Item 7. Management’s Discussion and Analysis
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 a variety 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 and countries its customers serve. Lift trucks and component parts are manufactured in the United States, China, Northern Ireland, Mexico, the Netherlands, the Philippines, Japan, Italy, Brazil and Vietnam.
The Company owns a 75% majority interest in Hyster-Yale Maximal Forklift (Zhejiang) Co., Ltd. ("Hyster-Yale Maximal"). Hyster-Yale Maximal is a Chinese manufacturer of low-intensity and standard lift trucks and specialized material handling equipment. Hyster-Yale Maximal also designs and produces specialized products in the port equipment and rough terrain forklift markets. The results of Hyster-Yale Maximal are included in the JAPIC segment since the date of acquisition.
The Company operates Bolzoni S.p.A. ("Bolzoni"). Bolzoni is a leading worldwide producer and distributor of attachments, forks and lift tables marketed under the Bolzoni ® , Auramo ® and Meyer ® brand names. Bolzoni products are manufactured in the United States, Italy, China, Germany and Finland. 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 the design, manufacture and sale of hydrogen fuel-cell stacks and engines.
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, offering the lowest cost of ownership and the best overall value by leveraging its high-quality, application-tailored lift trucks, attachments and power solutions. 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: provide the lowest cost of ownership, while enhancing productivity for customers; be the leader in the delivery of industry- and customer-focused solutions; 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.
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2019 Annual Report on Form 10-K for discussion of financial condition and results of operations for 2019 compared with 2018.
During 2020, broad measures taken by governments, businesses and others across the globe to limit the spread of novel coronavirus ("COVID-19") adversely affected the Company. The resulting significant decline in economic activity also reduced the demand for the Company's products and limited the availability of components from certain suppliers. Production was significantly reduced or suspended at the Company's Chinese and European facilities for certain periods during the first and second quarters of 2020. The Company also initiated several cost reduction measures designed to ease liquidity pressure. These cost containment actions included spending and travel restrictions, significant reductions in temporary personnel, furloughs, suspension of incentive compensation and profit sharing, benefit reductions and salary reductions. In addition, the Company
14
Table of Contents
adjusted production levels at its manufacturing plants to align more closely with the reduced levels of demand, and worked closely with suppliers to help ensure current needs were met while also ensuring continuity as the market improved.
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 are critical accounting policies. Certain of these are critical accounting estimates as they require significant judgments and estimates used in the preparation of the consolidated financial statements.
Long-lived assets, goodwill and intangible assets: Net property, plant and equipment, right-of-use ("ROU") assets, goodwill and net intangible assets at December 31, 2020 were $340.4 million, $71.3 million, $114.7 million and $58.5 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 twenty 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.
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 $58.5 million of net intangible assets, $18.4 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 March 31, 2020 and May 1, 2020, 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 an interim impairment test as of March 31, 2020 and the annual testing of impairment of goodwill as of May 1, 2020 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.
15
Table of Contents
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 $0.1 million to $0.5 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. The Company also has insurance for certain historic product liability 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.
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 2020 levels, the reserves for product warranties would increase and additional expense of $3.6 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.
Revenue recognition : Revenue is recognized when obligations under the terms of a contract with the customer are satisfied which occurs when control of products or services are transferred to the customer. Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing services. The satisfaction of performance obligations under the terms of a revenue contract generally gives rise for the right to payment from the customer. The Company's standard payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Given the insignificant days between revenue recognition and receipt of payment, financing components do not exist between the Company and its customers. Taxes collected from customers are excluded from revenue. The estimated costs of product warranties are recognized as expense when the products are sold. See Note 16 for further information on product warranties.
The majority of the Company's sales contracts contain performance obligations satisfied at a point in time when title and risks and rewards of ownership have transferred to the customer. Revenue for service contracts are recognized as the services are provided. See Note 3 for further information on revenue recognition.
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.
16
Table of Contents
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 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 the Company's U.K. pension plan 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)
2021 net pension expense Increase (decrease)
2020 projected benefit obligation
Discount rate 1% increase $(0.2) $(30.1)
1% decrease 0.6 34.8
Return on plan assets 1% increase (2.3) N/A
1% decrease 2.3 N/A
A change in life expectancy by one year would result in a $4.1 million change in the 2020 projected benefit obligation. See Note 10 to the consolidated financial statements in this Annual Report on Form 10-K for further discussion of the retirement benefit plans.
CONSOLIDATED FINANCIAL REVIEW
The following table identifies the components of change for 2020 compared with 2019 by segment:
Revenues Gross Profit Operating Profit Net Income Attributable to Stockholders
2019 $ 3,291.8 $ 541.8 $ 53.9 $ 35.8
Increase (decrease) in 2020
Americas (232.1) (36.7) 13.3 10.4
EMEA (162.6) (24.1) (7.6) (3.4)
JAPIC (56.6) (9.4) (5.7) (2.4)
Lift truck business (451.3) (70.2) — 4.6
Bolzoni (61.7) (4.7) (3.7) (2.6)
Nuvera (6.2) (1.0) 0.2 (0.4)
Eliminations 39.5 (0.5) (0.5) (0.3)
2020 $ 2,812.1 $ 465.4 $ 49.9 $ 37.1
17
Table of Contents
FINANCIAL REVIEW
The segment and geographic results of operations for the Company were as follows for the year ended December 31:
Favorable / (Unfavorable) % Change
2020 2019 2020 vs. 2019
Lift truck unit shipments (in thousands)
Americas 53.1 59.3 (10.5) %
EMEA 21.1 28.4 (25.7) %
JAPIC 11.3 12.6 (10.3) %
85.5 100.3 (14.8) %
Revenues
Americas $ 1,891.2 $ 2,123.3 (10.9) %
EMEA 588.6 751.2 (21.6) %
JAPIC 193.1 249.7 (22.7) %
Lift truck business 2,672.9 3,124.2 (14.4) %
Bolzoni 283.7 345.4 (17.9) %
Nuvera 3.9 10.1 n.m.
Eliminations (148.4) (187.9) n.m.
$ 2,812.1 $ 3,291.8 (14.6) %
Gross profit (loss)
Americas $ 318.1 $ 354.8 (10.3) %
EMEA 86.4 110.5 (21.8) %
JAPIC 20.3 29.7 (31.6) %
Lift truck business 424.8 495.0 (14.2) %
Bolzoni 53.4 58.1 (8.1) %
Nuvera (12.2) (11.2) (8.9) %
Eliminations (0.6) (0.1) n.m.
$ 465.4 $ 541.8 (14.1) %
Selling, general and administrative expenses
Americas $ 216.0 $ 266.0 18.8 %
EMEA 83.3 99.8 16.5 %
JAPIC 39.9 43.6 8.5 %
Lift truck business 339.2 409.4 17.1 %
Bolzoni 52.4 53.4 1.9 %
Nuvera 23.9 25.1 4.8 %
$ 415.5 $ 487.9 14.8 %
Operating profit (loss)
Americas $ 102.1 $ 88.8 15.0 %
EMEA 3.1 10.7 (71.0) %
JAPIC (19.6) (13.9) (41.0) %
Lift truck business 85.6 85.6 — %
Bolzoni 1.0 4.7 (78.7) %
Nuvera (36.1) (36.3) 0.6 %
Eliminations (0.6) (0.1) n.m.
$ 49.9 $ 53.9 (7.4) %
Interest expense $ 13.7 $ 19.8 30.8 %
Other income $ (6.0) $ (13.8) (56.5) %
Income before income taxes $ 42.2 $ 47.9 (11.9) %
18
Table of Contents
Favorable / (Unfavorable) % Change
2020 2019 2020 vs. 2019
Net income (loss) attributable to stockholders
Americas $ 71.6 $ 61.2 17.0 %
EMEA 5.6 9.0 (37.8) %
JAPIC (14.3) (11.9) (20.2) %
Lift truck business 62.9 58.3 7.9 %
Bolzoni 0.2 2.8 (92.9) %
Nuvera (25.6) (25.2) (1.6) %
Eliminations (0.4) (0.1) n.m.
$ 37.1 $ 35.8 3.6 %
Diluted earnings per share $ 2.21 $ 2.14 3.3 %
Reported income tax rate 8.8 % 23.6 %
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, 2020, 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, 2020 September 30, 2020 December 31, 2019
Unit backlog, beginning of period 41.2 41.2 43.9
Unit shipments (85.5) (64.0) (100.3)
Unit bookings 84.9 56.4 97.6
Unit backlog, end of period 40.6 33.6 41.2
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, 2020 September 30, 2020 December 31, 2019
Bookings, approximate sales value $ 2,020 $ 1,360 $ 2,240
Backlog, approximate sales value $ 1,070 $ 910 $ 1,070
2020 Compared with 2019
The following table identifies the components of change in revenues for 2020 compared with 2019:
Revenues
2019 $ 3,291.8
Increase (decrease) in 2020 from:
Unit volume and product mix (437.2)
Bolzoni revenues (61.7)
Parts (22.5)
Other (10.5)
Nuvera revenues (6.2)
Foreign currency (4.6)
Eliminations 39.5
Unit price 23.5
2020 $ 2,812.1
19
Table of Contents
Revenues decreased 14.6% to $2,812.1 million in 2020 from $3,291.8 million in 2019, mainly due to lower unit and part volumes in all geographic segments of the lift truck business and Bolzoni, primarily due to the COVID-19 pandemic and the resulting significant decline in economic activity. The decrease in revenue was partially offset by improved pricing in all geographic regions.
Nuvera's revenues decreased primarily due to reduced third-party fuel cell development services in 2020 compared to 2019.
The following table identifies the components of change in operating profit for 2020 compared with 2019:
Operating Profit
2019 $ 53.9
Increase (decrease) in 2020 from:
Lift truck gross profit (70.7)
Bolzoni operations (3.7)
Lift truck selling, general and administrative expenses 70.2
Nuvera operations 0.2
2020 $ 49.9
The Company recognized operating profit of $49.9 million in 2020 compared with $53.9 million in 2019. The decrease in operating profit was mainly due to lower gross profit, primarily from lower unit and parts volume due to the COVID-19 pandemic and the resulting significant decline in economic activity in all geographic lift truck segments and Bolzoni. The prior year also included $11.8 million of favorable retroactive tariff exclusion adjustments for certain components imported from China. These items were partially offset by favorable pricing in all geographic lift truck segments. The decline in gross profit was offset by lower selling, general and administrative expenses at all locations as the Company implemented cost containment actions to mitigate the impact of the COVID-19 pandemic, $7.8 million of COVID-related government subsidies in EMEA and lower provisions for estimated self-insurance claims during 2020 compared with 2019. The reduction in selling, general and administrative expenses was slightly offset by restructuring charges of $4.4 million recognized in 2020, including $2.0 million in EMEA, $1.4 million in JAPIC and $1.0 million in the Americas.
The Company recognized net income attributable to stockholders of $37.1 million in 2020 compared with $35.8 million in 2019. The increase was primarily the result of lower interest expense and favorable tax adjustments in 2020. These items were partially offset by lower operating profit and lower equity earnings of unconsolidated subsidiaries. See "Financial Review - Income Taxes" and Note 7 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 were 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.
20
Table of Contents
After the utilization of existing tax credits, the Company will pay cash taxes, including state income taxes, of $17.7 million with respect to the transition tax payable, as a result of the Tax Reform Act, over an installment period of eight years beginning in 2018. The Company provided for the anticipated withholding taxes on unremitted non-U.S. earnings for which no reinvestment plan has been identified and that may be repatriated in the foreseeable future. As such, the Company has provided a deferred tax liability with respect to these earnings of $1.0 million and $1.7 million at December 31, 2020 and 2019, respectively.
A reconciliation of the consolidated federal statutory and reported income tax is as follows for the years ended December 31:
2020 2019
Income before income taxes $ 42.2 $ 47.9
Statutory taxes at 21% $ 8.9 $ 10.1
Permanent adjustments:
Federal income tax credits (2.2) (2.8)
Equity interest earnings (1.0) (1.5)
Non-U.S. rate differences (0.1) (0.9)
Valuation allowance 2.1 0.5
Global intangible low-taxed income 1.9 1.6
Base-erosion and anti-abuse tax 0.8 1.4
Other 0.4 3.1
State income taxes 0.3 (0.2)
$ 2.2 $ 1.2
Discrete items:
Tax controversy resolution (5.8) (1.4)
Other (1.5) 2.1
Provision to return adjustments (0.9) (1.0)
Valuation allowance 0.8 0.3
$ (7.4) $ —
Income tax provision $ 3.7 $ 11.3
Reported income tax rate 8.8 % 23.6 %
The Company's effective income tax rate differs from the U.S. federal statutory tax rate primarily as a result of federal research and energy credits, income taxed in non-U.S. jurisdictions, equity interest earnings, global intangible low-taxed income, base-erosion and anti-abuse tax and changes in valuation allowances primarily in non-U.S. jurisdictions. Other permanent adjustments include non-deductible compensation and anticipated withholding tax on unremitted non-U.S. earnings.
The effect of discrete items on the reported income tax rate include the change in tax reserves for controversy resolution primarily driven by the expiration of the applicable statutes of limitation. During 2020, $4.3 million of the tax controversy benefit recognized relates to prior business acquisitions that was offset with the pretax reduction of the related indemnity receivable. In addition, the Company recognized the effect of the Tax Reform Act as discrete adjustment in 2019.
See Note 7 to the consolidated financial statements in this Annual Report on Form 10-K for further discussion of income taxes.
21
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following tables detail the change in cash flow for the years ended December 31:
2020 2019 Change
Operating activities:
Net income $ 38.5 $ 36.6 $ 1.9
Depreciation and amortization 42.9 43.3 (0.4)
Stock-based compensation 1.3 8.2 (6.9)
Dividends from unconsolidated affiliates 7.3 5.1 2.2
Other 6.0 10.1 (4.1)
Working capital changes 70.9 (26.6) 97.5
Net cash provided by operating activities 166.9 76.7 90.2
Investing activities:
Expenditures for property, plant and equipment (51.7) (49.7) (2.0)
Proceeds from the sale of property, plant and equipment 8.0 7.7 0.3
Net cash used for investing activities (43.7) (42.0) (1.7)
Cash flow before financing activities $ 123.2 $ 34.7 $ 88.5
Net cash provided by operating activities increased $90.2 million in 2020 compared with 2019, primarily as a result of the change in working capital items. During 2020, working capital was significantly affected by the COVID-19 pandemic and the resulting significant decline in economic activity. Accounts receivable and inventory were significantly reduced compared with 2019 as the Company adjusted to reduced demand. In addition, other liabilities decreased during 2020 compared with 2019 mainly as a result of lower deferred revenue and accruals for employee-related compensation due to cost cutting measures.
2020 2019 Change
Financing Activities:
Net reduction of long-term debt and revolving credit agreements $ (18.9) $ (29.8) $ 10.9
Cash dividends paid (21.3) (21.0) (0.3)
Other (0.4) (0.8) 0.4
Net cash used for financing activities $ (40.6) $ (51.6) $ 11.0
Financing Activities
The Company has a $240.0 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, 2020. The availability under the Facility at December 31, 2020 was $234.3 million, which reflects reductions of $5.7 million for letters of credit and other restrictions. As of December 31, 2020, the Facility consisted of a U.S. revolving credit facility of $150.0 million and a non-U.S. revolving credit facility of $90.0 million. The obligations under the Facility are generally secured by a first 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 (the "Facility Collateral") and a second lien on the Term Loan Collateral (defined below). The approximate book value of assets held as collateral under the Facility was $900 million as of December 31, 2020.
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, 2020, for U.S. base rate loans and LIBOR loans were 0.25% and 1.25%, respectively. The applicable margin, as of December 31, 2020, for non-U.S. base rate loans and LIBOR loans was 1.25%. The Facility also required the payment of a fee of 0.25% per annum on the unused commitments as of December 31, 2020.
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 set forth in the Facility, and limits the payment of dividends. If average availability for both total and U.S. revolving credit facilities, on a pro forma basis, is greater than 15% and less than or equal to 20%, 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 average availability is greater than 20% 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
22
Table of Contents
excess availability is less than 10% of the total commitments under the Facility or excess availability under the U.S. revolving credit facility is less than 10% of the U.S. revolver commitments, as defined in the Facility. At December 31, 2020, the Company was in compliance with the covenants in the Facility.
The Company also has a $200.0 million term loan (the "Term Loan"), which matures in May 2023. The Term Loan requires quarterly principal payments on the last business day of each March, June, September and December in an amount equal to $2.5 million. The final principal repayment is due on 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, 2020, there was $165.0 million of principle outstanding under the Term Loan which has been reduced in the consolidated balance sheet by $1.9 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 Facility Collateral. The approximate book value of assets held as collateral under the Term Loan was $600 million as of December 31, 2020.
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, as provided in the Term Loan, is 2.25% for U.S. base rate loans and 3.25% for Eurodollar loans. The interest rate on the amount outstanding under the Term Loan at December 31, 2020 was 3.40%. 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, 2020, the Company was in compliance with the covenants in the Term Loan.
The Company incurred fees of $0.4 million in 2019. No fees were incurred in 2020. These fees related to amending the Facility and 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 finance leases, of approximately $97.4 million at December 31, 2020. In addition to the excess availability under the Facility of $234.3 million, the Company had remaining availability of $32.1 million related to other non-U.S. revolving credit agreements.
The Company believes funds available from cash on hand, 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.
Contractual Obligations, Contingent Liabilities and Commitments
Following is a table summarizing the contractual obligations as of December 31, 2020:
Payments Due by Period
Contractual Obligations Total 2021 2022 2023 2024 2025 Thereafter
Term Loan $ 165.0 $ 10.0 $ 10.0 $ 145.0 $ — $ — $ —
Variable interest payments on Term Loan 12.9 5.6 5.2 2.1 — — —
Revolving credit agreements 0.7 0.7 — — — — —
Variable interest payments on revolving credit agreements 0.1 0.1 — — — — —
Other debt 96.7 65.6 7.9 7.8 12.9 2.5 —
Variable interest payments on other debt 3.2 1.9 0.8 0.4 0.1 — —
Finance lease obligations including principal and interest 28.9 10.0 6.9 5.5 3.7 2.8 —
Operating leases 89.1 20.5 17.1 13.1 9.6 6.4 22.4
Tax Reform Act transition tax liability 13.1 1.2 1.4 2.6 3.5 4.4 —
Purchase and other obligations 575.4 569.4 3.0 3.0 — — —
Total contractual cash obligations $ 985.1 $ 685.0 $ 52.3 $ 179.5 $ 29.8 $ 16.1 $ 22.4
23
Table of Contents
After the utilization of existing tax credits, the Company will pay cash taxes, including state income taxes, of $17.7 million with respect to the transition tax payable over an installment period of eight years beginning in 2018.
The Company has a long-term liability of approximately $14.8 million for unrecognized tax benefits, including interest and penalties, as of December 31, 2020. 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, 2020 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 $0.3 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 $3.1 million to its non-U.S. pension plans in 2021.
In addition, the Company has recourse and repurchase obligations with a maximum undiscounted potential liability of $119.7 million at December 31, 2020. 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 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, 2020 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 2021 Actual 2020 Actual 2019
Lift truck business $ 57.1 $ 44.2 $ 37.8
Bolzoni 10.8 5.3 5.6
Nuvera 3.4 2.2 6.3
$ 71.3 $ 51.7 $ 49.7
Planned expenditures in 2021 are primarily for product development and tooling, improvements to information technology infrastructure, improvements at manufacturing locations and manufacturing equipment. The principal sources of financing for these capital expenditures are expected to be internally generated funds and bank financing.
24
Table of Contents
Capital Structure
December 31
2020 2019 Change
Cash and cash equivalents $ 151.4 $ 64.6 $ 86.8
Other net tangible assets 615.7 632.6 (16.9)
Intangible assets 58.5 60.1 (1.6)
Goodwill 114.7 106.7 8.0
Net assets 940.3 864.0 76.3
Total debt (289.2) (287.0) (2.2)
Total equity $ 651.1 $ 577.0 $ 74.1
Debt to total capitalization 31 % 33 % (2) %
RELATED PARTY TRANSACTIONS
See Note 19 to the consolidated financial statements in this Annual Report on Form 10-K for further discussion of related party transactions.
BUSINESS PROSPECTS
Lift truck markets grew faster than anticipated during the fourth quarter of 2020, with markets ending the quarter significantly higher than pre-pandemic levels. Excluding China, which increased 56% over the prior year fourth quarter, the global lift truck market increased 9.3% compared with the fourth quarter of 2019. Compared to the third quarter of 2020, the global lift truck market, including China, increased 11.4% in the fourth quarter driven by a 28.1% increase in the Americas and a 22.9% increase in EMEA, as well as a 19.7% increase in China. The market improvements over the third quarter, and additional large customer bookings, translated into a substantial increase in the Company's 2020 fourth quarter bookings.
The Company expects increased bookings in 2021 as a result of markets that are anticipated to continue to improve over pre-pandemic levels, and as a result of the strategic projects the Company continues to pursue at each of its businesses to generate sound long-term financial returns. Although, definitive time frames for achieving the financial returns are still uncertain due to both the timing of the full impact of the strategic projects and the timing of the moderating financial impact of the pandemic.
Until COVID-19 cases are consistently at very low levels, the Company plans to continue to maintain procedures designed to limit the exposure of employees to the spread of COVID-19, including adjusting shift schedules to promote social distancing, enhancing cleaning and sanitation, promoting recommended hygiene practices, limiting workplace access and maintaining remote working where possible. At the same time, the Company and its employees remain committed to meeting the needs of dealers and end customers by ensuring they receive equipment, parts and services in a timely manner to the degree reasonably possible.
While recent market and bookings activity is strong and growth since the 2020 second-quarter shutdowns has been better than expected, the level of future bookings and the resulting shipments are still uncertain. Overall, the Company continues to operate on the assumption that the economic and market environment will remain difficult in 2021 until the COVID-19 vaccinations and alternative therapies are more widely available and cases decrease to substantially lower levels.
Beginning in March 2020, the Company put in place plans to mitigate the impact of declining markets and bookings and the consequential impact of reduced manufacturing activity from pandemic-related shutdowns by initiating cost reduction measures which were designed to lower costs and enhance liquidity. These measures included spending and travel restrictions, significant reductions in temporary personnel, furloughs, suspension of incentive compensation and profit sharing, benefit reductions and salary reductions. Effective January 1, 2021, the Company reinstated pre-pandemic salaries, benefits and incentive compensation programs. The cost containment actions associated with hiring, use of contract and temporary workers, travel and meetings, as well as other discretionary spending are continuing. These measures are expected to remain in place until market and economic uncertainty dissipates and results improve further, which the Company expects to occur over the course of 2021.
In preparation for a return to more normal, pre-pandemic operations and expense levels, the Company performed an in-depth global review to help establish a more sustainable long-term cost structure. As a result of this review, in the 2020 fourth quarter, the Company recognized a restructuring charge of approximately $4.4 million, largely for severance, related to optimizing global commercial operations. These expensed severance amounts are expected to be paid in 2021. The Company also anticipates it will incur subsequent charges of approximately $1.4 million in 2021 for additional costs related to the restructuring. Estimated benefits from this restructuring program are expected to be approximately $10.4 million annually beginning in 2022.
The Company adjusted production levels at its manufacturing plants during 2020 to align them more closely with market demand and target bookings levels. Throughout the fourth quarter, the Company increased production levels moderately to
25
Table of Contents
adjust for improved market levels, but maintained its focus on establishing a strong, stable backlog level as a foundation for higher production rates in 2021 given market growth expectations and expected bookings and backlog, barring any new widespread COVID-19-related shutdowns. However, certain new or intensifying headwinds are expected to present significant challenges for the Company in 2021. The Company is anticipating further pandemic-related global supply chain constraints, component shortages, shipping container availability and higher freight costs, as well as anticipated significant material cost inflation resulting from the increasing pace of the expected market recovery and the likelihood of the non-renewal of tariff exclusions. These items could affect both the costs of the Company's products and the ability to ramp up production rates. The Company will continue to focus on carefully adjusting production levels to match market and bookings changes and supply availability by working closely with suppliers to help ensure adequate component supply levels as its production levels change. The Company anticipates that commodity costs will continue to increase as the year progresses, although these costs, particularly for steel, remain volatile and sensitive to changes in the global economy and to tariffs. The Company will continue to monitor potential future supply costs and tariffs closely and adjust pricing accordingly.
Given the above factors, the Company expects operating profit and net income in the first quarter of 2021, excluding the gain from the sale of the Company's OneH2 investment, to be moderately lower than the 2020 fourth quarter and lower than the 2020 first quarter. The expected lower operating profit is due to the surge in commodity prices, and the resulting anticipated increases in material costs, and inefficiencies expected as a result of global supply chain challenges, as well as the elimination of certain cost containment measures, including the reinstatement of incentive compensation plans in 2021 that were suspended in 2020. An anticipated favorable currency impact based on current currency rates is expected to partially offset these decreases.
While the Company's expectations for the 2021 first quarter have been based on the most recent information available, past quarters in 2020 have shown that the effects of the pandemic on the economic and lift truck market environments can change expectations rapidly. Further shutdowns or supplier shortages could occur. Lockdown measures are still in place in a number of European countries to mitigate the spread of the COVID-19 virus, and similar actions could be taken by other countries. At this time, the lockdown measures in place have not required closure of the Company's plants. The Company is monitoring this situation, including by closely monitoring a number of suppliers based in areas where COVID-19 cases are high. The Company is prepared to take further action if necessary to maintain the health and safety of its global employees and to address production and supply chain issues which may develop. More broadly, as a result, pandemic-related uncertainty and its effect on the supply chain continue to limit the Company's ability to forecast bookings and shipment levels beyond the first quarter of 2021.
Looking to the future in the context of an improving bookings trend, the Company expects to increase its investment in working capital and other expenditures to support growth in its business. Capital expenditures were $51.7 million in 2020 and are expected to be approximately $71 million in 2021. While the Company expects to make these substantial additional investments in the business during 2021, maintaining liquidity also continues to be a priority. At December 31, 2020, the Company's cash on hand was $151.4 million and debt was $289.2 million compared with cash on hand of $89.9 million and debt of $297.7 million at September 30, 2020. In addition, as of December 31, 2020, the Company had unused borrowing capacity of approximately $266.4 million under existing revolving credit facilities, compared with $260 million at September 30, 2020.
Despite the potential volatility of near-term economic activity, the Company continues to execute its long-term strategy by focusing on advancing its key strategic initiatives. As the Company entered the COVID-19 crisis, it was in the midst of undertaking the largest set of strategic projects in its history with the expectation that they would collectively have a transformational impact on the Company’s competitiveness, market position and economic performance. While essentially all of the projects required to execute these initiatives continue to move forward, in the context of the COVID-19 pandemic, the pace of certain projects has been given greater emphasis than others to reduce near-term operating expenses and capital expenditures. In addition, certain accelerated projects have experienced delays as a result of the impact of pandemic-related challenges.
At Lift Truck, product projects are expected to lay the groundwork for enhanced market position by providing lower cost of ownership and enhanced productivity for the Company’s customers. While the Company continues to introduce a number of new products during this period, Lift Truck's primary focus is on a new set of modular and scalable product families covering both internal combustion engine and electric trucks designed to provide customers with enhanced flexibility for meeting their application needs in addition to the benefit of lowest total cost of ownership. The Company has been focused on maintaining, to the degree possible, the timing of the introduction of the first of these products, the standard version of the 2-to-3 ton internal combustion engine lift truck for the EMEA market, which is now expected to be launched in the second quarter of 2021. The launch of this new range of the 2-to-3 ton counterbalanced trucks is expected to continue throughout 2021 and the early part of 2022.
The introduction of these new products will lead to significant changes in supply chain sourcing and in the Company’s various manufacturing facilities around the world as certain products are moved between plants. Consolidated component volume sourced globally from reliable partners is expected to reduce long-term costs and improve quality as these new products are
26
Table of Contents
brought to market over time. Lift Truck’s largest manufacturing facilities, its Berea, Craigavon and Fuyang plants, are undergoing significant changes to accommodate these new products, and significant investments are being made to expand the Berea and Craigavon plants. Further, the Company has accelerated plans to move certain production locations to provide permanent structural changes designed to reduce costs and optimize its manufacturing footprint.
The Company believes the modular nature of the new products being introduced will enhance its ability to meet customer needs at lowest cost and with more specificity, both at the industry level and at the individual customer level. To capitalize on this capability, the Company has accelerated its focus on implementing comprehensive industry strategies, and investing in industry-focused sales capabilities to support its dealers. Given the COVID-19 environment, the Company has also focused on enhancing its remote selling capabilities through technology and IT enhancements.
Bolzoni continues to focus on its Americas growth strategy by strengthening its ability to serve industries in the North America market by introducing a broader range of locally produced attachments with shorter lead times to serve its customer base and through continuing to sell cylinders and various other components produced in its Sulligent, Alabama plant. Bolzoni is also implementing its "One Company - 3 brands" organizational approach to help streamline corporate operations and strengthen its North America and JAPIC commercial operations.
Nuvera continues to focus on serving heavy-duty applications, particularly bus and truck applications, with its 45kW and 60kW engines, which were both released for sale during 2020. As a result of these milestones, Nuvera has accelerated the 45kW and 60kW engine commercialization operations for the global market and is focusing on ramping up bookings of these products in 2021. Nuvera also continues to focus on the forklift truck market.
In summary, the Company believes it is at an inflection point in its businesses as a result of the momentum of its strategic projects as they move to full implementation. While these initiatives may reduce the Company's near-term financial results, they are expected to position the Company with enhanced market position as market conditions return to more normal levels. Nevertheless, since the Company recognizes that the timing and shape of the market recovery remains uncertain, it will maintain its focus on responding to changing conditions with agility based on contingency plans which are designed to respond appropriately to changing conditions. Once the COVID-19 pandemic has abated and markets have returned to normal, the Company believes the full impact of these projects will lead to significant profitability improvements for a number of years to come.
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) the duration and severity of the COVID-19 pandemic, any preventive or protective actions taken by governmental authorities, the effectiveness of actions taken globally to contain or mitigate its effects, and any unfavorable effects of the COVID-19 pandemic on either the Company's or its suppliers plants' capabilities to produce and ship products, (2) reduction in demand for lift trucks, attachments and related aftermarket parts and service on a global basis, (3) the ability of the Company and its dealers, suppliers and end-users to access credit in the current economic environment, or obtain financing at reasonable rates, or at all, as a result of current economic and market conditions, (4) delays in delivery or increases in costs, including transportation costs, raw materials or sourced products, the imposition of tariffs, or the inability to renew tariff exclusions, and labor or changes in or unavailability of quality suppliers, (5) delays in manufacturing and delivery schedules, (6) the successful commercialization of Nuvera's technology, (7) customer acceptance of pricing changes, (8) the effectiveness of the cost reduction programs implemented globally, including the successful implementation of procurement and sourcing initiatives, (9) the political and economic uncertainties in the countries where the
27
Table of Contents
Company does business, (10) exchange rate fluctuations and monetary policy changes and other changes in the regulatory climate in the countries in which the Company operates and/or sells products, (11) bankruptcy of or loss of major dealers, retail customers or suppliers, (12) customer acceptance of, changes in the costs of, or delays in the development of new products, (13) introduction of new products by, or more favorable product pricing offered by, competitors, (14) product liability or other litigation, warranty claims or returns of products, (15) changes mandated by federal, state and other regulation, including tax, health, safety or environmental legislation, and (16) 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, or the non-renewal of tariff exclusions, and/or economic sanctions.