds and Mexican pesos. The fair value of these contracts approximated a net liability of $2.1 million and $22.7 million at December 31, 2017 and 2016, respectively.
For the years ended December 31, 2017 and 2016, there was no material ineffectiveness of forward foreign currency exchange contracts that qualify for hedge accounting. Forward foreign currency exchange contracts that qualify for hedge accounting are generally used to hedge transactions expected to occur within the next 36 months. The mark-to-market effect of forward foreign currency exchange contracts that are considered effective as hedges has been included in OCI. Based on market valuations at December 31, 2017, $1.0 million of the amount of net deferred loss included in OCI at December 31, 2017 is expected to be reclassified as a gain into the Consolidated Statements of Operations over the next twelve months, as the transactions occur.
Interest Rate Derivatives: The Company holds certain contracts that hedge interest payments on the Term Loan borrowings and one and three-month LIBOR borrowings. The following table summarizes the notional amounts, related rates, excluding spreads, and remaining terms of interest rate swap agreements at December 31, 2017 and 2016:
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
Notional Amount | Average Fixed Rate | |||||||||||||
December 31 | December 31 | December 31 | December 31 | |||||||||||
2017 | 2016 | 2017 | 2016 | Term at December 31, 2017 | ||||||||||
$ | 100.0 | $ | 100.0 | 1.47 | % | 1.47 | % | Extending to December 2018 | ||||||
56.5 | — | 1.94 | % | — | % | November 2017 to November 2022 | ||||||||
83.5 | — | 2.20 | % | — | % | December 2018 to May 2023 | ||||||||
The Company does not apply hedge accounting to the interest rate derivatives which expire December 2018. The fair value of all interest rate swap agreements was a net asset of $0.8 million and a net liability $0.3 million at December 31, 2017 and 2016, respectively. The mark-to-market effect of interest rate swap agreements that are considered effective as hedges has been included in OCI. Based on market valuations at December 31, 2017, $0.1 million of the amount included in OCI is expected to be reclassified as expense in the Consolidated Statement of Operations over the next twelve months, as cash flow payments are made in accordance with the interest rate swap agreements.
The following table summarizes the fair value of derivative instruments at December 31 as recorded in the Consolidated Balance Sheets:
Asset Derivatives | Liability Derivatives | ||||||||||||||||||
Balance sheet location | 2017 | 2016 | Balance sheet location | 2017 | 2016 | ||||||||||||||
Derivatives designated as hedging instruments | |||||||||||||||||||
Cash Flow Hedges | |||||||||||||||||||
Interest rate swap agreements | |||||||||||||||||||
Current | Prepaid expenses and other | $ | — | $ | — | Prepaid expenses and other | $ | 0.1 | $ | — | |||||||||
Long-term | Other non-current assets | 0.7 | — | Other non-current assets | — | — | |||||||||||||
Other long-term liabilities | — | — | Other long-term liabilities | 0.1 | — | ||||||||||||||
Foreign currency exchange contracts | |||||||||||||||||||
Current | Prepaid expenses and other | 8.3 | — | Prepaid expenses and other | 4.0 | — | |||||||||||||
Other current liabilities | 2.8 | 3.7 | Other current liabilities | 4.3 | 14.0 | ||||||||||||||
Long-Term | Other non-current assets | 3.9 | — | Other non-current assets | 1.3 | — | |||||||||||||
Other long-term liabilities | 0.5 | — | Other long-term liabilities | 7.7 | 10.1 | ||||||||||||||
Total derivatives designated as hedging instruments | $ | 16.2 | $ | 3.7 | $ | 17.5 | $ | 24.1 | |||||||||||
Derivatives not designated as hedging instruments | |||||||||||||||||||
Cash Flow Hedges | |||||||||||||||||||
Interest rate swap agreements | |||||||||||||||||||
Current | Prepaid expenses and other | $ | 0.4 | $ | — | Prepaid expenses and other | $ | — | $ | — | |||||||||
Other current liabilities | — | — | Other current liabilities | — | 0.3 | ||||||||||||||
Long-term | Other non-current assets | — | 0.2 | Other non-current assets | — | — | |||||||||||||
Other long-term liabilities | — | — | Other long-term liabilities | 0.1 | 0.2 | ||||||||||||||
Foreign currency exchange contracts | |||||||||||||||||||
Current | Prepaid expenses and other | 0.8 | — | Prepaid expenses and other | 0.4 | — | |||||||||||||
Other current liabilities | 0.1 | 1.6 | Other current liabilities | 0.8 | 3.9 | ||||||||||||||
Total derivatives not designated as hedging instruments | $ | 1.3 | $ | 1.8 | $ | 1.3 | $ | 4.4 | |||||||||||
Total derivatives | $ | 17.5 | $ | 5.5 | $ | 18.8 | $ | 28.5 | |||||||||||
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
The following table summarizes the offsetting of the fair value of derivative instruments on a gross basis by counterparty at December 31, 2017 and 2016 as recorded in the Consolidated Balance Sheets:
Derivative Assets as of December 31, 2017 | Derivative Liabilities as of December 31, 2017 | |||||||||||||||||||||||||||||||
Gross Amounts of Recognized Assets | Gross Amounts Offset | Net Amounts Presented | Net Amount | Gross Amounts of Recognized Liabilities | Gross Amounts Offset | Net Amounts Presented | Net Amount | |||||||||||||||||||||||||
Cash Flow Hedges | ||||||||||||||||||||||||||||||||
Interest rate swap agreements | $ | 1.0 | $ | (0.2 | ) | $ | 0.8 | $ | 0.8 | $ | 0.2 | $ | (0.2 | ) | $ | — | $ | — | ||||||||||||||
Foreign currency exchange contracts | 7.3 | (7.3 | ) | — | — | 9.4 | (7.3 | ) | 2.1 | 2.1 | ||||||||||||||||||||||
Total derivatives | $ | 8.3 | $ | (7.5 | ) | $ | 0.8 | $ | 0.8 | $ | 9.6 | $ | (7.5 | ) | $ | 2.1 | $ | 2.1 | ||||||||||||||
Derivative Assets as of December 31, 2016 | Derivative Liabilities as of December 31, 2016 | |||||||||||||||||||||||||||||||
Gross Amounts of Recognized Assets | Gross Amounts Offset | Net Amounts Presented | Net Amount | Gross Amounts of Recognized Liabilities | Gross Amounts Offset | Net Amounts Presented | Net Amount | |||||||||||||||||||||||||
Cash Flow Hedges | ||||||||||||||||||||||||||||||||
Interest rate swap agreements | $ | 0.2 | $ | (0.2 | ) | $ | — | $ | — | $ | 0.5 | $ | (0.2 | ) | $ | 0.3 | $ | 0.3 | ||||||||||||||
Foreign currency exchange contracts | — | — | — | — | 22.7 | — | 22.7 | 22.7 | ||||||||||||||||||||||||
Total derivatives | $ | 0.2 | $ | (0.2 | ) | $ | — | $ | — | $ | 23.2 | $ | (0.2 | ) | $ | 23.0 | $ | 23.0 | ||||||||||||||
The following table summarizes the pre-tax impact of derivative instruments for each year ended December 31 as recorded in the Consolidated Statements of Operations:
Derivatives in Cash Flow Hedging Relationships | Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) | Location of Gain or (Loss) Reclassified from OCI into Income (Effective Portion) | Amount of Gain or (Loss) Reclassified from OCI into Income (Effective Portion) | Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||
Cash Flow Hedges | ||||||||||||||||||||||||||||||||||||||||
Interest rate swap agreements | $ | 0.5 | $ | — | $ | — | Interest expense | $ | — | $ | — | $ | — | Other | $ | — | $ | — | $ | — | ||||||||||||||||||||
Foreign currency exchange contracts | 14.1 | (15.5 | ) | (11.1 | ) | Cost of sales | (5.7 | ) | (3.0 | ) | (8.7 | ) | Cost of sales | (0.1 | ) | (0.2 | ) | 0.1 | ||||||||||||||||||||||
$ | 14.6 | $ | (15.5 | ) | $ | (11.1 | ) | $ | (5.7 | ) | $ | (3.0 | ) | $ | (8.7 | ) | $ | (0.1 | ) | $ | (0.2 | ) | $ | 0.1 | ||||||||||||||||
Derivatives Not Designated as Hedging Instruments | Location of Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative | ||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||||||
Cash flow hedges | ||||||||||||||||||||||||||||||||||||||||
Interest rate swap agreements | Other | $ | 0.2 | $ | (0.6 | ) | $ | (0.5 | ) | |||||||||||||||||||||||||||||||
Foreign currency exchange contracts | Cost of sales | 2.0 | (2.8 | ) | 0.3 | |||||||||||||||||||||||||||||||||||
Total | $ | 2.2 | $ | (3.4 | ) | $ | (0.2 | ) | ||||||||||||||||||||||||||||||||
NOTE 9—Retirement Benefit Plans
Defined Benefit Plans: The Company maintains various defined benefit pension plans that provide benefits based on years of service and average compensation during certain periods. The Company’s policy is to make contributions to fund these plans within the range allowed by applicable regulations. Plan assets consist primarily of publicly traded stocks and government and corporate bonds.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
Pension benefits for employees covered under the Company’s U.S. and U.K. plans are frozen. Only certain grandfathered employees in the Netherlands still earn retirement benefits under defined benefit pension plans. All other eligible employees of the Company, including employees whose pension benefits are frozen, receive retirement benefits under defined contribution retirement plans.
During 2017, 2016 and 2015, the Company recognized a settlement loss of $1.0 million, $0.9 million and $1.3 million, respectively, resulting from lump-sum distributions exceeding the total projected interest cost for the plan year for its U.S. pension plans.
The assumptions used in accounting for the defined benefit plans were as follows for the years ended December 31:
2017 | 2016 | 2015 | |||
United States Plans | |||||
Weighted average discount rates | 3.40% | 3.75% | 4.00% | ||
Expected long-term rate of return on assets | 7.50% | 7.50% | 7.50% | ||
Non-U.S. Plans | |||||
Weighted average discount rates | 0.88% - 2.40% | 0.86% - 2.50% | 2.10% - 3.70% | ||
Rate of increase in compensation levels | 1.50% - 2.50% | 1.50% - 2.50% | 2.00% - 2.50% | ||
Expected long-term rate of return on assets | 1.70% - 7.00% | 3.00% - 7.00% | 3.00% - 7.00% | ||
Each year, the assumptions used to calculate the benefit obligation are used to calculate the net periodic pension expense for the following year.
Set forth below is a detail of the net periodic pension expense for the defined benefit plans for the years ended December 31:
2017 | 2016 | 2015 | |||||||||
United States Plans | |||||||||||
Service cost | $ | — | $ | — | $ | — | |||||
Interest cost | 2.7 | 3.0 | 2.9 | ||||||||
Expected return on plan assets | (4.9 | ) | (5.0 | ) | (5.5 | ) | |||||
Amortization of actuarial loss | 1.8 | 1.6 | 1.5 | ||||||||
Amortization of prior service credit | (0.3 | ) | (0.3 | ) | (0.3 | ) | |||||
Settlements | 1.0 | 0.9 | 1.3 | ||||||||
Net periodic pension expense (benefit) | $ | 0.3 | $ | 0.2 | $ | (0.1 | ) | ||||
Non-U.S. Plans | |||||||||||
Service cost | $ | 0.2 | $ | 0.2 | $ | 0.2 | |||||
Interest cost | 4.1 | 5.0 | 5.6 | ||||||||
Expected return on plan assets | (9.2 | ) | (8.8 | ) | (9.6 | ) | |||||
Amortization of actuarial loss | 2.7 | 1.4 | 2.0 | ||||||||
Net periodic pension expense (benefit) | $ | (2.2 | ) | $ | (2.2 | ) | $ | (1.8 | ) | ||
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
Set forth below is a detail of other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) for the year ended December 31:
2017 | 2016 | 2015 | |||||||||
United States Plans | |||||||||||
Current year actuarial (gain) loss | $ | (2.0 | ) | $ | 1.6 | $ | 4.3 | ||||
Amortization of actuarial loss | (1.8 | ) | (1.6 | ) | (1.5 | ) | |||||
Amortization of prior service credit | 0.3 | 0.3 | 0.3 | ||||||||
Settlements | (1.0 | ) | (0.9 | ) | (1.3 | ) | |||||
Total recognized in other comprehensive income (loss) | $ | (4.5 | ) | $ | (0.6 | ) | $ | 1.8 | |||
Non-U.S. Plans | |||||||||||
Current year actuarial (gain) loss | $ | (13.8 | ) | $ | 20.5 | $ | 2.0 | ||||
Amortization of actuarial loss | (2.7 | ) | (1.4 | ) | (2.0 | ) | |||||
Current year prior service credit | — | — | (0.1 | ) | |||||||
Total recognized in other comprehensive income (loss) | $ | (16.5 | ) | $ | 19.1 | $ | (0.1 | ) | |||
The following table sets forth the changes in the benefit obligation and the plan assets during the year and the funded status of the defined benefit plans at December 31:
2017 | 2016 | ||||||||||||||
U.S. Plans | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | ||||||||||||
Change in benefit obligation | |||||||||||||||
Projected benefit obligation at beginning of year | $ | 75.7 | $ | 165.2 | $ | 77.3 | $ | 156.1 | |||||||
Service cost | — | 0.2 | — | 0.2 | |||||||||||
Interest cost | 2.7 | 4.1 | 3.0 | 5.0 | |||||||||||
Actuarial (gain) loss | 2.9 | (1.9 | ) | 1.2 | 34.6 | ||||||||||
Benefits paid | (4.5 | ) | (5.8 | ) | (4.2 | ) | (5.4 | ) | |||||||
Employee contributions | — | 0.1 | — | 0.1 | |||||||||||
Lump sum payments | (2.0 | ) | — | (1.6 | ) | — | |||||||||
Business acquisition benefit obligation | — | — | — | 2.5 | |||||||||||
Foreign currency exchange rate changes | — | 17.1 | — | (27.9 | ) | ||||||||||
Projected benefit obligation at end of year | $ | 74.8 | $ | 179.0 | $ | 75.7 | $ | 165.2 | |||||||
Accumulated benefit obligation at end of year | $ | 74.8 | $ | 178.4 | $ | 75.7 | $ | 164.7 | |||||||
Change in plan assets | |||||||||||||||
Fair value of plan assets at beginning of year | $ | 67.2 | $ | 138.9 | $ | 68.4 | $ | 144.7 | |||||||
Actual return on plan assets | 9.8 | 20.6 | 4.6 | 21.1 | |||||||||||
Employer contributions | 0.5 | 9.2 | — | 3.2 | |||||||||||
Employee contributions | — | 0.1 | — | 0.1 | |||||||||||
Benefits paid | (4.5 | ) | (5.8 | ) | (4.2 | ) | (5.4 | ) | |||||||
Settlements | (2.0 | ) | — | (1.6 | ) | — | |||||||||
Foreign currency exchange rate changes | — | 15.3 | — | (24.8 | ) | ||||||||||
Fair value of plan assets at end of year | $ | 71.0 | $ | 178.3 | $ | 67.2 | $ | 138.9 | |||||||
Funded status at end of year | $ | (3.8 | ) | $ | (0.7 | ) | $ | (8.5 | ) | $ | (26.3 | ) | |||
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
2017 | 2016 | ||||||||||||||
U.S. Plans | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | ||||||||||||
Amounts recognized in the consolidated balance sheets consist of: | |||||||||||||||
Noncurrent assets | $ | 0.1 | $ | 3.8 | $ | — | $ | — | |||||||
Noncurrent liabilities | (3.9 | ) | (4.5 | ) | (8.5 | ) | (26.3 | ) | |||||||
$ | (3.8 | ) | $ | (0.7 | ) | $ | (8.5 | ) | $ | (26.3 | ) | ||||
Components of accumulated other comprehensive income (loss) consist of: | |||||||||||||||
Actuarial loss | $ | 37.9 | $ | 40.1 | $ | 42.7 | $ | 53.3 | |||||||
Prior service credit | (0.3 | ) | (0.1 | ) | (0.6 | ) | (0.1 | ) | |||||||
Deferred taxes | (7.8 | ) | (5.2 | ) | (14.4 | ) | (9.0 | ) | |||||||
Change in statutory tax rate | (6.0 | ) | (2.0 | ) | (1.2 | ) | (1.6 | ) | |||||||
Foreign currency translation adjustment | — | 2.3 | — | 6.1 | |||||||||||
$ | 23.8 | $ | 35.1 | $ | 26.5 | $ | 48.7 | ||||||||
The projected benefit obligation included in the table above represents the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future pay increases. The accumulated benefit obligation also reflects the actuarial present value of benefits attributable to employee service rendered to date, but does not include the effects of estimated future pay increases.
Expected amortization of amounts included in accumulated other comprehensive income (loss) to be recognized in net periodic benefit cost in 2018 are:
Amount | Net of tax | |||||||
Actuarial loss | $ | 3.8 | $ | 3.0 | ||||
Prior service credit | $ | (0.2 | ) | $ | (0.2 | ) | ||
The Company expects to contribute $0.5 million to its non-U.S. pension plans in 2018. The Company does not expect to contribute to its U.S. pension plans in 2018.
Pension benefit payments are made from assets of the pension plans. Future pension benefit payments expected to be paid from assets of the pension plans are:
U.S. Plans | Non-U.S. Plans | ||||||
2018 | $ | 6.1 | $ | 5.7 | |||
2019 | 6.0 | 6.6 | |||||
2020 | 5.7 | 6.6 | |||||
2021 | 5.6 | 6.6 | |||||
2022 | 5.5 | 6.7 | |||||
2023 - 2027 | 23.9 | 39.4 | |||||
$ | 52.8 | $ | 71.6 | ||||
The expected long-term rate of return on defined benefit plan assets reflects management’s expectations of long-term rates of return on funds invested to provide for benefits included in the projected benefit obligations. The Company has established the expected long-term rate of return assumption for plan assets by considering the historical rates of return over a period of time that is consistent with the long-term nature of the underlying obligations of these plans as well as a forward-looking rate of return. The historical and forward-looking rates of return for each of the asset classes used to determine the Company's estimated rate of return assumption were based upon the rates of return earned or expected to be earned by investments in the equivalent benchmark market indices for each of the asset classes.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
Expected returns for most of the Company's pension plans are based on a calculated market-related value of assets. Under this methodology, asset gains and losses resulting from actual returns that differ from the Company’s expected returns are recognized in the market-related value of assets ratably over three years.
The pension plans maintain an investment policy that, among other things, establishes a portfolio asset allocation methodology with percentage allocation bands for individual asset classes. The investment policy provides that investments are reallocated between asset classes as balances exceed or fall below the appropriate allocation bands.
The following is the actual allocation percentage and target allocation percentage for the Company's U.S. pension plan assets at December 31:
2017 Actual Allocation | 2016 Actual Allocation | Target Allocation Range | |||
U.S. equity securities | 44.8% | 45.4% | 36.0% - 54.0% | ||
Non-U.S. equity securities | 20.0% | 19.7% | 16.0% - 24.0% | ||
Fixed income securities | 33.9% | 33.9% | 30.0% - 40.0% | ||
Money market | 1.3% | 1.0% | 0.0% - 10.0% | ||
The following is the actual allocation percentage and target allocation percentage for the Company's U.K. pension plan assets at December 31:
2017 Actual Allocation | 2016 Actual Allocation | Target Allocation | |||
U.K. equity securities | 20.2% | 21.2% | 21.0% | ||
Non-U.K. equity securities | 49.3% | 48.8% | 49.0% | ||
Fixed income securities | 27.7% | 30.0% | 30.0% | ||
Money market | 2.8% | —% | —% | ||
The Company maintains a pension plan for certain employees in the Netherlands which has purchased annuity contracts to meet its obligations.
The defined benefit pension plans do not have any direct ownership of Hyster-Yale common stock.
The fair value of each major category of U.S. plan assets for the Company’s pension plans are valued using quoted market prices in active markets for identical assets, or Level 1 in the fair value hierarchy. The fair value of each major category of Non-U.S. plan assets for the Company’s pension plans are valued using observable inputs, either directly or indirectly, other than quoted market prices in active markets for identical assets, or Level 2 in the fair value hierarchy. Following are the values as of December 31:
Level 1 | Level 2 | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
U.S. equity securities | $ | 31.8 | $ | 30.5 | $ | 26.1 | $ | 20.4 | |||||||
U.K. equity securities | — | — | 32.8 | 26.7 | |||||||||||
Non-U.S., non-U.K. equity securities | 14.2 | 13.3 | 54.0 | 42.0 | |||||||||||
Fixed income securities | 24.1 | 22.7 | 60.9 | 49.8 | |||||||||||
Money market | 0.9 | 0.7 | 4.5 | — | |||||||||||
Total | $ | 71.0 | $ | 67.2 | $ | 178.3 | $ | 138.9 | |||||||
Defined Contribution Plans: The Company has defined contribution (401(k)) plans for substantially all U.S. employees and similar plans for employees outside of the United States. The Company generally matches employee contributions based on plan provisions. In addition, the Company has defined contribution retirement plans whereby the contribution to participants is determined annually based on a formula that includes the effect of actual compared with targeted operating results and the age
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
and compensation of the participants. Total costs, including Company contributions, for these plans were $24.3 million, $21.2 million and $23.5 million in 2017, 2016 and 2015, respectively.
NOTE 10—Inventories
Inventories are stated at the lower of cost or market for last-in, first-out (“LIFO”) inventory or lower of cost or net realizable value for first-in, first-out (“FIFO”) inventory. At December 31, 2017 and 2016, 49% and 54%, respectively, of total inventories were determined using the LIFO method, which consists primarily of manufactured inventories, including service parts, in the United States. The FIFO method is used with respect to all other inventories.
The cost components of inventory include raw materials, purchased components, direct and indirect labor, utilities, depreciation, inbound freight charges, purchasing and receiving costs, inspection costs and warehousing costs. Reserves are maintained for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the net realizable value based upon assumptions about future demand and market conditions. Upon a subsequent sale or disposal of the impaired inventory, the corresponding reserve for impaired value is relieved to ensure that the cost basis of the inventory reflects any write-downs.
Inventories are summarized as follows:
December 31 | |||||||
2017 | 2016 | ||||||
Finished goods and service parts | $ | 193.7 | $ | 171.9 | |||
Work in process | 19.9 | 26.1 | |||||
Raw materials | 239.0 | 191.4 | |||||
Total manufactured inventories | 452.6 | 389.4 | |||||
LIFO reserve | (40.7 | ) | (37.2 | ) | |||
Total inventory | $ | 411.9 | $ | 352.2 | |||
NOTE 11—Property, Plant and Equipment, Net
Property, plant and equipment are recorded at cost. Depreciation and amortization are provided in amounts sufficient to amortize the cost of the assets, including assets recorded under capital leases, over their estimated useful lives using the straight-line method. Buildings are generally depreciated using a 20, 40 or 50-year life, improvements to land and buildings are depreciated over estimated useful lives ranging up to 40 years and equipment is depreciated over estimated useful lives ranging from three to 15 years. Capital grants received for the acquisition of equipment are recorded as reductions of the related equipment cost and reduce future depreciation expense. Repairs and maintenance costs are expensed when incurred.
The Company periodically evaluates long-lived assets, including intangible assets with finite lives, for impairment when changes in circumstances or the occurrence of certain events indicate the carrying amount of an asset may not be recoverable. Upon identification of indicators of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets or liabilities. The asset group would be considered impaired when the estimated future undiscounted cash flows generated by the asset group are less than carrying value. If the carrying value of an asset group is considered impaired, an impairment charge is recorded for the amount that the carrying value of the asset group exceeds its fair value. Fair value is estimated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
During the fourth quarter of 2017, in connection with the preparation of the Company's annual operating plan for 2018 and longer-term forecast, the Company identified indicators of impairment at Nuvera due to the extension of time expected to commercialize Nuvera's products and the related length of time needed to achieve break-even operating results and positive cash flows. Accordingly, the Company performed an impairment analysis during the fourth quarter of 2017 of Nuvera's long-lived assets, including property, plant and equipment and intangible assets with finite lives.Based on this analysis, it was determined that the fair value of these assets was less than the respective carrying amounts of such assets, and accordingly, the Company recognized an impairment charge of $4.9 million in the Nuvera segment, which is included in selling, general and administrative expenses in the consolidated statement of operations. The impairment charge reduced property, plant, and equipment by $3.7 million and intangible assets by $1.2 million. The estimated fair value of intangible assets with finite lives
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
was determined using a relief from royalty method and property, plant and equipment was determined using a cost approach. These valuation methods use Level 3 inputs under the fair value hierarchy.
Property, plant and equipment, net includes the following:
December 31 | |||||||
2017 | 2016 | ||||||
Land and land improvements | $ | 27.4 | $ | 26.3 | |||
Plant and equipment | 700.4 | 645.1 | |||||
Property, plant and equipment, at cost | 727.8 | 671.4 | |||||
Allowances for depreciation and amortization | (462.4 | ) | (416.3 | ) | |||
$ | 265.4 | $ | 255.1 | ||||
Total depreciation and amortization expense on property, plant and equipment was $37.4 million, $34.5 million and $28.4 million during 2017, 2016, and 2015, respectively.
NOTE 12—Goodwill and Intangible Assets
The Company evaluates the carrying amount of goodwill and indefinite-lived intangible assets for impairment annually as of May 1st and between annual evaluations if changes in circumstances or the occurrence of certain events indicate potential impairment. The Company uses either a qualitative or quantitative analysis to determine whether fair value exceeds carrying value. Goodwill impairment testing for 2017 was performed using a quantitative analysis for each reporting unit. As part of our quantitative testing process for goodwill, the Company estimated fair values using a discounted cash flow approach from the perspective of a market participant. Significant estimates in the discounted cash flow approach are cash flow forecasts of the reporting units, the discount rate, the terminal business value and the projected income tax rate. The cash flow forecasts of the reporting units are based upon management’s long-term view of markets and are the forecasts that are used by senior management and the Board of Directors to evaluate operating performance. The discount rate utilized is management’s estimate of what the market’s weighted average cost of capital is for a company with a similar debt rating and stock volatility, as measured by beta. The projected income tax rates utilized are the statutory tax rates for the countries where each reporting unit operates. The terminal business value is determined by applying a business growth factor to the latest year for which a forecast exists. As part of the goodwill quantitative testing process, the Company evaluates whether there are reasonably likely changes to management’s estimates that would have a material impact on the results of the goodwill impairment testing.
The annual testing of goodwill for impairment was conducted as of May 1, 2017. The fair value of each reporting unit was in excess of its carrying value and thus, no impairment exists.
The indefinite-lived intangible assets are the Bolzoni trademarks. Fair values used in testing for potential impairment of the trademarks are calculated by applying an estimated market value royalty rate to the forecasted revenues of the businesses that utilize those assets. The assumed cash flows from this calculation are discounted using the Company’s weighted average cost of capital. The annual testing of indefinite-lived intangibles for impairment was conducted as of May 1, 2017. The fair value of the indefinite-lived intangible assets was in excess of its carrying value and thus, no impairment exists.
The following table summarizes intangible assets, other than goodwill, recorded in the consolidated balance sheets:
December 31, 2017 | Gross Carrying Amount | Accumulated Amortization | Net Balance | |||||||||
Intangible assets not subject to amortization | ||||||||||||
Trademarks | $ | 18.0 | $ | — | $ | 18.0 | ||||||
Intangible assets subject to amortization | ||||||||||||
Customer and contractual relationships | 30.5 | (6.4 | ) | 24.1 | ||||||||
Patents and technology | 16.5 | (3.1 | ) | 13.4 | ||||||||
Trademarks | 0.6 | — | 0.6 | |||||||||
Total | $ | 65.6 | $ | (9.5 | ) | $ | 56.1 | |||||
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
December 31, 2016 | Gross Carrying Amount | Accumulated Amortization | Net Balance | |||||||||
Intangible assets not subject to amortization | ||||||||||||
Trademarks | $ | 15.8 | $ | — | $ | 15.8 | ||||||
Intangible assets subject to amortization | ||||||||||||
Customer and contractual relationships | $ | 27.9 | $ | (2.9 | ) | $ | 25.0 | |||||
Patents and technology | 16.3 | (2.0 | ) | 14.3 | ||||||||
Trademarks | 1.2 | (0.1 | ) | 1.1 | ||||||||
Total | $ | 61.2 | $ | (5.0 | ) | $ | 56.2 | |||||
As further described in Note 11, the Company recognized a $1.2 million impairment charge for Nuvera consisting of $0.8 million and $0.4 million for patents and technology and trademarks, respectively.
Amortization expense for intangible assets, which is recognized on a straight-line basis over the estimated useful life of the related asset, was $5.7 million and $4.6 million in 2017 and 2016, respectively. Expected annual amortization expense of other intangible assets, based upon December 31, 2017 U.S. dollar values, for the next five years is as follows: $4.9 million in 2018, $4.8 million in 2019, $4.5 million in 2020, $3.6 million in 2021 and $3.1 million in 2022. The weighted-average amortization period for intangible assets is as follows:
Intangible assets subject to amortization | Weighted-Average Useful Lives (Years) | |
Customer relationships | 10 | |
Engineering drawings | 9 | |
Non-compete agreement | 2 | |
Patents | 7 | |
Trademarks | 10 | |
The following table summarizes goodwill by segment as of December 31, 2017 and 2016:
Carrying Amount of Goodwill | ||||||||||||||||
Americas | EMEA | Bolzoni | Total | |||||||||||||
Balance at January 1, 2016 | $ | — | $ | — | $ | — | $ | — | ||||||||
Additions | 1.7 | — | 54.2 | 55.9 | ||||||||||||
Foreign currency translation | — | — | (5.2 | ) | (5.2 | ) | ||||||||||
Balance at December 31, 2016 | $ | 1.7 | $ | — | $ | 49.0 | $ | 50.7 | ||||||||
Additions | — | 0.8 | 1.0 | 1.8 | ||||||||||||
Foreign currency translation | — | — | 6.6 | 6.6 | ||||||||||||
Balance at December 31, 2017 | $ | 1.7 | $ | 0.8 | $ | 56.6 | $ | 59.1 | ||||||||
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
NOTE 13—Current and Long-Term Financing
The following table summarizes available and outstanding borrowings:
December 31 | |||||||
2017 | 2016 | ||||||
Total outstanding borrowings: | |||||||
Revolving credit agreements | $ | 6.1 | $ | 116.0 | |||
Term loan, net | 190.9 | — | |||||
Other debt | 73.9 | 68.5 | |||||
Capital lease obligations | 19.8 | 26.7 | |||||
Total debt outstanding | $ | 290.7 | $ | 211.2 | |||
Plus: discount on term loan and unamortized deferred financing fees | 4.1 | — | |||||
Total debt outstanding, gross | $ | 294.8 | $ | 211.2 | |||
Current portion of borrowings outstanding | $ | 74.5 | $ | 129.0 | |||
Long-term portion of borrowings outstanding | $ | 216.2 | $ | 82.2 | |||
Total available borrowings, net of limitations, under revolving credit agreements | $ | 218.8 | $ | 291.2 | |||
Unused revolving credit agreements | $ | 212.7 | $ | 175.2 | |||
Weighted average stated interest rate on total borrowings | 5.2 | % | 4.4 | % | |||
Weighted average effective interest rate on total borrowings (including interest rate swap agreements) | 3.9 | % | 4.4 | % | |||
Annual maturities of total debt, excluding capital leases, are as follows:
2018 | $ | 68.5 | |
2019 | 31.3 | ||
2020 | 10.1 | ||
2021 | 10.1 | ||
2022 | 10.0 | ||
Thereafter | 145.0 | ||
$ | 275.0 | ||
Interest paid on total debt was $13.6 million, $5.6 million and $3.6 million during 2017, 2016 and 2015, respectively.
The Company has a $200.0 million secured, floating-rate revolving credit facility (the "Facility”) that expires in April 2022. There were no borrowings outstanding under the Facility at December 31, 2017. The excess availability under the Facility, at December 31, 2017, was $195.9 million, which reflects reductions of $4.1 million for letters of credit and other restrictions. The Facility consists of a U.S. revolving credit facility in the amount of $120.0 million and a non-U.S. revolving credit facility in the amount of $80.0 million. The Facility can be increased up to the total aggregate amount of $300.0 million over the term of the agreement in minimum increments of $10.0 million subject to certain conditions. The obligations under the Facility are generally secured by a first priority lien on the working capital assets of the borrowers in the Facility, which include but are not limited to, cash and cash equivalents, accounts receivable and inventory and a second priority lien on the Term Loan Collateral (defined below). The approximate book value of assets held as collateral under the Facility was $1.0 billion as of December 31, 2017.
Borrowings bear interest at a floating rate based on a base rate or LIBOR, as defined in the Facility, plus an applicable margin. The applicable margins, as of December 31, 2017, for U.S. base rate loans and LIBOR loans were 0.25% and 1.25%, respectively. The applicable margins, as of December 31, 2017, for non-U.S. base rate loans and LIBOR loans was 1.25%. The applicable LIBOR interest rates under the Facility on December 31, 2017 were 2.73% and 1.25%, respectively, for the U.S. and non-U.S. facility including the applicable floating rate margin. The Facility also required the payment of a fee of 0.350% per annum on the unused commitment as of December 31, 2017.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
The Facility includes restrictive covenants, which, among other things, limit additional borrowings and investments of the Company and its subsidiaries subject to certain thresholds, as defined in the Facility, and limits the payment of dividends. If availability for both total and U.S. revolving credit facilities on a pro forma basis, is greater than fifteen percent and less than or equal to twenty percent, the Company may pay dividends subject to achieving a minimum fixed charge coverage ratio of 1.00 to 1.00, as defined in the Facility. If the availability is greater than twenty percent for both total and U.S. revolving credit facilities on a pro forma basis, the Company may pay dividends without any minimum fixed charge coverage ratio requirement. The Facility also requires the Company to achieve a minimum fixed charge coverage ratio in certain circumstances in which total excess availability is less than ten percent of the total commitments under the Facility or excess availability under the U.S. revolving credit facility is less than ten percent of the U.S. revolver commitments, as defined in the Facility. At December 31, 2017, the Company was in compliance with the covenants in the Facility.
In 2017, the Company entered into an agreement for a $200.0 million term loan (the “Term Loan”), which matures in May 2023. The Term Loan requires quarterly principal payments on the last day of each March, June, September and December commencing September 30, 2017 in an amount equal to $2.5 million and the final principal repayment due on the May 30, 2023. The Company may also be required to make mandatory prepayments, in certain circumstances, as provided in the Term Loan. At December 31, 2017, there was $195.0 million of principal outstanding under the Term Loan which has been reduced in the Consolidated Balance Sheet by $4.1 million of discounts and unamortized deferred financing fees.
The obligations under the Term Loan are generally secured by a first priority lien on the present and future shares of capital stock, material real property, fixtures and general intangibles consisting of intellectual property (collectively, the "Term Loan Collateral") and a second priority lien on the remaining collateral of the U.S. borrowers in the Facility. The approximate book value of assets held as collateral under the Term Loan was $710 million as of December 31, 2017.
Borrowings under the Term Loan bear interest at a floating rate, which can be a base rate or Eurodollar rate, as defined in the Term Loan, plus an applicable margin. The applicable margin is based on the consolidated leverage ratio, as provided in the Term Loan, and ranges from 2.75% to 3.00% for U.S. base rate loans and 3.75% to 4.00% for Eurodollar loans. The weighted average interest rate on the amount outstanding under the Term Loan at December 31, 2017 was 5.57%. In addition, the Term Loan includes restrictive covenants, which, among other things, limit additional borrowings and investments of the Company subject to certain thresholds, as provided in the Term Loan. The Term Loan limits the payment of regularly scheduled dividends and other restricted payments to $50.0 million in any fiscal year, unless the consolidated total net leverage ratio, as defined in the Term Loan, does not exceed 1.75 to 1.00 at the time of the payment. At December 31, 2017, the Company was in compliance with the covenants in the Term Loan.
The Company incurred fees and expenses of $4.7 million and $1.7 million in 2017 and 2016, respectively. These fees related to the amendment to the Facility and entry into the Term Loan. These fees were deferred and are being amortized as interest expense over the term of the applicable debt agreements. Fees related to the Term Loan are presented as a direct deduction of the corresponding debt.
The Company had other debt outstanding, excluding capital leases, of approximately $80.0 million at December 31, 2017. In addition to the excess availability under the Facility, the Company had remaining availability of $16.8 million related to other non-U.S. revolving credit agreements.
NOTE 14—Leasing Arrangements
The Company leases certain office, manufacturing and warehouse facilities and machinery and equipment under noncancellable capital and operating leases that expire at various dates through 2031. Many leases include renewal and/or fair value purchase options.
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
Future minimum capital and operating lease payments at December 31, 2017 are:
Capital Leases | Operating Leases | ||||||
2018 | $ | 7.1 | $ | 20.2 | |||
2019 | 5.9 | 13.9 | |||||
2020 | 4.9 | 10.3 | |||||
2021 | 2.4 | 7.4 | |||||
2022 | — | 6.1 | |||||
Subsequent to 2022 | — | 17.0 | |||||
Total minimum lease payments | 20.3 | $ | 74.9 | ||||
Amounts representing interest | 0.5 | ||||||
Present value of net minimum lease payments | 19.8 | ||||||
Current maturities | 6.8 | ||||||
Long-term capital lease obligation | $ | 13.0 | |||||
Rental expense for all operating leases was $22.5 million, $17.3 million and $18.3 million for 2017, 2016 and 2015, respectively. The Company also recognized $7.9 million, $5.3 million and $2.7 million in rental income on subleases of equipment for 2017, 2016 and 2015, respectively. These subleases were primarily related to lift trucks in which the Company records revenues over the term of the lease in accordance with the rental agreements with its customers. The sublease rental income for these lift trucks is included in “Revenues” and the related rent expense is included in “Cost of sales” in the Consolidated Statements of Operations for each period. Aggregate future minimum rentals to be received under noncancellable subleases of lift trucks as of December 31, 2017 are $26.8 million.
Assets recorded under capital leases are included in property, plant and equipment and consist of the following:
December 31 | |||||||
2017 | 2016 | ||||||
Plant and equipment | $ | 35.9 | $ | 37.5 | |||
Less accumulated amortization | (10.4 | ) | (8.1 | ) | |||
$ | 25.5 | $ | 29.4 | ||||
Amortization of plant and equipment under capital leases is included in depreciation expense. Capital lease obligations of $0.2 million, $12.8 million and $15.2 million were incurred in connection with lease agreements to acquire machinery and equipment during 2017, 2016 and 2015, respectively.
NOTE 15—Product Warranties
The Company provides a standard warranty on its lift trucks, generally for six to twelve months or 1,000 to 2,000 hours. For certain series of lift trucks, the Company provides a standard warranty of one to two years or 2,000 or 4,000 hours. For components in some series of lift trucks, the Company provides a standard warranty of two to three years or 4,000 to 6,000 hours. The Company estimates the costs which may be incurred under its standard warranty programs and records a liability for such costs at the time product revenue is recognized.
In addition, the Company sells separately priced extended warranty agreements that generally provide a warranty for an additional two to five years or up to 2,400 to 10,000 hours. The specific terms and conditions of those warranties vary depending upon the product sold and the country in which the Company does business. Revenue received for the sale of extended warranty contracts is deferred and recognized in the same manner as the costs incurred to perform under the warranty contracts.
The Company also maintains a quality enhancement program under which it provides for specifically identified field product improvements in its warranty obligation. Accruals under this program are determined based on estimates of the potential number of claims and the cost of those claims based on historical costs.
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Factors that affect the warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the cost per claim.
Changes in the Company's current and long-term warranty obligations, including deferred revenue on extended warranty contracts, are as follows:
2017 | 2016 | ||||||
Balance at January 1 | $ | 52.3 | $ | 55.5 | |||
Current year warranty expense | 32.2 | 35.4 | |||||
Change in estimate related to pre-existing warranties | (8.9 | ) | (10.1 | ) | |||
Payments made | (26.5 | ) | (27.9 | ) | |||
Foreign currency effect | 1.9 | (0.6 | ) | ||||
Balance at December 31 | $ | 51.0 | $ | 52.3 | |||
NOTE 16—Contingencies
Various legal and regulatory proceedings and claims have been or may be asserted against the Company relating to the conduct of its businesses, including product liability, environmental and other claims. These proceedings and claims are incidental to the ordinary course of business. Management believes that it has meritorious defenses and will vigorously defend the Company in these actions. Any costs that management estimates will be paid as a result of these claims are accrued when the liability is considered probable and the amount can be reasonably estimated. Although the ultimate disposition of these proceedings is not presently determinable, management believes, after consultation with its legal counsel, that the likelihood is remote that costs will be incurred materially in excess of accruals already recognized.
NOTE 17—Guarantees
Under various financing arrangements for certain customers, including independent retail dealerships, the Company provides recourse or repurchase obligations such that it would be obligated in the event of default by the customer. Terms of the third-party financing arrangements for which the Company is providing recourse or repurchase obligations generally range from one to five years. Total amounts subject to recourse or repurchase obligations at December 31, 2017 and 2016 were $203.5 million and $149.3 million, respectively. As of December 31, 2017, losses anticipated under the terms of the recourse or repurchase obligations were not significant and reserves have been provided for such losses based on historical experience in the accompanying consolidated financial statements. The Company generally retains a security interest in the related assets financed such that, in the event the Company would become obligated under the terms of the recourse or repurchase obligations, the Company would take title to the assets financed. The fair value of collateral held at December 31, 2017 was approximately $254.8 million based on Company estimates. The Company estimates the fair value of the collateral using information regarding the original sales price, the current age of the equipment and general market conditions that influence the value of both new and used lift trucks. The Company also regularly monitors the external credit ratings of the entities for which it has provided recourse or repurchase obligations. As of December 31, 2017, the Company did not believe there was a significant risk of non-payment or non-performance of the obligations by these entities; however, there can be no assurance that the risk may not increase in the future. In addition, the Company has an agreement with WF to limit its exposure to losses at certain eligible dealers. Under this agreement, losses related to $54.3 million of recourse or repurchase obligations for these certain eligible dealers are limited to 7.5% of their original loan balance, or $12.0 million as of December 31, 2017. The $54.3 million is included in the $203.5 million of total amounts subject to recourse or repurchase obligations at December 31, 2017.
Generally, the Company sells lift trucks through its independent dealer network or directly to customers. These dealers and customers may enter into a financing transaction with HYGFS or other unrelated third parties. HYGFS provides debt and lease financing to both dealers and customers. On occasion, the credit quality of a customer or credit concentration issues within WF may require the Company to provide recourse or repurchase obligations of the lift trucks purchased by customers and financed through HYGFS. At December 31, 2017, approximately $174.2 million of the Company's total recourse or repurchase obligations of $203.5 million related to transactions with HYGFS. In connection with the joint venture agreement, the Company also provides a guarantee to WF for 20% of HYGFS’ debt with WF, such that the Company would become liable under the terms of HYGFS’ debt agreements with WF in the case of default by HYGFS. At December 31, 2017, loans from WF
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
to HYGFS totaled $1.0 billion. Although the Company’s contractual guarantee was $205.9 million, the loans by WF to HYGFS are secured by HYGFS’ customer receivables, of which the Company guarantees $174.2 million. Excluding the HYGFS receivables guaranteed by the Company from HYGFS’ loans to WF, the Company’s incremental obligation as a result of this guarantee to WF is $179.6 million, which is secured by 20% of HYGFS' customer receivables and other secured assets of $272.3 million. HYGFS has not defaulted under the terms of this debt financing in the past, and although there can be no assurances, the Company is not aware of any circumstances that would cause HYGFS to default in future periods.
The following table includes the exposure amounts related to the Company's guarantees at December 31, 2017:
HYGFS | Total | |||||||
Total recourse or repurchase obligations | $ | 174.2 | $ | 203.5 | ||||
Less: exposure limited for certain dealers | 54.3 | 54.3 | ||||||
Plus: 7.5% of original loan balance | 12.0 | 12.0 | ||||||
131.9 | 161.2 | |||||||
Incremental obligation related to guarantee to WF | 179.6 | 179.6 | ||||||
Total exposure related to guarantees | $ | 311.5 | $ | 340.8 | ||||
NOTE 18—Equity Investments and Related Party Transactions
The Company maintains an interest in one variable interest entity, HYGFS. HYGFS is a joint venture with WF formed primarily for the purpose of providing financial services to independent Hyster® and Yale® lift truck dealers and National Account customers in the United States and is included in the Americas segment. The Company does not have a controlling financial interest or have the power to direct the activities that most significantly affect the economic performance of HYGFS. Therefore, the Company has concluded that the Company is not the primary beneficiary and uses the equity method to account for its 20% interest in HYGFS. The Company does not consider its variable interest in HYGFS to be significant.
Generally, the Company sells lift trucks through its independent dealer network or directly to customers. These dealers and customers may enter into a financing transaction with HYGFS or other unrelated third parties. HYGFS provides debt financing to dealers and lease financing to both dealers and customers. HYGFS’ total purchases of Hyster® and Yale® lift trucks from dealers, and directly from the Company such that HYGFS could provide retail lease financing to customers for the years ended December 31, 2017, 2016 and 2015 were $475.9 million, $438.8 million and $483.2 million, respectively. Of these amounts, $71.1 million, $69.4 million and $78.6 million for the years ended December 31, 2017, 2016 and 2015, respectively, were invoiced directly from the Company to HYGFS so that the customer could obtain operating lease financing from HYGFS. Amounts receivable from HYGFS were $10.4 million and $12.1 million at December 31, 2017 and 2016, respectively. The Company provides recourse for certain financing provided by HYGFS to its dealers and customers. In addition, the Company also provides a guarantee to WF for their portion of HYGFS' debt. Refer to Note 17 for additional details relating to the guarantees provided to WF.
In addition to providing financing to dealers, HYGFS provides operating lease financing to the Company. Operating lease obligations primarily relate to specific sale-leaseback-sublease transactions for certain customers whereby the Company sells lift trucks to HYGFS, leases these lift trucks back under an operating lease agreement and then subleases those lift trucks to customers under an operating lease agreement. Total obligations to HYGFS under the operating lease agreements were $15.8 million and $17.2 million at December 31, 2017 and 2016, respectively. In addition, the Company provides certain subsidies to its dealers that are paid directly to HYGFS. Total subsidies were $3.3 million, $2.8 million and $2.8 million for 2017, 2016 and 2015, respectively.
The Company provides certain services to HYGFS for which it receives compensation under the terms of the joint venture agreement. The services consist primarily of administrative functions and remarketing services. Total income recorded by the Company related to these services was $9.5 million in 2017, $9.8 million in 2016 and $14.6 million in 2015. In addition, in December 2015, the Company received $5.0 million as an amendment fee, that was deferred and is being recognized over the remaining term of the agreement which expires in December 2018.
The Company has a 50% ownership interest in SN, a limited liability company that was formed primarily to manufacture and distribute Sumitomo-branded lift trucks in Japan and export Hyster®- and Yale®- branded lift trucks and related components and service parts outside of Japan. The Company purchases products from SN under agreed-upon terms. The Company’s ownership
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
in SN is also accounted for using the equity method of accounting and is included in the JAPIC segment. The Company purchases products from SN under normal trade terms based on current market prices. In 2017, 2016 and 2015, purchases from SN were $46.8 million, $55.0 million and $57.1 million, respectively. Amounts payable to SN at December 31, 2017 and 2016 were $18.1 million and $16.5 million, respectively.
The Company recognized income of $0.4 million, $0.5 million and $0.3 million for payments from SN for use of technology developed by the Company which is included in “Revenues” in the Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015, respectively.
Summarized unaudited financial information for equity investments is as follows:
2017 | 2016 | 2015 | |||||||||
Statement of Operations | |||||||||||
Revenues | $ | 350.3 | $ | 326.7 | $ | 315.0 | |||||
Gross profit | $ | 111.9 | $ | 103.4 | $ | 98.7 | |||||
Income from continuing operations | $ | 127.2 | $ | 25.5 | $ | 23.1 | |||||
Net income | $ | 127.2 | $ | 25.5 | $ | 23.1 | |||||
Balance Sheet | |||||||||||
Current assets | $ | 125.3 | $ | 115.5 | |||||||
Non-current assets | $ | 1,484.0 | $ | 1,272.2 | |||||||
Current liabilities | $ | 120.7 | $ | 117.2 | |||||||
Non-current liabilities | $ | 1,241.6 | $ | 1,138.0 | |||||||
The results of HYGFS for 2017, which are included in the table above, include a provisional benefit of $99.2 million related to the Tax Reform Act, of which the Company has recognized $19.8 million under the equity method of accounting for HYGFS.
At December 31, 2017 and 2016, the investment in HYGFS was $35.2 million and $13.8 million, respectively, the investment in SN was $36.8 million and $31.6 million, respectively, and Bolzoni's investment in unconsolidated affiliates was $0.5 million and $0.5 million, respectively. The investments are included in “Investment in Unconsolidated Affiliates” in the Consolidated Balance Sheets. The Company received dividends of $2.4 million, $4.8 million and $2.3 million from HYGFS in 2017, 2016 and 2015, respectively. The Company received dividends of $0.4 million, $0.3 million and $0.2 million from SN in 2017, 2016 and 2015, respectively.
During 2017, the Company acquired an equity investment in a third party for $5.6 million. This investment is accounted for as an available-for-sale security and valued using a quoted market price in an active market, or Level 1 in the fair value hierarchy. The Company's investment as of December 31, 2017 was $9.4 million, which includes a $3.3 million unrealized gain ($2.8 million net of tax) that was recorded in OCI in the Consolidated Balance Sheet.
NOTE 19—Acquisitions
On April 1, 2016, the Company's indirect wholly owned subsidiary, Hyster-Yale Capital Holding Italy S.r.l. (“HY Italy”), acquired 100% of the outstanding shares of Penta Holding S.p.A. ("Penta") from its shareholders for an aggregate
cash purchase price of €53.5 million (approximately $60.9 million as of April 1, 2016), which includes the value of the majority stake (approximately 50.5%) of Bolzoni owned by Penta, as well as Penta's other assets and other liabilities.
Subsequent to the completion of the acquisition of Penta, HY Italy, in compliance with Italian law and CONSOB regulations, commenced the steps to launch a mandatory tender offer in Italy for all of the remaining outstanding shares of Bolzoni, with the intention to achieve the delisting of Bolzoni following completion of the mandatory tender offer and the processes related thereto.
During the second and third quarters of 2016, HY Italy acquired the remaining outstanding interest in Bolzoni for €55.4 million or approximately $62.2 million, which was funded using cash on hand and borrowings under the Facility. On July 6, 2016, Bolzoni was delisted from the Italian stock exchange.
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
The acquisition of Bolzoni added a broader range of forklift truck attachments, forks and lift tables to the Company's suite of products and provides an important platform for additional growth. The acquisition of Bolzoni has been accounted for using the acquisition method of accounting, which requires, among other things, the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. The process of estimating the fair values of intangible assets and certain tangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates.
The following table summarizes the final allocation of the fair values of the assets acquired and the liabilities assumed of Bolzoni as of April 1, 2016:
Acquired Assets and Liabilities | Fair Value | |||
Cash | $ | 8.0 | ||
Accounts receivable | 34.0 | |||
Inventories | 31.5 | |||
Property, plant and equipment | 43.3 | |||
Intangible Assets | 54.8 | |||
Other assets | 0.5 | |||
Total assets acquired | $ | 172.1 | ||
Accounts payable | 32.7 | |||
Total debt | 44.3 | |||
Long-term deferred tax liabilities | 12.5 | |||
Other liabilities | 8.0 | |||
Total liabilities assumed | $ | 97.5 | ||
Noncontrolling interest | 5.7 | |||
Net assets acquired | $ | 68.9 | ||
Initial purchase price | $ | 60.9 | ||
Interest acquired in mandatory tender offer | $ | 63.2 | ||
Goodwill | $ | 55.2 | ||
Acquired Intangible Assets | Fair Value | Weighted-Average Useful Lives (Years) | Valuation Method | |||||
Customer relationships | $ | 22.1 | 13 | Excess Earnings | ||||
Trademarks | 17.1 | Indefinite | Relief from Royalty | |||||
Engineering drawings | 12.5 | 10 | Reproduction Cost | |||||
Patents | 2.1 | 10 | Relief from Royalty | |||||
Non-compete agreement | 1.0 | 3 | Lost Profit | |||||
Total | $ | 54.8 | ||||||
The fair value of accounts receivable acquired was $34.0 million with the gross contractual amount being $34.0 million. At the time of the acquisition, the Company expected to collect all accounts receivable. The $55.2 million of goodwill was assigned to the Bolzoni segment. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of Bolzoni. None of the goodwill is expected to be deductible for income tax purposes. The results of Bolzoni’s operations have been included in the consolidated financial statements since the acquisition date and are reflected in the Bolzoni segment. Pro forma information has not been presented as it would not be materially different from historical reported results of operations.
In April 2016, the Company entered into a non-cash working capital transaction to acquire a telematics installation and distribution business with intangibles of approximately $8.1 million. The results of operations of this acquired business have been included in the America's segment since the date of acquisition and are not material to the Company's results of operations, financial position or cash flows.
On December 6, 2017, the Company's indirect wholly owned subsidiary, Hyster-Yale Acquisition Holding Ltd., entered into an Equity Transfer Agreement (“ETA”) with KNSN Pipe & Pile Company Limited (“KNSN”), pursuant to which Acquisition Co.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share and Percentage Data)
will purchase 75% of the equity interest of Zhejiang Maximal Forklift Co., Ltd. (“Maximal”) from KNSN for an aggregate purchase price of $90.0 million. After the closing under the ETA, which the Company currently anticipates to be in the second quarter of 2018, the remaining 25% of the equity interest of Maximal will be owned by the current senior management of Maximal, through Y-C Hong Kong Holding Company Limited (“HK Holding Co.”). Maximal is a privately held manufacturer of utility and standard lift trucks and specialized materials handling equipment founded in 2006 in the Hangzhou, Zhejiang Province of China.
Under the terms of the ETA, upon the closing, the Company will pay $81.0 million to a jointly-controlled bank account under the name of KNSN, and KNSN is only allowed to use such amount to repay intercompany indebtedness owed by KNSN to Maximal and to remove existing related-party guarantees provided by Maximal. Any balance amount remaining after fulfilling the specified purposes will belong to KNSN. In addition, upon the closing, the Company will pay $9.0 million to an escrow account, which will be released to KNSN in two installments. The first installment of $2.7 million will be released on the second anniversary of the closing and the second installment of $6.3 million will be released on the third anniversary of the closing subject to a number of conditions. The closing of the transaction is subject to customary closing conditions and required regulatory approvals. KNSN is obligated to indemnify the Company from and against any breach of representations and warranties and any liabilities and losses associated with the pre-closing operations of Maximal. Either party has a right to terminate the transaction if the closing conditions (other than governmental approvals) have not been satisfied within nine months of the signing, with no penalties on either party.
In addition, on December 6, 2017, the Company signed an incentive agreement with Mr. Jin Hong Lu, a key member of senior management of Maximal and the majority shareholder of KNSN. Pursuant to this agreement, the Company will pay $10.0 million to Mr. Lu by the third anniversary of the closing under the ETA, provided that Mr. Lu, his immediate family members and any affiliates fully comply with the non-competition, conflict of interest, non-solicitation, and compliance covenants set forth in the agreement.
On December 6, 2017, pursuant to the terms of the ETA, Mr. Lu signed and issued a Guarantee and Undertaking Letter for the benefit of the Company, guaranteeing KNSN’s performance of all terms under the ETA. In the case of any breach of the ETA by KNSN, Mr. Lu shall be liable and shall indemnify the Company against any losses arising from such breach in accordance with the ETA and applicable laws.
On December 6, 2017, pursuant to the terms of the ETA, Mr. Lu signed and issued a Guarantee and Undertaking Letter for the benefit of the Company, guaranteeing KNSN’s performance of all terms under the ETA. In the case of any breach of the ETA by KNSN, Mr. Lu shall be liable and shall indemnify the Company against any losses arising from such breach in accordance with the ETA and applicable laws.
The Company recognized $2.5 million and $6.6 million of acquisition-related costs during 2017 and 2016, respectively, which are included in the Americas segment. These costs are included in the line “Selling, general and administrative expenses” in the Consolidated Statement of Operations.
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SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 2017, 2016 AND 2015
Additions | ||||||||||||||||||||||
Description | Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts — Describe (A) | Deductions — Describe | Balance at End of Period | |||||||||||||||||
(In millions) | ||||||||||||||||||||||
2017 | ||||||||||||||||||||||
Reserves deducted from asset accounts: | ||||||||||||||||||||||
Allowance for doubtful accounts (B) | $ | 14.9 | $ | 0.2 | $ | 1.1 | $ | 7.5 | (C) | $ | 8.7 | |||||||||||
2016 | ||||||||||||||||||||||
Reserves deducted from asset accounts: | ||||||||||||||||||||||
Allowance for doubtful accounts (B) | $ | 12.8 | $ | 6.3 | $ | (2.7 | ) | $ | 1.5 | (C) | $ | 14.9 | ||||||||||
2015 | ||||||||||||||||||||||
Reserves deducted from asset accounts: | ||||||||||||||||||||||
Allowance for doubtful accounts (B) | $ | 16.3 | $ | 4.9 | $ | (2.1 | ) | $ | 6.3 | (C) | $ | 12.8 | ||||||||||
(A) | Foreign currency translation adjustments and other. |
(B) | Includes allowance of receivables classified as long-term of $5.0 million, $4.6 million and $4.5 million in 2017, 2016 and 2015, respectively. |
(C) | Write-offs, net of recoveries. |
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