Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS -----------------
The Company's Background ------------------------
Hyster-Yale Materials Handling, Inc. ("Hyster-Yale" or the "Company") was formed as a Delaware corporation in May 1989 in connection with the acquisition of Hyster Company ("Hyster") by NACCO Industries, Inc. ("NACCO"). NACCO directly owns approximately 97% of common stock, par value $1.00 per share ("Common Stock") of the Company, which is the parent company of NACCO Materials Handling Group, Inc. ("NMHG"). NMHG designs, manufactures and markets the two full lines of forklifts and related service parts under the Hyster(R) and Yale(R) brand names.
Significant Events ------------------
DEBT RESTRUCTURING. In August 1994, NACCO and the Company's two minority shareholders, Sumitomo Heavy Industries Ltd. of Japan ("Sumitomo") and Jungheinrich Aktiengesellschaft, a German manufacturer of forklift trucks, ("Jungheinrich"), made a pro rata cash contribution of $25 million. This cash contribution, along with internally generated funds and borrowings, enabled the Company to call approximately $48 million face value of subordinated debentures at a price of 105.
In December, 1994, NMHG called an additional approximately $24 million face value of subordinated debentures at a price of 105 using internally generated funds and borrowings. At December 31, 1994 there remain outstanding subordinated debentures having a face value of approximately $78.5 million.
On February 28, 1995, NMHG entered into a new long-term credit agreement to replace its existing bank agreement and to refinance the majority of its existing long-term debt. The new agreement provided the company with an unsecured $350 million revolving credit facility to replace its current senior credit facility. The new credit facility has a five-year maturity with extension options and performance-based pricing comparable to its current senior credit facility which provides the company with reduced interest rates upon achievement of certain financial performance targets. With the new credit facility in place, the company has the ability to call the remaining $78.5 million outstanding subordinated debentures in 1995. In anticipation of the call, an extraordinary charge of $3.4 million will be recorded in the first quarter of 1995 to write-off unamortized debt issuance costs and anticipated premiums.
The Forklift Truck Industry ---------------------------
Forklift trucks are used in both manufacturing and warehousing environments. The materials handling industry, especially in industrialized nations, is generally a mature industry which has historically been cyclical.
Fluctuations in the rate of orders for forklift trucks reflect the capital investment decisions of the customers, which in turn depend upon the general level of economic activity in the various industries served by such customers. In the most recent business cycle the North American market for forklift trucks reached its lowest level in 1991 and has increased in each
- 1 - year since then to a record level in 1994. The European and Japanese markets generally had been in decline since 1990; they both showed recovery in 1994. During this business cycle, however, the total worldwide lift-truck market was relatively stable.
Company Operations ------------------
NMHG maintains product differentiation between Hyster(R) and Yale(R) brands of forklift trucks and distributes its products through separate worldwide dealer networks. Nevertheless, opportunities have been identified and addressed to improve the Company's results by integrating overlapping operations and taking advantage of economies of scale in design, manufacturing and purchasing. NMHG provides all design, manufacturing and administrative functions. Products are marketed and sold through two separate groups which retain the Hyster and Yale identities. In Japan, NMHG has a 50% owned joint venture with Sumitomo named Sumitomo Yale Company Limited ("S-Y"). S-Y performs certain design activities and produces lift trucks and components which it markets in Japan and which are exported for sale by NMHG and its affiliates in the U.S. and Europe.
Product Lines -------------
NMHG manufactures a wide range of forklift trucks under both the Hyster(R) and Yale(R) brand names. The principal categories of forklift trucks include electric rider, electric narrow-aisle and electric motorized hand forklift trucks primarily for indoor use, and internal combustion engine ("ICE") forklift trucks for indoor or outdoor use. Forklift truck sales accounted for approximately 82%, 80%, and 79%, of NMHG's net sales in 1994, 1993, and 1992 respectively.
NMHG also derives significant revenues from the sale of service parts for its products. Profit margins on service parts are greater than those on forklift trucks. The large population of Hyster(R) and Yale(R) forklift trucks now in service provides a market for service parts. In addition to parts for its own forklift trucks, NMHG has a program (termed UNISOURCETM in North America and MULTIQUIPTM in Europe) designed to supply Hyster dealers with replacement parts for most competing brands of forklift trucks. NMHG has a similar program (termed PREMIERTM) for its Yale dealers in the Americas and Europe. Accordingly, NMHG dealers can offer their mixed fleet customers a "one stop" supply source. Certain of these parts are manufactured by and purchased from third party component makers, NMHG also manufactures some of these parts through reverse-engineering of its competitors' parts. Service parts accounted for approximately 18%, 20%, and 21% of NMHG's net sales in 1994, 1993, and 1992, respectively.
Competition -----------
The forklift truck industry is highly competitive. The worldwide competitive structure of the industry is fragmented by product line and country. The principal methods of competition among forklift truck manufacturers are product performance, price, service and distribution networks. The forklift truck industry competes with alternative methods of materials handling, including conveyor systems, automated guided vehicle systems and hand labor. Global competition is also affected by a number of other factors, including currency fluctuations, variations in labor costs and effective tax rates, and the costs related to compliance with applicable regulations, including export restraints, antidumping provisions and
- 2 - environmental regulations.
Although there is no official source for information on the subject, the Company believes it is one of the top three manufacturers of forklift trucks in the world.
NMHG's position is strongest in North America, where it believes it is the leader in unit sales of electric rider and ICE forklift trucks and has a significant share of unit sales of electric narrow-aisle and electric motorized hand forklift trucks. Although the European market is fragmented and competitive positions vary from country to country, NMHG believes that it has a significant share of unit sales of electric rider and ICE forklift trucks in Western Europe. Although NMHG's current market share in Asia-Pacific, including Japan, is lower than in other geographical areas, it has been targeted for additional market share growth.
Trade Restrictions ------------------
A. United States -------------
Since June 1988, Japanese-built ICE forklift trucks, imported into the U.S., with lifting capacities between 2,000 and 15,000 pounds, including finished and unfinished forklift trucks, chassis, frames, and frames assembled with one or more component parts, have been subject to an antidumping duty order. Antidumping duty rates in effect through 1994 range from 4.48% to 56.81% depending on manufacturer or importer. The antidumping duty rate applicable to imports from S-Y is 51.33%, and is likely to continue unchanged for the foreseeable future, unless S-Y and NMHG decide to participate in proceedings to have it reduced. NMHG does not currently import for sale in the United States any forklift trucks or components subject to the antidumping duty order. This antidumping duty order will remain in effect until the Japanese manufacturers and importers satisfy the U.S. Department of Commerce ("Commerce") that they have not individually sold merchandise subject to the order in the United States below foreign market value for at least three consecutive years, or unless Commerce or the U.S. International Trade Commission finds that changed circumstances exist sufficient to warrant the order's revocation. The legislation implementing the Uruguay Round of GATT negotiations passed in 1994 provides that the antidumping order will be reviewed for possible revocation in the year 2000. All of NMHG's major Japanese competitors have either built or acquired manufacturing or assembly facilities in the United States. The Company cannot predict with any certainty if there will be any negative effects to the Company resulting from the Japanese sourcing of their forklift products in the United States.
B. Europe ------
From 1986 through 1994, Japanese forklift truck manufacturers were subject to informal export restraints on Japanese-manufactured electric rider, electric narrow-aisle, and ICE forklift trucks shipped to Europe. These informal restraints are not expected to continue in 1995. Several Japanese manufacturers have established manufacturing or assembly facilities within the European community. The Company also cannot predict with any certainty if there will be any negative effects to NMHG resulting from the Japanese sourcing of their forklift products in Europe.
- 3 - Product Design and Development ------------------------------
NMHG spent $23.2 million, $20.7 million, and $21.9 million on product design and development activities in 1994, 1993, and 1992, respectively. The Hyster(R) and Yale(R) products are differentiated for the specific needs of their respective customer bases. NMHG continues to pursue opportunities to improve product cost by engineering new Hyster(R) and Yale(R) brand products with component commonality.
Certain product design and development activities with respect to ICE forklift trucks and some components are performed in Japan by S-Y. S-Y spent approximately $4.5 million, $4.0 million, and $3.7 million on product design and development in 1994, 1993, and 1992, respectively.
Backlog -------
As of December 31, 1994, NMHG's backlog of unfilled orders for forklift trucks was approximately 24,600 units, or $433 million. This compares to the backlog as of December 31, 1993 of approximately 12,100 units, or $206 million. Management believes NMHG's backlog level is consistent with overall increases in industry backlog levels. Backlog represents unit orders to NMHG's manufacturing plants from independent dealerships, retail customers and contracts with the U.S. Government. Although these orders are believed to be firm, such orders may be subject to cancellation or modification.
Sources -------
NMHG has adopted a strategy of obtaining its raw materials and principal components on a global basis from competitively priced sources. NMHG is dependent on a limited number of suppliers for certain of its critical components, including diesel and gasoline engines and cast-iron counterweights used on certain forklift trucks. There would be a material adverse effect on NMHG if it were unable to obtain all or a significant part of such components, or if the cost of such components were to increase significantly under circumstances which prevented NMHG from passing on such increases to its customers.
Distribution ------------
The Hyster(R) and Yale(R) brand products are distributed through separate highly developed worldwide dealer networks. Each also sells directly to certain major accounts.
In Japan, forklift truck products are distributed by S-Y. In 1991, Yale reached a ten-year agreement with Jungheinrich to continue distribution of Yale brand products in Germany and Austria and to provide to Jungheinrich certain ICE and electric-powered products for sale in other major European countries under the Jungheinrich brand name.
- 4 - Financing of Sales ------------------
Hyster U.S. dealer and direct sales are supported by leasing and financing services provided by Hyster Credit Company, a division of AT&T Commercial Finance Corporation, pursuant to an operating agreement which expires in 2000.
NMHG is a minority stockholder of Yale Financial Services, Inc., a subsidiary of General Electric Capital Corporation, which offers Yale U.S. dealers wholesale and retail financing and leasing services. Such retail financing and leasing services are also available to Yale national account customers.
Employees ---------
As of February 28, 1995, NMHG had approximately 6,000 employees. Employees in the Danville, Illinois manufacturing and parts depot operations are unionized, as are tool room employees located in Portland, Oregon. A three-year contract for the Danville union employees was signed in 1994 which will expire in June 1997. A new three-year contract was signed in 1994 with the Portland tool room union which will expire in October 1997. Employees at the facilities in Berea, Kentucky; Sulligent, Alabama; and Greenville and Lenoir, North Carolina are not represented by unions.
In Europe, shop employees in the Craigavon, Northern Ireland facility are unionized. Employees in the Irvine, Scotland and Nijmegen, The Netherlands facilities are not represented by unions. The employees in Nijmegen have organized a works council, as required by Dutch law, which performs a consultative role on employment matters.
NMHG's management believes its current labor relations with both union and non-union employees are generally satisfactory.
Government Regulation ---------------------
NMHG's manufacturing facilities, in common with others in industry, are subject to numerous laws and regulations designed to protect the environment, particularly with respect to disposal of plant waste. NMHG's products are also subject to various industry and governmental standards. NMHG's management believes that such requirements have not had a material adverse effect on its operations.
Patents, Trademarks and Licenses --------------------------------
NMHG is not materially dependent upon patents or patent protection. The Hyster(R) trademark is currently registered in approximately 51 countries. The Yale(R) trademark, which is used on a perpetual royalty-free basis in connection with the manufacture and sale of forklift trucks and related components, is currently registered in approximately 100 countries. NMHG's management believes that its business is not dependent upon any individual trademark registration or license, but that the Hyster(R) and Yale(R) trademarks are material to its business.
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In 1994, NMHG sold one of its facilities located in Danville, Illinois and is currently leasing back a portion of this facility for its Hyster Americas Marketing and Sales operations.
ITEM 3.




ITEM 3. LEGAL PROCEEDINGS --------------------------
The Company is not a party to any material pending legal proceeding except ordinary routine litigation incidental to its business. Certain of such routine litigation includes claims for punitive damages; however, the management of the Company believes that none of such litigation, individually or in the aggregate, will have a material adverse effect on the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------------------------------------------------------------
No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company.
- 7 - PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ------------------------------------------------------------------------------
There is no established public trading market for the Company's Common Stock. On February 28, 1995 there were three holders of record of the Company's Common Stock.
The Company has not paid any dividends on shares of its Common Stock since its organization in 1989, and had not been able to declare or pay dividends with respect to the Common Stock under the terms of its prior debt agreements. The revised Credit Agreement entered into on February 28, 1995 will allow the transfer of up to $25.0 million to NACCO. The information set forth in Note I to the Consolidated Financial Statements in Part IV, pages through of this Form 10-K is incorporated herein by reference.
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Record market size in North America and higher market share in all geographic regions resulted in record revenues of $1.2 billion in 1994. The Company's worldwide unit volume increased from approximately 44,000 trucks in 1993 to approximately 56,000 trucks in 1994 and was the major contributor to the 30% revenue growth from year to year. Price increases announced in mid-1994 which took effect later in the year also contributed to higher sales and operating profit. After market parts sales, attributed primarily to the robust economic climate in North America, increased 15% from 1993 levels to $210.5 million in 1994. Continued development and upgrading of dealer networks in Europe also contributed to the sales gains.
Unit volumes increased 26% in 1994 over 1993 and the higher manufacturing throughput contributed favorably to margins. However, manufacturing inefficiencies caused by plant ramp-ups and vendor parts shortages, combined with higher warranty costs, had an unfavorable impact on margins. Also, the strong Japanese yen continued to put upward pressure on the cost of materials sourced from Japan. As a result, gross margin declined from 20.3% of sales in 1993 to 19.6% in 1994.
Operating expenses increased $21.2 million in 1994 over 1993 although as a percent of sales, they declined 1.6 percentage points to 13.1%. In support of the Company's strategy to gain market share, several marketing initiatives were launched in 1994, including dealer support programs for Hyster in Germany and Yale in the Americas. Additional expenses were also incurred to improve customer service and to support new product development. The investments in strategic programs are expected to plateau in the next two years.
- 11 - Interest expense decreased from $40.4 million in 1993 to $33.7 million in 1994 as the Company continued to pay down its total debt with internal cash flow and a $25 million equity contribution from existing shareholders. The Company's effective interest rate also decreased as approximately $72 million of its 12-3/8% subordinated debentures were retired during 1994. The Company has entered into unsecured interest rate swaps for a portion of its floating rate debt to provide near-term protection against increases in interest rates.
Other income in 1994 consisted primarily of $3.2 million of European employment grants. In 1994, the Company's 50% equity interest in the earnings of Sumitomo Yale was $0.5 million income versus a $3.9 million loss in 1993.
Factory backlog at December 31, 1994 was at a record level of approximately 24,600 units compared to 12,100 units at December 31, 1993 and 1992. The increased order demand in 1994 and, to a lesser degree, vendor parts shortages have extended delivery lead times and resulted in expanded backlog in 1994. Management believes that the backlog level is consistent with overall increases in industry backlog levels.
1993 COMPARED TO 1992 ---------------------
The following schedule details the changes in sales, operating profit and net income (loss) for 1993 compared with 1992:
- 12 - 1993 results reflected the strengthening North American market offset by continued weakness in Europe and Japan. Increased demand in North America resulted in slightly higher prices compared to 1992; however, competitive pressures continued to restrain margin growth. The improving economy in the United States stimulated parts sales and, along with tighter cost controls, resulted in increased operating profit. The success of new products introduced in 1993 raised the average sales value, however, margins did not increase proportionately due to mix swings to countries where prices are generally lower.
Manufacturing costs were higher in 1993 due to new product start-up costs and under absorbed overhead in Europe. The Pound Sterling weakened against the U.S. Dollar in 1993 causing sales and operating profit to be translated at lower amounts. The strong Yen in 1993 contributed to higher costs for products and parts sourced from Japan.
The debt restructuring and equity infusion in 1993 reduced outstanding debt and lowered overall effective interest rates resulting in reduced interest expenses. Other expense of $1.7 million in 1993 was primarily the net of a $3.9 million loss from the Company's equity interest in Sumitomo Yale and a $2.1 million gain from the sale of a former plant site. Other income in 1992 included foreign exchange gains which were not repeated as the Company began hedging a portion of its foreign currency exposures in 1993.
PROVISION FOR INCOME TAXES --------------------------
The Company's effective tax rate for 1994 was 47.7 percent. For 1993, the effective tax rate was not meaningful because expenses not deductible for tax purposes, primarily amortization of goodwill, resulted in a tax provision in 1993 despite a loss before income taxes. The higher level of pretax income in 1994 reduced the effect of these non-deductible expenses and resulted in an effective tax rate that is closer to the statutory tax rate. Also in 1993, the Company began providing for U.S. taxes on foreign earnings taxed at overall lower rates in anticipation of future repatriations.
In 1992 the effective tax rate was 70.7 percent. The high effective tax rate in 1992 was due to the low level of pretax income in that year relative to the expenses not deductible for tax purposes.
EXTRAORDINARY CHARGES ---------------------
The extraordinary charges of $3.2 million and $3.3 million, net of $2.0 million in tax benefits, were recognized in the second quarters of 1994 and 1993, respectively. These charges represent the write-off of premiums and unamortized debt issuance costs associated with the retirement of approximately $70.0 million and $50.0 million face value of 12 3/8% subordinated debentures. These retirements were achieved using internally generated funds and equity infusions from existing stockholders.
ENVIRONMENTAL MATTERS ---------------------
The Company's manufacturing operations, like those of other companies engaged in similar businesses, involve the use, disposal and clean-up of substances regulated under environmental protection laws. Compliance with these increasingly stringent standards results in higher expenditures for both capital improvements and operating costs. The Company's policies emphasize environmental responsibility and compliance with these regulations. Based on current information, management does not expect compliance with these regulations to have a material adverse effect on its financial condition or results of operations.
- 13 - 1995 OUTLOOK ------------
The forklift truck industry historically has been cyclical. Demand is affected by the general economic conditions in the various markets in which the industry's customers operate. Current economic forecasts and recent factory order trends indicate continued strong economic activity in North America. Europe has begun to recover from the recent recession and demand is expected to increase in 1995. In Asia-Pacific, most of the markets in which the Company participates continue to show growth, and the largest market, Japan, is expected to show signs of improvement. It is anticipated that worldwide shipments will be significantly higher in 1995 than in 1994.
The Company plans to continue its aggressive new products introduction schedule in 1995 and to pursue its strategy of gaining worldwide market share. Focus will be on strengthening strategic partnerships with key vendors and improving manufacturing and operational efficiency. The recent earthquake in Japan has affected the performance of some of the Company's suppliers but the overall impact is not expected to be material to the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES -------------------------------
Net cash provided by operations was $36.1 million in 1994 compared with $34.1 million in 1993. The increase in cash provided by operations resulted primarily from reduced net working capital requirements due to cash enhancement programs and improved profitability.
Expenditures for property, plant and equipment were $25.9 million in 1994 versus $20.2 million in 1993. The majority of these expenditures were for manufacturing capacity and tooling for new products and the principal source of financing was internally generated cash flow. Planned capital expenditures in 1995 are approximately $40 million, almost half of which will be for expanded capacity and for new product development. Approximately $2 million of the $40 million is expected to be financed by economic development capital grants.
Increased cash flow from operations and a $25 million equity infusion from NACCO enabled the Company to reduce debt during 1994. The Company had $67 million of its $100 million revolving credit facility available at December 31, 1994. In February 1995, the Company entered into a new long term unsecured credit agreement to replace its existing Credit Agreement and to refinance the majority of its existing long-term debt.
The new agreement provides the Company with an unsecured $350 million revolving credit facility to replace its current senior credit facility. The new credit facility has a five year maturity with an extension option and pricing comparable to its current senior credit facility. It also provides the Company with reduced interest rates upon achievement of certain financial performance targets. With the new credit agreement in place, the Company can redeem the remaining $78.5 million of the 12 3/8% subordinated debentures and intends to in 1995. In anticipation of the redemption, the Company intends to record an extraordinary charge of $3.4 million in the first quarter of 1995, to write-off unamortized debt issuance costs and anticipated premiums. The Company believes it can adequately meet all of its current and long-term commitments and operating needs from operating cash flow and funds available under credit agreements.
During 1993, the Company repatriated $18.3 million of earnings from certain foreign subsidiaries. U.S. income taxes were previously provided for financial reporting purposes. Future distributions of
- 14 - unremitted earnings may be affected by changes in currency exchange rates and foreign and U.S. tax rates.
Foreign currency exchange gains (losses) were $(4.7) million, $(0.1) million and $5.7 million in 1994, 1993, and 1992, respectively. The Company began hedging a portion of its foreign currency exposure in 1993 to mitigate income statement exposure. Foreign currency exchange losses in 1994 resulted primarily from the strong Yen increasing costs of Japanese sourced materials as minimal hedging of Yen exposures was performed in 1994. Stockholders' equity was affected by translation of foreign country financial statements where the functional currency was not the U.S. dollar. The translation gain (loss) recorded in stockholders' equity was $8.0 million and $(2.2) million in 1994 and 1993, respectively.
EFFECTS OF INFLATION --------------------
The Company attempts to minimize the impact of inflation on production and operating costs through productivity improvements and cost reduction programs. The LIFO method is used to value domestic inventories. Under this method, cost of goods sold reported in the financial statements approximates current cost. Therefore, net income for 1994 adjusted for inflation would not be materially different from net income reported in the consolidated financial statements.
- 15 - ITEM 8.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ----------------------------------------------------
The information required by this Item 8 is set forth at pages through of the Financial Statements and Supplementary Data contained in Part IV hereof.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ------------------------------------------------------------------------ FINANCIAL DISCLOSURES ---------------------
None.
- 16 - PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------------------------------
A. Directors of the Company ------------------------
The following table sets forth the names, ages and professional occupations and directorships of the persons who are currently directors of the Company. The directors of the Company are elected to serve until the next annual meeting of the stockholders of the Company.
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Alfred M. Rankin, Jr. and Claiborne R. Rankin are brothers and are nephews of Frank E. Taplin, Jr. and are cousins of David F. Taplin (who is the son of Frank E. Taplin, Jr.) and Britton T. Taplin (who is a nephew of Frank E. Taplin, Jr.).
B. Executive Officers of the Company ---------------------------------
The following tables set forth certain information relating to the executive officers of the Company and NACCO Materials Handling Group, Inc. Executive officers of the Company serve at the will of the Board of Directors.
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- 24 - ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION --------------------------------
The following table sets forth the annual, long-term and all other compensation for services in all capacities to the Company of the five persons who were, as of December 31, 1994, the Chief Executive Officer and the Company's four most highly compensated executive officers other than the Chief Executive Officer (the "Named Executive Officers").
- 25 - and $9,170, respectively. For Mr. Decker, the amounts listed for 1994 and 1993 include payments of cash in lieu of perquisites of $13,900 and $12,265, respectively. For Mr. Ryan, the amounts listed for 1994, 1993 and 1992 include payments of cash in lieu of perquisites of $11,400, $9,013 and $7,308, respectively.
(2) Includes overseas allowances paid to Mr. Pollock of $50,835, $50,996, and $69,445 for the years 1994, 1993, and 1992, respectively.
(3) These amounts were paid in cash pursuant to the NACCO Materials Handling Group, Inc. Annual Incentive Compensation Plan.
(4) For Mr. Eklund, the amount listed for 1992 consists of annual interest of $12,419 paid on a $200,000 promissory note previously held by him ("Mr. Eklund's Promissory Note"), which note bore interest at a rate equal to a 13-week U.S. Treasury Bill plus 2%, with a cap of 12%, compounded quarterly, which was payable by Yale on February 28, 1995 and which note represented the balance due to Mr. Eklund under the Yale Materials Handling Corporation 1985 Employee Incentive Plan that was terminated effective January 1, 1990. The principal and accrued interest of Mr. Eklund's Promissory Note were pre-paid in 1992. See note (6) below.
(5) For Mr. Pollock the amounts shown represent the value of the use of a car.
(6) The amount listed was paid in cash to Mr. Eklund upon the pre-payment of Mr. Eklund's Promissory Note. See Note 4 above.
(7) For Mr. Eklund, the amounts listed include: for 1994, 1993 and 1992 $13,270, $15,370 and $14,963, respectively, consisting of Company contributions under the NACCO Materials Handling Group, Inc. Profit Sharing Plan; for 1992, $9,464 consisting of deferred payments under the Yale Short-Term Incentive Compensation Deferral Plan earned by Mr. Eklund for 1986; for 1994, 1993 and 1992, $25,224, $9,014 and $5,690, respectively, consisting of credits under the NACCO Materials Handling Group, Inc. Unfunded Benefit Plan.
(8) For Mr. Pollock the amounts listed were contributed by the Company to match before-tax contributions made under the NACCO Materials Handling Group, Inc. Profit Sharing Plan. For 1994, the amount includes $2,702 for Company matching contributions to this plan and $5,056 in credits under the NACCO Materials Handling Group, Inc. Unfunded Benefit Plan.
(9) For the years 1993 and 1992, the amounts listed for Messrs. Muller, Decker and Ryan consist of contributions made by the Company to the NACCO Materials Handling Group, Inc. Profit Sharing Plan. For 1994, Company contributions to this plan for Messrs. Muller Decker and Ryan were $10,314, $10,314 and $12,282 respectively. For 1994, $10,237, $6,513 and $3,998 represent credits for Messrs. Muller, Decker and Ryan respectively under the NACCO Materials Handling Group, Inc. Unfunded Benefit Plan. For 1994 the amount listed for Mr. Decker also includes $15,513 Company reimbursement for moving expenses.
- 26 - Compensation Committee Interlocks and Insider Participation -----------------------------------------------------------
During 1994, the members of the Nomination, Organization and Compensation Committee of the Company were John J. Dwyer, Robert M. Gates, Dennis W. LaBarre, Alred M. Rankin (through January 23, 1994), Alred M. Rankin, Jr. and John C. Sawhill.
Mr. LaBarre is a partner in the law firm of Jones, Day, Reavis & Pogue. Such firm provided legal services on behalf of the Company during 1994 on a variety of matters, and it is anticipated that such firm will provide such services in 1995.
Pension Plan ------------
NACCO Materials Handling Group, Inc. Pension Plans
Mr. Pollock is covered by the non-contributory defined benefit cash balance plans (qualified and non-qualified) of the Company. Each year, effective as of January 1, 1992, an amount is credited to a notional account for each covered employee equal to a percentage of the employee's compensation (including bonuses and salary deferrals) for such year, in accordance with an age-based formula that is integrated with Social Security. The notional account balances are then credited with interest each year until the employee's normal retirement date (generally, age 65) at a stated rate of interest. The notional account balances are paid in the form of a lump sum payment or converted to an annuity to provide monthly benefit payments.
The estimated annual pension benefit (including prior plan benefits, if any) for Mr. Pollock under the cash balance plans, which would be payable on a straight life annuity basis at normal retirement age, is $89,300.
Messrs. Eklund, Decker, Muller and Ryan have never been covered by any defined benefit pension plans of the Company, Hyster or Yale.
Compensation of Directors -------------------------
The Company's directors are compensated for their service to the Company in accordance with the current practices of NACCO. Directors of the Company who are employees of NACCO will be compensated principally by NACCO and will participate in employee benefit plans of NACCO. Currently, Mr. Alfred M. Rankin, Jr. is employed by NACCO and receives his compensation and employee benefits from NACCO. Officers of the Company who are also directors receive no additional compensation for their services as a director. Mr. Eklund is both an officer and a director of the Company. Mr. Eklund receives his salary and benefits from the Company. The directors of the Company who are also directors of NACCO are currently compensated by NACCO with respect to their Company Board of Directors activities, and the Company reimburses NACCO for a pro rata share (with NACCO and two other subsidiaries of NACCO) of the compensation paid by NACCO to its directors who are also directors of NACCO. Each NACCO director who is not an officer of NACCO receives a retainer of $26,400 for each calendar year of service on the NACCO and subsidiary Board of Directors. In addition, each such director receives $500 for attending each meeting of the NACCO or subsidiary Board of Directors and each meeting of a committee thereof. Such fees for attendance at Board meetings and committee meetings may not exceed $1,000 per day. In addition, the chairman of each committee of the NACCO or subsidiary Board of Directors receives $4,000 for each calendar year for service as committee chairman. Directors of the
- 27 - Company who are neither directors of NACCO nor officers of the Company are paid by the Company $9,000 for each calendar year, plus $500 for attending each meeting of the Company Board of Directors and each meeting of a committee thereof (such fees for attendance at Board of Directors' meetings and multiple committee meetings do not exceed $1,000 per day).
ITEM 12.

ITEM 12. --------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --------------------------------------------------------------
The Company -----------
The Company currently has 10,000 authorized shares of Common Stock which is the only authorized class of Company capital stock, of which 5,598.857 shares are currently issued and outstanding. NACCO Industries, Inc., a Delaware corporation, with its headquarters located at 5875 Landerbrook Drive, Mayfield Heights, Ohio 44124-4017, is the beneficial owner of 5,435.826 shares (97%) of Common Stock. No officer or director of the Company beneficially owns any shares of the Common Stock. In connection with the financing of the acquisition of Hyster, all of the Company's Common Stock owned beneficially by NACCO was pledged to lenders to secure the Company's obligations under a Credit Agreement entered into to finance the acquisition. On February 28, 1995, this Credit Agreement and related security documents were canceled and the pledge of the Company's common stock was released.
Beneficial Ownership of NACCO Securities ----------------------------------------
Set forth in the following table is the indicated information with respect to beneficial ownership of Class A Common Stock, par value $1.00 per share ("Class A Common") and Class B Common Stock, par value $1.00 per share ("Class B Common"), of NACCO, by the directors and Named Executive Officers of the Company and all executive officers and directors of the Company as a group as of January 15, 1995. Each share of Class A Common is entitled to one vote on all matters brought before a meeting of NACCO's stockholders, while each share of Class B Common is entitled to ten votes on each such matter. Beneficial ownership of Class A Common and Class B Common has been determined for this purpose in accordance with Rule 13d-3 of the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which provides, among other things, that a person is deemed to be the beneficial owner of Class A Common or Class B Common if such person, directly or indirectly, has or shares voting power or investment power in respect of such stock or has the right to acquire such ownership within sixty days. Accordingly, the amounts shown in the table do not purport to represent beneficial ownership for any purpose other than compliance with SEC reporting requirements. Further, beneficial ownership as determined in this manner does not necessarily bear on the economic incidence of ownership of Class A Common or Class B Common.
- 28 -
- 29 -
- 30 - Common or prior to any sale or transfer of Class B Common to any permitted transferee (under the terms of the Class B Common) who has not become a Signatory, to offer such shares to all of the other Signatories on a pro rata basis. A Signatory may sell or transfer all shares not purchased under the right of first refusal as long as they first are converted into Class A Common prior to their sale or transfer. Accordingly, the Signatories may be deemed to have acquired beneficial ownership of all of the Class B Common subject to the Stockholders' Agreement, an aggregate of 1,542,757 shares, as a "group" as defined under the Exchange Act. The shares subject to the Stockholders' Agreements constitute 89.56% of the Class B Common outstanding on January 15, 1995, or 63.01% of the combined voting power of all Class A Common and Class B Common outstanding on such date. Certain Signatories own Class A Common, which is not subject to the Stockholders' Agreement. Under the Stockholders' Agreement, NACCO may, but is not obligated to, buy any of the shares of Class B Common not purchased by the Signatories following the trigger of the right of first refusal. The Stockholders' Agreement does not restrict in any respect how a Signatory may vote such Signatory's shares of Class B Common. The Class B Common shown in the foregoing table as beneficially owned by named persons who are Signatories is subject to the Stockholders' Agreement.
(5) While Mr. Jones, a director of the Company, is a Trustee of Fidelity Funds, he has not exercised and does not presently intend to exercise any voting or investment power over any of the 1,161,769 shares of Class A Common in which a Schedule 13G filed with the SEC for NACCO on February 14, 1992 and amended on February 16, 1993 by Amendment No. 1 and amended and restated on February 14, 1994 by Amendment No. 2, and amended on February 13, 1995 by Amendment No. 3 reported that FMR Corp. and certain related parties, including Fidelity Funds, have a beneficial ownership interest.
(6) Represents shares in a certain trust of which Mr. Rankin, Jr. became a trustee on February 9, 1994, and a certain trust of which he became a trustee on March 10, 1994.
(7) Includes the following shares which such persons have, or had, within 60 days after January 15, 1995, the right to acquire upon the exercise of stock options: Mr. Rankin, Jr., 25,000 shares of Class A Common, and all executive officers and directors of the company as a group, 25,000 shares of Class A Common.
(8) Includes 16,861 shares of Class A Common and 4,688 shares of Class B Common owned by members of Mr. Rankin's immediate family for which Mr. Rankin serves as custodian, as to which Mr. Rankin disclaims beneficial ownership.
(9) Includes 20 shares of Class A Common owned by a member of the immediate family of an executive officer as to which such executive officer disclaims beneficial ownership.
Frank E. Taplin, Jr. and Thomas E. Taplin (who was, as of December 31, 1994, the beneficial owner of an aggregate of 574,000 shares of Class A Common and, as of January 15, 1995, 317,000 shares of Class B Common) are brothers, and Clara Taplin Rankin (who was, as of December 31, 1994, the beneficial owner of an aggregate of 638,091 shares of Class A Common and, as of January 15, 1995, 336,247 shares of Class B Common) is their sister. Britton T. Taplin is the
- 31 - son of Thomas E. Taplin and the nephew of Frank E. Taplin, Jr. and Clara Taplin Rankin. David F. Taplin is the son of Frank E. Taplin, Jr. and the nephew of Thomas E. Taplin and Clara Taplin Rankin. Clara Taplin Rankin is the mother of Alfred M. Rankin, Jr. and Claiborne R. Rankin. The combined beneficial ownership of such persons equals 2,049,102 shares or 28.22% of Class A Common and 1,127,536 shares or 65.46% of Class B Common outstanding on January 15, 1995. The combined beneficial ownership of all directors of the Company, together with Clara Taplin Rankin, Thomas E. Taplin and all of the executive officers of the Company whose beneficial ownership of Class A Common and Class B Common (including shares which would be held by such directors if they exercised certain stock options) must be disclosed in the foregoing table in accordance with Rule 13d-3 under the Exchange Act, equals 2,065,663 shares or 28.45% of Class A Common and 1,127,836 shares or 65.47% of Class B Common outstanding on January 15, 1995 (including shares which would be outstanding if certain stock options were exercised by such directors). Such shares of Class A Common and Class B Common represent 54.50% of the combined voting power of all Class A Common and Class B Common outstanding on such date (including those shares which would be outstanding if the stock options referred to above were exercised).
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS --------------------------------------------------------
As a result of its ownership of in excess of 97% of the Company's stock, NACCO controls the Company and has the power to elect the Company's entire Board of Directors and to make certain strategic decisions concerning the Company (including decisions relating to mergers, consolidations or the sale of all or substantially all of the assets of the Company) without the approval of other stockholders. However, the Company has operated and conducted its day-to-day business autonomously.
Tax Agreement -------------
So long as the Company continues to meet the definition of an included corporation for Federal income tax purposes, as that definition may change from time to time, NACCO intends to include the Company in the consolidated Federal income tax returns of NACCO. NACCO and the Company are parties to an income tax sharing agreement providing for the allocation of Federal income tax liabilities. Under the agreement, the Company will be compensated by NACCO for certain of its tax attributes (e.g., any available tax credits), while all Federal income tax deficiencies and refunds relating to the Company for prior and future years are charged or credited to the Company as they are finally determined. Under this arrangement, the Company will pay to NACCO an amount equal to the taxes that would be payable by the Company if it were a corporation filing a separate return.
A similar arrangement currently exists between NACCO and NMHG and between NACCO and each of its other subsidiaries.
- 32 - Directors' and Officers' Liability Insurance and Other NACCO Services ---------------------------------------------------------------------
NACCO provides directors' and officers' liability insurance to the Company's directors and officers, with the Company reimbursing NACCO for a portion of such costs. The Company may also make use and be charged for the use of NACCO's corporate airplane. NACCO is also expected to provide certain legal, accounting and insurance services to the Company for which it will be reimbursed.
Other -----
Mr. Yoshinori Ohno is President of S-Y. S-Y manufactures semi-complete or complete industrial lift trucks which are purchased by NMHG, Yale Europe and Jungheinrich. S-Y also markets in Japan industrial truck products it manufactures and which it imports from NMHG. For a discussion of inter-affiliate transactions involving S-Y see Note F, Investments, on pages and.
- 33 - PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K --------------------------------------------------------------------------
(a)(1) and (2) The response to Item 14(a)(1) and (2) is set forth beginning at page of this Annual Report on Form 10-K.
(a)(3) Listing of Exhibits - See the exhibit index beginning at page X-1 of this Annual Report on Form 10-K.
(b) The Company has not filed any Current Reports on Form 8-K during the fourth quarter of 1994.
(c) The response to Item 14(c) is set forth beginning at page X-1 of this Annual Report on Form 10-K.
(d) Financial Statement Schedule - The response to Item 14(d) is set forth on page of this annual Report on Form 10-K.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
Neither an annual report nor a proxy statement covering the Company's last fiscal year has been circulated or is going to be circulated to security holders.
- 34 - SIGNATURES ----------
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Hyster-Yale Materials Handling, Inc.
By: /s/ Reginald R. Eklund -----------------------------------------
Reginald R. Eklund President and Chief Executive Officer
Date: March 30, 1995
- 35 - 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.
- 36 -
- 37 - ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14 (A) (1) AND (2), AND ITEM 14 (D)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 1994
HYSTER-YALE MATERIALS HANDLING, INC.
PORTLAND, OREGON
FORM 10-K
ITEM 14 (A) (1) AND (2)
HYSTER-YALE MATERIALS HANDLING, INC.
LIST OF FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Hyster-Yale Materials Handling, Inc. and subsidiaries are included in item 8:
Report of Independent Accountants for years ended December 31, 1994, 1993 and 1992
Consolidated balance sheets--December 31, 1994 and December 31, 1993
Consolidated statements of income--Years ended December 31, 1994, 1993 and 1992
Consolidated statements of cash fLows--Years ended December 31, 1994, 1993 and 1992
Consolidated statements of stockholders equity--Years ended December 31, 1994, 1993 and 1992
Notes to consolidated financial statements--December 31, 1994
The following consolidated financial statement schedule of Hyster-Yale Materials Handling, Inc. and subsidiaries is included in Item 14 (d):
Schedule 11 - VaLuation and qualifying accounts
ALL other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
Report of Independent Public Accountants
To the Board of Directors and Stockholders of Hyster-YaLe Materials Handling, Inc.:
We have audited the accompanying consolidated balance sheets of Hyster-YaLe Materials Handling, Inc. (an indirect, majority-owned subsidiary of NACCO Industries, Inc.) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, stockholders, equity and cash flows for each of the three years in the period ended December 31, 1994. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as welt as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in aLt material respects, the financial position of Hyster-YaLe Materials Handling, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the List of financial statements and supplementary data is presented for purposes of complying with the Securities and Exchange ConTnission's rules and is not a required part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic consolidated financial statements and, in our opinion, is fairly stated in aLL material respects in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon February 28, 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HYSTER-YALE MATERIALS HANDLING, INC. AND SUBSIDIARIES FOR THE THREE YEARS ENDED DECEMBER 31, 1994
NOTE A - ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements of Hyster-Yale Materials Handling, Inc. and subsidiaries (the Company) include the accounts of Hyster-Yale Materials Handling, Inc. (Hyster-Yale), a 97% owned subsidiary of NACCO Industries, Inc. (NACCO), and its wholly-owned subsidiary NACCO Materials Handling Group, Inc., which is the primary operating business.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Hyster-Yale and its majority-owned domestic and international subsidiaries except for a Brazilian subsidiary. Income from Companhia Hyster, the Brazilian subsidiary, is recognized when cash is received in the form of a dividend. Investments in Sumitomo Yale Company, Ltd. (S-Y), a 50% owned joint venture and Yale Financial Services, Inc. (YFS, Inc.), a 20% owned joint venture are accounted for by the equity method. All significant intercompany accounts and transactions among the consolidated companies are eliminated in consolidation.
CASH AND CASH EQUIVALENTS: The Company considers cash equivalents to be investments purchased with a maturity of three months or less.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost has been determined under the last-in, first-out (LIFO) method for domestic inventories and under the first-in, first-out (FIFO) method with respect to all other inventories. Costs for inventory valuation include labor, material and manufacturing overhead.
PROPERTY, PLANT AND EQUIPMENT: Depreciation of plant and equipment is computed using the straight-line method over the estimated useful service lives for purposes of financial reporting. For tax purposes, an accelerated method is generally used. Maintenance and repairs are expensed as incurred.
GOODWILL: Goodwill, which represents the excess purchase price paid over the fair value of the net assets acquired in the 1989 acquisition of Hyster Company, is amortized on a straight-line basis over 40 years. Amortization was $10.8 million in each of 1994, 1993 and 1992, respectively. Accumulated amortization was $60.4 million and $49.6 million at December 31, 1994 and 1993. Management regularly evaluates its accounting for goodwill considering such factors as historical and future profitability and believes that the asset is realizable and the amortization period is still appropriate.
DEFERRED FINANCING COSTS: Deferred financing costs from the acquisition of Hyster Company are being amortized over the term of the related indebtedness. Amortization of deferred financing costs was $1.5 million in 1994, $1.9 million in 1993 and $2.1 million in 1992. In addition, deferred financing costs of $1.7 million in 1994 and $1.4 million in 1993 were written-off in conjunction with the extraordinary charges (see Note B).
PRODUCT DEVELOPMENT COSTS: Expenditures associated with the development of new products and improvements to existing products are expensed as incurred. These costs amounted to $23.2, $20.7 and $21.9 million in 1994, 1993 and 1992, respectively.
FOREIGN CURRENCY: The financial statements of the Company's foreign operations are translated into United States dollars at year-end exchange rates as to assets and liabilities and at weighted average exchange rates as to revenues and expenses. Gains and losses that do not impact cash flows are excluded from net income. Effects of changes in exchange rates on foreign financial statements is designated as "foreign currency translation adjustment" and included as a separate component of stockholders' equity.
FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS: The fair values of financial instruments have been determined through information obtained from quoted market sources and management estimates. The Company does not hold or issue financial instruments or derivative financial instruments for trading purposes.
The Company enters into forward foreign exchange contracts with terms of one-to-twelve months. These contracts hedge certain foreign currency denominated receivables and payables and foreign currency commitments. Gains and losses on contracts which do not hedge firm commitments are reported currently in income, while gains and losses from contracts related to firm commitments are deferred and recognized as part of the cost of the underlying transaction being hedged.
The Company also enters into interest rate swap agreements with terms ranging from six months to five years. The differential between the floating interest rate and the fixed interest rate which is to be paid or received is recognized in interest expense as the floating interest rate changes over the life of the agreement.
RECLASSIFICATION: Certain amounts in the prior periods consolidated financial statements have been reclassified to conform to the current period's presentation.
NOTE B - EXTRAORDINARY CHARGES
The 1994 extraordinary charge of $3.2 million, net of $2.0 million in tax benefits, represents the write-off of premiums and unamortized debt issuance costs associated with the retirement of approximately $72 million of the Company's 12 3/8% subordinated debentures. The Company retired approximately $48 million of debentures in August 1994 using internally generated funds and a $25 million equity contribution from existing shareholders. The remaining $24 million of debentures was retired in December 1994 using internally generated funds and the senior revolving credit facility.
The 1993 extraordinary charge related to retirement of approximately $50 million of subordinated debentures.
NOTE C - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
NOTE D - ACCOUNTS RECEIVABLE
Allowances for doubtful accounts of $3.3 and $4.9 million at December 31, 1994 and 1993, respectively, were deducted from accounts receivable.
NOTE E - INVENTORIES
Inventories are summarized as follows:
The cost of inventories has been determined by the last-in first-out (LIFO) method for 63% of such inventories as of December 31, 1994 and 61% as of December 31, 1993.
NOTE F - INVESTMENTS
The Company owns a 50% interest in S-Y. The joint venture operates a facility in Japan from which the Company purchases certain components, internal combustion engines and electric forklift trucks. Following is a summary of unaudited condensed financial information on a separate company basis (before elimination of intercompany profits) pertaining to S-Y.
Condensed Balance Sheets
Condensed Statements of Income
The Company's purchases from S-Y for 1994, 1993 and 1992 were $92.0, $64.9 and $47.8 million, respectively. Trade terms on certain payables to S-Y were extended in 1993 from 60 days to 180 days and to 210 days in 1994. The Company pays interest at market rates on all amounts owing after 60 days. Payables to S-Y with terms greater than 60 days are shown as working capital financing in the consolidated statement of cash flows. The Company's accounts receivable and accounts payable balances with S-Y were as follows:
The Company earned commission income on certain S-Y sales. Commission income was $0.3, $1.4 and $2.2 million in 1994, 1993 and 1992, respectively. The Company also reimbursed S-Y $1.5 and $0.5 million for engineering assistance during 1994 and 1993, respectively.
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes the following:
Depreciation charged to income was $19.9, $18.8 and $19.0 million in 1994, 1993 and 1992, respectively.
NOTE H - ACCRUED EXPENSES
The components of accrued expenses are summarized as follows:
NOTE I - SHORT-TERM AND LONG-TERM OBLIGATIONS
The Company has a Credit Agreement with a group of banks to provide financing for a portion of the acquisition of Hyster and working capital needs of Hyster-Yale. The Credit Agreement is secured by all domestic assets and the pledge of stock of certain subsidiaries. The Credit Agreement provides for a term note in an aggregate principal amount of $375.0 million and a long-term revolving credit facility which permits advances and secured letters of credit to the Company up to an aggregate principal amount of $100.0 million through expiration in 1997.
Borrowings under the revolving credit facility, which were classified as long-term, were $33.0 million at December 31, 1994. The commitment fee on the unused portion of the revolving credit facility is currently at 0.3% per annum. The term note and the revolving credit facility bear interest at an effective lender's prime rate plus .75% or LIBOR plus 1.875% subject to reductions based on favorable performance. The average effective interest rate on the revolving credit facility was 7.50% and 6.0% in 1994 and 1993 respectively. The interest rate at December 31, 1994 was 8.50%.
The term note requires quarterly payments expiring May 31, 1997. The average effective interest rate on the term note inclusive of the effects of interest rate swaps was 6.34% and 6.5% in 1994 and 1993, respectively.
As further discussed in Note N to the consolidated financial statements, the Company has entered into unsecured interest rate swap agreements. The interest rate swap agreements mature at varying lengths from six-months to five years and effectively change the majority of the Company's floating interest rate exposure on the term note to a fixed rate. The Company evaluates its exposure to floating rate debt on an ongoing basis.
The Credit Agreement contains covenants related to minimum net worth, working capital, debt to equity, and interest and fixed charge coverage ratios. In addition, the Credit Agreement limits capital spending, investments, sales of certain assets and dividends. As of December 31, 1994, the Company was in compliance with all the covenants in the Credit Agreement.
The senior subordinated debentures in the amount of $78.5 million bear interest at 12 3/8%. There is a mandatory sinking fund payment on August 1, 1998 of $78.5 million. As of August 1, 1994, the debentures can be redeemed at a price of 105 which will drop to 102.5 at August 1, 1995. Restrictions on redeeming the subordinated debentures are included in the Credit Agreement.
Maturities on long-term obligations for the next five years are as follows:
On February 28, 1995 the Company entered into a new long-term financing agreement to replace the existing Credit Agreement and refinance the majority of its long-term debt. The new agreement provides the Company with an unsecured $350 million revolving credit facility to replace its current senior credit facility. The new credit facility has a five year maturity with an extension option and interest rates comparable to its current senior credit facility. The new agreement also provides the Company with reduced interest rates upon achievement of certain financial performance targets. With the new credit agreement in place, the Company can redeem the remaining $78.5 million of subordinated debentures and intends to do so in 1995. In anticipation of the redemption, the Company intends to record an extraordinary charge of $3.4 million in the first quarter of 1995, to write-off unamortized debt issuance costs and anticipated premiums.
Foreign subsidiaries had unused credit lines at December 31, 1994 of $24.7 million, to the extent that borrowings under these credit lines would not cause the subsidiaries to exceed any of various restrictive covenants. These credit lines are in various currencies and bear interest at rates that range from 7.0% to 7.95% at December 31, 1994.
Short-term obligations consist of the following:
NOTE J - INCOME TAXES
The Company is included in the consolidated federal income tax return of NACCO. The Company and NACCO are parties to an income tax sharing agreement providing for the allocation of federal income tax liabilities. Under this arrangement, the Company will pay to NACCO an amount equal to the income taxes that would be payable by the Company if it were a corporation filing a separate return. Therefore, the currently payable federal portion of the provision for income taxes is payable to NACCO. The Company files separate state income tax returns.
Components of income (loss) before income taxes and extraordinary charge are as follows:
Domestic income (loss) before income taxes includes expenses related to interest on acquisition indebtedness, goodwill and deferred financing fee amortization of approximately $40.4, $47.6 and $51.7 million in 1994, 1993 and 1992, respectively.
Income taxes consist of the following:
The Company has provided for estimated United States and foreign income taxes, less available tax credits and deductions, which would be incurred on the remittance of undistributed earnings in its foreign subsidiaries in excess of earnings deemed to be indefinitely reinvested. It is management's intent to provide income taxes on all future accumulations of undistributed earnings for those foreign subsidiaries where it is anticipated that distribution of earnings is likely to occur.
Accumulated earnings at December 31, 1994 of international subsidiaries which have been indefinitely reinvested totaled $39.0 million. Determination of the amount of unrecognized deferred tax liability on these unremitted earnings is not practicable. The amount of withholding taxes that would be payable upon remittance of all undistributed foreign earnings would be $5.0 million. These withholding taxes, subject to certain limitations, may be used to reduce U.S. income taxes.
A reconciliation of the provisions for income taxes at the federal statutory income tax rate to income taxes as reported is as follows:
A summary of the components of the net deferred tax balance in the Company's consolidated balance sheets resulting from differences in the book and tax basis of assets and liabilities follows:
NOTE K - POSTRETIREMENT BENEFITS
The Company maintains a variety of postretirement plans covering a majority of its employees. A portion of the employees are participants in the defined benefit plans discussed below. Most of the remaining covered employees participate in the profit sharing portion of the Company's defined contribution plan also described below. In addition, all eligible employees are included in the 401(k) portion of the defined contribution plan. Total postretirement expense for the Company was $8.5, $7.0 and $6.8 million for the years 1994, 1993 and 1992, respectively. Included in these amounts is the expense associated with government sponsored plans in which the Company's international subsidiaries participate. Cash contributions under the above plans were $7.2 million in 1994 and $7.1 million in 1993.
Each defined benefit plan has a formula which is used to determine benefits upon retirement. Most formulas take into account age, compensation, and success of the Company in meeting certain goals although certain hourly employee's formulas are based primarily on years of service. The Company's current funding policy is to contribute annually the minimum contribution calculated by the independent actuaries. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
The components of periodic pension cost and actuarial assumptions for the Company's principal defined benefit plans for the years ended December 31, 1994, 1993 and 1992 are as follows:
The following schedule reconciles the funded status of the Company's principal defined benefit plans with amounts reported in the consolidated balance sheets at December 31, 1994 and 1993:
The Company maintains a defined contribution retirement plan for U.S. employees which includes a profit sharing portion and a 401(k) portion. Contributions to the profit sharing plan are based on a formula which takes into account age, compensation, and success of the Company in meeting certain goals. Contributions vest over a five-year period. Under the 401(k) portion, eligible employees may contribute up to 17% of their compensation and the Company matches an amount equal to 66-2/3% of the participants' initial 3% before tax contribution. Participants are at all times fully vested in their contributions and those made by the Company.
NOTE L - OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company maintains health care and life insurance plans which provide benefits to eligible retired employees. The Company funds these benefits on a "pay as you go" basis, with the retirees paying a portion of the costs.
Summary information on the Company's plans is as follows:
The components of net periodic other postretirement benefit cost are as follows:
The assumed health care cost trend rate for measuring the postretirement benefit obligation was 10% in 1994 and 11% in 1993, gradually reducing to 5.25% in years 2003 and after. The weighted average discount rate utilized was 8.5% in 1994 and 7.5% in the 1993 valuation. If the assumed health care trend rate were increased by 1%, the effect on the APBO and expense would be immaterial.
Effective January 1, 1994 the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" which requires, among other things, that the expected cost of postemployment benefits be recognized when they are earned or become payable (accrual method) when certain conditions are met rather than the old method which recognized these costs when they were paid (pay as you go). The adoption of this new standard did not materially impact the Company's financial condition or results of operations.
NOTE M - LONG-TERM INCENTIVE COMPENSATION PLAN
The Company has a Long-Term Incentive Compensation Plan for officers and key management employees of the Company and its subsidiaries. Awards under this plan represent book value appreciation units and entitle the recipient, subject to vesting and other restrictions, to receive cash equal to the difference between the base period price for the units and the book value price as of the quarter date coincident or immediately preceding the date of disbursement. Awards vest and are payable ten years from date of grant or earlier under certain conditions. As of December 31, 1994, 1,800,000 units have been awarded to key employees and officers. The amount charged (credited) to expense was $1.7, $(0.2) and ($1.0) million in 1994, 1993 and 1992, respectively. The total amount accrued at December 31, 1994 and 1993 for these awards was $2.0 and $0.3 million, respectively, and was recorded as a long-term liability.
NOTE N - FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS - A financial instrument is cash or a contract that imposes, or conveys, a contractual obligation, or right, to deliver, or receive, cash or another financial instrument. The fair value of financial instruments, except for the Company's 12 3/8% subordinated debentures, approximated their carrying values at December 31, 1994. The fair value of the subordinated debentures was $82.5 million at December 31, 1994 compared with their carrying value of $78.5 million.
INTEREST RATE DERIVATIVES - The Company has entered into interest rate swap agreements. The use of these agreements allows the Company to enter into long-term credit arrangements that have performance based, floating rates of interest and then swap them into fixed rates as opposed to entering into higher cost fixed-rate credit arrangements. These agreements are with major commercial banks; therefore, the risk of credit loss from nonperformance by the banks is minimal. As of December 31, 1994 the Company had $185 million notional principal amount of interest rate swaps with an average effective fixed rate of 5.3%, although $60 million of the swaps are delayed to start in 1995.
FOREIGN CURRENCY DERIVATIVES - The Company enters into forward foreign exchange contracts for purposes of hedging exposure to foreign currency exchange rate fluctuations. These contracts are with major financial institutions, therefore, the risk of credit loss from nonperformance by these institutions is minimal. These contracts hedge primarily firm commitments and, to a lesser degree, anticipated commitments relating to cash flows associated with sales and purchases denominated in foreign currencies. The Company enters into foreign exchange contracts in a variety of foreign currencies with maturities not exceeding one year. At December 31, 1994 the Company had $190.9 million contract value of forward foreign exchange contracts and had deferred losses of $0.5 million in accordance with the Company's accounting policy.
NOTE O - COMMITMENTS
Future minimum lease payments on office space, automobiles and office equipment as of December 31, 1994 are as follows:
Aggregate rental expense for operating leases included in the consolidated statements of income was $4.0, $4.2 and $3.4 million in 1994, 1993 and 1992, respectively.
NOTE P - CONTINGENCIES
The Company is subject to recourse or repurchase obligations under various financing arrangements for certain independently-owned retail dealerships. Also, certain dealer loans are guaranteed by the Company. Total amounts subject to recourse, guarantee or repurchase obligation at December 31, 1994 were $91.0 million.
When the Company is the guarantor of the principal amount financed, a security interest is usually maintained in assets of parties for whom the Company is guaranteeing debt. Losses anticipated under the terms of the recourse or repurchase obligations have been provided for and are not significant.
The Company is the defendant in various product liability and other legal proceedings incidental to its business. The majority of this litigation involves product liability claims. The Company has recorded a reserve for potential product liability losses at December 31, 1994 of $43.2 million, of which $8.0 million is estimated to be payable in 1995. While the resolution of litigation cannot be predicted with certainty, management believes that the reserves are adequate and no material adverse effect upon the financial position or results of operations of the Company will result from such legal actions.
NOTE Q - SEGMENT INFORMATION
The Company's business consists of the engineering, manufacturing and marketing of materials handling machinery and equipment, under the Hyster and Yale trade names. The Company's products are manufactured in plants at five locations in the United States and six international plants located in Scotland, Northern Ireland, The Netherlands, Brazil, Australia and Japan. Service parts are distributed through parts depots located in the United States, Europe, Australia and Brazil. Generally, product assembled abroad is comprised of parts and components manufactured or purchased locally and from U.S. plants at established transfer prices. The transfer price of production parts and completed units is established by a procedure designed to equate to an arm's-length price. However, for purposes of the following financial statement disclosure, transfers between geographic areas are presented at standard cost.
In addition to product sourced from plants abroad, export sales from the United States plants to unaffiliated customers were $75.0, $53.8, and $44.9 million in 1994, 1993 and 1992, respectively. Total sales into markets outside the United States were $428.3, $311.5 and $326.1 million in 1994, 1993 and 1992, respectively.
NOTE R - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
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