SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended Commission File Number:1-5646 September 30, 1994 CLARK EQUIPMENT COMPANY (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of 38-0425350 incorporation or organization) (IRS Employer Identification No.) 100 North Michigan Street 46634 P.O. Box 7008 (Zip Code) South Bend, Indiana (Address of Principal Executive Offices) Registrant's telephone number, including area code: (219) 239-0100 Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 17,399,940 shares of $7.50 Par Value Common Stock were outstanding at the close of business on November 8, 1994. -1- Total Number of Pages: 23 Exhibit Index at Page: 21 PART I FINANCIAL INFORMATION The following items are attached to this report: For Clark Equipment Company and Consolidated Subsidiaries: Statement of Income and Retained Earnings Balance Sheet Statement of Cash Flows Management's Discussion and Analysis of Financial Condition and Results of Operations For 50 Percent Owned Company Selected Financial Data - VME Group, N.V. PART II OTHER INFORMATION Item 5. Other Information Attached hereto as Exhibit (99) is a Computation of Registrant's Ratio of Earnings to Fixed Charges for the nine months ended September 30, 1994. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (See attached Exhibit List and Index) (b) Reports on Form 8-K: 1. The Registrant filed a Form 8-KA dated July 27, 1994 reporting on Item 7, FINANCIAL STATEMENTS AND EXHIBITS. This Form 8-KA contained the following financial statements and pro forma financial information: (a) combined audited financial statements of Blaw-Knox Construction Equipment Corporation ("Blaw-Knox") for the year ended December 31, 1993 and unaudited combined financial statements for the first quarters ended March 31, 1994 and 1993, (b) pro forma balance sheet which combines the balance sheet of Blaw-Knox with the consolidated balance sheet of Registrant at March 31, 1994 and (c) pro forma income statements combining the results of Registrant and Blaw-Knox for the year ended December 31, 1993 and the quarter ended March 31, 1994. 2. The Registrant filed a Form 8-K dated July 27, 1994 reporting on Item 5, OTHER EVENTS, and Item 7, FINANCIAL STATEMENTS AND EXHIBITS. -2- 3. The Registrant filed a Form 8-K dated July 27, 1994 reporting on Item 5, OTHER EVENTS, and Item 7, FINANCIAL STATEMENTS AND EXHIBITS. This Form 8-K included Registrant's income statement and balance sheet for the period ended June 30, 1994. 4. The Registrant filed a Form 8-K dated September 8, 1994 reporting on Item 5, OTHER EVENTS, and Item 7, FINANCIAL STATEMENTS AND EXHIBITS. 5. The Registrant filed a Form 8-K dated September 13, 1994 reporting on Item 5, OTHER EVENTS, and Item 7, FINANCIAL STATEMENTS AND EXHIBITS. This Form 8-K included the Registrant's financial statements for the year ended December 31, 1993, restated to reflect the deconsolidation of Clark Automotive Products Corporation ("CAPCO"), together with the report of Price Waterhouse LLP on those financial statements. 6. The Registrant filed a Form 8-K dated September 23, 1994 reporting on Item 5, OTHER EVENTS, and Item 7, FINANCIAL STATEMENTS AND EXHIBITS. -3- *********** SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 11, 1994 By: /s/ B. D. Henely B. D. Henely Vice President, General Counsel and Secretary (Duly Authorized Officer) Date: November 11, 1994 By: /s/ W. N. Harper W. N. Harper Vice President and Controller (Principal Accounting Officer) -4- CLARK EQUIPMENT COMPANY AND CONSOLIDATED SUBSIDIARIES STATEMENT OF INCOME AND RETAINED EARNINGS (UNAUDITED) For the Period Ended September (Amounts in Thousands, except per share data) Third Quarter Nine Months 1994 1993* 1994 1993* Net sales.....................................$ 249,210 $ 167,126 $ 696,898 $ 517,486 Operating costs and expenses: Cost of goods sold.......................... 195,944 136,390 548,066 412,651 Selling, general and administrative expenses.................. 28,683 29,962 83,223 77,283 224,627 166,352 631,289 489,934 Operating income............................... 24,583 774 65,609 27,552 Other income, net.............................. 4,204 4,959 14,065 10,128 Interest expense............................... (4,926) (5,388) (15,157) (15,980) Pre-tax income from consolidated operations.... 23,861 345 64,517 21,700 Provision (credit) for income taxes............ 7,345 (1,054) 21,421 4,939 Income from consolidated operations............ 16,516 1,399 43,096 16,761 Equity in net income (loss) of associated companies..................... 15,822 1,787 44,459 (2,547) Income from continuing operations.............. 32,338 3,186 87,555 14,214 Discontinued operations: Income from operations...................... 0 6,886 1,275 9,261 Gain on sale................................ 0 0 32,884 0 Income from discontinued operations............ 0 6,886 34,159 9,261 Income before effect of change in accounting principle.............. 32,338 10,072 121,714 23,475 Effect of accounting change--income taxes...... - - - 6,150 Net income..................................... 32,338 10,072 121,714 29,625 Add: Income retained at beginning of period................... 182,084 64,346 92,708 44,869 Deduct: Excess cost of treasury shares issued over the cost of certain employee benefits....... 0 (53) 0 23 Income retained at end of period..............$ 214,422 $ 74,471 $ 214,422 $ 74,471 Income per share: From continuing operations.................$ 1.86 $ .18 $ 5.03 $ .82 From discontinued operations................ - .40 1.96 .53 From effect of accounting change............ - - - .35 Net income.................................$ 1.86 $ .58 $ 6.99 $ 1.70 Average number of shares....................... 17,399 17,419 17,416 17,418 Number of shares outstanding at end of period............................ 17,398 17,374 17,398 17,374 <FN> * Restated to reflect the deconsolidation of the automotive business. <FN> See Notes to Financial Statements 5 CLARK EQUIPMENT COMPANY AND CONSOLIDATED SUBSIDIARIES BALANCE SHEET (UNAUDITED) Amounts in Thousands Sep. 30, Dec. 31, ASSETS 1994 1993 Current Assets: Cash, cash equivalents and short-term investments................$ 232,045 $ 235,828 Accounts and notes receivable.................................... 106,426 77,103 Accounts receivable from associated companies.................... 1,371 2,041 Refundable income taxes........................................... 0 3,543 Inventories: Raw materials................................................. 39,957 32,212 Work-in-process and finished goods............................ 81,065 65,928 Manufacturing supplies........................................ 4,089 10,480 Total inventory........................................ 125,111 108,620 Deferred tax assets.............................................. 28,364 29,202 Other current assets............................................. 4,950 5,434 Total current assets................................... 498,267 461,771 Investments and advances ........................................ 189,230 122,106 Deferred tax assets - net........................................ 105,718 101,018 Property, plant and equipment - at cost.......................... 375,409 487,330 Less accumulated depreciation.................................... 196,627 285,406 Net property, plant and equipment...................... 178,782 201,924 Assets held for sale ............................................ 8,619 6,765 Goodwill......................................................... 169,658 67,461 Other assets..................................................... 34,745 40,890 $1,185,019 $1,001,935 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable....................................................$ 16,160 $ 22,512 Accounts payable and accruals.................................... 127,041 115,333 Accrued payrolls, social security and general taxes.............. 33,087 34,809 Accrued postretirement benefits - current........................ 20,643 19,560 Taxes on income.................................................. 7,250 4,139 Deferred income taxes............................................ 4,353 800 Current installments on long-term debt........................... 13,434 9,612 Total current liabilities.............................. 221,968 206,765 Long-term debt................................................... 194,266 204,770 Other non-current liabilities.................................... 101,800 74,686 Accrued postretirement benefits.................................. 240,398 233,239 Deferred income taxes............................................ 16,040 14,322 Total liabilities...................................... 774,472 733,782 Stockholders' Equity: Preferred stock - authorized 3,000,000 shares at $1.00 par value - none issued........................................... - - Capital stock common - authorized 40,000,000 shares at $7.50 par value - issued 19,194,684 shares and 19,194,334 shares at September 30, 1994 and December 31, 1993, respectively..... 143,960 143,958 Capital in excess of par value of stock.......................... 180,027 179,582 Retained earnings................................................ 214,422 92,708 Cumulative translation and other adjustments..................... (43,007) (67,083) 495,402 349,165 Less, common stock held in treasury, at cost - 1,797,091 shares and 1,792,431 shares at September 30, 1994 and December 31, 1993, respectively............................... (53,571) (49,728) Less, unallocated LESOP shares purchased with debt - 1,009,155 shares at September 30, 1994 and December 31, 1993, respectively............................................ (31,284) (31,284) Total stockholders' equity............................. 410,547 268,153 $1,185,019 $1,001,935 <FN> See Notes to Financial Statements 6 CLARK EQUIPMENT COMPANY AND CONSOLIDATED SUBSIDIARIES STATEMENT OF CASH FLOWS (UNAUDITED) Nine months ended September 30 Amounts in Thousands 1994 1993* CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................................................$ 121,714 $ 29,625 Less, income from discontinued automotive operations............. (1,275) (9,261) Adjustments to reconcile net income to net cash provided by operating activities: Effect of accounting changes............................... 0 (6,150) Depreciation............................................... 23,507 21,681 Amortization of intangibles................................ 2,386 1,578 Net gain on sale of a business............................. (32,884) 0 Exchange (gain) loss....................................... 3,626 (6,799) Employee benefit expense funded with treasury stock........ 1,448 598 Loss (earnings) of unconsolidated companies................ (44,459) 2,547 Increase in receivables and other current assets........... (17,170) (6,832) Decrease in refundable income taxes........................ 3,543 0 Increase in inventory...................................... (11,733) (14,254) Decrease (increase) in net deferred tax assets............. 1,119 (3,896) Increase in payables and accruals.......................... 18,257 12,332 Increase in postretirement benefit accruals................ 3,906 2,230 Decrease (increase) in other non-current assets............ 7,660 (749) Increase in other long-term liabilities.................... 14,319 303 Other...................................................... 200 58 Net cash provided by operating activities.................. 94,164 23,011 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of business (net of business' cash).......... 103,405 0 Cost of acquisition - net of cash acquired...................... (145,363) 0 Additions to properties......................................... (23,027) (17,072) Sales of properties............................................. 679 532 Decrease (increase) in short-term investments................... 12,400 (63,000) Decrease(increase)in investments and advances-associated companies (1,531) 3,960 Net cash used in investing activities...................... (53,437) (75,580) CASH FLOWS FROM FINANCING ACTIVITIES: Additions to long-term borrowings............................... 26 91,006 Payments on long-term debt...................................... (6,215) (79,699) Increase (decrease) in notes payable--current................... (8,864) 5,902 Proceeds from sale of stock under option plans.................. 10 29 Other........................................................... 2,349 156 Net cash provided (used) in financing activities........... (12,694) 17,394 Effect of exchange rate changes on cash......................... (6,301) 5,889 Cash flows from discontinued automotive operations.............. (13,115) 7,797 Increase (decrease) in cash and cash equivalents................ 8,617 (21,489) Cash and cash equivalents at beginning of year.................. 35,228 71,024 Cash and cash equivalents at end of period...................... 43,845 49,535 Short-term investments (cost approximates market)............... 188,200 183,900 Cash, cash equivalents and short-term investments...............$ 232,045 $ 233,435 * Restated to separately reflect cash flows from discontinued operations. <FN> See Notes to Financial Statements 7 CLARK EQUIPMENT COMPANY AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS General Information These financial statements have been prepared from the unaudited financial records of the Registrant (also referred to herein as the "Company" or "Clark"). The statements should be read in conjunction with the Company's 1993 Annual Report filed on Form 10-K, and the restatement of such financial statements for the deconsolidation of Clark Automotive Products Corporation (see "Organizational Developments" below) which was filed with a Form 8-K dated September 13, 1994. In the opinion of management, all adjustments necessary for a fair statement of the results of operations for the interim periods have been reflected. All adjustments are of a normal and recurring nature except as otherwise discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations. Net income per share amounts are in dollars, based on the average number of shares outstanding for the period, taking into account the dilutive effect of common stock equivalents under the Registrant's stock option plans. The number of shares used to compute net income per share for the nine month periods ended September 30, 1994 and September 30, 1993, were 17,415,889 and 17,418,444, respectively. There were no dividends paid during the nine months ending September 30, 1994 or September 30, 1993. 7,738 shares of common stock were reserved for issuance pursuant to the exercise of options under the 1985 Stock Option Plan on September 30, 1994. Options for 7,738 shares were outstanding under the 1985 Stock Option Plan on the same date. On May 10, 1994, the stockholders of the Company approved the 1994 Long Term Incentive Plan ("LTIP") and the Stock Acquisition Plan for Non-Employee Directors ("Director Stock Plan"). 850,000 shares and 150,000 shares were authorized for issuance under the LTIP and the Director Stock Plan respectively. Organizational Developments In the second quarter of 1994, the Company completed the sale of Clark Automotive Products Corporation ("CAPCO") to the public through an initial public offering. CAPCO was a business unit of Clark which manufactured transmissions, primarily for on-highway applications for sale in Brazil and North America. Clark sold approximately 91 percent of its interest in CAPCO and received net proceeds of approximately $103 million. A gain of approximately $33 million was realized on the sale. CAPCO has been included in the financial statements as a discontinued operation for all periods presented. On May 13, 1994, the Company completed the purchase of Blaw-Knox Construction Equipment Corporation ("Blaw-Knox") from White Consolidated Industries ("WCI"). Blaw-Knox is a leading manufacturer of asphalt pavers which are sold in North America and other world markets. The purchase price was approximately $145 million. The balance sheet and the results of operations of Blaw-Knox are included in the consolidated accounts of Clark subsequent to the acquisition date. If Blaw-Knox had been consolidated with Clark from January 1, 1993, pro forma year-to-date sales would have been $735.5 million in 1994 and $583.3 million in 1993. Third quarter 1994 -8- sales were $249.2 million and pro forma 1993 third quarter sales would have been $187.5 million. The Blaw-Knox acquisition as of an earlier date would not have materially affected Clark's net income from continuing operations in either 1994 or 1993. As reported by the Company on Form 8-KA filed on July 27, 1994, the pro forma impact on Clark of the acquisition of Blaw-Knox as of January 1, 1993 would have increased the full year 1993 net income from continuing operations by $0.19 per share and would have increased the first quarter 1994 net income from continuing operations by $0.12 per share. Statement of Cash Flows The Statement of Cash Flows for the nine months ended September 30, 1994 and 1993 has been prepared based on the continuing operations of the Company. As such, the cash flows of CAPCO have been included as a separate line in the Statement of Cash Flows. Contingencies The Company is self-insured with respect to product liability risk, although insurance coverage is obtained for catastrophic losses. The Company has pending approximately 75 claims, with respect to which approximately 38 suits have been filed alleging damages for injuries or deaths arising from accidents involving products manufactured by the Company's continuing operations. In the aggregate, these claims could be material to the Company. At September 30, 1994, the Company had reserves of approximately $14 million related to product liability exposures. The Company is involved in numerous other lawsuits arising out of the ordinary conduct of its business. These lawsuits pertain to various matters, including warranties, civil rights, safety, anti-trust, and other issues. The ultimate results of these claims and proceedings at September 30, 1994 are subject to a high degree of estimation and cannot be determined with complete precision. However, in the opinion of management, either adequate provision for anticipated costs has been made through insurance coverage or accruals, or the ultimate costs will not materially affect the consolidated financial position of the Company. The Company has given certain guarantees to third parties and has entered into certain repurchase arrangements relating to product distribution and product financing activities involving the Company's continuing operations. As of September 30, 1994, guarantees are approximately $24 million and repurchase arrangements relating to product financing by an independent finance company approximate $76 million. It is not practicable to determine the additional amount subject to repurchase solely under product distribution agreements. Under the repurchase arrangements relating to product distribution and product financing activities, when dealer terminations do occur, a newly selected dealer generally acquires the assets of the prior dealer and assumes any related financial obligations. Accordingly, the risk of loss to Clark is minimal, and historically Clark has incurred only immaterial losses relating to these arrangements. The Company is or may be liable for other matters, including contingencies related to the sale of its forklift truck business, Clark Material Handling Company ("CMHC"), and environmental issues (see pages 14 - 16 "Management's Discussion and Analysis of Operations"). -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Overview: Organizational Developments In the second quarter of 1994, the Company completed the sale of Clark Automotive Products Corporation ("CAPCO") to the public through an initial public offering. CAPCO was a business unit of Clark which manufactured transmissions, primarily for on-highway applications for sale in Brazil and North America. Clark sold approximately 91 percent of its interest in CAPCO and received net proceeds of approximately $103 million. A gain of approximately $33 million was realized on the sale. CAPCO has been included in the financial statements as a discontinued operation for all periods presented. On May 13, 1994, the Company completed the purchase of Blaw-Knox Construction Equipment Corporation ("Blaw-Knox") from White Consolidated Industries ("WCI"). Blaw-Knox is a leading manufacturer of asphalt pavers which are sold in North America and other world markets. The purchase price was approximately $145 million. The balance sheet and the results of operations of Blaw-Knox are included in the consolidated accounts of Clark subsequent to the acquisition date. If Blaw-Knox had been consolidated with Clark from January 1, 1993, pro forma year-to-date sales would have been $735.5 million in 1994 and $583.3 million in 1993. Third quarter 1994 sales were $249.2 million and pro forma 1993 third quarter sales would have been $187.5 million. The Blaw-Knox acquisition as of an earlier date would not have materially affected Clark's net income from continuing operations in either 1994 or 1993. As reported by the Company on Form 8-KA filed on July 27, 1994, the pro forma impact on Clark of the acquisition of Blaw-Knox as of January 1, 1993 would have increased the full year 1993 net income from continuing operations by $0.19 per share and would have increased the first quarter 1994 net income from continuing operations by $0.12 per share. General Discussion of Third Quarter and Nine Month Results: Third quarter 1994 sales increased 49.1 percent over third quarter 1993 sales. The increase was the result of improved sales levels at both Clark-Hurth and Melroe and includes incremental sales of approximately $26.3 million as a result of the acquisition of Blaw- Knox in May of 1994. The increased sales resulted in higher income from consolidated operations which amounted to $16.5 million in the third quarter of 1994 compared to $1.4 million in the third quarter of 1993. VME, Clark's 50 percent owned construction machinery joint venture, also reported significantly higher earnings in 1994 as a result of improved economic conditions, improved operating margins from past cost reductions and the devaluation of the Swedish Krona. Clark's share of VME's earnings was $16.0 million in the third quarter of 1994 compared to $1.8 million in the third quarter of 1993. Clark's overall results from continuing operations improved to $32.3 million, or $1.86 per share, in the third quarter of 1994 from $3.2 million, or $0.18 per share, in the same period of 1993. The third quarter of 1993 also reflected income from discontinued operations of $6.9 million, or $0.40 per share, related to the operations of CAPCO. -10- In the first nine months of 1994, Clark earned $87.6 million, or $5.03 per share, from continuing operations compared to $14.2 million, or $0.82 per share, in the first nine months of 1993. The improvement resulted from a 34.7 percent growth in sales relating to consolidated operations and significantly improved VME earnings. Net income, including continuing and discontinued operations and the impacts of accounting changes, was $121.7 million, or $6.99 per share, in the first nine months of 1994 compared to $29.6 million, or $1.70 per share, in the first nine months of 1993. The 1993 results include a change in accounting for income taxes at VME which contributed $6.2 million, or $0.35 per share, to Clark's earnings. Results of Operations: Third Quarter of 1994 Compared to Third Quarter of 1993: Sales in the third quarter of 1994 were $249.2 million compared with $167.1 million in the third quarter of 1993. The consolidated sales increase of $82.1 million relates mostly to volume improvements and includes incremental sales of $26.3 million as a result of the acquisition of Blaw-Knox in May of 1994. Minor price increases also contributed to the sales improvement. Favorable foreign currency translation impacts increased sales by about $1.7 million. Strength in North American construction machinery markets was the primary cause of the third quarter 1994 sales increase. Selected European markets also showed some improvement. Excluding Blaw-Knox sales, North American sales increased by $36.5 million, or 31.9 percent, in the third quarter of 1994 when compared with the third quarter of 1993 and overseas sales increased $19.3 million, or 36.5 percent, when comparing the same period. Gross margins were $53.3 million, or 21.4 percent of sales in the third quarter of 1994 compared with $30.7 million, or 18.4 percent of sales, in the same period of 1993. The 1993 gross margins were reduced by restructuring charges of $4.9 million relating to rationalization actions at Clark-Hurth Components. This impact was partially offset by a refund of prior year duty drawback claims from the U.S. Customs Department which resulted in a reduction in cost of sales of $3.5 million. With these unusual items excluded, gross margins were 19.2% of sales in the third quarter of 1993. The gross margin percentage increased in the third quarter of 1994 over the normalized 1993 margin as a result of improved capacity utilization at Clark-Hurth Components and as a result of the contribution of Blaw- Knox to the consolidated margins of Clark. Foreign currency translation and exchange results included in cost of sales were losses of $2.0 million in the third quarter of 1994 and gains of $2.7 million in the third quarter of 1993. Selling, general and administrative expenses were $28.7 million, or 11.5 percent of sales, in the third quarter of 1994 compared with $30.0 million, or 17.9 percent of sales, in the third quarter of 1993. The decrease as a percentage of sales resulted from a reduced level of expenditures, higher sales levels and the fixed nature of certain of these expenses. The decrease in the dollar level of expenditures was principally related to a decrease in 1994 of expense associated with stock appreciation rights ($3.1 million) partially offset by an increase in volume/promotional related selling expense ($1.8 million). -11- Operating income from continuing consolidated operations increased to $24.6 million from the 1993 third quarter level of $0.8 million. Operating income as a percentage of sales was 9.9 percent in the third quarter of 1994 compared to 0.5 percent in the third quarter of 1993. Increased operating income is attributable to higher sales and higher gross margins and decreases in selling, general and administrative expenses. Other income of $4.2 million in the third quarter of 1994 reflects a decrease of $0.8 million over the 1993 level. Other income in 1993 includes $1.7 million of interest income resulting from duty drawback refunds from the U.S. Customs Department relating to prior years activities. Higher interest rates on invested cash partially offset the impact of this item on the 1994 results. Interest expense decreased approximately $0.5 million in the third quarter of 1994 when compared to the same period of 1993 due to lower average debt balances outstanding during the third quarter of 1994. Pre-tax income from consolidated continuing operations in the third quarter of 1994 was $23.9 million compared to $0.3 million for the same period of 1993. The improved results reflect higher sales and improved gross margins. A tax provision of $7.3 million and a credit of $1.1 million were recorded in the respective third quarter periods of 1994 and 1993. The effective tax rate in the third quarter of 1994 was 30.8 percent and was lower than the U.S. statutory rate because of the expected utilization of certain previously unrecognized foreign net operating loss carryforwards and the existence of certain components of U.S. income which are not subject to income tax. The tax credit in 1993 is the result of the passage of the tax act of 1993 which resulted in the increase in the U.S. statutory tax rate to 35%. The Company reflected the impact of this one percent tax rate increase on its net deferred tax asset position by recording a $3.0 million benefit as a credit to its tax provision. This favorable impact was partially offset by additional taxes provided in the quarter as a result of an upward adjustment of the full year effective tax rate. Clark's share of VME's earnings for the third quarter increased to $16.0 million, or $0.92 per share, compared to $1.8 million, or $0.10 per share, in the same 1993 period. VME's consolidated sales were $357.9 million, up 26 percent from third quarter 1993 sales of $283.1 million. VME's earnings improvements were driven by higher sales volumes, improved price realization, and lower interest costs due to declining debt levels. VME's North American markets continued to show strength in all product areas while most European economies continued their slow progress toward economic recovery. Results from continuing operations, which includes the results of VME, were income of $32.3 million and $3.2 million, respectively, in the third quarters of 1994 and 1993. The third quarter of 1993 also reflected income from discontinued operations of $6.9 million, or $0.40 per share, related to the operations of CAPCO. In the aggregate, Clark recorded net income of $32.3 million, or $1.86 per share, in the third quarter of 1994 and $10.1 million, or $0.58 per share, in the same period of 1993. -12- First Nine Months of 1994 Compared to First Nine Months of 1993: Sales in the first nine months of 1994 were $696.9 million compared with $517.5 million in the first nine months of 1993. The consolidated sales increase of $179.4 million relates mostly to volume improvements and includes incremental sales of $41.1 million as a result of the acquisition of Blaw-Knox in May of 1994. Minor price increases also contributed to the sales improvement. Unfavorable foreign currency translation impacts decreased sales by about $4.3 million. Strength in North American construction machinery markets was the primary cause of the nine month 1994 sales increase. Selected European markets also showed some improvement. Excluding Blaw-Knox sales, North American sales increased by $106.1 million, or 31.4 percent, in the first nine months of 1994 when compared with the first nine months of 1993, and overseas sales increased $32.2 million, or 17.9 percent, when comparing the same period. Gross margins were $148.8 million, or 21.4 percent of sales in the first nine months of 1994 compared with $104.8 million, or 20.3 percent of sales in the same period of 1993. The gross margin percentage increased in the nine months of 1994 over the 1993 margin as a result of improved capacity utilization at Clark-Hurth Components and as a result of the contribution of Blaw-Knox to the consolidated margins of Clark. Foreign currency translation and exchange results included in cost of sales were losses of $3.6 million in the first nine months of 1994 and gains of $6.8 million in the first nine months of 1993. Selling, general and administrative expenses were $83.2 million, or 11.9 percent of sales, in the first nine months of 1994 compared with $77.3 million, or 14.9 percent of sales, in the first nine months of 1993. The increase in the expense level was principally related to stock appreciation rights and volume/promotional related selling expenses. The decrease as a percentage of sales resulted from higher sales levels and the fixed nature of certain of these expenses. Operating income from continuing consolidated operations increased to $65.6 million from the 1993 first nine month level of $27.6 million. Operating income as a percentage of sales was 9.4 percent in the first nine months of 1994 and 5.3 percent in the same period of 1993. The increased level of operating income is attributable to higher sales and higher gross margins, partially offset by increases in selling, general and administrative expenses. Other income increased by $3.9 million from the first nine month 1993 level to $14.1 million. This resulted from an increase of $0.6 million in interest income and a gain of about $4.2 million on the sale of certain overseas bonds, partially offset by reduced miscellaneous revenues. Interest expense decreased approximately $0.8 million in the first nine months of 1994 when compared to the same period of 1993 due to lower average debt balances outstanding during the first three quarters of 1994. Pre-tax income from consolidated continuing operations in the first nine months of 1994 was $64.5 million compared to $21.7 million for the same period of 1993. The improved results reflect higher sales and improved gross margins. -13- Tax provisions of $21.4 million and $4.9 million were recorded in the respective first nine month periods of 1994 and 1993. The effective tax rate in the first nine months of 1994 was 33.2 percent which is somewhat less than the U.S. statutory rate as a result of the expected utilization of certain previously unrecognized foreign net operating loss carryforwards and the existence of certain components of U.S. income which are not subject to tax. The 1993 first nine month rate of 22.8 percent was lower than the U.S. statutory rate principally as a result of a retroactive increase in the U.S. corporate income tax rate which resulted in a $3.0 million tax benefit as net U.S. deferred tax assets were revalued at the higher tax rate. Through September 30, 1994, Clark has recorded equity income in VME of $44.6 million. This compares to a loss of $2.5 million in the first nine month period of 1993. VME's consolidated sales for the first nine months increased by 22.3 percent to $1,091.5 million compared to last year. Higher unit and spare parts sales drove the gain. Market conditions in North America continued to strengthen in all product lines and selected markets in Western Europe, such as Great Britain and Scandinavia, also improved. The German market, though down, has been above expectations. Results from continuing operations, which include the results of VME, were income of $87.6 million and $14.2 million, respectively, in the first nine months of 1994 and 1993. Income from discontinued operations, which consisted primarily of the $32.9 million gain on the sale of CAPCO, increased to $34.2 million compared to $9.3 million in the first nine months of 1993. The income from discontinued operations in 1993 related to the operations of CAPCO. Including the discontinued operations, but before the effect of a change in accounting principles, Clark recorded income of $121.7 million, or $6.99 per share, in the first nine months of 1994 and $23.5 million, or $1.35 per share, for the same period of 1993. Also, effective January 1, 1993, VME adopted FAS No. 109, "Accounting for Income Taxes" and Clark's 50 percent share of the impact of the accounting change was $6.2 million, or $0.35 per share. In the aggregate, Clark recorded net income of $29.6 million, or $1.70 per share, for the first nine months of 1993. Contingencies: Environmental The Company is involved in environmental clean-up activities or litigation in connection with eight former waste disposal sites and four former U.S. plant locations. The Company is also involved in an environmental clean-up action at one current location. The Company is also a defendant in a lawsuit filed by the United States Environmental Protection Agency which seeks civil penalties for alleged violations of the Clean Water Act arising out of the discharge of certain metal finishing wastewaters generated at the Company's Melroe facility in Gwinner, North Dakota. At each of the eight waste disposal sites, Clark contracted with independent waste disposal operators to properly handle the disposal of its waste. The Environmental Protection Agency (EPA) also has identified other parties responsible for clean-up costs at the waste disposal sites. The Company has and will continue to accrue these costs when the liability can be reasonably estimated. As of September 30, 1994, the Company had -14- reserves of approximately $15.8 million for potential future environmental clean-up costs. The environmental reserves represent Clark's current estimate of its liability for environmental clean-up costs and are not reduced by any possible recoveries from insurance companies. The Company's estimate of its liability is based upon (1) the estimated costs of investigating and remediating the environmental contamination at each site and (2) the Company's estimated share of the liability at the site. Estimated costs of remediation can change as the site investigation and remediation progresses and additional information becomes available. Further, these estimated costs can change if the selected remedial action at a site is not effective and additional work is required. In addition, the development of new remediation technologies could impact these costs. In estimating its share of the potential liability at a site, the Company takes into account the contributions to the cleanup costs which will be paid by other potentially responsible parties. The Company's share of the potential liability could therefore change if other potentially responsible parties become financially insolvent or dispute their liability. As a result of the possibility of changes in remedial cost estimates and in the Company's share of liability, the Company continually monitors the adequacy of its reserves and makes adjustments as necessary. Based upon the information presently available to it, the Company does not believe that it will incur any material costs in excess of the amount of its reserves as a result of any such changes. Although management cannot determine whether or not a material effect on future operations is reasonably likely to occur, it believes that the recorded reserve levels are appropriate estimates of its potential liability for environmental cleanup costs. Further, management believes that the additional maximum exposure level in excess of the recorded reserve level would not be material to the financial condition of the Company. Although settlement of the reserves will cause future cash outlays, it is not expected that such outlays will materially impact the Company's liquidity position. The Company's expenditures in the first three quarters of 1994 relating to environmental compliance and clean-up activities were less than $2 million. Sale of Clark Material Handling Company ("CMHC") The Company sold its forklift truck business, CMHC, to Terex on July 31, 1992. As part of the sale, Terex and CMHC assumed substantially all of the obligations of the Company relating to the CMHC operations, including: 1) contingent liabilities of the Company with respect to floor plan and rental repurchase agreements, 2) certain guarantees of obligations of third parties, and 3) existing and future product liability claims involving CMHC products. In the event that Terex and CMHC fail to perform or are unable to discharge any of the assumed obligations, the Company could be required to discharge such obligations. 1) Repurchase Agreements At the time of the sale, the Company had agreed with an independent finance company to repurchase approximately $220 million of CMHC dealer floor plan and rental inventory in the event of a default by individual dealers for whom the inventory is financed. Since the sale, dealer floor plan and rental inventory obligations have been liquidating in the normal course of business and stand at approximately $48 million at September 30, 1994. These obligations will continue to liquidate in an orderly fashion. The Company will -15- not be required to perform these repurchase obligations unless the dealer defaults in the underlying obligations and Terex and CMHC default in their repurchase obligations. Should that occur, the collateral value securing the obligations should be sufficient to reduce any loss to an immaterial amount. 2) Third Party Guarantees The Company has guaranteed approximately $17 million of obligations of third parties relating to the CMHC operation. Approximately $11 million of these guarantees relate to national account rental arrangements with a number of large creditworthy customers. Approximately $6 million relates to capital loans given by a finance company to independent CMHC dealers, which are secured by a lien on substantially all of the dealer's assets. These guaranteed obligations are expected to liquidate over time. The Company believes, based on past experience, that the national account customers and dealers, who are the primary obligors, will meet their obligations, resulting in immaterial losses to the Company regardless of whether CMHC and Terex are able to perform their obligations. 3) Product Liability Claims CMHC had approximately $45 million of reserves relating to existing product liability claims at the time of the sale. Future accidents will likely occur, which will result in increased product liability exposure over time. The Company will incur losses relating to these product liability claims if CMHC and Terex fail to perform their obligations. The impact of any such losses would be mitigated by available tax benefits and by insurance coverage that is available for catastrophic losses. Cash settlement of product liability claims are generally made over extended periods of time, thereby significantly reducing the impact on cash flow in any one year. Uncertainty exists as to the ultimate effect on Clark if Terex and CMHC fail to perform these obligations and commitments. While the aggregate losses associated with these obligations could be material, the Company does not believe such an event would materially affect the Company's ability to meet its cash requirements. In their latest report on the financial statements that were filed as a part of Terex's 10-K for 1992, Terex's independent accountants indicated that Terex's recurring losses, its capital deficiency, and its inability to borrow additional funds under a bank lending agreement raised doubts about Terex's ability to continue as a going concern. Terex has filed its report on Form 10-Q for the period ended June 30, 1994 which indicates that they earned $10 million in the second quarter of 1994, which included a $19.7 million gain from the sale of certain non- strategic assets. Management indicates in that report that it believes tha0t0 its "lending facility and other financing and cash generating activities will allow the Company to meet its obligations on a timely basis". Terex also indicated in a press release that it earned approximately $1 million in the third quarter of 1994. These results include a gain of $4.2 million from the sale of certain non-strategic assets. Other: Clark has certain other contingent liabilities which have arisen in the normal course of business. These are discussed further in the Notes to the Financial Statements on page 9. -16- Liquidity and Capital Resources: At September 30, 1994, the Company's cash and short-term investments amounted to $232.0 million compared with $235.8 million at December 31, 1993. The decrease in cash is principally due to the expenditure of approximately $145 million for the acquisition of Blaw-Knox; partially offset by proceeds from the sale of CAPCO of approximately $103 million and cash flow from operations of approximately $38 million. On April 6, 1994, the Company entered into a $100 million Master Credit Agreement with nine banks. The new agreement has a term of three years and replaces a previous agreement of $66.2 million. There were no outstanding borrowings under the Company's line of credit as of September 30, 1994. In the first quarter of 1993, the Company filed a shelf registration statement with the Securities and Exchange Commission to register $150 million of medium term notes. To date, $90.2 million of the medium term notes have been issued, leaving $59.8 million available for future issuance. The Company believes that it has adequate liquidity either through cash reserves, its line of credit, or through its access to public and private markets to meet its operating needs and strategic objectives. Capital Investment: Capital expenditures were $23.0 million in the first nine months of 1994 as compared to $17.1 million in the first nine months of 1993. A comparative breakdown of expenditures is as follows: In Millions 1994 1993 By Type: . Capital facilities and equipment $18.2 $14.1 . Tooling 4.8 3.0 Total $23.0 $17.1 By Location: . North America $17.7 $13.0 . Foreign locations 5.3 4.1 Total $23.0 $17.1 Depreciation of fixed assets was $23.5 million in the first nine months of 1994 as compared to $21.7 million in the first nine months of 1993. Capitalization: At September 30, 1994, debt as a percentage of total capitalization (total debt and stockholders' equity) was 35.3 percent compared with 46.9 percent at December 31, 1993. The improvement in the ratio relates to increased stockholders' equity, principally, the current year income of $121.7 million and favorability in the cumulative translation adjustment. Total debt at September 30, 1994 decreased to $223.9 million from the December 31, 1993, level of $236.9 million. Stockholders' equity per share was $23.60 at September 30, 1994 and $15.41 at December 31, 1993. -17- Outlook: The backlog at September 30, 1994 was $202.4 million, up from $122.1 million at September 30, 1993. The backlog amount in the third quarter of 1994 includes $11.1 million for Blaw-Knox. The Company believes the level of business activity as demonstrated by the third quarter results and order rates provide an optimistic picture of business activity for the balance of the year. Demand remained strong throughout the third quarter in all Clark businesses. None experienced typical seasonal declines. Sales and earnings in the fourth quarter of 1994 are expected to show continued strength compared to the prior year, with production and shipping rates similar to the third quarter. -18- SELECTED FINANCIAL DATA - VME GROUP N.V. In 1985 a joint venture was formed combining the construction machinery businesses of Clark Equipment Company and AB Volvo of Sweden. VME Group N.V. ("VME") is owned 50 percent each by Clark and Volvo as a result of their contribution of ownership in their construction machinery subsidiaries VME Americas Inc. (then Clark Michigan Company) and VME Holding Sweden AB (then Volvo BM AB), respectively. Following are condensed consolidated financial data of VME Group N.V. (amounts in millions): 3rd Quarter Nine Months Period ended September 30 Sales and Income 1994 1993 1994 1993 Sales $357.9 $283.1 $1,091.5 $892.7 Income Before Interest & Taxes (EBIT) $ 55.3 $ 18.4 $ 150.4 $ 36.2 Interest Expense 4.7 6.3 15.1 24.9 Income Before Income Taxes & Changes in Accounting Principles 50.6 12.1 135.3 11.3 Provision for Income Taxes 18.2 6.7 44.5 12.2 Income (Loss) Before Changes in Accounting Principles 32.4 5.4 90.8 (0.9) Effect of Change - Accounting Principles - - - 12.3 Net Income $ 32.4 $ 5.4 $ 90.8 $ 11.4 0Balance Sheet Sept. 30, '94 Dec. 31, '93 Receivables (Trade Debtors) $203.7 $160.1 Inventories Net $314.1 $270.1 Total Assets $922.8 $789.2 Debt $200.0 $252.5 Equity 267.6 158.4 Total Capital $467.6 $410.9 Debt to Capital 42.8% 61.5% VME's sales during the first nine months of 1994 were $1,091.5 million, up $198.8 million from $892.7 million in the first nine months of 1993. The increase resulted because demand for construction equipment continued to strengthen in North America and Great Britain and showed improvement from low levels in other markets, including the Nordic countries, France, Spain and Australia. The German market was also stronger than anticipated. VME recorded net income of $32.4 million in the third quarter of 1994 compared to net income of $5.4 in the same period of 1993, an increase of $27 million. The net income of $90.8 million in the first nine months of 1994 compares to net income of $11.4 million, including $12.3 million related to a change in accounting for income taxes, in the same period of 1993, an increase of $79.4 million. -19- The improvement in operating results is mainly due to the following: - Higher production and sales volumes - Improved price realization - Reduced overhead expenses in both distribution and manufacturing In the first quarter of 1993, VME adopted FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and FAS No. 109, "Accounting for Income Taxes". VME elected to recognize its estimated obligations under FAS No. 106 on a transitional basis over 20 years, and a net charge of $2.1 million was included in the first nine months of 1994 and 1993. The impact in 1993 of the adoption of FAS 109 was a benefit of $12.3 million. Total assets of VME were $922.8 million at the end of September 1994, an increase of $106.7 million from $816.1 million in September 1993. The increase is mainly from higher receivables resulting from higher sales volumes, increased goodwill related to the purchase of the remaining shares in Zettelmeyer Baumaschinen GmbH as of January 1, 1994, and increased cash reflecting the positive cash flow generated by increased profitability. -20- EXHIBITS LIST AND INDEX Filed Herewith Unless Exhibit Description Otherwise Indicated (27) Financial Data Schedule Page 22 (99) Computation of Ratio of Page 23 Earnings to Fixed Charges for the nine months ended September 30, 1994 -21-