SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to ________
Commission file number 1-9172
NACCO Industries, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1505819
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5875 LANDERBROOK DRIVE, MAYFIELD HEIGHTS, OHIO 44124-4017
(Address of principal executive offices) (Zip code)
(440) 449-9600
(Registrant's telephone number, including area code)
NA
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ____
Number of shares of Class A Common Stock outstanding at July 31, 2002
6,570,509
Number of shares of Class B Common Stock outstanding at July 31, 2002
1,627,162
NACCO INDUSTRIES, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2002 (Unaudited) and December 31, 2001
Unaudited Condensed Consolidated Statements of
Operations for the Three Months and Six Months
Ended June 30, 2002 and 2001
Unaudited Condensed Consolidated Statements of
Cash Flows for the Six Months Ended June 30, 2002
and 2001
Unaudited Condensed Consolidated Statements of
Changes in Stockholders' Equity for the Six Months
Ended June 30, 2002 and 2001
Notes to Unaudited Condensed Consolidated
Financial Statements
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About
Market Risk
Part II. OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security
Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signature
Exhibit Index
PART I
FINANCIAL INFORMATION
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Unaudited) (Audited)
JUNE 30 DECEMBER 31
2002 2001
---------- ----------
(In millions)
ASSETS
Current Assets
Cash and cash equivalents $ 63.4 $ 71.9
Accounts receivable, net 293.9 264.5
Inventories 372.8 360.6
Deferred income taxes 31.9 40.2
Prepaid expenses and other 34.9 32.8
---------- ----------
796.9 770.0
Property, Plant and Equipment, Net 685.7 732.0
Non-current Assets
Goodwill, net 429.0 427.9
Coal supply agreements and other intangibles, net 85.8 85.2
Deferred costs and other 62.8 50.7
Deferred income taxes 27.0 26.1
Other non-current assets 64.1 70.0
---------- ----------
668.7 659.9
---------- ----------
Total Assets $ 2,151.3 $ 2,161.9
========== ==========
See notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Unaudited) (Audited)
JUNE 30 DECEMBER 31
2002 2001
-------------- --------------
(In millions, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 264.4 $ 235.3
Revolving credit agreements 66.1 59.7
Revolving credit agreement expected to be refinanced within 12 months 82.0 265.0
Current maturities of long-term debt 32.8 41.9
Current obligations of project mining subsidiaries 35.4 37.9
Other current liabilities 239.1 234.5
-------------- --------------
719.8 874.3
Long-term Debt- not guaranteed by the parent company 375.8 248.1
Obligations of Project Mining Subsidiaries - not guaranteed by
the parent company or its North American Coal subsidiary 266.8 271.3
Self-insurance Reserves and Other 238.2 235.5
Minority Interest 2.9 3.4
Stockholders' Equity
Common stock:
Class A, par value $1 per share, 6,582,569
shares outstanding (2001 - 6,559,925
shares outstanding) 6.6 6.5
Class B, par value $1 per share, convertible
into Class A on a one-for-one basis,
1,615,102 shares outstanding
(2001 - 1,635,720 shares outstanding) 1.6 1.6
Capital in excess of par value 4.8 4.7
Retained earnings 576.5 571.3
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment (16.4) (28.2)
Reclassification of hedging activities into earnings 5.6 .9
Cumulative effect of change in accounting for derivatives
and hedging --- (9.3)
Deferred loss on cash flow hedging (16.1) (3.4)
Minimum pension liability adjustment (14.8) (14.8)
-------------- --------------
547.8 529.3
-------------- --------------
Total Liabilities and Stockholders' Equity $ 2,151.3 $ 2,161.9
============== ==============
See notes to unaudited condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ----------------
2002 2001 2002 2001
---------- ---------- ------------ ------------
(In millions, except per share data)
Net sales $ 607.3 $ 661.8 $ 1,179.0 $ 1,372.0
Other revenues 2.3 6.2 7.1 13.2
---------- ---------- ------------ ------------
Revenues 609.6 668.0 1,186.1 1,385.2
Cost of sales 495.8 551.7 971.9 1,138.6
---------- ---------- ------------ ------------
Gross Profit 113.8 116.3 214.2 246.6
Selling, general and administrative expenses 88.2 94.2 169.8 187.4
Amortization of goodwill --- 4.0 --- 8.0
---------- ---------- ------------ ------------
Operating Profit 25.6 18.1 44.4 51.2
Other income (expenses)
Interest expense (17.2) (14.8) (31.7) (26.2)
Insurance recovery --- 5.2 --- 7.7
Gains (losses) on interest rate swap agreements (3.1) .4 (2.8) (.5)
Other - net (1.6) .3 (.2) .1
---------- ---------- ------------ ------------
(21.9) (8.9) (34.7) (18.9)
---------- ---------- ------------ ------------
Income Before Income Taxes, Minority Interest 3.7 9.2 9.7 32.3
and Cumulative Effect of Accounting
Changes
Provision for income taxes 1.2 3.3 1.1 12.2
---------- ---------- ------------ ------------
Income Before Minority Interest and Cumulative
Effect of Accounting Changes 2.5 5.9 8.6 20.1
Minority interest income .3 .2 .5 .4
---------- ---------- ------------ ------------
Income Before Cumulative Effect of Accounting
Changes 2.8 6.1 9.1 20.5
Cumulative effect of accounting changes (net of $0.8
tax benefit) --- --- --- (1.3)
---------- ---------- ------------ ------------
Net Income $ 2.8 $ 6.1 $ 9.1 $ 19.2
========== ========== ============ ============
Comprehensive Income (Loss) $ 10.3 $ 3.3 $ 22.2 $ (4.1)
========== ========== ============ ============
Earnings per Share:
Income Before Cumulative Effect of Accounting
Changes $ 0.34 $ 0.74 $ 1.11 $ 2.50
Cumulative effect of accounting changes (net-of-tax) --- --- --- (0.16)
---------- ---------- ------------ ------------
Net Income $ 0.34 $ 0.74 $ 1.11 $ 2.34
========== ========== ============ ============
Dividends per share $ .245 $ .235 $ .480 $ .460
========== ========== ============ ============
Weighted average shares outstanding 8.197 8.193 8.196 8.187
========== ========== ============ ============
See notes to unaudited condensed consolidated financial statements
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
SIX MONTHS ENDED
JUNE 30
----------------
2002 2001
-------- --------
(In millions)
Operating Activities
Net income $ 9.1 $ 19.2
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization 46.7 57.9
Deferred income taxes 11.0 .8
Minority interest (.5) (.4)
Cumulative effect of accounting changes (net-of-tax) --- 1.3
Other non-cash items 3.1 (1.5)
Working capital changes
Accounts receivable (7.1) 50.2
Inventories (6.6) (29.7)
Other current assets (.2) (2.8)
Accounts payable and other liabilities 15.3 (36.9)
-------- --------
Net cash provided by operating activities 70.8 58.1
Investing Activities
Expenditures for property, plant and equipment (20.6) (53.9)
Proceeds from the sale of assets 2.9 7.4
Investments in unconsolidated affiliates --- (.1)
Proceeds from unconsolidated affiliates .7 ---
Other - net (1.1) (4.4)
-------- --------
Net cash used for investing activities (18.1) (51.0)
Financing Activities
Additions to long-term debt and revolving credit agreements 299.3 51.0
Reductions of long-term debt and revolving credit agreements (338.1) (40.0)
Additions to obligations of project mining subsidiaries 35.4 45.1
Reductions of obligations of project mining subsidiaries (42.2) (61.2)
Cash dividends paid (3.9) (3.8)
Deferred financing costs (14.0) (.6)
Other - net (.2) .3
-------- --------
Net cash used for financing activities (63.7) (9.2)
Effect of exchange rate changes on cash 2.5 (1.8)
-------- --------
Cash and Cash Equivalents
Decrease for the period (8.5) (3.9)
Balance at the beginning of the period 71.9 33.7
-------- --------
Balance at the end of the period $ 63.4 $ 29.8
======== ========
See notes to unaudited condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
SIX MONTHS ENDED
JUNE 30
----------------
2002 2001
-------- -------
(In millions, except per
share data)
Class A Common Stock
Beginning balance $ 6.5 $ 6.5
Shares issued under stock option and compensation plans .1 .1
-------- -------
6.6 6.6
-------- -------
Class B Common Stock 1.6 1.6
-------- -------
Capital in Excess of Par Value
Beginning balance 4.7 3.6
Shares issued under stock option and compensation plans .1 1.0
-------- -------
4.8 4.6
-------- -------
Retained Earnings
Beginning balance 571.3 614.9
Net income 9.1 19.2
Cash dividends on Class A and Class B common stock:
2002 $.480 per share (3.9) ---
2001 $.460 per share --- (3.8)
-------- -------
576.5 630.3
-------- -------
Accumulated Other Comprehensive Income (Loss)
Beginning balance (54.8) (20.2)
Foreign currency translation adjustment 11.8 (17.1)
Cumulative effect of change in accounting for derivatives and hedging 9.3 (3.4)
Reclassification from cumulative effect of change in accounting for derivatives
and hedging to deferred loss on cash flow hedging (9.3) ---
Reclassification of hedging activity into earnings 4.7 .2
Current period cash flow hedging activity (3.4) (3.0)
-------- -------
(41.7) (43.5)
-------- -------
Total Stockholders' Equity $ 547.8 $ 599.6
======== ========
See notes to unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
JUNE 30, 2002
(Tabular Amounts in Millions)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of NACCO Industries, Inc. ("NACCO," the parent company) and its
wholly owned subsidiaries ("NACCO Industries, Inc. and Subsidiaries," or the
"Company"). Intercompany accounts and transactions have been eliminated. NACCO
is a holding company with subsidiaries that operate in three principal
industries: lift trucks, housewares and lignite mining. The Company manages its
subsidiaries by industry; however, the Company segments its lift truck
operations into two components: wholesale manufacturing and retail distribution.
NMHG Holding Co. ("NMHG Parent"), through its wholly owned subsidiaries, NACCO
Materials Handling Group, Inc. ("NMHG Wholesale") and NMHG Distribution Co.
("NMHG Retail") (collectively "NMHG") designs, engineers, manufactures, sells,
services and leases a full line of lift trucks and service parts marketed
worldwide under the Hyster(R) and Yale(R) brand names. NMHG Wholesale includes
the manufacture and sale of lift trucks and related service parts, primarily to
independent and wholly owned Hyster and Yale retail dealerships. NMHG Retail
includes the sale, service and rental of Hyster and Yale lift trucks and related
service parts by wholly owned retail dealerships. NACCO Housewares Group
("Housewares") consists of Hamilton Beach/Proctor-Silex, Inc. ("HB/PS"), a
leading manufacturer and marketer of small electric motor and heat-driven
appliances as well as commercial products for restaurants, bars and hotels, and
The Kitchen Collection, Inc. ("KCI"), a national specialty retailer of
brand-name kitchenware, small electrical appliances and related accessories. The
North American Coal Corporation ("NACoal") mines and markets lignite primarily
as fuel for power providers.
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position of the
Company as of June 30, 2002 and the results of its operations, cash flows and
changes in stockholders' equity for the three and six month periods ended June
30, 2002 and 2001 have been included.
Operating results for the three and six month periods ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the remainder
of the year ending December 31, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
Note 2 - Inventories
Inventories are summarized as follows:
(UNAUDITED) (AUDITED)
JUNE 30 DECEMBER 31
2002 2001
--------- ---------
Manufactured inventories:
Finished goods and service parts -
NMHG $ 92.6 $ 99.6
Housewares 74.2 54.0
--------- ---------
166.8 153.6
Raw materials and work in process -
NMHG Wholesale 110.1 111.4
Housewares 8.8 10.5
--------- ---------
118.9 121.9
--------- ---------
Total manufactured inventories 285.7 275.5
Retail inventories:
NMHG Retail 32.2 35.8
Housewares 20.9 17.6
--------- ---------
Total retail inventories 53.1 53.4
Total inventories at FIFO 338.8 328.9
Coal - NACoal 18.0 17.5
Mining supplies - NACoal 24.3 23.8
--------- ---------
Total inventories at weighted average 42.3 41.3
LIFO reserve -
NMHG (10.9) (12.3)
Housewares 2.6 2.7
--------- ---------
(8.3) (9.6)
--------- ---------
$ 372.8 $ 360.6
========= =========
The cost of certain manufactured and retail inventories has been determined
using the LIFO method. At June 30, 2002 and December 31, 2001, 58 percent and 60
percent, respectively, of total inventories were determined using the LIFO
method. An actual valuation of inventory under the LIFO method can be made only
at the end of the year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these
estimates are subject to change and may be different than the actual inventory
levels and costs at year-end, interim results are subject to the final year-end
LIFO inventory valuation.
Note 3 - Restructuring Charge
The changes to the Company's restructuring accruals since December 31, 2001 are
as follows:
Curtailment
Losses -
Pension and
Other Post-
Asset Lease Employment
Severance Impairment Impairment Benefits Other Total
--------- ---------- ---------- -------- ----- -----
NMHG Wholesale
Balance at December 31, 2001 $ 5.3 $ --- $ --- $ 7.5 $ --- $ 12.8
Foreign currency effect .2 --- --- --- --- .2
Payments (2.8) --- --- --- --- (2.8)
------ ----- ----- ----- ----- -------
Balance at June 30, 2002 $ 2.7 $ --- $ --- $ 7.5 $ --- $ 10.2
====== ====== ====== ===== ===== =======
NMHG Retail
Balance at December 31, 2001 $ 3.9 $ --- $ .4 $ --- $ --- $ 4.3
Payments
(.9) --- (.1) --- --- (1.0)
------ ----- ----- ----- ----- -------
Balance at June 30, 2002 $ 3.0 $ --- $ .3 $ --- $ --- $ 3.3
====== ====== ====== ===== ===== =======
Housewares
Balance at December 31, 2001 $ 3.4 $ 5.0 $ 3.3 $ --- $ .7 $ 12.4
Payments/assets disposed
(2.4) (2.1) (1.3) --- (.1) (5.9)
------ ----- ----- ----- ----- -------
Balance at June 30, 2002 $ 1.0 $ 2.9 $ 2.0 $ --- $ .6 $ 6.5
====== ====== ====== ===== ===== =======
NMHG Wholesale: The reserve balance at NMHG Wholesale consists of two
restructuring programs: the 2001 closure of the Danville, Illinois facility and
the restructuring of the European wholesale operations initiated in 2001. The
Danville program, which was approved and accrued in December 2000, was
essentially completed in 2001. In the first half of 2002, severance payments of
$2.0 million were made to approximately 215 employees which reduced the ending
severance reserve balance related to the Danville closure to $0.1 million. The
reserve balance for curtailment losses relating to pension and other
post-employment benefits relates entirely to the closure of the Danville
facility and will not be paid until employees reach retirement age. In the first
half of 2002, NMHG Wholesale recognized a charge of approximately $1.4 million,
which had not previously been accrued and is not included in the table above,
related primarily to the costs of the idle Danville facility. Cost savings
primarily from reduced employee wages and benefits of approximately $3.1 million
pre-tax were recognized in the first half of 2002 related to this program. Cost
savings primarily from reduced employee wages and benefits, net of idle facility
costs, are estimated to be $5.8 million pre-tax for the remainder of 2002 and
$13.4 million annually thereafter, as a result of anticipated improved
manufacturing efficiencies and reduced fixed factory overhead. Although a
significant portion of the projected savings is the result of a reduction in
fixed factory costs, the overall benefit estimates could vary depending on unit
volumes and the resulting impact on manufacturing efficiencies.
In 2001, NMHG Wholesale recognized a restructuring charge of approximately $4.5
million pre-tax for severance and other employee benefits to be paid to
approximately 285 direct and indirect factory labor and administrative personnel
in Europe. Of this amount, $3.2 million remained unpaid as of December 31, 2001.
Payments of $0.8 million were made in the first half of 2002 to approximately 40
employees. The majority of the headcount reductions were made by the end of the
first half of 2002. Pursuant to local country requirements, the remaining
headcount reductions will be initiated in the second half of 2002, with the
initiation of severance payments thereafter. Cost savings primarily from reduced
employee wages and benefits of approximately $1.9 million pre-tax were
recognized in the first half of 2002 related to this program. Cost savings
primarily from reduced employee wages and benefits for the remainder of 2002 are
estimated to be $5.0 million pre-tax. Although a majority of the projected
savings is the result of a reduction in fixed factory costs, the overall benefit
estimates could vary depending on unit volumes and the resulting impact on
manufacturing efficiencies.
NMHG Retail: NMHG Retail recognized a restructuring charge of approximately $4.7
million pre-tax, in 2001, of which $0.4 million relates to lease termination
costs and $4.3 million relates to severance and other employee benefits to be
paid to approximately 140 service technicians, salesmen and administrative
personnel at wholly owned dealers in Europe. During 2001, severance payments of
$0.4 million were made to approximately 40 employees. In the first half of 2002,
severance payments of $0.9 million were made to approximately 10 employees. A
majority of the headcount reductions were made by the end of the first half of
2002. The majority of the severance amount accrued is expected to be paid by
December 31, 2002. Cost savings primarily from reduced employee wages, employee
benefits and lease costs of approximately $1.3 million pre-tax were recognized
in the first half of 2002 related to this program. Cost savings primarily from
reduced employee wages, employee benefits and lease costs for the remainder of
2002 are estimated to be $1.6 million pre-tax. Estimated benefits could be
reduced by additional severance payments, if any, made to employees above the
statutory or contractually required amount that was accrued in 2001.
Housewares: In 2001, HB/PS recognized a charge of $0.8 million classified as
restructuring related to severance benefits to be paid to personnel located at
the company's headquarters. Severance benefits of $0.3 million were paid to
headquarters' personnel in 2001, which reduced the required accrual to $0.5
million at December 31, 2001. Final severance benefits of $0.5 million relating
to the headquarters restructuring plan were paid in the first half of 2002. Cost
savings from reduced employee wages and benefits related to this plan were
approximately $1.4 million pre-tax in the first half of 2002 and are estimated
to be $1.3 million pre-tax for the remainder of 2002.
Also in 2001, HB/PS recognized a charge of $11.9 million classified as
restructuring related to management's plan to restructure HB/PS' manufacturing
activities in Mexico. Of the $11.9 million accrued, $2.9 million related to
severance benefits. HB/PS began consolidation and outsourcing of certain of its
Mexican manufacturing activities related to this restructuring program and made
severance payments of $1.9 million to approximately 760 manufacturing personnel
at HB/PS' facilities in Mexico, during the first half of 2002. This reduced the
ending severance reserve balance relating to manufacturing personnel to $1.0
million at June 30, 2002. Severance payments to employees are expected to be
made by December 31, 2002. Lease payments on idle facilities and disposition of
impaired assets are expected to be completed in 2003. In addition, manufacturing
inefficiencies of approximately $1.0 million and severance payments of
approximately $0.5 million were expensed in the first half of 2002 that had not
previously been accrued and are not included in the table above. Cost savings
primarily from reduced employee wages, employee benefits and lease costs related
to this plan were approximately $2.8 million pre-tax in the first half of 2002
and are estimated to be $5.6 million pre-tax for the remainder of 2002. Although
a significant portion of the projected savings is the result of a reduction in
fixed factory costs, the overall benefit estimates could vary depending on unit
volumes and the resulting savings from the outsourcing of certain products.
Note 4 - Accounting for Goodwill
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." This
Statement establishes accounting and reporting standards for goodwill and other
intangible assets and supersedes APB Opinion No. 17, "Intangible Assets."
Goodwill and other intangibles that have indefinite lives will no longer be
amortized, but will be subject to annual impairment tests. All other intangible
assets will continue to be amortized over their estimated useful lives, which
are no longer limited to 40 years. Effective January 1, 2002, the Company
discontinued amortization of its goodwill in accordance with this Statement. The
amortization periods of the Company's other intangible assets were not revised
as a result of the adoption of this Statement. Adjusted net income and earnings
per share, assuming the adoption of this Statement in the prior year, is as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ----------------
2002 2001 2002 2001
------- -------- ------- --------
(In millions)
Reported net income $ 2.8 $ 6.1 $ 9.1 $ 19.2
Add back: goodwill amortization --- 4.0 --- 8.0
------- -------- ------- --------
Adjusted net income $ 2.8 $ 10.1 $ 9.1 $ 27.2
======= ======== ======= ========
(In dollars)
Reported earnings per share $ .34 $ 0.74 $ 1.11 $ 2.34
Add back: goodwill amortization --- .49 --- .98
------- -------- ------- --------
Adjusted earnings per share $ .34 $ 1.23 $ 1.11 $ 3.32
======= ======== ======== ========
In addition, this Statement requires goodwill to be tested for impairment at the
beginning of the fiscal year of adoption, January 1, 2002 for the Company, and,
thereafter, at least annually at a level of reporting defined in the Statement
as a "reporting unit," using a two-step process. The first step requires
comparison of the reporting unit's fair market value to its carrying value. If
the fair market value of the reporting unit exceeds its carrying value, no
further analysis is necessary and goodwill is not impaired. If the carrying
value of the reporting unit exceeds its fair market value, then the second step,
as defined in the Statement, must be completed. The second step, if necessary,
requires the determination of the fair market value of each existing asset and
liability of the applicable reporting unit to enable the derivation of the
"implied" fair market value of goodwill. If the implied fair market value of
goodwill is less than the carrying value of goodwill, then an impairment loss
must be recognized.
During the second quarter of 2002, the Company completed its impairment testing
of goodwill as described above. For each of the Company's reporting units, the
fair market value of the reporting unit exceeded the reporting unit's carrying
value; therefore, there is no goodwill impairment as of the testing date,
January 1, 2002.
The process to test goodwill for impairment included an allocation of goodwill
among the Company's reporting units. As a result of this allocation process,
goodwill that was previously reported in the Company's reportable segment, NMHG
Retail, was reallocated to NMHG Wholesale. This reallocation was primarily based
on an analysis of the synergy benefits that arose as a result of the
acquisitions of the retail dealerships. As a result, goodwill of approximately
$40.3 million that was previously reported in NMHG Retail is now reported in
NMHG Wholesale.
Following is a summary of the changes in goodwill during the first half of 2002:
Carrying Amount of Goodwill
---------------------------
NMHG NMHG NACCO
Wholesale Retail Housewares Consolidated
--------- ------ ---------- ------------
Balance at December 31, 2001 $ 304.6 $ 39.6 $ 83.7 $ 427.9
Reclassification to other intangibles --- (1.8) --- (1.8)
Reallocation among segments 40.3 (40.3) --- ---
Foreign currency translation .4 2.5 --- 2.9
--------- ------- -------- ---------
Balance at June 30, 2002 $ 345.3 $ --- $ 83.7 $ 429.0
========= ======= ======== =========
During the first half of 2002, $1.8 million that was previously preliminarily
classified as goodwill relating to an acquisition of a retail dealership in 2001
was reclassified to other intangibles.
The balance of other intangible assets, which continue to be subject to
amortization and relate to assets acquired prior to January 1, 2002, is as
follows at June 30, 2002:
Other Intangibles
-----------------
Gross Carrying Accumulated Net
Amount Amortization Balance
-------------- ------------ -------
Balance at June 30, 2002
Coal supply agreements $ 85.8 $ (1.6) $ 84.2
Other intangibles 1.8 (.2) 1.6
--------- --------- ---------
$ 87.6 $ (1.8) $ 85.8
========= ========= =========
Balance at December 31, 2001
Coal supply agreements $ 85.8 $ (.6) $ 85.2
Other intangibles --- --- ---
--------- --------- ---------
$ 85.8 $ (.6) $ 85.2
========= ======== =========
Amortization expense for the three and six months ended June 30, 2002 was $1.0
million and $1.2 million, respectively. Expected annual amortization expense of
other intangible assets for the next five years is as follows: $2.7 million in
2002, $3.1 million in 2003, $3.2 million in 2004, $3.2 million 2005 and $3.2
million in 2006.
Note 5 - Debt Financing
NMHG: On May 9, 2002, NMHG replaced its primary financing agreement, an
unsecured floating-rate revolving line of credit with availability of $350.0
million, certain other lines of credit with availability of $28.6 million and a
program to sell accounts receivable in Europe, with the proceeds from the
private placement of $250.0 million of 10% unsecured Senior Notes due 2009 and
borrowings under a secured, floating-rate revolving credit facility which
expires in May 2005. The proceeds from the Senior Notes were reduced by an
original issue discount of $3.1 million.
The $250.0 million of 10% Senior Notes mature on May 15, 2009. The Senior Notes
are senior unsecured obligations of NMHG Holding Co. and are guaranteed by
substantially all of NMHG's domestic subsidiaries. NMHG has filed a registration
statement on Form S-4 to exchange the Senior Notes for notes with substantially
identical terms registered with the SEC. NMHG Holding Co. has the option to
redeem all or a portion of the Senior Notes on or after May 15, 2006 at the
redemption prices set forth in the Indenture governing the Senior Notes.
Availability under the new revolving credit facility is up to $175.0 million and
is governed by a borrowing base based on advance rates against the inventory and
accounts receivable of the "borrowers." Adjustments to reserves booked against
these assets, including inventory reserves, will change the eligible borrowing
base and thereby impact the liquidity provided by the facility. The borrowers,
as defined in the new revolving credit facility, include NMHG Holding Co. and
certain domestic and foreign subsidiaries of NMHG Holding Co. Borrowings bear
interest at a floating rate, which can be either a base rate or LIBOR, as
defined, plus an applicable margin. The initial applicable margins, effective
through September 30, 2002, for base rate loans and LIBOR loans are 2.00% and
3.00%, respectively. The new revolving credit facility also requires a fee of
0.5% per annum on the unused commitment. Subsequent to September 30, 2002, the
margins and unused commitment fee will be subject to adjustment based on a
leverage ratio.
At June 30, 2002, the borrowing capacity under this facility, both domestic and
foreign, was $79.9 million, which has been reduced by the commitments or
availability under certain foreign credit facilities and an excess availability
requirement of $15.0 million, as described below. Borrowings outstanding under
this facility were $34.9 million at June 30, 2002. The domestic floating rate of
interest applicable to this facility on June 30, 2002 was 6.75%, including the
applicable floating rate margin. The new revolving credit facility includes a
subfacility for foreign borrowers which can be denominated in British pounds
sterling or euro. The foreign floating rate of interest applicable to this
subfacility on June 30, 2002 was 7.18%, including the applicable floating rate
margin. Included in the borrowing capacity is a $15.0 million overdraft facility
available to foreign borrowers. The initial applicable margin, effective through
September 30, 2002, for overdraft loans is 3.25% above the London base rate, as
defined. The new revolving credit facility is guaranteed by certain domestic and
foreign subsidiaries of NMHG Holding Co. and secured by substantially all of the
assets, other than property, plant and equipment, of the borrowers and
guarantors, both domestic and foreign, under the facility.
The terms of the new revolving credit facility provide that availability is
reduced by the commitments or availability under a foreign credit facility of
the borrowers and certain foreign working capital facilities. A foreign credit
facility commitment of approximately U.S. $18.1 million on June 30, 2002,
denominated in Australian dollars, reduced the amount of availability under the
new revolving credit facility. In addition, availability under the new revolving
credit facility was reduced by $5.5 million for a working capital facility
denominated in Chinese yuan. If the commitments or availability under these
facilities are increased, availability under the new revolving credit facility
will be reduced. The $79.9 million of capacity under the new revolving credit
facility at June 30, 2002 reflected the reduction of these foreign credit
facilities.
Both the new revolving credit facility and terms of the Senior Notes include
restrictive covenants which, among other things, limit dividends to NACCO. The
new revolving credit facility also requires NMHG to meet certain financial
tests, including, but not limited to, minimum excess availability, maximum
capital expenditures, maximum leverage ratio and minimum fixed charge coverage
ratio tests. The borrowers must maintain aggregate excess availability under the
new revolving credit facility of at least $15.0 million.
NMHG paid financing fees of approximately $13.0 million related to this
refinancing. These fees were deferred and will be amortized as interest expense
in the statement of operations over the respective terms of the new financing
facilities.
As a result of the refinancing of NMHG's floating-rate revolving credit
facility, NMHG's interest rate swap agreements no longer qualify for hedge
accounting treatment in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. As such, the mark-to-market of
these interest rate swap agreements will be recognized in the statement of
operations until such time the interest rate swap agreements are terminated or
expire. Prior to the refinancing, the mark-to-market of interest rate swap
agreements that qualified for hedge accounting treatment was recognized as a
component of other comprehensive income (loss) in stockholders' equity.
Prior to the cessation of hedge accounting resulting from the May 9, 2002
refinancing, the balance in other comprehensive income (loss) for all of NMHG's
interest rate swap agreements was a pre-tax loss of $4.2 million ($2.6 million
after-tax). This balance is being amortized into the statement of operations
over the remaining lives of the interest rate swap agreements in accordance with
the provisions in SFAS No. 133, as amended. The amount of amortization of
accumulated other comprehensive income included in the statement of operations
during the three and six months ended June 30, 2002 was a pre-tax expense of
$0.9 million. At June 30, 2002, NMHG held interest rate swap agreements with a
notional amount of $335.0 million and a fair market value of a payable of $10.7
million. The mark-to-market of the interest rate swap agreements that was
included in the statement of operations during the second quarter of 2002 and
the first six months of 2002 was an expense of $2.2 million and $1.9 million,
respectively.
On June 27, 2002, NMHG terminated certain interest rate swap agreements, which
required cash settlement on July 1, 2002. The combined notional amount and fair
market value of the interest rate swap agreements terminated was $100.0 million
and a payable of $5.5 million on the date of termination. The amount of the
deferred loss remaining in accumulated other comprehensive income (loss)
relating to these interest rate swap agreements will continue to be amortized
over the original lives of the terminated interest rate swap agreements.
Housewares: Effective May 29, 2002, KCI entered into a financing arrangement
that provides for a secured, floating-rate revolving line of credit (the
"Facility") with availability up to $15.0 million, based on a formula using
KCI's eligible inventory, as defined. The Facility includes restrictive
covenants that, among other things, limit capital expenditures and requires an
annual repayment to ensure borrowings do not exceed $6.5 million for 30
consecutive days during January and February. The Facility also requires KCI to
maintain certain debt and interest coverage ratios and maintain a minimum level
of tangible net worth, as defined. The term of this facility is three years.
This financing is intended to replace KCI's previous source of financing, which
was intercompany borrowings from HB/PS or the parent company. At June 30, 2002,
the borrowing base as defined in the agreement was $10.3 million. Borrowings
outstanding at June 30, 2002 were $8.2 million at an effective interest rate of
LIBOR plus 1.35%, or 3.19%.
During the second quarter of 2002, HB/PS' revolving line of credit was revised
to reduce the amount available from $160.0 million to $150.0 million. This
reduction in capacity was primarily driven by a reduction in the need for HB/PS
to advance funds to its affiliate, KCI. Also during the second quarter of 2002,
the entire amount outstanding under HB/PS' revolving line of credit of $82.0
million is classified as a current liability due to the expiration of the
facility within the next 12 months, in May 2003. HB/PS intends to refinance this
revolving line of credit prior to its expiration. However, there can be no
assurance that a new line of credit can be obtained on favorable terms or at
all.
Note 6 - Asset Impairment
In the second quarter of 2002, NMHG Wholesale recognized an impairment loss of
approximately $0.8 million, included on the line selling, general and
administrative expenses in the accompanying statement of operations, on certain
property, primarily land, owned in South America due to an estimated decline in
value provided by broker quotes.
Note 7 - Segment Information
Financial information for each of the Company's reportable segments, as defined
by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is presented in the following table.
NMHG Wholesale derives a portion of its revenues from transactions with NMHG
Retail. The amount of these revenues, which are based on current market prices
on similar third-party transactions, are indicated in the following table on the
line "NMHG Eliminations" in the revenues section. No other intersegment sales
transactions occur.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ----------------
2002 2001 2002 2001
-------- -------- -------- --------
REVENUES FROM EXTERNAL CUSTOMERS
NMHG Wholesale $ 347.2 $ 392.0 $ 674.9 $ 834.9
NMHG Retail 58.6 78.3 114.8 153.6
NMHG Eliminations (17.1) (25.6) (29.2) (48.2)
-------- -------- --------- --------
NMHG Consolidated 388.7 444.7 760.5 940.3
Housewares 134.5 140.1 256.1 278.4
NACoal 86.3 83.1 169.4 166.4
NACCO and Other .1 .1 .1 .1
-------- -------- --------- --------
$ 609.6 $ 668.0 $ 1,186.1 $1,385.2
======== ======== ========= ========
GROSS PROFIT
NMHG Wholesale $ 57.6 $ 54.0 $ 106.4 $ 126.6
NMHG Retail 10.6 16.5 22.9 32.0
NMHG Eliminations .3 1.5 .9 2.2
-------- -------- --------- --------
NMHG Consolidated 68.5 72.0 130.2 160.8
Housewares 29.5 26.4 49.8 48.2
NACoal 15.7 17.8 34.2 37.6
NACCO and Other .1 .1 --- ---
-------- -------- --------- --------
$ 113.8 $ 116.3 $ 214.2 $ 246.6
======== ======== ========= ========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
NMHG Wholesale $ 43.8 $ 43.3 $ 85.6 $ 87.2
NMHG Retail 14.0 20.6 27.0 40.2
NMHG Eliminations (.3) (.2) (.6) (.5)
-------- -------- --------- --------
NMHG Consolidated 57.5 63.7 112.0 126.9
Housewares 26.3 24.5 49.2 48.5
NACoal 3.3 3.0 6.8 5.9
NACCO and Other 1.1 3.0 1.8 6.1
-------- -------- --------- --------
$ 88.2 $ 94.2 $ 169.8 $ 187.4
======== ======== ========= ========
FINANCIAL SUMMARY - continued
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ----------------
2002 2001 2002 2001
-------- -------- -------- --------
AMORTIZATION OF GOODWILL*
NMHG Wholesale $ --- $ 2.9 $ --- $ 5.8
NMHG Retail --- .4 --- .7
-------- -------- -------- --------
NMHG Consolidated --- 3.3 --- 6.5
Housewares --- .7 --- 1.5
-------- -------- -------- --------
$ --- $ 4.0 $ --- $ 8.0
======== ======== ======== ========
OPERATING PROFIT (LOSS)
NMHG Wholesale $ 13.8 $ 7.8 $ 20.8 $ 33.6
NMHG Retail (3.4) (4.5) (4.1) (8.9)
NMHG Eliminations .6 1.7 1.5 2.7
-------- -------- -------- --------
NMHG Consolidated 11.0 5.0 18.2 27.4
Housewares 3.2 1.2 .6 (1.8)
NACoal 12.4 14.8 27.4 31.7
NACCO and Other (1.0) (2.9) (1.8) (6.1)
-------- -------- -------- --------
$ 25.6 $ 18.1 $ 44.4 $ 51.2
======== ======== ======== ========
OPERATING PROFIT (LOSS) EXCLUDING
GOODWILL AMORTIZATION
NMHG Wholesale $ 13.8 $ 10.7 $ 20.8 $ 39.4
NMHG Retail (3.4) (4.1) (4.1) (8.2)
NMHG Eliminations .6 1.7 1.5 2.7
-------- -------- -------- --------
NMHG Consolidated 11.0 8.3 18.2 33.9
Housewares 3.2 1.9 .6 (.3)
NACoal 12.4 14.8 27.4 31.7
NACCO and Other (1.0) (2.9) (1.8) (6.1)
-------- -------- -------- --------
$ 25.6 $ 22.1 $ 44.4 $ 59.2
======== ======== ======== ========
INTEREST EXPENSE
NMHG Wholesale $ (6.6) $ (3.4) $ (10.2) $ (6.0)
NMHG Retail (.9) (1.1) (1.7) (2.6)
NMHG Eliminations (1.1) (1.5) (2.2) (2.6)
-------- -------- -------- --------
NMHG Consolidated (8.6) (6.0) (14.1) (11.2)
Housewares (1.9) (1.8) (3.8) (3.5)
NACoal (2.7) (3.0) (5.9) (3.3)
Eliminations .1 .2 .2 .2
-------- -------- -------- --------
(13.1) (10.6) (23.6) (17.8)
Project mining subsidiaries (4.1) (4.2) (8.1) (8.4)
-------- -------- -------- --------
$ (17.2) $ (14.8) $ (31.7) $ (26.2)
======== ======== ======== ========
INTEREST INCOME
NMHG Wholesale $ .6 $ .9 $ 1.2 $ 1.8
NMHG Retail --- .1 --- .1
-------- -------- -------- --------
NMHG Consolidated .6 1.0 1.2 1.9
NACoal .1 .1 .1 .3
NACCO and Other .1 --- .2 ---
Eliminations (.1) (.2) (.2) (.2)
-------- -------- -------- --------
$ .7 $ .9 $ 1.3 $ 2.0
======== ======== ======== ========
* Amortization of goodwill is not recognized in 2002 as a result of the adoption
of SFAS No. 142 on January 1, 2002. See Note 4 for further discussion.
FINANCIAL SUMMARY - continued
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ----------------
2002 2001 2002 2001
------- ------- -------- -------
OTHER-NET, INCOME (EXPENSE), EXCLUDING INTEREST
INCOME
NMHG Wholesale $ (4.2) $ 2.4 $ (3.3) $ 1.5
NMHG Retail (1.0) --- (1.0) ---
------- ------- -------- -------
NMHG Consolidated (5.2) 2.4 (4.3) 1.5
Housewares (.7) .7 (.8) ---
NACoal (.1) (.4) (.3) (.7)
NACCO and Other .6 2.3 1.1 4.5
------- ------- -------- -------
$ (5.4) $ 5.0 $ (4.3) $ 5.3
======= ======= ======== =======
INCOME TAX PROVISION (BENEFIT)
NMHG Wholesale $ 1.4 $ 3.0 $ .9 $ 12.7
NMHG Retail (1.9) (1.7) (2.2) (3.6)
NMHG Eliminations (.2) .1 (.3) .1
------- ------- -------- -------
NMHG Consolidated (.7) 1.4 (1.6) 9.2
Housewares .2 --- (1.6) (2.3)
NACoal 1.4 1.9 2.6 5.0
NACCO and Other .3 --- 1.7 .3
------- ------- -------- -------
$ 1.2 $ 3.3 $ 1.1 $ 12.2
======= ======= ======== =======
NET INCOME (LOSS)
NMHG Wholesale $ 2.5 $ 4.9 $ 8.1 $ 17.3
NMHG Retail (3.4) (3.8) (4.6) (7.8)
NMHG Eliminations (.3) .1 (.4) ---
------- ------- -------- -------
NMHG Consolidated (1.2) 1.2 3.1 9.5
Housewares .4 .1 (2.4) (3.0)
NACoal 4.2 5.4 10.6 14.6
NACCO and Other (.6) (.6) (2.2) (1.9)
------- ------- -------- -------
$ 2.8 $ 6.1 $ 9.1 $ 19.2
======= ======= ======== =======
DEPRECIATION, DEPLETION AND
AMORTIZATION EXPENSE
NMHG Wholesale $ 7.6 $ 11.2 $ 15.2 $ 22.2
NMHG Retail 2.5 3.2 5.5 6.9
------- ------- -------- -------
NMHG Consolidated 10.1 14.4 20.7 29.1
Housewares 2.9 5.4 7.1 11.0
NACoal 2.0 1.3 4.1 2.5
NACCO and Other --- --- --- .1
------- ------- -------- -------
15.0 21.1 31.9 42.7
Project mining subsidiaries 7.1 7.6 14.8 15.2
------- ------- -------- -------
$ 22.1 $ 28.7 $ 46.7 $ 57.9
======= ======= ======== =======
CAPITAL EXPENDITURES
NMHG Wholesale $ 2.4 $ 12.3 $ 7.8 $ 21.5
NMHG Retail .5 8.0 1.3 8.5
------- ------- -------- -------
NMHG Consolidated 2.9 20.3 9.1 30.0
Housewares 1.5 4.0 2.5 8.4
NACoal 1.9 3.7 3.1 8.9
NACCO and Other .3 --- .7 ---
------- ------- -------- -------
6.6 28.0 15.4 47.3
Project mining subsidiaries 3.6 5.0 5.2 6.6
------- ------- -------- -------
$ 10.2 $ 33.0 $ 20.6 $ 53.9
======= ======= ======== =======
FINANCIAL SUMMARY - continued
JUNE 30 DECEMBER 31
2002 2001
----------- -----------
TOTAL ASSETS
NMHG Wholesale $ 1,113.7 $ 1,164.9
NMHG Retail 202.9 215.6
NMHG Parent/Eliminations (100.0) (175.4)
----------- -----------
NMHG Consolidated 1,216.6 1,205.1
Housewares 342.2 250.3
NACoal 225.7 347.5
NACCO and Other 52.5 60.4
----------- -----------
1,837.0 1,863.3
Project mining subsidiaries 378.3 383.1
----------- -----------
2,215.3 2,246.4
Consolidating Eliminations (64.0) (84.5)
----------- -----------
$ 2,151.3 $ 2,161.9
=========== ===========
Note 8 - Accounting Standards Not Yet Adopted
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 requires gains and losses on extinguishments of debt to be
reclassified as income or loss from continuing operations rather than as
extraordinary items as previously required by SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt." SFAS No. 145 also amends SFAS No. 13 to
require certain modifications to capital leases to be treated as sale-leaseback
transactions and modifies the accounting for subleases when the original lessee
remains a secondary obligor, or guarantor. SFAS No. 145 also rescinded SFAS No.
44, which addressed the accounting for intangible assets of motor carriers and
made numerous technical corrections.
The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are
effective for fiscal years beginning after May 15, 2002, with restatement of
prior periods for any gain or loss on the extinguishment of debt that was
classified as an extraordinary item in prior periods, as necessary. The
remaining provisions of SFAS No. 145 are effective for transactions and
reporting subsequent to May 15, 2002. The adoption of SFAS No. 145 did not have
a material impact to the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 is effective for exit or disposal activities initiated
after December 31, 2002. SFAS No. 146 requires that liabilities for one-time
termination benefits that will be incurred over future service periods should be
measured at the fair value as of the termination date and recognized over the
future service period. This statement also requires that liabilities associated
with disposal activities should be recorded when incurred. These liabilities
should be adjusted for subsequent changes resulting from revisions to either the
timing or amount of estimated cash flows, discounted at the original
credit-adjusted risk-free rate. Interest on the liability would be accreted and
charged to expense as an operating item. The Company does not expect the
adoption of this statement to have a material impact to the Company's financial
position or results of operations.
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Per Share Data)
=========================================
Critical Accounting Policies and Estimates
=========================================
Please refer to the discussion of the Company's Critical Accounting Policies and
Estimates as disclosed on pages 19 and 20 in the Company's Form 10-K for the
fiscal year ended December 31, 2001. In addition to those policies and estimates
set forth in the Form 10-K, as a result of the adoption of SFAS No. 142, as
discussed in Note 4 to the Unaudited Condensed Consolidated Financial Statements
in this Form 10-Q, the Company also considers the accounting for its goodwill,
which is a significant asset to the Company, to be a critical accounting policy.
Changes in management's judgments and estimates could significantly affect the
Company's analysis of the impairment of goodwill. To test goodwill for
impairment, the Company is required to estimate the fair market value of each of
its reporting units. Using management judgments, a model was developed to
estimate the fair market value of the reporting units. This fair market value
model incorporated the Company's estimates of future cash flows, estimated
allocations of certain assets and cash flows among reporting units, estimates of
future growth rates and management's judgment regarding the applicable discount
rates to use to discount those estimated cash flows. Changes to these judgments
and estimates could result in a significantly different estimate of the fair
market value of the reporting units which could result in an impairment of
goodwill.
=================
FINANCIAL SUMMARY
=================
See Note 7 to the Unaudited Condensed Consolidated Financial Statements included
in this Form 10-Q for financial information by segment.
The parent company charges fees to its operating subsidiaries for services
provided by the corporate headquarters. These services represent most of the
parent company's operating expenses. The classification in the statement of
operations by the segments, however, changed in the first quarter of 2002 to
reflect a portion of the fees in selling, general and administrative expenses
and a portion of the fees in other-net, as directed by the parent company for
purposes of internal analysis. Following is a table for comparison of parent
company fees:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
NACCO fees included in selling, general and
administrative expenses
NMHG Wholesale $ 1.1 $ --- $ 2.3 $ ---
Housewares .5 --- 1.0 ---
NACoal .2 --- .3 ---
-------- -------- -------- --------
$ 1.8 $ --- $ 3.6 $ ---
======== ======== ======== ========
NACCO fees included in other-net, income
(expense)
NMHG Wholesale $ .6 $ 1.7 $ 1.2 $ 3.4
Housewares .2 .6 .4 1.3
NACoal .1 .2 .2 .5
-------- -------- -------- --------
$ .9 $ 2.5 $ 1.8 $ 5.2
======== ======== ======== ========
Total NACCO fees charged to segments
NMHG Wholesale $ 1.7 $ 1.7 $ 3.5 $ 3.4
Housewares .7 .6 1.4 1.3
NACoal .3 .2 .5 .5
-------- -------- -------- --------
$ 2.7 $ 2.5 $ 5.4 $ 5.2
======== ======== ======== ========
================
NMHG HOLDING CO.
================
NMHG designs, engineers, manufactures, sells, services and leases a full line of
lift trucks and service parts marketed worldwide under the Hyster(R) and Yale(R)
brand names.
FINANCIAL REVIEW
The segment and geographic results of operations for NMHG were as follows for
the three months and six months ended June 30:
THREE MONTHS SIX MONTHS
------------ ----------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues
Wholesale
Americas $ 237.6 $ 280.1 $ 465.9 $ 607.6
Europe, Africa and Middle East 92.2 94.6 176.8 194.2
Asia-Pacific 17.4 17.3 32.2 33.1
-------- -------- -------- --------
347.2 392.0 674.9 834.9
-------- -------- -------- --------
Retail (net of eliminations)
Americas 6.4 9.0 14.0 17.4
Europe, Africa and Middle East 16.2 25.4 32.3 50.3
Asia-Pacific 18.9 18.3 39.3 37.7
-------- -------- -------- --------
41.5 52.7 85.6 105.4
-------- -------- -------- --------
NMHG Consolidated $ 388.7 $ 444.7 $ 760.5 $ 940.3
======== ======== ======== ========
Operating profit (loss)
Wholesale
Americas $ 12.2 $ 8.5 $ 22.0 $ 34.3
Europe, Africa and Middle East 1.8 (.4) (1.0) .3
Asia-Pacific (.2) (.3) (.2) (1.0)
-------- -------- -------- --------
13.8 7.8 20.8 33.6
-------- -------- -------- --------
Retail (net of eliminations)
Americas (.4) (.1) (.2) (1.0)
Europe, Africa and Middle East .7 (3.8) 1.0 (7.7)
Asia-Pacific (3.1) 1.1 (3.4) 2.5
-------- -------- -------- --------
(2.8) (2.8) (2.6) (6.2)
-------- -------- -------- --------
NMHG Consolidated $ 11.0 $ 5.0 $ 18.2 $ 27.4
======== ======== ======== ========
Operating profit (loss) excluding
goodwill amortization
Wholesale
Americas $ 12.2 $ 10.4 $ 22.0 $ 38.2
Europe, Africa and Middle East 1.8 .5 (1.0) 2.0
Asia-Pacific (.2) (.2) (.2) (.8)
-------- -------- -------- --------
13.8 10.7 20.8 39.4
-------- -------- -------- --------
Retail (net of eliminations)
Americas (.4) --- (.2) (.8)
Europe, Africa and Middle East .7 (3.7) 1.0 (7.5)
Asia-Pacific (3.1) 1.3 (3.4) 2.8
-------- -------- -------- --------
(2.8) (2.4) (2.6) (5.5)
-------- -------- -------- --------
NMHG Consolidated $ 11.0 $ 8.3 $ 18.2 $ 33.9
======== ======== ======== ========
Interest expense
Wholesale $ (6.6) $ (3.4) $ (10.2) $ (6.0)
Retail (net of eliminations) (2.0) (2.6) (3.9) (5.2)
-------- -------- -------- --------
NMHG Consolidated $ (8.6) $ (6.0) $ (14.1) $ (11.2)
======== ======== ======== ========
NMHG HOLDING CO. - continued
FINANCIAL REVIEW - continued
THREE MONTHS SIX MONTHS
------------ ----------
2002 2001 2002 2001
------- ------- ------- -------
Other-net
Wholesale $ (3.6) $ 3.3 $ (2.1) $ 3.3
Retail (net of eliminations) (1.0) .1 (1.0) .1
------- ------- ------- -------
NMHG Consolidated $ (4.6) $ 3.4 $ (3.1) $ 3.4
======= ======= ======= =======
Net income (loss)
Wholesale $ 2.5 $ 4.9 $ 8.1 $ 17.3
Retail (net of eliminations) (3.7) (3.7) (5.0) (7.8)
------- ------- ------- -------
NMHG Consolidated $ (1.2) $ 1.2 $ 3.1 $ 9.5
======= ======= ======= =======
Effective tax rate
Wholesale 38.9% 39.0% 10.6% 41.1%
Retail (including eliminations) 36.2% 30.2% 33.3% 31.0%
NMHG Consolidated 31.8% 58.3% See (a) 46.9%
(a) The effective tax rate for the six months ended June 30, 2002 for NMHG
Consolidated is not meaningful.
The effective tax rate for the six months ended June 30, 2002 is a low 10.6
percent for NMHG Wholesale and is not meaningful for NMHG Consolidated due to a
$1.9 million tax benefit recognized in the first quarter of 2002 related to the
recognition of previously generated losses in China, combined with a relatively
low level of pre-tax income. These factors resulted in a net tax benefit for
NMHG Consolidated generated on pre-tax income.
Second Quarter of 2002 Compared with Second Quarter of 2001
NMHG Wholesale: Revenues decreased to $347.2 million in the second quarter of
2002, down 11.4 percent from $392.0 million in the second quarter of 2001. The
decline in revenues was largely due to decreased unit volume worldwide, as unit
shipments declined 12.3 percent to 16,135 units in the second quarter of 2002
from 18,402 units in the second quarter of 2001.
Operating profit increased to $13.8 million in the second quarter of 2002 from
$7.8 million in the second quarter of 2001. Operating profit improved despite a
decrease in unit volume primarily due to (i) lower manufacturing costs driven by
the completion of the Danville restructuring program in the fourth quarter of
2001 and global procurement and cost control programs, (ii) a favorable shift in
mix to higher-margin lift trucks and (iii) the elimination of goodwill
amortization of $2.9 million. See Note 3 and Note 4 to the Unaudited Condensed
Consolidated Financial Statements in this Form 10-Q for a discussion of the NMHG
Wholesale restructuring programs and the adoption of SFAS No. 142, respectively.
Net income decreased to $2.5 million in the second quarter of 2002 from $4.9
million in the second quarter of 2001. Although operating profit increased for
the second quarter of 2002 as compared with 2001, net income declined due to an
increase in interest expense and other-net expenses. Interest expense increased
in the second quarter of 2002 as compared with the second quarter of 2001 due to
an increase in the average borrowings outstanding, an increase in interest rates
and the amortization of deferred financing fees.
NMHG HOLDING CO. - continued
FINANCIAL REVIEW - continued
Both the increase in interest rates and the amortization of deferred financing
fees relate to the refinancing of NMHG's debt during the second quarter of 2002,
which is discussed further in the NMHG Holding Co. Liquidity and Capital
Resources section of this Form 10-Q. The increase in the average borrowings
outstanding is primarily due to the December 2001 termination of the asset
securitization program in the Americas, such that, effective December 2001,
certain accounts receivables in the United States are no longer sold, but are
financed with debt. In addition, the increase in the average borrowings
outstanding is due to the May 9, 2002 termination of a program to sell accounts
receivable in Europe such that, effective May 9, 2002, certain accounts
receivable in Europe are no longer sold, but are financed with debt.
In the second quarter of 2002, other-net includes a pre-tax expense of $3.1
million ($1.9 million after-tax) related to (i) the mark-to-market of interest
rate swap agreements that no longer qualify for hedge accounting due to the
refinancing of NMHG's debt and (ii) the recognition of previously deferred
losses on these interest rate swap agreements. See further discussion in Note 5
to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q.
Also affecting the year over year comparability of net income is a pre-tax
insurance recovery of $5.2 million ($3.2 million after-tax) included in
other-net in the second quarter of 2001 relating to flood damage in September
2000 at NMHG's Sumitomo-NACCO joint venture in Japan.
The worldwide backlog level increased to 17,500 units at June 30, 2002 from
14,100 units at June 30, 2001 and 16,300 units at the end of the first quarter
of 2002 due to an increase in demand in the Americas and Europe.
NMHG Retail (net of eliminations): Revenues decreased to $41.5 million in the
second quarter of 2002 from $52.7 million in the second quarter of 2001. This
decrease is primarily due to the sale of retail dealerships in the fourth
quarter of 2001 (the "sold operations"), which were included in the results for
the second quarter of 2001, and decreased sales of new units worldwide. Revenues
generated in the second quarter of 2001 by the sold operations were $6.7
million, net of intercompany eliminations.
Operating loss was unchanged at $2.8 million for both the second quarter of 2002
and the second quarter of 2001. Benefits from (i) lower operating costs in
Europe resulting from restructuring programs implemented in 2001, (ii) the
elimination of losses incurred by the sold operations in the second quarter of
2001 and (iii) the elimination of goodwill amortization were offset by the
unfavorable effect of lower volumes and expenses for implementing cost reduction
programs in Asia-Pacific.
Unchanged operating loss and a decrease in the interest expense incurred by NMHG
Retail offset by unfavorable foreign currency movements included in other-net
expenses, resulted in an unchanged net loss of $3.7 million for both the second
quarter of 2002 and the second quarter of 2001.
First Six Months of 2002 Compared with First Six Months of 2001
NMHG Wholesale: Revenues decreased to $674.9 million in the first six months of
2002 from $834.9 million in the first six months of 2001. The decline in
revenues was primarily driven by decreased unit volume and, to a lesser degree,
decreased service parts sales in the Americas. The decrease was slightly offset
by a favorable shift in mix to higher-priced lift trucks.
NMHG HOLDING CO. - continued
FINANCIAL REVIEW - continued
Operating profit decreased to $20.8 million in the first half of 2002 from $33.6
million in the first half of 2001. The decrease in operating profit was
primarily driven by reduced unit and parts volume and the consequent negative
impact of lower shipments on manufacturing overhead absorption. The decline in
operating profit was partially offset by a shift in mix to higher-margin lift
trucks; the positive impact from improvement programs initiated in 2001,
including the completion of the Danville, Illinois, plant closure in the fourth
quarter of 2001 and the benefits of procurement, restructuring and cost control
programs; and the elimination of goodwill amortization as a result of the
adoption of SFAS No. 142.
Net income decreased to $8.1 million in the first six months of 2002 from $17.3
million in the first six months of 2001 as a result of the factors affecting
operating profit and additional interest and other-net expenses due to the
factors discussed for the second quarter operating results, above. Net income
for the first six months of 2001 also included a $1.3 million after-tax charge
for the cumulative effect of accounting changes for derivatives and pension
costs.
NMHG Retail (net of eliminations): Revenues decreased to $85.6 million for the
first six months of 2002 from $105.4 million for the first six months of 2001.
Revenues for the first six months of 2001 include 12.4 million of revenues
generated by the sold operations. Revenues also declined year over year due to
decreased volumes of new units. Operating loss in the first six months of 2002
was $2.6 million compared with an operating loss of $6.2 million in the first
six months of 2001. Operating results improved primarily due to (i) lower
operating costs in Europe resulting from restructuring programs implemented in
2001, (ii) the elimination of losses incurred by the sold operations in the
second half of 2001 and (iii) the elimination of goodwill amortization,
partially offset by the unfavorable effect of lower volumes and expenses for
implementing cost reduction programs in Asia-Pacific. Net loss was $5.0 million
for the six months ended June 30, 2002 compared with $7.8 million for the first
six months of 2001, primarily due to the factors affecting operating loss.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $7.8 million for NMHG
Wholesale and $1.3 million for NMHG Retail during the first half of 2002. These
capital expenditures include investments in machinery and equipment, tooling for
new products, information systems and lease and rental fleet. It is estimated
that NMHG's capital expenditures for the remainder of 2002 will be approximately
$9.0 million for NMHG Wholesale and $1.3 million for NMHG Retail. Planned
expenditures for the remainder of 2002 include tooling for new products,
investments in worldwide information systems and additions to retail lease and
rental fleet. The principal sources of financing for these capital expenditures
are internally generated funds and bank borrowings.
During the first half of 2002, NMHG Retail entered into operating lease
agreements, primarily for rental equipment, with future minimum lease payments
of approximately $5.6 million in 2002, $6.1 million in 2003, $4.9 million in
2004, $4.7 million in 2005, $3.0 million in 2006 and $1.9 million thereafter,
for a total increase in NMHG's operating lease obligations of $26.2 million
since December 31, 2001. In addition, see the discussion below regarding
refinancing of certain of NMHG's debt. Since December 31, 2001, there have been
no other significant changes in the total amount of NMHG's contractual
obligations or commercial commitments, or the timing of cash flows in accordance
with those obligations, as reported in the Company's 10-K for the year ended
December 31, 2001.
On May 9, 2002, NMHG replaced its primary financing agreement, an unsecured
floating-rate revolving line of credit with availability of $350.0 million,
certain other lines of credit with availability of $28.6 million and a program
to sell accounts receivable in Europe, with the proceeds from the private
placement of $250.0 million of 10% unsecured Senior Notes due 2009 and
borrowings under a secured, floating-rate revolving credit facility which
expires in May 2005. The proceeds from the Senior Notes were reduced by an
original issue discount of $3.1 million.
NMHG HOLDING CO. - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
The $250.0 million of 10% Senior Notes mature on May 15, 2009. The Senior Notes
are senior unsecured obligations of NMHG Holding Co. and are guaranteed by
substantially all of NMHG's domestic subsidiaries. NMHG has filed a registration
statement on Form S-4 to exchange the Senior Notes for notes with substantially
identical terms registered with the SEC. NMHG Holding Co. has the option to
redeem all or a portion of the Senior Notes on or after May 15, 2006 at the
redemption prices set forth in the Indenture governing the Senior Notes.
Availability under the new revolving credit facility is up to $175.0 million and
is governed by a borrowing base based on advance rates against the inventory and
accounts receivable of the "borrowers." Adjustments to reserves booked against
these assets, including inventory reserves, will change the eligible borrowing
base and thereby impact the liquidity provided by the facility. The borrowers,
as defined in the new revolving credit facility, include NMHG Holding Co. and
certain domestic and foreign subsidiaries of NMHG Holding Co. Borrowings bear
interest at a floating rate, which can be either a base rate or LIBOR, as
defined, plus an applicable margin. The initial applicable margins, effective
through September 30, 2002, for base rate loans and LIBOR loans are 2.00% and
3.00%, respectively. The new revolving credit facility also requires a fee of
0.5% per annum on the unused commitment. Subsequent to September 30, 2002, the
margins and unused commitment fee will be subject to adjustment based on a
leverage ratio.
At June 30, 2002, the borrowing capacity under this facility, both domestic and
foreign, was $79.9 million, which has been reduced by the commitments or
availability under certain foreign credit facilities and an excess availability
requirement of $15.0 million, as described below. Borrowings outstanding under
this facility were $34.9 million at June 30, 2002. The domestic floating rate of
interest applicable to this facility on June 30, 2002 was 6.75%, including the
applicable floating rate margin. The new revolving credit facility includes a
subfacility for foreign borrowers which can be denominated in British pounds
sterling or euro. The foreign floating rate of interest applicable to this
subfacility on June 30, 2002 was 7.18%, including the applicable floating rate
margin. Included in the borrowing capacity is a $15.0 million overdraft facility
available to foreign borrowers. The initial applicable margin, effective through
September 30, 2002, for overdraft loans is 3.25% above the London base rate, as
defined. The new revolving credit facility is guaranteed by certain domestic and
foreign subsidiaries of NMHG Holding Co. and secured by substantially all of the
assets, other than property, plant and equipment, of the borrowers and
guarantors, both domestic and foreign, under the facility.
The terms of the new revolving credit facility provide that availability is
reduced by the commitments or availability under a foreign credit facility of
the borrowers and certain foreign working capital facilities. A foreign credit
facility commitment of approximately U.S. $18.1 million on June 30, 2002,
denominated in Australian dollars, reduced the amount of availability under the
new revolving credit facility. In addition, availability under the new revolving
credit facility was reduced by $5.5 million for a working capital facility
denominated in Chinese yuan. If the commitments or availability under these
facilities are increased, availability under the new revolving credit facility
will be reduced. The $79.9 million of capacity under the new revolving credit
facility at June 30, 2002 reflected the reduction of these foreign credit
facilities.
Both the new revolving credit facility and terms of the Senior Notes include
restrictive covenants which, among other things, limit dividends to NACCO. The
new revolving credit facility also requires NMHG to meet certain financial
tests, including, but not limited to, minimum excess availability, maximum
capital expenditures, maximum leverage ratio and minimum fixed charge coverage
ratio tests. The borrowers must maintain aggregate excess availability under the
new revolving credit facility of at least $15.0 million.
NMHG paid financing fees of approximately $13.0 million related to this
refinancing. These fees were deferred and will be amortized as interest expense
in the statement of operations over the respective terms of the new financing
facilities.
As a result of the refinancing of NMHG's floating-rate revolving credit
facility, NMHG's interest rate swap agreements no longer qualify for hedge
accounting treatment in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. See further discussion in Note
5 to the Unaudited Condensed Consolidated Financial Statements included in this
Form 10-Q.
NMHG HOLDING CO. - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
NMHG believes that funds available under the new revolving credit facility,
other available lines of credit and operating cash flows are sufficient to
finance all of its operating needs and commitments arising during the
foreseeable future.
NMHG Wholesale's capital structure is presented below:
JUNE 30 DECEMBER 31
2002 2001
-------- ------------
NMHG Wholesale:
Total net tangible assets $ 282.8 $ 375.2
Advances to NMHG Retail 16.2 70.2
Goodwill at cost 488.1 446.0
-------- --------
Net assets before goodwill amortization 787.1 891.4
Accumulated goodwill amortization (142.8) (141.4)
Advances from NACCO --- (8.0)
Advances from NMHG Parent (250.1) ---
Other debt (45.2) (300.9)
Minority interest (1.8) (2.3)
-------- --------
Stockholder's equity $ 347.2 $ 438.8
======== ========
Debt to total capitalization 46% 41%
The decrease in net tangible assets of $92.4 million is primarily due to a $79.0
million decrease in investments in NMHG Retail which was allocated to NMHG
Holding Co., the parent, and is not held by NMHG Wholesale. The remaining $13.4
million decrease in net tangible assets is due to decreases in cash and cash
equivalents, inventories, property, plant and equipment and net deferred tax
assets combined with increases in accounts payable and intercompany interest
payable, somewhat offset by an increase in accounts receivable. Accounts
receivable increased primarily due to the second quarter 2002 termination of an
agreement to sell European accounts receivable as part of NMHG's debt
refinancing.
As a result of NMHG's debt refinancing, certain of NMHG Wholesale's borrowings
that were previously from external sources are now financed from an intercompany
advance from NMHG Parent. As such, advances from NMHG Parent replaced the
majority of NMHG Wholesale's "other debt." Furthermore, NMHG Wholesale's
advances to NMHG Retail were reduced to the extent that NMHG Retail now obtains
financing from NMHG Parent instead of from NMHG Wholesale.
Net goodwill increased $40.7 million primarily due to a reallocation of goodwill
from NMHG Retail as part of the adoption of SFAS No. 142. See further discussion
in Note 4 to the Unaudited Condensed Consolidated Financial Statements in this
Form 10-Q.
Stockholder's equity decreased due to a dividend to the NMHG Parent of $117.7
million and a dividend to NACCO of $15.0 million, partially offset by a $10.4
million favorable adjustment to the foreign currency cumulative translation
balance, net income for the first six months of 2002 of $8.1 million, a $3.5
million favorable adjustment to the deferred loss on derivatives and a $19.1
million reallocation of equity from NMHG Retail and NMHG Parent. This adjustment
to equity among segments does not affect NMHG's consolidated equity position.
NMHG HOLDING CO. - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
NMHG Retail's capital structure is presented below:
JUNE 30 DECEMBER 31
2002 2001
------- --------
NMHG Retail:
Total net tangible assets $ 84.7 $ 109.5
Advances from NMHG Wholesale (16.2) (70.2)
Goodwill and other intangibles at cost 1.8 45.2
------- --------
Net assets before goodwill amortization 70.3 84.5
Accumulated goodwill and other intangible amortization (.2) (5.6)
Advances from NMHG Parent (16.2) ---
Other debt (39.1) (53.5)
------- --------
Stockholder's equity $ 14.8 $ 25.4
======= ========
Debt to total capitalization 79% 68%
The decrease in total net tangible assets of $24.8 million is primarily due to a
$19.8 million decrease in net intercompany and other receivables. The decrease
in net intercompany accounts receivable is primarily due to the settlement of
fiscal 2001 intercompany tax advances with NMHG Wholesale. Other receivables
decreased primarily due to proceeds received in the first quarter of 2002 for
the 2001 sold operations. A portion of these proceeds was used to pay down debt.
As noted above, certain advances from NMHG Wholesale were replaced with advances
from NMHG Parent. Overall, advances from affiliates decreased primarily due to
the transfer of net goodwill to NMHG Wholesale. See further discussion in Note 4
to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q.
The decrease in stockholder's equity is due to the $5.0 million net loss and a
$6.7 million reallocation of equity to NMHG Wholesale and NMHG Parent, partially
offset by a $1.1 favorable adjustment to the foreign currency cumulative
translation balance. The reallocation of equity among segments does not affect
NMHG's consolidated equity position.
======================
NACCO HOUSEWARES GROUP
======================
Because the Housewares business is seasonal, a majority of revenues and
operating profit occurs in the second half of the year when sales of small
electric appliances to retailers and consumers increase significantly for the
fall holiday selling season.
FINANCIAL REVIEW
The results of operations for Housewares were as follows for the three and six
months ended June 30:
THREE MONTHS SIX MONTHS
------------ ----------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues $ 134.5 $ 140.1 $ 256.1 $ 278.4
Operating profit (loss) $ 3.2 $ 1.2 $ .6 $ (1.8)
Operating profit (loss) excluding
goodwill amortization $ 3.2 $ 1.9 $ .6 $ (.3)
Interest expense $ (1.9) $ (1.8) $ (3.8) $ (3.5)
Other-net $ (.7) $ .7 $ (.8) $ ---
Net income (loss) $ .4 $ .1 $ (2.4) $ (3.0)
Effective tax rate 33.3% See(a) 40.0% 43.4%
(a) The effective tax rate for the quarter ended June 30, 2001 is not meaningful
due to the small level of pre-tax income and net income recognized during the
quarter.
Second Quarter of 2002 Compared with Second Quarter of 2001
Housewares' revenues decreased to $134.5 million in the second quarter of 2002
from $140.1 million in the second quarter of 2001 primarily due to lower unit
volume at HB/PS as a result of HB/PS' strategic decision to withdraw from
selected low-margin, opening-price-point business. Also, sales of HB/PS' home
health products decreased in the second quarter of 2002, compared with the
second quarter of 2001, due to the timing of advertising and promotions of
TrueAir(TM) home odor eliminators as well as increased competition in this
market segment. These declines in revenues were partially offset by increased
sales of General Electric-branded products to Wal*Mart. Increased revenues at
KCI were primarily due to higher overall consumer spending in outlet malls and
from decreased competition following the bankruptcy of a major competitor.
Second quarter 2002 KCI revenues were also positively affected by increases in
comparable stores' average sales transaction value and the total number of sales
transactions per store, compared with the second quarter of 2001. Also, the
number of stores operated by KCI increased to 169 stores at June 30, 2002 from
160 stores at June 30, 2001.
Operating profit in the seasonally weak second quarter was $3.2 million in the
second quarter of 2002 compared with $1.2 million in the second quarter of 2001.
This improvement in operating profit was primarily due to lower manufacturing
costs at HB/PS' Mexican plants as a result of restructuring activities initiated
in 2001, lower overall operating costs, including advertising expenditures, in
the second quarter of 2002, the elimination of goodwill amortization in the
second quarter of 2002 as a result of the adoption of SFAS No. 142 and increased
sales volume at KCI. These improvements were partially offset by a charge of
$3.6 million in the second quarter of 2002 related to a partial write-down of
pre-bankruptcy receivables from Kmart. See Note 3 and Note 4 to the Unaudited
Condensed Consolidated Financial Statements in this Form 10-Q for a discussion
of HB/PS' restructuring programs and the adoption of SFAS No. 142, respectively.
Net income of $0.4 million for the second quarter of 2002 improved as compared
with net income of $0.1 million for the second quarter of 2001 due to the
factors affecting operating profit, partially offset by unfavorable foreign
currency effects from transactions denominated in the Mexican peso.
NACCO HOUSEWARES GROUP - continued
FINANCIAL REVIEW - continued
First Six Months of 2002 Compared with First Six Months of 2001
Housewares' revenues decreased to $256.1 million in the first six months of
2002, down 8.0 percent from $278.4 million in the first six months of 2001. The
decline in revenues resulted from the same factors affecting the second quarter
discussed above.
For the six months ended June 30, 2002, Housewares recognized operating profit
of $0.6 million compared with an operating loss of $1.8 million for the first
six months of 2001. Improved operating profit resulted from lower manufacturing
costs at HB/PS' Mexican plants as a result of restructuring activities initiated
in 2001, lower advertising expenditures, lower transportation and warehousing
costs, increased sales volume at KCI and the elimination of the amortization of
goodwill in 2002. These improvements were partially offset by the second quarter
2002 charge of $3.6 million related to a partial write-down of pre-bankruptcy
receivables from Kmart.
Net loss of $2.4 million for the first six months of 2002 decreased as compared
with a net loss of $3.0 million for the first six months of 2001 primarily due
to the factors affecting operating profit, partially offset by unfavorable
foreign currency effects from transactions denominated in the Mexican peso.
The decrease in the effective tax rate for the six months ended June 30, 2002 as
compared with the six months ended June 30, 2001 was primarily due to the effect
of nondeductible goodwill amortization expense in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Housewares' expenditures for property, plant and equipment were $2.5 million
during the first half of 2002 and are estimated to be $9.1 million for the
remainder of 2002. These planned capital expenditures are primarily for tooling
and equipment designed for new products, as well as tooling and equipment
intended to reduce manufacturing costs and increase efficiency. These
expenditures are funded primarily from internally generated funds and short-term
borrowings.
During the second quarter of 2002, HB/PS' revolving line of credit (the "HB/PS
Facility") was revised to reduce the amount available from $160.0 million to
$150.0 million. This reduction in capacity was primarily driven by a reduction
in the need for HB/PS to advance funds to its affiliate, KCI. As discussed
below, during the second quarter of 2002, KCI entered into a separate financing
arrangement with a third-party financing company such that borrowings from HB/PS
should not be necessary in the near-term. The HB/PS Facility is secured by
substantially all of HB/PS' assets, provides lower interest rates if HB/PS
achieves certain interest coverage ratios and allows for interest rates quoted
under a competitive bid option. At June 30, 2002, the entire amount outstanding
under HB/PS' revolving line of credit of $82.0 million is classified as a
current liability due to the expiration of the facility within the next 12
months, in May 2003. HB/PS intends to refinance this revolving line of credit
prior to its expiration. However, there can be no assurance that a new line of
credit can be obtained on favorable terms or at all. At June 30, 2002, HB/PS had
$67.1 million of unrestricted availability under this facility. In addition,
HB/PS has separate uncommitted facilities of which $13.5 million was available
at June 30, 2002.
Effective May 29, 2002, KCI entered into a financing arrangement that provides
for a secured, floating-rate revolving line of credit (the "Facility") with
availability up to $15.0 million, based on a formula using KCI's eligible
inventory, as defined. The Facility includes restrictive covenants that, among
other things, limit capital expenditures and requires an annual repayment to
ensure borrowings do not exceed $6.5 million for 30 consecutive days during
January and February. The Facility also requires KCI to maintain certain debt
and interest coverage ratios and maintain a minimum level of tangible net worth,
as defined. The term of this facility is three years. This financing is intended
to replace KCI's previous source of financing, which was intercompany borrowings
from HB/PS or the parent company. At June 30, 2002, the borrowing base as
defined in the agreement was $10.3 million. Borrowings outstanding at June 30,
2002 were $8.2 million at an effective interest rate of LIBOR plus 1.35%, or
3.19%.
NACCO HOUSEWARES GROUP - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
With the exception of the new financing arrangement at KCI, which is due in
2005, there have been no significant changes in the total amount of Housewares'
contractual obligations or commercial commitments or the timing of cash flows in
accordance with those obligations, as reported in the Company's 10-K for the
year ended December 31, 2001.
With the expectation that the HB/PS Facility will be refinanced prior to its
expiration in May 2003, Housewares believes that funds available under its
credit facilities and operating cash flows are sufficient to finance all of its
operating needs and commitments arising during the foreseeable future.
Housewares' capital structure is presented below:
JUNE 30 DECEMBER 31
2002 2001
-------- --------
Total net tangible assets $ 149.6 $ 168.7
Goodwill at cost 123.5 123.5
-------- --------
Net assets before goodwill amortization 273.1 292.2
Accumulated goodwill amortization (39.8) (39.8)
Advances from NACCO --- (3.0)
Other debt (92.0) (103.8)
-------- --------
Stockholder's equity $ 141.3 $ 145.6
======== ========
Debt to total capitalization 39% 42%
The decline in total net tangible assets of $19.1 million since December 31,
2001 is primarily due to a $4.9 million decrease in cash and cash equivalents, a
$16.1 million decrease in current and long-term accounts receivable, a $6.5
million decrease in property, plant and equipment and a $14.7 million increase
in accounts payable, partially offset by a $21.6 million increase in
inventories. The decline in accounts receivable is due to a $3.6 million
write-down of pre-bankruptcy receivables from Kmart and a reduction in revenues
generated in the second quarter of 2002 versus the fourth quarter of 2001.
Increases in inventory and payables are primarily due to the seasonality of the
Housewares business.
Debt and advances from NACCO declined primarily as a result of the decrease in
net tangible assets. The decline in stockholder's equity at June 30, 2002
compared with December 31, 2001 is due to the $2.4 million net loss and an
increase in accumulated other comprehensive loss relating to an unfavorable
mark-to-market of derivatives.
===================================
THE NORTH AMERICAN COAL CORPORATION
===================================
NACoal mines and markets lignite for use primarily as fuel for power providers.
The lignite is surface mined in North Dakota, Texas, Louisiana and Mississippi.
Total coal reserves approximate 2.6 billion tons, with 1.2 billion tons
committed to customers pursuant to long-term contracts. NACoal operates six
wholly owned lignite mines: The Coteau Properties Company ("Coteau"), The
Falkirk Mining Company ("Falkirk"), The Sabine Mining Company ("Sabine"), San
Miguel Lignite Mine ("San Miguel"), Red River Mining Company ("Red River") and
Mississippi Lignite Mining Company ("MLMC"). NACoal also provides dragline
mining services ("Florida dragline operations") for a limerock quarry near
Miami, Florida. The operating results of Coteau, Falkirk and Sabine are included
in "project mining subsidiaries." The operating results of all other operations
are included in "other mining operations."
NACoal's subsidiaries, Coteau, Falkirk and Sabine, are termed "project mining
subsidiaries" because they mine lignite for utility customers pursuant to
long-term contracts at a price based on actual cost plus an agreed pre-tax
profit per ton. Due to the cost-plus nature of these contracts, revenues and
operating profits are affected by increases and decreases in operating costs, as
well as by tons sold. Net income of the project mining subsidiaries, however, is
not significantly affected by changes in such operating costs, which include
costs of operations, interest expense and certain other items. Because of the
nature of the contracts at these mines and because the operating results of the
project mining subsidiaries represent a substantial portion of NACoal's revenues
and profits, operating results are best analyzed in terms of lignite tons sold,
income before taxes and net income.
FINANCIAL REVIEW
Lignite tons sold by NACoal's operating lignite mines were as follows for the
three and six months ended June 30:
THREE MONTHS SIX MONTHS
------------ ----------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Coteau 3.4 3.3 7.5 7.6
Falkirk 1.5 1.7 3.4 3.5
Sabine .9 .8 2.0 1.5
San Miguel .8 1.0 1.6 1.6
MLMC .9 .1 1.2 .2
Red River .2 .2 .3 .5
----------- ----------- ----------- -----------
Total lignite 7.7 7.1 16.0 14.9
=========== =========== =========== ===========
The Florida dragline operations delivered 2.8 million and 5.2 million cubic
yards of limerock in the three and six months ended June 30, 2002, respectively.
This compares with 2.1 million and 4.0 million cubic yards of limerock in the
three and six months ended June 30, 2001, respectively.
THE NORTH AMERICAN COAL CORPORATION - continued
FINANCIAL REVIEW - continued
Revenues, income before taxes, provision for taxes and net income were as
follows for the three and six months ended June 30:
THREE MONTHS SIX MONTHS
------------ ----------
2002 2001 2002 2001
------- -------- -------- --------
Revenues
Project mining subsidiaries $ 63.8 $ 65.4 $ 128.2 $ 130.3
Other mining operations 21.8 11.5 36.2 22.9
------- -------- -------- --------
85.6 76.9 164.4 153.2
Liquidated damage payments recorded by MLMC --- 5.1 3.3 10.2
Arbitration award received by San Miguel --- --- --- 1.1
Royalties and other .7 1.1 1.7 1.9
------- -------- -------- --------
$ 86.3 $ 83.1 $ 169.4 $ 166.4
======= ======== ======== ========
Income before taxes
Project mining subsidiaries $ 6.1 $ 6.1 $ 13.5 $ 12.9
Other mining operations 2.5 5.3 6.8 12.1
------- -------- -------- --------
Total from operating mines 8.6 11.4 20.3 25.0
Royalties and other expenses, net (1.1) (2.7) (3.6) (2.5)
Other operating expenses (1.9) (1.4) (3.5) (2.9)
------- -------- -------- --------
5.6 7.3 13.2 19.6
Provision for taxes 1.4 1.9 2.6 5.0
------- -------- -------- --------
Net income $ 4.2 $ 5.4 $ 10.6 $ 14.6
======= ======== ======== ========
Second Quarter of 2002 Compared with Second Quarter of 2001
Revenues for the second quarter of 2002 increased to $86.3 million, up 3.9
percent from $83.1 million in the second quarter of 2001. Increased revenues in
the second quarter of 2002 as compared with the second quarter of 2001 is
primarily due to an increase in tons sold at MLMC due to the commencement of
commercial operations of the customer's power plant in 2002, partially offset by
(i) a decrease in liquidated damages payments which were received by MLMC in the
second quarter of 2001 due to the delay of commercial operations of the
customer's power plant, (ii) a slight decrease in tonnage volume at Red River
and (iii) a decrease in pass-through costs billed to the project mining
subsidiaries' customers.
Income before taxes decreased to $5.6 million in the second quarter of 2002 from
$7.3 million in the second quarter of 2001. This decrease is primarily due to
(i) increased operating costs at MLMC due to the significant increase in
production and delivery of lignite to the customer during the second quarter of
2002 as compared with operating costs incurred when receiving liquidated damages
payments in the second quarter of 2001 and (ii) lower tonnage volume at Red
River, partially offset by a $1.4 million gain on the sale of undeveloped
Eastern coal reserves that were not aligned with NACoal's development
strategies. Net income in the second quarter of 2002 decreased to $4.2 million
from $5.4 million in the second quarter of 2001 as a result of these factors.
First Six Months of 2002 Compared with First Six Months of 2001
Revenues for the first six months of 2002 increased to $169.4 million, up 1.8
percent from $166.4 million in the first six months of 2001. Increased revenues
in the first six months of 2002 as compared with the first six months of 2001 is
primarily due to an increase in tons sold at MLMC due to the commencement of
commercial operations of the customer's power plant in 2002 and increased tons
sold at Sabine, partially offset by (i) a decrease in pass-through costs billed
to the project mining subsidiaries' customers, (ii) a decrease in liquidated
damages payments which were received by MLMC in the second half of 2001 due to
the delay of commercial operations of the customer's power plant and (iii) a
decrease in tonnage volume at Red River.
THE NORTH AMERICAN COAL CORPORATION - continued
FINANCIAL REVIEW - continued
Income before taxes decreased to $13.2 million for the first six months of 2002
from $19.6 million for the first six months of 2001. This decrease is primarily
due to (i) lower tonnage volume at Red River, (ii) unfavorable operating results
at MLMC primarily due to increased operating costs from the significant increase
in production and delivery of lignite to the customer during the first six
months of 2002 as compared with operating costs incurred when receiving
liquidated damages payments during the first six months of 2001 and (iii)
increased interest expense primarily due to the capitalization of interest cost
during the first quarter of 2001 as part of the development of the initial
mining area at MLMC. These decreases were partially offset by a $1.4 million
gain on the sale of undeveloped Eastern coal reserves that were not aligned with
NACoal's development strategies. Net income in the second half of 2002 decreased
to $10.6 million from $14.6 million in the second half of 2001 as a result of
these factors.
Other Income and Expense and Income Taxes
The components of other income (expense) and the effective tax rate for the
three months and six months ended June 30 are as follows:
THREE MONTHS SIX MONTHS
------------ ----------
2002 2001 2002 2001
------- ------- ------- -------
Interest expense
Project mining subsidiaries $ (4.1) $ (4.2) $ (8.1) $ (8.4)
Other mining operations (2.7) (3.0) (5.9) (3.3)
------- ------- ------- -------
$ (6.8) $ (7.2) $ (14.0) $ (11.7)
======= ======= ======= =======
Other-net
Project mining subsidiaries $ .1 $ --- $ .1 $ .1
Other mining operations (.1) (.3) (.3) (.5)
------- ------- ------- -------
$ --- $ (.3) (.2) $ (.4)
======= ======= ======= =======
Effective tax rate 25.0% 26.0% 19.7% 25.5%
The decrease in the effective tax rate for the first six months of 2002 as
compared with the first six months of 2001 is primarily due to a greater
proportion of income from operations eligible to record a benefit from
percentage depletion.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $8.3 million during the
first half of 2002. NACoal estimates that its capital expenditures for the
remainder of 2002 will be $29.4 million, of which $22.3 million relates to the
development, establishment and improvement of the project mining subsidiaries'
mines and are financed or guaranteed by the utility customers. The remaining
$7.1 million of capital expenditures for 2002 primarily relates to continued
capital expenditures at MLMC and will be funded primarily from internally
generated funds and short-term borrowings.
NACoal's non-project-mine financing needs are provided by a revolving line of
credit of up to $60.0 million and a remaining term loan of $100.0 million (the
"NACoal Facility"). The NACoal Facility requires annual term loan repayments of
$15.0 million, with a final term loan repayment of $55.0 million in October
2005. The revolving credit facility of $60.0 million is available until the
facility's expiration in October 2005. The NACoal Facility has performance-based
pricing which sets interest rates based upon achieving various levels of Debt to
EBITDA ratios, as defined therein. At June 30, 2002, NACoal had $46.1 million of
its revolving credit facility available.
Since December 31, 2001, there have been no significant changes in the total
amount of NACoal's contractual obligations or commercial commitments, or the
timing of cash flows in accordance with those obligations, as reported in the
Company's 10-K for the year ended December 31, 2001.
THE NORTH AMERICAN COAL CORPORATION - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
The financing of the project mining subsidiaries, which is either provided or
guaranteed by the utility customers, includes long-term equipment leases, notes
payable and non-interest-bearing advances from customers. The obligations of the
project mining subsidiaries do not affect the short-term or long-term liquidity
of NACoal and are without recourse to NACCO or NACoal. These arrangements allow
the project mining subsidiaries to pay dividends to NACoal in amounts based on
their earnings.
NACoal believes that funds available under its revolving credit facility,
operating cash flows and financing provided by the project mining subsidiaries'
customers are sufficient to finance all of its term loan principal repayments
and its operating needs and commitments arising during the foreseeable future.
NACoal's capital structure, excluding the project mining subsidiaries, is
presented below:
JUNE 30 DECEMBER 31
2002 2001
-------- --------
Investment in project mining subsidiaries $ 4.4 $ 4.9
Other net tangible assets 103.3 127.6
Coal supply agreements, net 84.2 85.2
-------- --------
Net tangible assets 191.9 217.7
Advances from NACCO (19.5) (12.3)
Debt (114.1) (156.5)
-------- --------
Stockholder's equity $ 58.3 $ 48.9
======== ========
Debt to total capitalization 70% 78%
The decrease in other net tangible assets and debt is primarily due to the first
quarter 2002 refinancing of a lease covering several large pieces of equipment
at MLMC which was previously classified as a capital lease and now qualifies as
an operating lease. The total lease obligation and the timing of payments did
not change significantly as a result of this refinancing. The increase in
stockholder's equity is due to $10.6 million of net income for the first half of
2002 partially offset by dividends paid to NACCO.
===============
NACCO AND OTHER
===============
FINANCIAL REVIEW
NACCO and Other includes the parent company operations and Bellaire Corporation
("Bellaire"), a non-operating subsidiary of NACCO. Although Bellaire has no
significant ongoing operations, it does have significant long-term liabilities
related to closed mines, primarily from former eastern U.S. underground
coal-mining activities. On average, annual after-tax cash outflows related to
Bellaire's obligations are approximately $2.5 million.
The results of operations at NACCO and Other were as follows for the three and
six months ended June 30:
THREE MONTHS SIX MONTHS
------------ ----------
2002 2001 2002 2001
------ ------ ------ ------
Revenues $ .1 $ .1 $ .1 $ .1
Operating loss $ (1.0) $ (2.9) $ (1.8) $ (6.1)
Other income, net $ .7 $ 2.3 $ 1.3 $ 4.5
Net loss $ (.6) $ (.6) $ (2.2) $ (1.9)
The decrease in operating loss and other income, net in the three and six month
periods of 2002 as compared with the same periods of 2001 is primarily due to a
change in the classification of certain of NACCO's fees charged to the operating
segments. In 2002, $1.8 million and $3.6 million for the three and six months
ended June 30, 2002, respectively, of income from fees charged to the operating
segments is included in operating loss, but was classified in other income, net
in the same periods of 2001.
LIQUIDITY AND CAPITAL RESOURCES
Although NACCO's subsidiaries have entered into substantial borrowing
agreements, NACCO has not guaranteed the long-term debt or any borrowings of its
subsidiaries. The borrowing agreements at NMHG, Housewares and NACoal allow for
the payment to NACCO of dividends and advances under certain circumstances.
Dividends, advances and management fees from its subsidiaries are the primary
sources of cash for NACCO.
The Company believes that funds available under credit facilities, anticipated
funds to be generated from operations and the utility customers' funding of the
project mining subsidiaries are sufficient to finance all of its scheduled
principal repayments, operating needs and commitments arising during the
foreseeable future.
NACCO AND OTHER - continued
FINANCIAL REVIEW - continued
NACCO's consolidated capital structure is presented below:
JUNE 30 DECEMBER 31
2002 2001
---------- ----------
Total net tangible assets $ 634.2 $ 676.2
Coal supply agreements and other intangibles, net 85.8 85.2
Goodwill at cost 611.6 614.7
---------- ----------
Net assets before goodwill amortization 1,331.6 1,376.1
Accumulated goodwill amortization (182.6) (186.8)
Total debt, excluding current and long-term portion of
obligations of project mining subsidiaries (556.7) (614.7)
Closed mine obligations (Bellaire), including the
United Mine Worker retirees' medical fund, net-of-tax (41.6) (41.9)
Minority interest (2.9) (3.4)
---------- ----------
Stockholders' equity $ 547.8 $ 529.3
========== ==========
Debt to total capitalization 50% 54%
EFFECTS OF FOREIGN CURRENCY
NMHG and Housewares operate internationally and enter into transactions
denominated in foreign currencies. As such, the Company's financial results are
subject to the variability that arises from exchange rate movements. The effects
of foreign currency fluctuations on revenues, operating income and net income at
NMHG and Housewares were not material in the first half of 2002 as compared with
the first half of 2001. See also Item 3, "Quantitative and Qualitative
Disclosures About Market Risk, in this Form 10-Q.
OUTLOOK
NMHG Wholesale
NMHG Wholesale expects that previously initiated cost reduction activities,
including restructuring programs, procurement initiatives, and other strategic
and cost reduction programs, have positioned the company for improved results in
the second half of 2002, compared with the second half of 2001. Furthermore,
NMHG Wholesale does not expect to incur the inefficiencies of the second half of
2001, when production was dramatically reduced. NMHG Wholesale expects improved
operating results but also to incur, as a result of the refinancing of NMHG's
debt, increased interest expense, amortization of deferred financing fees and
the negative effect of interest rate swap agreements during the second half of
2002, compared with the second half of 2001.
NMHG Retail
NMHG Retail expects to continue its programs to improve the performance of its
wholly owned dealerships as part of its objective for reaching at least
break-even results.
OUTLOOK - continued
Housewares
HB/PS is cautiously optimistic that markets for consumer goods will continue to
improve in the second half of 2002. The company expects an improved product mix
due to additional product placements and new product introductions. HB/PS
anticipates that programs to reduce and consolidate its Mexican manufacturing
capacity will result in continued improvements in manufacturing efficiencies and
manufacturing overhead costs in the second half of 2002 in comparison with the
second half of 2001. The company anticipates that cash flow will improve as a
result of ongoing inventory management programs and tightly controlled capital
spending.
KCI expects comparable store revenues to continue improving over the next two
quarters. The company anticipates opening additional Kitchen Collection(R)
stores in outlet malls and Gadgets & More(R) stores in enclosed malls.
NACoal
NACoal anticipates that lignite coal deliveries for the second half of 2002 will
increase, compared with the second half of 2001, as a result of increased
lignite deliveries at MLMC resulting from demand from the Red Hills Power Plant.
Lignite coal deliveries at MLMC are expected to be approximately 2.8 million
tons in 2002. Red River is expected to sell fewer tons of lignite coal in the
second half of 2002 due to lower customer requirements.
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 in
these forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Such risks and uncertainties
with respect to each subsidiary's operations include, without limitation:
NMHG: (1) changes in demand for lift trucks and related aftermarket parts and
service on a worldwide basis, especially in the U.S. where the company derives a
majority of its sales, (2) changes in sales prices, (3) delays in delivery or
changes in costs of raw materials or sourced products and labor, (4) delays in
manufacturing and delivery schedules, (5) exchange rate fluctuations, changes in
foreign import tariffs and monetary policies and other changes in the regulatory
climate in the foreign countries in which NMHG operates and/or sells products,
(6) product liability or other litigation, warranty claims or returns of
products, (7) delays in or increased costs of restructuring programs, (8) the
effectiveness of the cost reduction programs implemented globally, including the
successful implementation of procurement initiatives, (9) acquisitions and/or
dispositions of dealerships by NMHG, (10) costs related to the integration of
acquisitions, (11) the impact of the introduction of the euro, including
increased competition, foreign currency exchange movements and/or changes in
operating costs and (12) uncertainties regarding the impact the September 11,
2001 terrorist activities and the subsequent climate of war may have on the
economy or the public's confidence in general.
Housewares: (1) changes in the sales prices, product mix or levels of consumer
purchases of kitchenware and small electric appliances, (2) bankruptcy of or
loss of major retail customers or suppliers, (3) changes in costs of raw
materials or sourced products, (4) delays in delivery or the unavailability of
raw materials or key component parts, (5) exchange rate fluctuations, changes in
the foreign import tariffs and monetary policies and other changes in the
regulatory climate in the foreign countries in which HB/PS buys, operates and/or
sells products, (6) product liability, regulatory actions or other litigation,
warranty claims or returns of products, (7) increased competition, (8) customer
acceptance of, changes in costs of, or delays in the development of new
products, including the GE-branded products sold to Wal*Mart and new home
environment products, (9) weather conditions or other events that would affect
the number of customers visiting Kitchen Collection stores and (10)
uncertainties regarding the impact the September 11, 2001 terrorist activities
and the subsequent climate of war may have on the economy or the public's
confidence in general.
NACoal: (1) weather conditions and other events that would change the level of
customers' fuel requirements, (2) weather or equipment problems that could
affect lignite deliveries to customers, (3) changes in maintenance, fuel or
other similar costs, (4) costs to pursue international opportunities and (5)
changes in the U.S. economy or in the power industry that would affect demand
for NACoal's Eastern U.S. underground reserves.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See pages 40, F-10, F-11 and F-20 of the Company's Form 10-K for the fiscal year
ended December 31, 2001, for a discussion of its derivative hedging policies and
use of financial instruments.
Interest Rate Risk: On May 9, 2002, NMHG refinanced a majority of its
floating-rate debt financing with the issuance of bonds at a fixed rate of
interest, thereby reducing the Company's exposure from its debt financing to
changes in the market rate of interest. However, at June 30, 2002, NMHG held
certain interest rate swap agreements that, because of the refinancing, are no
longer effective as hedges to changes in the floating rate of interest, and
thus, increase the Company's exposure to changes in the market rate of interest.
During the second quarter of 2002, NMHG terminated certain interest rate swap
agreements, with subsequent cash payment for the termination in July 2002. The
combined notional amount and fair market value of the interest rate swap
agreements terminated was $100.0 million and a payable of $5.5 million on the
date of termination. Therefore, at June 30, 2002, the market risk exposure from
changes in fair market value with respect to interest rate swap agreements held
by the Company has decreased as compared with December 31, 2001, due to the
termination of these interest rate swap agreements. See also discussion in Note
5 to the Unaudited Condensed Consolidated Financial Statements in this Form
10-Q.
For purposes of specific risk analysis, the Company uses sensitivity analysis to
measure the potential loss in fair value of financial instruments sensitive to
changes in interest rates. Assuming a hypothetical 10 percent decrease in
interest rates, the fair market value of interest rate sensitive financial
instruments, which primarily represents interest rate swap agreements, would
decline by $4.1 million as compared with their fair market value at December 31,
2001. The effect of terminating the interest rate swap agreements reduces this
exposure by approximately $0.6 million, such that a 10 percent decrease in
interest rates would reduce the fair market value by $3.5 million as compared
with the fair market value at December 31, 2001.
There have been no other material changes in the Company's market risk exposures
since December 31, 2001.
Part II
OTHER INFORMATION
Item 1 Legal Proceedings - None
Item 2 Changes in Securities and Use of Proceeds - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security
holders at the Annual Meeting of Stockholders held May 8, 2002,
with the results indicated:
Outstanding Shares Entitled to Vote Number of Votes
--------------------------------------- ---------------
Class A Common 6,560,427
Class B Common 16,352,180
---------------
22,912,607
===============
Item A.Election of twelve directors for the ensuing year.
Votes Votes
Director Nominee For Withheld Total
--------------------- ---------- -------- -----------
Owsley Brown II 21,645,316 28,526 21,673,842
Robert M. Gates 21,645,156 28,686 21,673,842
Leon J. Hendrix, Jr. 21,645,156 28,686 21,673,842
David H. Hoag 21,644,951 28,891 21,673,842
Dennis W. LaBarre 21,645,616 28,226 21,673,842
Richard de J. Osborne 21,644,851 28,991 21,673,842
Alfred M. Rankin, Jr. 21,645,816 28,026 21,673,842
Ian M. Ross 21,645,152 28,690 21,673,842
Britton T. Taplin 21,628,716 45,126 21,673,842
David F. Taplin 21,645,356 28,486 21,673,842
John F. Turben 21,645,252 28,590 21,673,842
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits. See Exhibit Index on page 41 of this quarterly
report on Form 10-Q.
(b) Reports on Form 8-K.
Current Report on Form 8-K filed with the
Commission on April 18, 2002 (Item 9)
Current Report on Form 8-K filed with the Commission
on April 18, 2002 (Items 5 and 7)
Current Report on Form 8-K filed with the Commission
on May 9, 2002 (Items 5 and 7)
Current Report on Form 8-K filed with the Commission
on May 10, 2002 (Item 4)
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.
NACCO Industries, Inc.
----------------------
(Registrant)
Date August 14, 2002 /s/ Kenneth C. Schilling
- ---- --------------- ------------------------
Kenneth C. Schilling
Vice President and Controller
(Authorized Officer and Principal
Financial and Accounting Officer)
Exhibit Index
Exhibit
Number Description of Exhibit
4(xix) Indenture, dated as of May 9, 2002, by and among NMHG Holding
Co., the Subsidiary Guarantors named therein and U.S. Bank
National Association, as Trustee (including the form of 10%
senior note due 2009), is incorporated by reference from
Exhibit 4.2 to the Registration on Form S-4 of NMHG Holding
Co. (Registration No. 333-89248)
4(xx) Registration Rights Agreement, dated as of May 9, 2002, by and
among NMHG Holding Co., the Guarantors named therein and
Credit Suisse First Boston Corporation, Salomon Smith Barney
Inc., U.S. Bancorp Piper Jaffray Inc., McDonald Investments
Inc., NatCity Investments, Inc. and Wells Fargo Brokerage
Services, LLC, is incorporated by reference from Exhibit 4.3
to the Registration on Form S-4 of NMHG Holding Co.
(Registration No. 333-89248)
10(lxxiv) Credit Agreement dated as of May 9, 2002, among NMHG Holding
Co., NACCO Materials Handling Group, Inc., NMHG Distribution
Co., NACCO Materials Handling Limited, NACCO Materials
Handling B.V., the financial institutions from time to time a
party thereto as Lenders, the financial institutions from time
to time a party thereto as Issuing Bank, Citicorp North
America, Inc., as administrative agent for the Lenders and the
Issuing Bank thereunder and Credit Suisse First Boston as
joint arrangers and joint bookrunners and CSFB as syndication
agent, is incorporated by reference from Exhibit 10.1 to the
Registration Statement on Form S-4 of NMHG Holding Co.
(Registration No. 333-89248)