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TMCNet:  HYSTER-YALE MATERIALS HANDLING, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Per Share and Percentage Data)

[July 30, 2014]

HYSTER-YALE MATERIALS HANDLING, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Per Share and Percentage Data)

(Edgar Glimpses Via Acquire Media NewsEdge) Hyster-Yale Materials Handling, Inc. and its subsidiaries ("Hyster-Yale" or the "Company"), including its operating company, NACCO Materials Handling Group, Inc. ("NMHG"), is a leading designer, engineer, manufacturer, seller and servicer of a comprehensive line of lift trucks and aftermarket parts marketed globally primarily under the Hyster® and Yale® brand names, mainly to independent Hyster® and Yale® retail dealerships. Lift trucks and component parts are manufactured in the United States, Northern Ireland, Mexico, The Netherlands, Italy, the Philippines, Vietnam, Japan, Brazil and China.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES Please refer to the discussion of Critical Accounting Policies and Estimates as disclosed on pages 13 through 15 in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Critical Accounting Policies and Estimates have not materially changed since December 31, 2013.

FINANCIAL REVIEW The results of operations for the Company were as follows for the three and six months ended June 30: Favorable / Favorable / THREE MONTHS (Unfavorable) SIX MONTHS (Unfavorable) 2014 2013 % Change 2014 2013 % Change Unit Shipments (in thousands) Americas 13.7 13.6 0.7 % 27.1 26.8 1.1 % Europe 6.1 5.7 7.0 % 11.7 11.9 (1.7 )% Asia-Pacific 1.9 1.5 26.7 % 3.6 2.9 24.1 % 21.7 20.8 4.3 % 42.4 41.6 1.9 % Revenues Americas $ 440.8 $ 433.2 1.8 % $ 897.7 $ 851.7 5.4 % Europe 184.2 171.3 7.5 % 353.2 345.9 2.1 % Asia-Pacific 59.7 55.1 8.3 % 109.8 106.9 2.7 % $ 684.7 $ 659.6 3.8 % $ 1,360.7 $ 1,304.5 4.3 % Gross profit Americas $ 67.5 $ 78.4 (13.9 )% $ 143.5 $ 152.6 (6.0 )% Europe 34.9 29.2 19.5 % 64.9 56.3 15.3 % Asia-Pacific 4.9 6.7 (26.9 )% 10.6 14.6 (27.4 )% $ 107.3 $ 114.3 (6.1 )% $ 219.0 $ 223.5 (2.0 )% Selling, general and administrative expenses Americas $ 47.3 $ 50.5 (6.3 )% $ 97.6 $ 100.0 (2.4 )% Europe 24.1 21.9 10.0 % 47.8 43.3 10.4 % Asia-Pacific 5.9 6.0 (1.7 )% 12.0 12.2 (1.6 )% $ 77.3 $ 78.4 (1.4 )% $ 157.4 $ 155.5 1.2 % Operating profit (loss) Americas $ 37.9 $ 27.9 35.8 % $ 63.6 $ 52.6 20.9 % Europe 10.8 7.3 47.9 % 17.1 13.0 31.5 % Asia-Pacific (1.0 ) 0.7 (242.9 )% (1.4 ) 2.4 (158.3 )% $ 47.7 $ 35.9 32.9 % $ 79.3 $ 68.0 16.6 % Interest expense $ 0.8 $ 2.3 65.2 % $ 1.7 $ 4.8 64.6 % Other income $ (1.8 ) $ (0.9 ) 100.0 % $ (2.7 ) $ (2.0 ) 35.0 % Net income attributable to stockholders $ 32.9 $ 36.2 (9.1 )% $ 55.0 $ 60.8 (9.5 )% Diluted earnings per share $ 1.95 $ 2.16 (9.7 )% $ 3.26 $ 3.62 (9.9 )% Effective income tax rate 32.2 % (4.9 )% 31.4 % 6.7 % 18-------------------------------------------------------------------------------- Table of Contents Second Quarter of 2014 Compared with Second Quarter of 2013 The following table identifies the components of change in revenues for the second quarter of 2014 compared with the second quarter of 2013: Revenues 2013 $ 659.6 Increase (decrease) in 2014 from: Unit volume and product mix 16.1 Foreign currency 4.5 Unit price 2.8 Parts 2.7 Other (1.0 ) 2014 $ 684.7 Revenues increased 3.8% to $684.7 million in the second quarter of 2014 from $659.6 million in the second quarter of 2013. The improvement was primarily due to an increase in unit volumes, mainly in North America and Europe, partially offset by a decrease in Latin America and Brazil. In addition, favorable currency movements, the favorable effect of unit price increases implemented in 2013 primarily in the Americas to offset the impact of weakness in the Brazilian real, and an increase in parts volume in all geographic regions also contributed to the increase in revenues. Favorable currency movements in the second quarter of 2014 compared with the second quarter of 2013 resulted from the strengthening of the euro against the U.S. dollar, partially offset by the effect of the weakening Brazilian real and Australian dollar. Worldwide new unit shipments increased in the second quarter of 2014 to 21,719 units from shipments of 20,858 units in the second quarter of 2013.

The following table identifies the components of change in operating profit for the second quarter of 2014 compared with the second quarter of 2013: Operating Profit 2013 $ 35.9 Increase (decrease) in 2014 from: Gross profit (7.0 ) Selling, general and administrative expenses 1.1 30.0 Gain on sale of assets 17.7 2014 $ 47.7 The Company recognized operating profit of $47.7 million in the second quarter of 2014 compared with $35.9 million in the second quarter of 2013. The second quarter 2014 operating profit includes a gain of $17.7 million related to the sale of the Brazil real estate and operating facility. Excluding the gain on the sale of assets, the decrease in operating profit was primarily the result of lower gross profit primarily attributable to a shift in sales mix to units with lower average profit margins in all geographic regions, higher U.S. health care costs and higher warranty expense as favorable adjustments in the second quarter of 2013 did not recur in the second quarter of 2014. In addition, unfavorable foreign currency movements of $2.1 million from the weakening of the Brazilian real and Australian dollar, partially offset by the strengthening of the euro against the U.S. dollar also affected gross profit. The decrease in gross profit was partially offset by an increase in unit and parts volumes, unit price increases mainly in the Americas and lower material costs in the Americas and Europe. Gross margin decreased to 15.7% in the second quarter of 2014 from 17.3% in the second quarter of 2013. These items were partially offset by a decrease in selling, general and administrative expenses primarily from lower incentive compensation estimates, partially offset by an increase in other employee-related expenses as a result of higher U.S. health care costs, normal inflationary increases and increased headcount in marketing and engineering to support the Company's five strategic initiatives.

The Company recognized net income attributable to stockholders of $32.9 million in the second quarter of 2014 compared with $36.2 million in the second quarter of 2013. The decrease was primarily the result of the absence of the release of $12.8 million in the second quarter of 2013 of certain portions of previously recorded income tax valuation allowances related to the Company's United Kingdom operations. See Note 10 to the unaudited condensed consolidated financial statements for additional information. The decrease was partially offset by improved operating profit including the gain on the sale of the 19-------------------------------------------------------------------------------- Table of Contents Brazil facility and reduced interest expense as a result of lower debt levels and lower interest rates in the second quarter of 2014 compared with the second quarter of 2013.

Backlog As of June 30, 2014, the Company's backlog of unfilled orders placed with its manufacturing and assembly operations for new lift trucks was approximately 28,800 units, or approximately $745 million, of which substantially all is expected to be sold during fiscal 2014. This compares with backlog as of June 30, 2013 of approximately 29,300 units, or approximately $700 million, and backlog as of March 31, 2014 of approximately 28,900 units, or approximately $715 million. The dollar value of backlog is calculated using the current unit backlog and the forecasted average sales price per unit.

First Six Months of 2014 Compared with First Six Months of 2013 The following table identifies the components of change in revenues for the first six months of 2014 compared with the first six months of 2013: Revenues 2013 $ 1,304.5 Increase (decrease) in 2014 from: Unit volume and product mix 32.0 Unit price 9.9 Parts 7.8 Other 6.9 Foreign currency (0.4 ) 2014 $ 1,360.7 Revenues increased 4.3% to $1,360.7 million in the first six months of 2014 from $1,304.5 million in the first six months of 2013. The improvement was primarily due to an increase in unit volumes in Asia-Pacific and the Americas and an increase in sales of higher-priced lift trucks in the Americas. In addition, revenues increased due to the favorable effect of unit price increases implemented in 2013, primarily in the Americas to offset the impact of weakness in the Brazilian real, and an increase in parts volumes and fleet services revenue in the Americas. Unfavorable currency movements in the first six months of 2014 compared with the first six months of 2013 resulted from the weakening of the Brazilian real and Australian dollar, which more than offset the strengthening of the euro against the U.S. dollar. Worldwide new unit shipments increased in the first six months of 2014 to 42,360 units from shipments of 41,614 units in the first six months of 2013.

The following table identifies the components of change in operating profit for the first six months of 2014 compared with the first six months of 2013: Operating Profit 2013 $ 68.0 Increase (decrease) in 2014 from: Gross profit (4.5 ) Selling, general and administrative expenses (1.9 ) 61.6 Gain on the sale of assets 17.7 2014 $ 79.3 The Company recognized operating profit of $79.3 million in the first six months of 2014 compared with $68.0 million in the first six months of 2013. Operating profit for the first six months of 2014 includes a gain of $17.7 million related to the sale of the Brazil real estate and operating facility. Excluding the gain on the sale of assets, the decrease in operating profit was primarily the result of lower gross profit mainly attributable to a shift in sales mix to units with lower average profit margins primarily in the Americas, higher warranty expense as favorable adjustments in the first six months of 2013 did not recur in 2014 and higher U.S. health care costs. In addition, unfavorable foreign currency movements of $6.5 million from the weakening of the Brazilian real and Australian dollar, partially offset by the strengthening of the euro against the U.S. dollar also affected gross profit. The decrease in gross profit was partially offset by unit price increases mainly in the Americas, an increase in parts volumes and lower material costs in the Americas and Europe. Operating profit also decreased due to higher selling, general and administrative expenses primarily due to an increase in other employee-related expenses as a result of 20-------------------------------------------------------------------------------- Table of Contents higher U.S. health care costs, normal inflationary increases and increased headcount in marketing and engineering to support the Company's five strategic initiatives, partially offset by lower incentive compensation estimates.

The Company recognized net income attributable to stockholders of $55.0 million in the first six months of 2014 compared with $60.8 million in the first six months of 2013. The decrease was primarily the result of the absence of the release of $12.8 million in the second quarter of 2013 of certain portions of previously recorded income tax valuation allowances related to the Company's United Kingdom operations. See Note 10 to the unaudited condensed consolidated financial statements for additional information. Higher operating profit, including the gain on the sale of the Brazil facility, and lower interest expense due to lower debt outstanding and lower interest rates during the first six months of 2014 compared with the first six months of 2013 partially offset the reduction in net income.

Income taxes The income tax provision includes U.S. federal, state and local, and foreign income taxes and is based on the application of a forecasted annual income tax rate applied to the current quarter's year-to-date pre-tax income or loss. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company's annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the Company's ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates and certain circumstances with respect to valuation allowances or the tax effect of other unusual or non-recurring transactions or adjustments are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated effective annual income tax rate.

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. During the second quarter of 2013, the Company determined that its United Kingdom deferred tax assets met the more likely than not threshold required for realization based upon the anticipated timing of deferred temporary differences, the continuing trend of earnings, the projection of future taxable income, and the improving assessment of the economic environment affecting the Company's European business operations. Accordingly, the Company released $12.8 million of its United Kingdom valuation allowance during the second quarter of 2013.

21-------------------------------------------------------------------------------- Table of Contents A reconciliation of the consolidated federal statutory and effective income tax is as follows for the three and six months ended June 30: THREE MONTHS SIX MONTHS 2014 2013 2014 2013 Income before income taxes $ 48.7 $ 34.5 $ 80.3 $ 65.2 Gain on sale of assets 17.7 - 17.7 - $ 31.0 $ 34.5 $ 62.6 $ 65.2 Statutory taxes at 35% $ 10.9 $ 12.1 $ 21.9 $ 22.8 Permanent adjustments: Foreign rate differences (2.2 ) (2.6 ) (4.4 ) (5.5 ) Valuation allowance - 0.5 - - Federal tax credits - (0.2 ) - (0.4 ) State income taxes 0.6 0.8 1.2 1.5 Other (0.4 ) (0.1 ) (0.4 ) (0.4 ) $ (2.0 ) $ (1.6 ) $ (3.6 ) $ (4.8 ) Discrete items: Valuation allowance - (12.8 ) - (12.8 ) Change in tax law 0.1 - 0.1 (1.4 ) Other 0.5 0.6 0.6 0.6 $ 0.6 $ (12.2 ) $ 0.7 $ (13.6 ) Income tax expense on gain on sale of assets 6.2 - 6.2 - Income tax provision $ 15.7 $ (1.7 ) $ 25.2 $ 4.4 Effective income tax rate 32.2 % (4.9 )% 31.4 % 6.7 % During the second quarter of 2014, the company recognized a gain on the sale of real estate and an operating facility in Brazil of $17.7 million, and related income tax expense of $6.2 million. During the second quarter of 2014, the income tax expense related to the gain was considered an unusual and non-recurring transaction and excluded from the computation of the estimated effective annual tax rate. The Company's effective income tax rate differs from the U.S. federal statutory tax rate of 35% primarily as a result of income taxed in non-U.S. jurisdictions as well as state income taxes.

The effect of discrete items was as follows: During 2013, the Company determined that its United Kingdom deferred tax assets met the more likely than not threshold for recognition which resulted in the release of valuation allowance against those deferred tax assets. In addition, the Company also recognized discrete tax items from the changes in certain U.S.

and foreign tax laws recognized in the first six months of 2013.

22-------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Cash Flows The following tables detail the changes in cash flow for the six months ended June 30: 2014 2013 Change Operating activities: Net income $ 55.1 $ 60.8 $ (5.7 ) Depreciation and amortization 14.9 14.9 - Gain on sale of assets (17.7 ) - (17.7 ) Dividends from unconsolidated affiliates - 6.8 (6.8 ) Other 3.4 (1.8 ) 5.2 Working capital changes (69.3 ) (40.6 ) (28.7 ) Net cash provided by (used for) operating activities (13.6 ) 40.1 (53.7 ) Investing activities: Expenditures for property, plant and equipment (16.9 ) (17.0 ) 0.1 Other 7.5 10.5 (3.0 ) Net cash used for investing activities (9.4 ) (6.5 ) (2.9 ) Cash flow before financing activities $ (23.0 ) $ 33.6 $ (56.6 ) Net cash provided by (used for) operating activities decreased $53.7 million in the first six months of 2014 compared with the first six months of 2013. The decrease was primarily a result of the change in working capital, the adjustment to net income for the gain on the sale of the real estate and operating facility in Brazil, the absence of dividends received from an unconsolidated affiliate in 2013 and the decrease in net income. The change in working capital was mainly attributable to an increase in inventory during the first six months of 2014 compared with a decrease in the first six months of 2013 primarily due to lower than anticipated unit volume in Europe and Brazil.

Other investing activities included the receipt of a $9.9 million deposit related to the sale of the Brazil real estate and operating facility during the second quarter of 2013 and the proceeds received of $8.2 million in the second quarter of 2014 when the sale was finalized.

2014 2013 Change Financing activities: Net reductions of long-term debt and revolving credit agreements $ (35.7 ) $ (9.6 ) $ (26.1 ) Cash dividends paid (8.8 ) (8.4 ) (0.4 ) Purchase of treasury stock (9.1 ) (3.0 ) (6.1 ) Net cash used for financing activities $ (53.6 ) $ (21.0 ) $ (32.6 ) The increase in net cash used for financing activities during the first six months of 2014 compared with the first six months of 2013 was primarily the result of higher repayments of borrowings under the Company's revolving credit facilities in the first six months of 2014 compared with the first six months of 2013 and higher repurchases of Company's stock during the first six months of 2014.

Financing Activities The Company has a $220.0 million secured, floating-rate revolving credit facility (the "Facility") that expires in December 2018. There were no borrowings outstanding under the Facility at June 30, 2014. The excess availability under the Facility at June 30, 2014 was $213.4 million, which reflects reductions of $6.6 million for letters of credit. The Facility consists of a U.S. revolving credit facility of $120.0 million and a non-U.S. revolving credit facility of $100.0 million. The Facility can be increased up to $320.0 million over the term of the agreement in minimum increments of $25.0 million subject to certain conditions. The obligations under the Facility are generally secured by a lien on the working capital assets of the borrowers in the Facility, which include but are not limited to, cash and cash equivalents, accounts receivable and inventory. The approximate book value of assets held as collateral under the Facility was $540 million as of June 30, 2014.

23-------------------------------------------------------------------------------- Table of Contents Borrowings bear interest at a floating rate that can be a base rate or LIBOR, as defined in the Facility, plus an applicable margin. The applicable margins, effective June 30, 2014, for U.S. domestic base rate loans and LIBOR loans were 0.50% and 1.50%, respectively. The applicable margin, effective June 30, 2014, for foreign base rate loans and LIBOR loans was 1.50%. The interest rate under the Facility on June 30, 2014 was 1.75% and 2.00%, respectively, for the U.S.

and non-U.S. facility including the applicable floating rate margin. The Facility also requires the payment of a fee of 0.375% per annum on the unused commitment as of June 30, 2014.

The Facility includes restrictive covenants, which, among other things, limit additional borrowings and investments of the borrowers subject to certain thresholds, as defined in the Facility and limits the payment of dividends. If the minimum availability threshold, as defined in the Facility, is greater than fifteen percent for both total and U.S. revolving credit facilities, the Company may pay dividends subject to maintaining a certain level of availability prior to and upon payment of a dividend and achieving a minimum fixed charge coverage ratio of 1.00 to 1.00, as defined in the Facility. If the minimum availability threshold, as defined in the Facility, is greater than twenty percent for both total and U.S. revolving credit facilities, the Company may pay dividends without any minimum fixed charge coverage ratio requirement. The Facility also requires the Company to achieve a minimum fixed charge coverage ratio in certain circumstances in which total excess availability is less than ten percent of the total commitments under the Facility or excess availability under the U.S.

revolving credit facility is less than 10 percent of the domestic revolver commitments, as defined in the Facility. At June 30, 2014, the Company was in compliance with the covenants in the Facility.

The Company had borrowings of approximately $26.2 million of other debt at June 30, 2014. In addition to the excess availability under the Facility, at June 30, 2014, the Company had remaining availability of $30.0 million related to other foreign 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 December 2018.

Contractual Obligations, Contingent Liabilities and Commitments Since December 31, 2013, there have been no significant changes in the total amount of the Company's contractual obligations or commercial commitments, or the timing of cash flows in accordance with those obligations, as reported on pages 23 and 24 in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

Capital Expenditures Expenditures for property, plant and equipment were $16.9 million during the first six months of 2014. Capital expenditures are estimated to be an additional $43.2 million for the remainder of 2014. Planned expenditures for the remainder of 2014 are primarily for a new facility in Brazil, improvements at manufacturing locations, product development and improvements to information technology infrastructure. The principal sources of financing for these capital expenditures are expected to be internally generated funds, bank borrowings and the proceeds from the sale of the current Brazil facility.

Capital Structure The Company's capital structure is presented below: JUNE 30 DECEMBER 31 2014 2013 Change Cash and cash equivalents $ 98.6 $ 175.7 $ (77.1 ) Other net tangible assets 441.6 344.7 96.9 Net assets 540.2 520.4 19.8 Total debt (41.7 ) (69.5 ) 27.8 Total equity $ 498.5 $ 450.9 $ 47.6 Debt to total capitalization 8 % 13 % (5 )% 24-------------------------------------------------------------------------------- Table of Contents OUTLOOK The global market for forklift trucks is expected to grow moderately during the remainder of 2014 compared with 2013. Generally, this growth is expected to be concentrated in developed western markets and China, and is expected to be partially offset by weakening in certain developing markets. As a result of this anticipated global market growth, combined with expected increases in market share, the Company anticipates an overall increase in unit shipments and parts volumes and, as a result, increased sales over the remainder of 2014 compared with 2013. The majority of this increase is expected to come from North America and Western Europe, with smaller increases in the Asia-Pacific unit shipments.

The Company expects that, in particular, weakening markets in Latin America, including Brazil, as well as Eastern Europe will only partially offset growth in the Company's significant western developed markets.

The Company expects material costs in the remainder of 2014 to be comparable with the second half of 2013. Although commodity costs have remained relatively stable over the first half of 2014, these markets, particularly steel, remain volatile and sensitive to changes in the global economy. The Company will continue to monitor commodity costs, economic conditions, currency movements and the resulting effects on costs and pricing, and will take appropriate pricing actions, if necessary.

The Company expects to generate a significant increase in operating profit during the second half of 2014, in excess of the rate of the sales increase, with the majority of the increase occurring during the fourth quarter of 2014.

The favorable effect of anticipated increased unit volumes resulting from the Company's strategic initiatives, increased parts volume and product enhancements are all expected to contribute to this improvement. In addition, because it is not anticipated that the market price of the Company's stock will increase at the rate experienced in 2013, lower estimated equity incentive compensation is expected to contribute to the improved operating profit in the second half of 2014. These favorable items are expected to be partially offset by the full year impact of marketing and employee costs associated with the investments in strategic initiatives that were made over the course of 2013 and the first half of 2014, unfavorable foreign currency movements in the Americas and Asia-Pacific and anticipated higher employee benefit costs, primarily health care expenses.

Net income in the second half of 2014 is expected to improve compared with the second half of 2013. The effect of improved operating profit as well as lower interest expense due to lower debt outstanding and lower interest rates under the Company's new revolving credit agreement are expected to be partially offset by a higher effective income tax rate. The higher effective income tax rate in 2014 is expected to result primarily from the effect of higher United Kingdom income taxes due to the 2013 valuation allowance release, combined with an anticipated increase in the portion of the Company's income in the Americas operations, including the tax expense on the Brazil plant gain, which have a higher tax rate.

Operating profit results for the second half of 2014 are expected to improve significantly in the Americas segment, which includes the North America, Latin America and Brazil markets, with anticipated increases in unit and parts margins partially offset by continued unfavorable foreign currency movements from an expected strong euro and slight increases in material costs. Operating profit in the Europe segment, which includes the Middle East and Africa markets, is expected to increase moderately in the second half of 2014 compared with the second half of 2013 due to anticipated benefits of the current strength of the euro, the favorable effect of improved pricing and slightly lower material costs. These improvements are expected to be partially offset by the full year effect of marketing and employee costs, which gradually increased throughout 2013. Asia-Pacific results for the second half of 2014 are expected to be slightly higher than the second half of 2013 resulting from the favorable effect of improved pricing and an expected increase in unit volume partially offset by the weakness of the Australian dollar and weaker industry demand in Australia.

Cash flow before financing activities for 2014 is expected to decrease from 2013 primarily due to an increase in capital expenditures, largely driven by the construction of a new plant in Brazil. These capital expenditures will be partially offset by the final cash payment received during the second quarter of 2014 when the sale of the current facility was finalized.

The Company remains focused on gaining market share over time, as well as on improving margins in its internal combustion engine business, through the execution of its five strategic initiatives: (1) understanding customer needs at the product and aftermarket levels in order to create and provide a full range of differentiated product and service solutions for specific industry applications, (2) offering the lowest cost of ownership by utilizing the Company's understanding of customers' major cost drivers and developing solutions that consistently lower cost of ownership and create a differentiated competitive position, (3) enhancing independent distribution by implementing programs aimed at broadening account coverage of the market, expanding the number of dual-brand dealers, and ensuring dealer excellence in all areas of the world, (4) improving the Company's warehouse market position through enhancing dealer and customer support, adding products, increasing incentives, and implementing programs to increase focus on key customers, and (5) expanding in Asian markets by offering products aimed at the needs of these markets, enhancing distribution excellence and focusing on strategic alliances with local partners in China, India and Japan.

25-------------------------------------------------------------------------------- Table of Contents To meet the specific application needs of its customers, the Company is focusing on developing utility, standard and premium products. To this end, development programs are underway for its electric-rider, warehouse, internal combustion engine (ICE) and big truck product lines. Within its premium product warehouse line, the Company began production of a 4,500 pound heavy duty pedestrian pallet truck at its Greenville, North Carolina plant in the first quarter of 2014. Over time this platform is expected to be produced in other regions, which will maximize design and component commonality. The Company also expects to introduce a new warehouse rider truck in the North America market in the third quarter of 2014 which has an enclosed operator compartment and a 10,000 pound capacity to enable multiple pallet handling in trailer loading/unloading and cross-dock applications.

During the second quarter of 2014, as part of the 2014 model year improvements for the premium counterbalanced internal combustion engine (ICE) product line, the Company introduced a new premium 2.5 liter spark-ignited engine for its 2 to 3.5 ton cushion and pneumatic ICE trucks and upgraded the hydraulic system and dual hydraulic tanks to improve overall efficiency and lower ownership costs on the 4 to 5.5 ton ICE cushion trucks. As stated previously, the Company's model year programs will keep its platforms soundly positioned in the market over time. Further, new platforms are expected to be developed and launched over the next few years based on longer-term segment needs and technological change opportunities.

Finally, during the third quarter of 2014, the Company plans to introduce the first group of its premium Big Truck models with Tier IV final emission solutions, as well as expanded use of premium transmissions on trucks up to 32 ton capacity and implementing load-sensing hydraulic systems on its 18 to 22 ton trucks.

The Company offers one model of the standard ICE lift truck for medium-duty applications in both pneumatic and cushion tires for both Hyster® and Yale®. The Company expects to launch additional trucks in the standard ICE model series in future years. The Company expanded the UTILEV®-branded series of utility lift trucks by introducing a 1 to 3 ton ICE cushion tire truck in North America and a 3-wheel electric rider truck globally in 2013. The UTILEV®-branded series of lift trucks is expected to continue to gain market position in 2014.

All of these new products and upgraded products, including the new Reach Truck and new Big Truck models introduced in late 2013, are expected to help increase market share, to improve revenues and to enhance operating margins. In addition, stricter diesel emission regulations for new trucks began to go into effect in 2011 and will be fully in effect by 2015 in certain global markets. The Company has launched and expects to continue to launch lift truck series over this period that will meet these new emission requirements.

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. See also Item 3, "Quantitative and Qualitative Disclosures About Market Risk," in Part I of this Quarterly Report on Form 10-Q.

FORWARD-LOOKING STATEMENTS The statements contained in this Form 10-Q that are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are made subject to certain risks and uncertainties, which could cause actual results to differ materially from those presented.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Among the factors that could cause plans, actions and results to differ materially from current expectations are, without limitation: (1) reduction in demand for lift trucks and related aftermarket parts and service on a global basis, (2) the ability of dealers, suppliers and end-users to obtain financing at reasonable rates, or at all, as a result of current economic and market conditions, (3) the political and economic uncertainties in Eastern Europe, (4) customer acceptance of pricing, (5) delays in delivery or increases in costs, including transportation costs, of raw materials or sourced products and labor or changes in or unavailability of quality suppliers, (6) exchange rate fluctuations, changes in foreign import tariffs and monetary policies and other changes in the regulatory climate in the foreign countries in which the Company operates and/or sells products, (7) delays in manufacturing and delivery schedules, (8) bankruptcy of or loss of major dealers, retail customers or suppliers, (9) customer acceptance of, changes in the costs of, or delays in the development of new products, (10) introduction of new products by, or more favorable product pricing offered by, competitors, (11) product liability or other litigation, warranty claims or returns of products, (12) the effectiveness of the cost reduction programs implemented globally, including the successful implementation of procurement and sourcing initiatives, (13) changes mandated by federal, state and 26-------------------------------------------------------------------------------- Table of Contents other regulation, including health, safety or environmental legislation and (14) delays in or increased costs associated with the Brazil plant construction.

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