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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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 SEPTEMBER 30, 2003
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.
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(Exact name of registrant as specified in its charter)
DELAWARE 34-1505819
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5875 LANDERBROOK DRIVE, MAYFIELD HEIGHTS, OHIO 44124-4017
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(Address of principal executive offices) (Zip code)
(440) 449-9600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
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(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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Number of shares of Class A Common Stock outstanding at October 31, 2003 6,583,208
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Number of shares of Class B Common Stock outstanding at October 31, 2003 1,622,301
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1
NACCO INDUSTRIES, INC.
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Unaudited Condensed Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002 3
Unaudited Condensed Consolidated Statements of
Income for the Three Months and Nine Months Ended
September 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2003 and 2002 5
Unaudited Condensed Consolidated Statements of Changes
in Stockholders' Equity for the Nine Months Ended
September 30, 2003 and 2002 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7-18
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-37
Item 3 Quantitative and Qualitative Disclosures About Market Risk 37
Item 4 Controls and Procedures 37
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 38
Item 2 Changes in Securities and Use of Proceeds 38
Item 3 Defaults Upon Senior Securities 38
Item 4 Submission of Matters to a Vote of Security Holders 38
Item 5 Other Information 38
Item 6 Exhibits and Reports on Form 8-K 38
Signature 39
Exhibit Index 40
2
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
SEPTEMBER 30 DECEMBER 31
2003 2002
-------------- --------------
(In millions, except share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 32.3 $ 64.1
Accounts receivable, net 330.5 278.8
Inventories 432.9 357.0
Deferred income taxes 29.4 29.0
Prepaid expenses and other 50.4 54.1
-------------- --------------
TOTAL CURRENT ASSETS 875.5 783.0
PROPERTY, PLANT AND EQUIPMENT, NET 663.3 658.0
GOODWILL 431.7 427.4
COAL SUPPLY AGREEMENTS AND OTHER INTANGIBLES, NET 82.5 85.0
OTHER NON-CURRENT ASSETS 175.5 170.5
-------------- --------------
TOTAL ASSETS $ 2,228.5 $ 2,123.9
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 305.5 $ 257.2
Revolving credit agreements 41.8 33.2
Current maturities of long-term debt 37.5 35.0
Current obligations of project mining subsidiaries 32.5 35.0
Other current liabilities 234.8 235.8
-------------- --------------
TOTAL CURRENT LIABILITIES 652.1 596.2
LONG-TERM DEBT- not guaranteed by the parent company 403.5 406.5
OBLIGATIONS OF PROJECT MINING SUBSIDIARIES - not guaranteed by
the parent company or its North American Coal subsidiary 263.3 275.1
SELF-INSURANCE LIABILITIES AND OTHER 310.6 285.6
MINORITY INTEREST .3 1.1
STOCKHOLDERS' EQUITY
Common stock:
Class A, par value $1 per share, 6,582,888 shares outstanding
(2002 - 6,576,936 shares outstanding) 6.6 6.6
Class B, par value $1 per share, convertible
into Class A on a one-for-one basis, 1,622,621 shares
outstanding (2002 - 1,623,651 shares outstanding) 1.6 1.6
Capital in excess of par value 5.2 4.9
Retained earnings 623.9 605.7
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment 7.2 (11.6)
Deferred loss on cash flow hedging (11.3) (13.3)
Minimum pension liability adjustment (34.5) (34.5)
-------------- --------------
598.7 559.4
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,228.5 $ 2,123.9
============== ==============
See notes to unaudited condensed consolidated financial statements.
3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(In millions, except per share data)
Net sales $ 652.8 $ 623.3 $ 1,903.2 $ 1,802.3
Other revenues 3.3 .8 10.3 7.9
------------ ------------ ------------ ------------
REVENUES 656.1 624.1 1,913.5 1,810.2
Cost of sales 531.7 502.2 1,559.4 1,474.1
------------ ------------ ------------ ------------
GROSS PROFIT 124.4 121.9 354.1 336.1
Selling, general and administrative expenses 95.5 86.6 275.0 256.4
------------ ------------ ------------ ------------
OPERATING PROFIT 28.9 35.3 79.1 79.7
Other income (expenses)
Interest expense (16.6) (19.6) (50.2) (51.3)
Losses on interest rate swap agreements (.4) (2.1) (1.1) (4.9)
Income (loss) from unconsolidated affiliates .7 (2.2) 2.4 (1.1)
Other - net (.9) (1.2) (1.2) (2.5)
------------ ------------ ------------ ------------
(17.2) (25.1) (50.1) (59.8)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 11.7 10.2 29.0 19.9
Provision for income taxes .4 2.6 5.7 3.7
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 11.3 7.6 23.3 16.2
Minority interest income .4 .4 .9 .9
------------ ------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 11.7 8.0 24.2 17.1
Cumulative effect of accounting change (net of $0.7
tax expense) -- -- 1.2 --
------------ ------------ ------------ ------------
NET INCOME $ 11.7 $ 8.0 $ 25.4 $ 17.1
============ ============ ============ ============
COMPREHENSIVE INCOME $ 16.1 $ 1.9 $ 46.2 $ 24.1
============ ============ ============ ============
EARNINGS PER SHARE:
Income Before Cumulative Effect of Accounting
Change $ 1.43 $ .98 $ 2.95 $ 2.09
Cumulative effect of accounting change (net-of-tax) -- -- .15 --
------------ ------------ ------------ ------------
Net Income $ 1.43 $ .98 $ 3.10 $ 2.09
============ ============ ============ ============
DIVIDENDS PER SHARE $ .380 $ .245 $ .880 $ .725
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 8.205 8.198 8.203 8.197
============ ============ ============ ============
See notes to unaudited condensed consolidated financial statements.
4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
2003 2002
------------ ------------
(In millions)
OPERATING ACTIVITIES
Net income $ 25.4 $ 17.1
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization 75.2 75.7
Deferred income taxes 13.8 10.8
Minority interest (.9) (.9)
Cumulative effect of accounting change (net-of-tax) (1.2) --
Other non-cash items 4.4 7.4
Working capital changes
Accounts receivable (45.5) (10.8)
Inventories (65.3) (37.1)
Other current assets (12.8) (1.7)
Accounts payable and other liabilities 37.2 19.6
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 30.3 80.1
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (55.9) (45.0)
Proceeds from the sale of assets 15.4 27.6
Proceeds from unconsolidated affiliates -- .7
Other - net (.1) (1.1)
------------ ------------
NET CASH USED FOR INVESTING ACTIVITIES (40.6) (17.8)
FINANCING ACTIVITIES
Additions to long-term debt and revolving credit agreements 38.3 296.6
Reductions of long-term debt and revolving credit agreements (35.2) (351.0)
Additions to obligations of project mining subsidiaries -- 42.9
Reductions of obligations of project mining subsidiaries (18.7) (68.3)
Cash dividends paid (7.2) (5.9)
Financing fees paid (.2) (16.5)
------------ ------------
NET CASH USED FOR FINANCING ACTIVITIES (23.0) (102.2)
Effect of exchange rate changes on cash 1.5 2.2
------------ ------------
CASH AND CASH EQUIVALENTS
Decrease for the period (31.8) (37.7)
Balance at the beginning of the period 64.1 71.9
------------ ------------
BALANCE AT THE END OF THE PERIOD $ 32.3 $ 34.2
============ ============
See notes to unaudited condensed consolidated financial statements.
5
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
2003 2002
------------ ------------
(In millions, except per
share data)
CLASS A COMMON STOCK
Beginning balance $ 6.6 $ 6.5
Shares issued under stock compensation plans -- .1
------------ ------------
6.6 6.6
------------ ------------
CLASS B COMMON STOCK 1.6 1.6
------------ ------------
CAPITAL IN EXCESS OF PAR VALUE
Beginning balance 4.9 4.7
Shares issued under stock compensation plans .3 .1
------------ ------------
5.2 4.8
------------ ------------
RETAINED EARNINGS
Beginning balance 605.7 571.3
Net income 25.4 17.1
Cash dividends on Class A and Class B common stock:
2003 $0.880 per share (7.2) --
2002 $0.725 per share -- (5.9)
------------ ------------
623.9 582.5
------------ ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Beginning balance (59.4) (54.8)
Foreign currency translation adjustment 18.8 9.2
Reclassification of hedging activity into earnings 5.0 6.6
Current period cash flow hedging activity (3.0) (8.8)
------------ ------------
(38.6) (47.8)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 598.7 $ 547.7
============ ============
See notes to unaudited condensed consolidated financial statements.
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
SEPTEMBER 30, 2003
(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. The
Company's subsidiaries operate in three principal industries: lift trucks,
housewares and lignite mining. The Company manages its subsidiaries primarily by
industry; however, the Company manages its lift truck operations as two
reportable segments: wholesale manufacturing and retail distribution.
NMHG Holding Co., 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 comprehensive line of lift trucks and aftermarket parts and
services marketed globally 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, leasing and service of Hyster and
Yale lift trucks and related service parts by wholly owned retail dealerships
and rental companies. NACCO Housewares Group ("Housewares") consists of Hamilton
Beach/Proctor-Silex, Inc. ("HB/PS"), a leading manufacturer, marketer and
distributor 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 coal 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 September 30, 2003 and the results of its operations for the three
and nine month periods ended September 30, 2003 and 2002 and the results of its
cash flows and changes in stockholders' equity for the nine month periods ended
September 30, 2003 and 2002 have been included.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information or
notes required by accounting principles generally accepted in the United States
for complete financial statements.
Operating results for the three and nine month periods ended September 30, 2003
are not necessarily indicative of the results that may be expected for the
remainder of the year ending December 31, 2003. Because the housewares business
is seasonal, a majority of revenues and operating profit occurs in the second
half of the calendar year when sales of small electric appliances to retailers
and consumers increase significantly for the fall holiday selling season. 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, 2002.
Certain amounts in the prior period's Unaudited Condensed Consolidated Statement
of Cash Flows have been reclassified to conform to the current period's
presentation.
7
NOTE 2 - INVENTORIES
Inventories are summarized as follows:
SEPTEMBER 30 DECEMBER 31
2003 2002
------------ ------------
Manufactured inventories:
Finished goods and service parts -
NMHG Wholesale $ 122.6 $ 99.9
Housewares 97.3 66.8
------------ ------------
219.9 166.7
Raw materials and work in process -
NMHG Wholesale 127.4 110.3
Housewares 5.9 6.5
------------ ------------
133.3 116.8
------------ ------------
Total manufactured inventories 353.2 283.5
Retail inventories:
NMHG Retail 27.6 23.4
Housewares 23.5 21.4
------------ ------------
Total retail inventories 51.1 44.8
Total inventories at FIFO 404.3 328.3
Coal - NACoal 15.2 14.5
Mining supplies - NACoal 22.7 22.3
------------ ------------
Total inventories at weighted average 37.9 36.8
LIFO reserve -
NMHG (14.0) (11.6)
Housewares 4.7 3.5
------------ ------------
(9.3) (8.1)
------------ ------------
$ 432.9 $ 357.0
============ ============
The cost of certain manufactured and retail inventories has been determined
using the LIFO method. At September 30, 2003 and December 31, 2002, 60% and 59%,
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.
Housewares' LIFO inventory value exceeds its FIFO value primarily due to price
deflation experienced by HB/PS.
8
NOTE 3 - RESTRUCTURING CHARGES
The changes to the Company's restructuring accruals since December 31, 2002 are
as follows:
LEASE
SEVERANCE IMPAIRMENT OTHER TOTAL
--------- ---------- ----- -----
NMHG WHOLESALE
Balance at December 31, 2002 $ 9.3 $ -- $ .9 $ 10.2(a)
Foreign currency effect (.4) -- -- (.4)
Reversal (.3) -- -- (.3)
Payments (2.1) -- -- (2.1)
------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2003 $ 6.5 $ -- $ .9 $ 7.4
============================================================
NMHG RETAIL
Balance at December 31, 2002 $ 1.5 $ .1 $ -- $ 1.6
Provision/(reversal) (.7) .2 -- (.5)
Payments (.4) (.1) -- (.5)
------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2003 $ .4 $ .2 $ -- $ .6
============================================================
HOUSEWARES
Balance at December 31, 2002 $ -- $ 1.2 $ .4 $ 1.6
Reversal -- (.1) (.1) (.2)
Payments -- (.7) (.1) (.8)
------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2003 $ -- $ .4 $ .2 $ .6
============================================================
(a) The December 31, 2002 balance indicated in the table above does not include
$7.6 million in curtailment losses relating to pension and other post-retirement
benefits which will not be paid until employees reach retirement age. These
amounts were accrued in the fiscal year ended December 31, 2000 as part of the
restructuring of the Danville, Illinois assembly plant. Final severance payments
for the Danville restructuring plan were made in 2002.
NMHG 2002 RESTRUCTURING PROGRAM
As announced in December 2002, NMHG Wholesale is phasing out its Lenoir, North
Carolina, lift truck component facility and restructuring other manufacturing
and administrative operations, primarily its Irvine, Scotland, lift truck
assembly and component facility. During the fourth quarter of 2002, NMHG
Wholesale recognized a restructuring charge of approximately $12.5 million
pre-tax. Of this amount, $3.8 million related to a non-cash asset impairment
charge for a building, machinery and tooling, which was determined based on the
then current market values for similar assets and broker quotes as compared to
the net book value of these assets; and $8.7 million related to severance and
other employee benefits to be paid to approximately 615 manufacturing and
administrative employees. Payments began during the second quarter of 2003. As
of September 30, 2003, payments of $1.2 million were made to approximately 150
employees. Payments are expected to continue through 2005. In addition, $0.3
million of the amount accrued at December 31, 2002 was reversed in the first
nine months of 2003 as a result of a reduction in the estimate of employees
eligible to receive severance payments. Included in the table above is $0.9
million accrued for post-employment medical benefits. Approximately $5.4 million
of pre-tax restructuring related costs which were not eligible for accrual in
December 2002, primarily related to manufacturing inefficiencies, were expensed
in the first nine months of 2003 and are not shown in the table above. Of the
$5.4 million additional costs incurred during 2003, $5.1 million is classified
as cost of sales and $0.3 million is classified as selling, general, and
administrative expenses in the Unaudited Condensed Consolidated Statement of
Income for the nine months ended September 30, 2003.
9
NMHG 2001 RESTRUCTURING PROGRAMS
During 2001, management committed to the restructuring of certain operations in
Europe for both the Wholesale and Retail segments of the business. As such, 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. As
of December 31, 2002, payments of $3.4 million to approximately 245 employees
had been made and $0.2 million of the amount originally accrued was reversed in
2002. Although the majority of the headcount reductions were made by the end of
2002, final payments of $0.9 million were made to 16 employees during the first
nine months of 2003.
NMHG Retail recognized a restructuring charge of approximately $4.7 million
pre-tax in 2001, of which $0.4 million related to lease termination costs and
$4.3 million related to severance and other employee benefits to be paid to
approximately 140 service technicians, salesmen and administrative personnel at
wholly owned dealers in Europe. As of December 31, 2002, severance payments of
$2.8 million had been made to approximately 110 employees. Although the majority
of the headcount reductions were made by the end of 2002, during the first nine
months of 2003, severance payments of $0.4 million were made to seven employees.
In addition, $0.7 million of the amount accrued at December 31, 2002 was
reversed in the first nine months of 2003 as a result of a reduction in the
estimate of the total number of employees to receive severance as well as a
reduction in the average amount to be paid to each employee. The remaining
severance payments are expected to be completed during 2004. In addition, the
lease impairment accrual was increased by $0.2 million during 2003 as a result
of additional lease expense.
HOUSEWARES: In 2001, the Board of Directors approved management's plan to
restructure HB/PS' manufacturing activities in Mexico by outsourcing certain of
the company's products and consolidating production from three of the company's
Mexican manufacturing plants in the Juarez area into one plant. This
restructuring was substantially completed during 2002. However, lease payments
on idle facilities are expected to continue through the first quarter of 2004.
During the first nine months of 2003, $0.7 million of lease payments were made
and $0.1 million of the amount originally accrued was reversed due to a decrease
in estimated future costs. In addition, $0.1 million of the amount accrued and
included in "other" in the table above was reversed since actual payments to
settle outstanding liabilities were less than originally estimated. Payments of
$0.1 million related to those outstanding liabilities were made during the first
nine months of 2003, with final settlement of these liabilities expected to
occur by December 31, 2003.
NOTE 4 - ACCOUNTING CHANGES
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS
No. 143 provides accounting requirements for retirement obligations associated
with tangible long-lived assets, including: (i) the timing of liability
recognition; (ii) initial measurement of the liability; (iii) allocation of
asset retirement cost to expense; (iv) subsequent measurement of the liability;
and (v) financial statement disclosures. SFAS No. 143 requires that an asset's
retirement cost should be capitalized as part of the cost of the related
long-lived asset and subsequently allocated to expense using a systematic and
rational method.
A cumulative effect of a change in accounting principle ("CECAP") adjustment of
$1.2 million, net of tax expense of $0.7 million, to increase net income has
been recognized in the accompanying Unaudited Condensed Consolidated Statement
of Income for the nine months ended September 30, 2003, as a result of the
adoption of SFAS No. 143 on January 1, 2003. This adjustment consists of a CECAP
adjustment to decrease net income by $1.3 million, net of a tax benefit of $0.7
million, recorded by NACoal and a CECAP adjustment to increase net income by
$2.5 million, net of $1.4 million tax expense, recorded by Bellaire Corporation
("Bellaire"). Bellaire's results are included in the non-operating segment
"NACCO & Other."
Bellaire is a non-operating subsidiary of the Company with legacy liabilities
relating to closed mining operations, primarily former Eastern U.S. underground
coal mining operations. These legacy liabilities include obligations for water
treatment and other environmental remediation which arose as part of the normal
course of closing these underground mining operations. Prior to the adoption of
SFAS No. 143, an accrual for these legacy liabilities was estimated and
discounted using an applicable risk-free rate of return. As of January 1, 2003,
these obligations have been remeasured to their estimated fair market value and
discounted
10
using a credit-adjusted risk-free rate, as required pursuant to SFAS No. 143.
This change in the measurement of these liabilities as required pursuant to SFAS
No. 143 resulted in a CECAP adjustment to increase net income, primarily as a
result of the change in the discount rate used to measure these liabilities. As
a result, future accretion expense is expected to increase as compared with the
Company's previous methodology for measuring this obligation. Since Bellaire's
properties are no longer active operations, no associated asset was capitalized
as a result of the adoption of SFAS No. 143.
NACoal's asset retirement obligations are for costs to close its surface mines
and reclaim the land it has disturbed as a result of its normal mining
activities. As a result of the adoption of SFAS No. 143, NACoal has estimated
these costs and recognized a liability and associated asset in accordance with
the Statement. The Company determined these obligations based on estimates
adjusted for inflation, projected to the estimated closure dates, and then
discounted using a credit-adjusted risk-free interest rate. The accretion of the
liability is being recognized over the estimated life of each mine. The
associated asset established in connection with the implementation of SFAS No.
143 is recorded in property, plant and equipment in the accompanying Unaudited
Condensed Consolidated Balance Sheet at September 30, 2003. Prior to the
adoption of SFAS No. 143, NACoal's accounting policy was to accrue for
mine-closing costs over the five-year period prior to the closing of the mine.
Since none of NACoal's mines were forecasted to be closed within the next five
years, NACoal did not have an accrual recognized for asset retirement
obligations prior to the adoption of SFAS No. 143.
For NACoal and Bellaire, there are no assets legally restricted for purposes of
settling the asset retirement obligations. The asset retirement obligations for
the project mining subsidiaries will be funded by the respective project mining
subsidiaries' customer. NACoal's non-project mining operations and Bellaire's
asset retirement obligation will be funded out of general corporate funds. A
reconciliation of the beginning and ending aggregate carrying amount of the
asset retirement obligation is as follows:
NACOAL NACOAL
PROJECT NON-PROJECT NACOAL NACCO
MINES MINES CONSOLIDATED BELLAIRE CONSOLIDATED
------- ------ ------------ -------- ------------
Balance at December 31, 2002 $ -- $ -- $ -- $ 15.9 $ 15.9
Increase (decrease) to liabilities
recorded as a result of the
adoption of SFAS No. 143 40.8 3.5 44.3 (3.9) 40.4
Liabilities settled during the period -- -- -- (.3) (.3)
Accretion expense 2.1 .3 2.4 .8 3.2
------- ------ ------- ------- -------
BALANCE AT SEPTEMBER 30, 2003 $ 42.9 $ 3.8 $ 46.7 $ 12.5 $ 59.2
======= ====== ======= ======= =======
Assuming the adoption of SFAS No. 143 in the prior year, the liabilities
recorded on the balance sheet would have been as follows:
NACOAL NACOAL
PROJECT NON-PROJECT NACOAL NACCO
MINES MINES CONSOLIDATED BELLAIRE CONSOLIDATED
------- ------ ------------ -------- ------------
Balance at January 1, 2002 $ 38.2 $ 3.2 $ 41.4 $ 12.0 $ 53.4
Balance at December 31, 2002 $ 40.8 $ 3.5 $ 44.3 $ 12.0 $ 56.3
The effect of adopting SFAS No. 143 was to decrease income before the cumulative
effect of accounting change and net income in the three and nine months ended
September 30, 2003 by $0.1 million and $0.2 million, respectively. The effect on
earnings per share in the three and nine months ended September 30, 2003 was a
decrease of $0.01 per share and $0.02 per share, respectively.
11
Additional pro forma information, assuming the adoption of SFAS No. 143 in the
prior year, is as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2002
------------- -------------
(in millions)
Reported net income $ 8.0 $ 17.1
Deduct additional expense assuming the
adoption of SFAS No. 143 on 12/31/01 -- .1
------ -------
Adjusted net income $ 8.0 $ 17.0
====== =======
(in dollars)
Reported earnings per share $ .98 $ 2.09
Deduct additional expense per share assuming
the adoption of SFAS No. 143 on 12/31/01 -- .02
------ -------
Adjusted earnings per share $ .98 $ 2.07
====== =======
ACCOUNTING FOR GUARANTEES
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN No. 45 requires guarantors to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee for those guarantees initiated or modified after December
31, 2002. However, certain guarantees, including product warranties and
guarantees between parties under common control (i.e., parent and subsidiary),
are not required to be recognized at fair value at inception. FIN No. 45 also
requires additional disclosures of guarantees, including product warranties and
guarantees between parties under common control, beginning with interim or
annual periods ending after December 15, 2002. Guarantees initiated prior to
December 31, 2002 are not recognized as a liability measured at fair value per
FIN No. 45, but are subject to the disclosure requirements. The Company has made
the required disclosures in these financial statements. Also, the Company has
recognized guarantees included within the scope of FIN No. 45 and initiated
after December 31, 2002 as liabilities measured at fair value. The adoption of
the fair value provisions of FIN No. 45 did not have a material impact on the
Company's financial position or results of operations for the three or nine
months ended September 30, 2003.
Under various financing arrangements for certain customers, including
independently owned retail dealerships, NMHG provides guarantees of the residual
values of lift trucks, or recourse or repurchase obligations such that NMHG
would be obligated in the event of default by the customer. Terms of the
third-party financing arrangements for which NMHG is providing a guarantee
generally range from one to five years. Total guarantees and amounts subject to
recourse or repurchase obligations at September 30, 2003 and December 31, 2002
were $169.3 million and $153.6 million, respectively. Losses anticipated under
the terms of the guarantees, recourse or repurchase obligations, which are not
significant, have been reserved for in the accompanying Unaudited Condensed
Consolidated Financial Statements. Generally, NMHG retains a security interest
in the related assets financed such that, in the event that NMHG would become
obligated under the terms of the recourse or repurchase obligations, NMHG would
take title to the assets financed. The fair value of collateral held at
September 30, 2003 was approximately $181.9 million, based on Company estimates.
The Company estimates the fair value of the collateral using information
regarding the original sales price, the current age of the equipment, the type
of equipment and general market conditions that influence the value of both new
and used forklift trucks.
NMHG has a 20% ownership interest in NMHG Financial Services, Inc. ("NFS"), a
joint venture with GE Capital Corporation ("GECC"), formed primarily for the
purpose of providing financial services to Hyster and Yale lift truck dealers
and national account customers in the United States. NMHG's ownership in NFS is
accounted for using the equity method of accounting. Generally, NMHG sells lift
trucks through its independent dealer network or directly to customers. These
dealers and customers may enter into a financing transaction with NFS or another
unrelated third-party. NFS provides debt financing to dealers and lease
financing to both dealers and customers. On occasion, the credit quality of the
customer or concentration issues within GECC necessitate providing standby
recourse or repurchase obligations or a guarantee of the residual value of the
lift trucks purchased by customers and financed through NFS. At September 30,
2003, $126.7 million of the $169.3 million of guarantees discussed above related
to transactions with NFS. In
12
addition, in connection with the formation of the current joint venture
agreement that expires in April 2004, NMHG also provides a guarantee to GECC for
20% of NFS' debt with GECC, such that NMHG would become liable under the terms
of NFS' debt agreements with GECC in the case of default by NFS. At September
30, 2003, the amount of NFS' debt guaranteed by NMHG was $101.2 million. NFS has
not defaulted under the terms of this debt financing in the past and although
there can be no assurances, NMHG is not aware of any circumstances that would
cause NFS to default in future periods.
NMHG provides a standard warranty on its lift trucks, generally for six to
twelve months or 1,000 to 2,000 hours. In addition, NMHG sells extended warranty
agreements which provide additional warranty up to three to five years or up to
3,600 to 10,000 hours. The specific terms and conditions of those warranties
vary depending upon the product sold and the country in which NMHG does
business. Revenue received for the sale of extended warranty contracts is
deferred and recognized in the same manner as the costs are incurred to perform
under the warranty contracts, in accordance with FASB Technical Bulletin 90-1,
"Accounting for Separately Priced Extended Warranty and Product Maintenance
Contracts." HB/PS provides a standard warranty to consumers for all of its
products. The specific terms and conditions of those warranties vary depending
upon the product brand. In general, if a product is returned under warranty, a
refund is provided to the consumer by HB/PS' customer, the retailer. Generally,
the retailer returns those products to HB/PS for a credit. The Company estimates
the costs that may be incurred under its warranty programs, both standard and
extended, and records a liability for such costs at the time product revenue is
recognized. Factors that affect the Company's warranty liability include the
number of units sold, historical and anticipated rates of warranty claims and
the cost per claim. Additionally, NMHG maintains a quality enhancement program
under which it provides for specially identified field product improvements in
its warranty obligation. Accruals under this program are determined based on
estimates of the potential number of claims to be processed and the cost of
processing those claims. The Company periodically assesses the adequacy of its
recorded warranty liabilities and adjusts the amounts as necessary.
Changes in the Company's current and long-term warranty obligations, including
deferred revenue on extended warranty contracts, during the nine months ended
September 30, 2003 are as follows:
Balance at December 31, 2002 $ 43.9
Warranties issued 25.4
Settlements made (26.0)
Changes in estimates (2.2)
Foreign currency effect .2
--------
BALANCE AT SEPTEMBER 30, 2003 $ 41.3
========
As part of its periodic review of warranty estimates, the Company reduced its
warranty accrual by $2.2 million during the nine months ended September 30,
2003, based on recent history of the volume of claims processed, the amount of
those claims and expectations of future trends under its warranty programs. This
adjustment is not necessarily indicative of future trends or adjustments that
may be required to adjust the warranty accrual in future periods.
OTHER ACCOUNTING CHANGES
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivatives and hedging based on decisions made: (a)
previously as part of the Derivative Implementation Group process, (b) in
connection with other FASB projects and (c) regarding other issues raised,
including the characteristics of a derivative that contains a financing
component. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact
on the Company's financial position or its results of operations.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
provides guidance on how an entity classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 requires the recognition of a
cumulative effect of a change in accounting transition adjustment for financial
instruments existing at the adoption date. On October 29, 2003, the FASB
deferred the application of the requirements of SFAS No. 150 as they apply to
noncontrolling interests of a limited-life subsidiary. The adoption of the
13
remaining provisions of SFAS No. 150 did not have a material impact on the
Company's financial position or its results of operations.
In November 2002, the FASB issued Emerging Issues Task Force ("EITF") No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF No. 00-21
addresses when and how an arrangement involving multiple deliverables should be
divided into separate units of accounting, as well as how the arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. The Company prospectively adopted the provisions
of EITF No. 00-21 on July 1, 2003 as required. The adoption of this standard did
not have a material impact on the Company's financial position or results of
operations.
NOTE 5 - CURRENT AND LONG-TERM FINANCING
In April 2003, NACoal refinanced $15.8 million of equipment previously financed
under operating leases with collateralized debt. The equipment consisted of
mining equipment, such as trucks, bulldozers, graders and a backhoe. These April
2003 purchases were financed with three collateralized notes payable that
expire, in accordance with their respective terms, in either 2007 or 2008 and
require monthly principal and interest payments at a weighted-average fixed
interest rate of 5.46%.
NOTE 6 - CONTINGENT OBLIGATION
As a result of the Coal Industry Retiree Health Benefit Act of 1992, the
Company's non-operating subsidiary, Bellaire, is obligated to the United Mine
Workers of America Combined Benefit Fund (the "Fund") for the medical expenses
of certain United Mine Worker retirees. As a result, the Company established an
estimate of this obligation in 1992 and has continued to revise this estimate as
new facts arise. See additional discussion in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002, on pages F-10, F-17, F-28
and F-29. Revisions to this liability are recognized in the statement of
operations as an extraordinary item pursuant to the requirement of EITF 92-13,
"Accounting for Estimated Payments in Connection with the Coal Industry Retiree
Health Benefit Act of 1992." On July 15, 2003, the Fund filed suit against 214
defendant companies, including Bellaire, seeking a declaratory judgment
requiring these defendants to pay the increased premium established by the
Social Security Administration. If the Fund prevails, the Company estimates its
accrual could increase within an estimated range of $0 to $6.2 million pre-tax.
14
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- -------------------------
2003 2002 2003 2002
-------- ------- -------- --------
REVENUES FROM EXTERNAL CUSTOMERS
NMHG Wholesale $ 367.2 $ 342.3 $1,139.0 $1,017.2
NMHG Retail 57.5 59.7 168.9 174.5
NMHG Eliminations (16.8) (16.4) (52.6) (45.6)
-------- ------- -------- --------
NMHG Consolidated 407.9 385.6 1,255.3 1,146.1
Housewares 151.2 148.4 385.5 404.5
NACoal 97.0 90.1 272.6 259.5
NACCO and Other -- -- .1 .1
-------- ------- -------- --------
$ 656.1 $ 624.1 $1,913.5 $1,810.2
======== ======= ======== ========
GROSS PROFIT
NMHG Wholesale $ 62.2 $ 56.4 $ 190.6 $ 162.8
NMHG Retail 9.6 13.5 31.4 36.4
NMHG Eliminations .4 .9 .5 1.8
-------- ------- -------- --------
NMHG Consolidated 72.2 70.8 222.5 201.0
Housewares 35.3 34.8 83.7 84.6
NACoal 17.0 16.4 48.0 50.6
NACCO and Other (.1) (.1) (.1) (.1)
-------- ------- -------- --------
$ 124.4 $ 121.9 $ 354.1 $ 336.1
======== ======= ======== ========
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
NMHG Wholesale $ 55.1 $ 42.9 $ 154.3 $ 128.5
NMHG Retail 11.4 14.6 34.3 41.6
NMHG Eliminations (.1) (.4) (.2) (1.0)
-------- ------- -------- --------
NMHG Consolidated 66.4 57.1 188.4 169.1
Housewares 23.9 24.3 71.7 73.5
NACoal 5.0 4.3 14.6 11.1
NACCO and Other .2 .9 .3 2.7
-------- ------- -------- --------
$ 95.5 $ 86.6 $ 275.0 $ 256.4
======== ======= ======== ========
OPERATING PROFIT (LOSS)
NMHG Wholesale $ 7.1 $ 13.5 $ 36.3 $ 34.3
NMHG Retail (1.8) (1.1) (2.9) (5.2)
NMHG Eliminations .5 1.3 .7 2.8
-------- ------- -------- --------
NMHG Consolidated 5.8 13.7 34.1 31.9
Housewares 11.4 10.5 12.0 11.1
NACoal 12.0 12.1 33.4 39.5
NACCO and Other (.3) (1.0) (.4) (2.8)
-------- ------- -------- --------
$ 28.9 $ 35.3 $ 79.1 $ 79.7
======== ======= ======== ========
15
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- -----------------------
2003 2002 2003 2002
-------- --------- -------- --------
INTEREST EXPENSE
NMHG Wholesale $ (7.2) $ (8.1) $ (21.7) $ (18.3)
NMHG Retail (.9) (.8) (2.7) (2.5)
NMHG Eliminations (.5) (1.5) (1.5) (3.7)
-------- --------- -------- --------
NMHG Consolidated (8.6) (10.4) (25.9) (24.5)
Housewares (1.7) (2.1) (5.0) (5.9)
NACoal (2.2) (2.9) (6.9) (8.8)
NACCO and Other -- -- (.3) --
Eliminations -- .1 .2 .3
-------- --------- -------- --------
(12.5) (15.3) (37.9) (38.9)
Project mining subsidiaries (4.1) (4.3) (12.3) (12.4)
-------- --------- -------- --------
$ (16.6) $ (19.6) $ (50.2) $ (51.3)
======== ========= ======== ========
INTEREST INCOME
NMHG Wholesale $ .7 $ .4 $ 1.9 $ 1.6
NMHG Retail -- -- .1 --
-------- --------- -------- --------
NMHG Consolidated .7 .4 2.0 1.6
NACoal -- -- .3 .1
NACCO and Other -- .1 .2 .3
Eliminations -- (.1) (.2) (.3)
-------- --------- -------- --------
$ .7 $ .4 $ 2.3 $ 1.7
======== ========= ======== ========
OTHER-NET, INCOME (EXPENSE)
NMHG Wholesale $ .1 $ (5.5) $ .1 $ (8.8)
NMHG Retail .1 (.1) .7 (1.1)
NMHG Eliminations (.1) -- (.1) --
-------- --------- -------- --------
NMHG Consolidated .1 (5.6) .7 (9.9)
Housewares (1.1) (.7) (1.5) (1.5)
NACoal (.1) (.1) (.2) (.4)
NACCO and Other (.2) .5 (1.2) 1.6
-------- --------- -------- --------
$ (1.3) $ (5.9) $ (2.2) $ (10.2)
======== ========= ======== ========
INCOME TAX PROVISION (BENEFIT)
NMHG Wholesale $ (.5) $ (.1) $ 4.9 $ .8
NMHG Retail (4.0) .4 (4.7) (1.8)
NMHG Eliminations .3 (1.0) -- (1.3)
-------- --------- -------- --------
NMHG Consolidated (4.2) (.7) .2 (2.3)
Housewares 3.4 3.1 2.2 1.5
NACoal 1.8 1.1 2.7 3.7
NACCO and Other (.6) (.9) .6 .8
-------- --------- -------- --------
$ .4 $ 2.6 $ 5.7 $ 3.7
======== ========= ======== ========
NET INCOME (LOSS)
NMHG Wholesale $ 1.6 $ .8 $ 12.6 $ 8.9
NMHG Retail 1.4 (2.4) (.1) (7.0)
NMHG Eliminations (.4) .8 (.9) .4
-------- --------- -------- --------
NMHG Consolidated 2.6 (.8) 11.6 2.3
Housewares 5.2 4.6 3.3 2.2
NACoal 3.8 3.7 10.3 14.3
NACCO and Other .1 .5 .2 (1.7)
-------- --------- -------- --------
$ 11.7 $ 8.0 $ 25.4 $ 17.1
======== ========= ======== ========
16
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ---------------------
2003 2002 2003 2002
------- ------- -------- --------
DEPRECIATION, DEPLETION AND
AMORTIZATION EXPENSE
NMHG Wholesale $ 6.4 $ 7.4 $ 19.6 $ 22.6
NMHG Retail 3.9 4.8 13.0 14.0
------- ------- -------- --------
NMHG Consolidated 10.3 12.2 32.6 36.6
Housewares 3.2 3.4 9.6 10.5
NACoal 2.9 2.1 8.3 6.2
NACCO and Other -- .1 .1 .1
------- ------- -------- --------
16.4 17.8 50.6 53.4
Project mining subsidiaries 8.2 7.5 24.6 22.3
------- ------- -------- --------
$ 24.6 $ 25.3 $ 75.2 $ 75.7
======= ======= ======== ========
CAPITAL EXPENDITURES
NMHG Wholesale $ 6.1 $ 1.9 $ 14.5 $ 9.7
NMHG Retail 1.5 1.1 3.9 2.4
------- ------- -------- --------
NMHG Consolidated 7.6 3.0 18.4 12.1
Housewares 1.0 1.3 4.3 3.8
NACoal 3.8 2.4 24.5 5.5
NACCO and Other .1 .2 .1 .9
------- ------- -------- --------
12.5 6.9 47.3 22.3
Project mining subsidiaries 3.3 17.5 8.6 22.7
------- ------- -------- --------
$ 15.8 $ 24.4 $ 55.9 $ 45.0
======= ======= ======== ========
SEPTEMBER 30 DECEMBER 31
2003 2002
------------ ----------
TOTAL ASSETS
NMHG Wholesale $ 1,142.3 $ 1,070.7
NMHG Retail 169.8 187.7
NMHG Parent/Eliminations (85.9) (54.9)
---------- ----------
NMHG Consolidated 1,226.2 1,203.5
Housewares 367.0 331.5
NACoal 245.2 224.2
NACCO and Other 78.2 75.5
---------- ----------
1,916.6 1,834.7
Project mining subsidiaries 414.4 381.2
---------- ----------
2,331.0 2,215.9
Consolidating Eliminations (102.5) (92.0)
---------- ----------
$ 2,228.5 $ 2,123.9
========== ==========
NOTE 8 - ACCOUNTING STANDARDS NOT YET ADOPTED
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN No. 46 clarifies the application of Accounting Research Bulletin
("ARB") No. 51, "Consolidated Financial Statements" for certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN No. 46 requires that variable interest entities, as defined,
should be consolidated by the primary beneficiary, which is defined as the
entity that is expected to absorb the majority of the expected losses, receive a
majority of the expected gains, or both.
At its October 8, 2003 meeting, the FASB amended FIN No. 46 to defer the
adoption requirements until the first interim or annual period ending after
December 15, 2003. Therefore, the Company will adopt FIN No. 46 for the
reporting period beginning on October 1, 2003, as required. The Company believes
that three of NACoal's wholly owned subsidiaries, the "project mining
subsidiaries" meet the definition of a variable interest entity pursuant to FIN
No. 46. Although NACoal owns 100% of the equity interest of the project mining
subsidiaries, the Company has initially determined that NACoal is not the
primary beneficiary and thus, must deconsolidate these entities. The project
mining subsidiaries operate lignite coal mines under
17
long-term contracts with various utility customers to sell lignite coal at a
price based on actual cost plus an agreed pre-tax profit per ton. These entities
are capitalized primarily with debt financing, which the utility customers have
arranged and guaranteed. The obligations of these project mining subsidiaries
are currently included in the Company's consolidated balance sheets, but do not
affect the short-term or long-term liquidity of the Company and are without
recourse to NACCO and NACoal. NACoal owns 100% of the stock and manages the
daily operations of these entities. Its equity investment in these entities at
September 30, 2003 was $4.6 million, which supports total assets of $414.4
million at September 30, 2003.
As of October 1, 2003, the Company expects to no longer consolidate North
American Coal's project mining subsidiaries in its financial statements. As a
result of the expected deconsolidation of these entities, the financial
statement presentation of the Company will change significantly. However, the
Company does not expect this accounting change to affect its consolidated
reported net earnings.
The Company's risk of loss relating to these entities is limited to its invested
capital, which was $4.6 million at September 30, 2003. Selected financial
information for the project mining subsidiaries is as follows:
AS OF AND AS OF AND AS OF AND
FOR THE NINE FOR THE NINE FOR THE YEAR
MONTHS ENDED MONTHS ENDED ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 DECEMBER 31, 2002
------------------ ------------------ -----------------
Revenues $ 204.6 $ 198.1 $ 263.1
Net income $ 18.9 $ 18.9 $ 24.7
Total assets $ 414.4 $ 380.8 $ 381.2
Stockholder's equity $ 4.6 $ 4.9 $ 4.9
In addition, NMHG has an interest in a variable interest entity, NFS. The
Company, however, has concluded that NMHG is not the primary beneficiary and the
Company does not consider NMHG's variable interest to be significant. NMHG will
continue to use the equity method to account for its 20% interest in NFS. The
Company continues to review other entities with which NMHG is affiliated to
determine if they meet the definition of a variable interest entity. The Company
expects to complete its analysis and adopt FIN No. 46 during the fourth quarter
of 2003.
18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Tabular Amounts in Millions)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Please refer to the discussion of the Company's Critical Accounting Policies and
Estimates as disclosed on pages 21 and 22 in the Company's Form 10-K for the
fiscal year ended December 31, 2002.
FINANCIAL SUMMARY
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 income statement
by the segments, however, has changed to reflect all of the fees in selling,
general and administrative expenses, as directed by the parent company for
purposes of internal analysis. Following is a table for comparison of parent
company fees year over year:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
NACCO FEES INCLUDED IN SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
NMHG Wholesale $ 2.0 $ 1.1 $ 6.1 $ 3.4
Housewares .8 .5 2.4 1.5
NACoal .3 .3 .9 .6
------ ------ ------ ------
$ 3.1 $ 1.9 $ 9.4 $ 5.5
====== ====== ====== ======
NACCO FEES INCLUDED IN OTHER-NET, INCOME
(EXPENSE)
NMHG Wholesale $ -- $ .6 $ -- $ 1.8
Housewares -- .2 -- .6
NACoal -- .1 -- .3
------ ------ ------ ------
$ -- $ .9 $ -- $ 2.7
====== ====== ====== ======
TOTAL NACCO FEES CHARGED TO SEGMENTS
NMHG Wholesale $ 2.0 $ 1.7 $ 6.1 $ 5.2
Housewares .8 .7 2.4 2.1
NACoal .3 .4 .9 .9
------ ------ ------ ------
$ 3.1 $ 2.8 $ 9.4 $ 8.2
====== ====== ====== ======
19
NMHG HOLDING CO.
NMHG designs, engineers, manufactures, sells, services and leases a
comprehensive 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 and nine months ended September 30:
THREE MONTHS NINE MONTHS
------------------------- --------------------------
2003 2002 2003 2002
-------- -------- --------- ---------
REVENUES
Wholesale
Americas $ 239.5 $ 229.4 $ 747.4 $ 695.3
Europe, Africa and Middle East 102.6 95.0 316.8 271.8
Asia-Pacific 25.1 17.9 74.8 50.1
-------- -------- --------- ---------
367.2 342.3 1,139.0 1,017.2
-------- -------- --------- ---------
Retail (net of eliminations)
Americas -- 6.4 1.2 20.4
Europe, Africa and Middle East 17.8 15.7 55.2 48.0
Asia-Pacific 22.9 21.2 59.9 60.5
-------- -------- --------- ---------
40.7 43.3 116.3 128.9
-------- -------- --------- ---------
NMHG Consolidated $ 407.9 $ 385.6 $ 1,255.3 $ 1,146.1
======== ======== ========= =========
OPERATING PROFIT (LOSS)
Wholesale
Americas $ 6.5 $ 14.3 $ 32.7 $ 36.3
Europe, Africa and Middle East (.3) (.6) 1.8 (1.6)
Asia-Pacific .9 (.2) 1.8 (.4)
-------- -------- --------- ---------
7.1 13.5 36.3 34.3
-------- -------- --------- ---------
Retail (net of eliminations)
Americas -- (1.2) .1 (1.4)
Europe, Africa and Middle East (.7) (.2) (3.0) .8
Asia-Pacific (.6) 1.6 .7 (1.8)
-------- -------- --------- ---------
(1.3) .2 (2.2) (2.4)
-------- -------- --------- ---------
NMHG Consolidated $ 5.8 $ 13.7 $ 34.1 $ 31.9
======== ======== ========= =========
20
NMHG HOLDING CO. - continued
FINANCIAL REVIEW - continued
THREE MONTHS NINE MONTHS
---------------------- ------------------------
2003 2002 2003 2002
------- -------- -------- ---------
INTEREST EXPENSE
Wholesale $ (7.2) $ (8.1) $ (21.7) $ (18.3)
Retail (net of eliminations) (1.4) (2.3) (4.2) (6.2)
------- -------- -------- --------
NMHG Consolidated $ (8.6) $ (10.4) $ (25.9) $ (24.5)
======= ======== ======== ========
OTHER INCOME (EXPENSE)-NET
Wholesale $ .8 $ (5.1) $ 2.0 $ (7.2)
Retail (net of eliminations) -- (.1) .7 (1.1)
------- -------- -------- --------
NMHG Consolidated $ .8 $ (5.2) $ 2.7 $ (8.3)
======= ======== ======== ========
NET INCOME (LOSS)
Wholesale $ 1.6 $ .8 $ 12.6 $ 8.9
Retail (net of eliminations) 1.0 (1.6) (1.0) (6.6)
------- -------- -------- --------
NMHG Consolidated $ 2.6 $ (.8) $ 11.6 $ 2.3
======= ======== ======== ========
A reconciliation of NMHG Wholesale's federal statutory and effective income tax
is as follows for the three and nine months ended September 30:
THREE MONTHS NINE MONTHS
----------------- -------------------
2003 2002 2003 2002
------ ------ ------- -------
NMHG WHOLESALE
Income before income taxes and
minority interest: $ .7 $ .3 $ 16.6 $ 8.8
====== ====== ======= =======
Statutory taxes at 35% $ .2 $ .1 $ 5.8 $ 3.0
Recognition of prior losses on
investment in China -- -- -- (1.9)
Other permanent items (.7) (.2) (.9) (.3)
------ ------ ------- -------
Income tax provision (benefit) $ (.5) $ (.1) $ 4.9 $ .8
====== ====== ======= =======
Effective rate (a) (a) 29.5% 9.1%
====== ====== ======= =======
(a) The effective tax rates for the three months ended September 30, 2003 and
2002 are not meaningful.
During the first nine months of 2002, NMHG Wholesale recognized a U.S. tax
benefit of $1.9 million related to the recognition of previously generated
losses from its investment in China.
21
NMHG HOLDING CO. - continued
FINANCIAL REVIEW - continued
A reconciliation of NMHG Retail's federal statutory and effective income tax is
as follows for the three and nine months ended September 30:
THREE MONTHS NINE MONTHS
-------------------- -------------------
2003 2002 2003 2002
-------- ------- ------- -------
NMHG RETAIL (NET OF ELIMINATIONS)
Loss before income taxes: $ (2.7) $ (2.2) $ (5.7) $ (9.7)
======= ======= ======= =======
Statutory taxes at 35% $ (.9) $ (.8) $ (2.0) $ (3.4)
Release of valuation reserve (2.8) -- (2.8) --
Other permanent items -- .2 .1 .3
------- ------- ------- -------
Income tax provision (benefit) $ (3.7) $ (.6) $ (4.7) $ (3.1)
======= ======= ======= =======
Effective rate (a) 27.3% 82.5% 32.0%
======= ======= ======= =======
(a) The effective tax rate for the three months ended September 30, 2003 is not
meaningful.
During the third quarter of 2003, NMHG Retail reversed $2.8 million in valuation
allowances related to foreign net operating loss carryforwards. As a result of
non-U.S. tax law changes, the Company now expects to utilize these foreign net
operating loss carryforwards.
THIRD QUARTER OF 2003 COMPARED WITH THIRD QUARTER OF 2002
NMHG WHOLESALE: Revenues increased $24.9 million, or 7.3%, to $367.2 million in
the third quarter of 2003 from $342.3 million in the third quarter of 2002. The
increase in revenues was primarily due to (i) a $15.1 million increase as a
result of improved unit volume worldwide, (ii) a $13.0 million increase due to
favorable foreign currency movements and (iii) $4.7 million of other
improvements primarily as a result of a shift in product mix to higher-priced
lift trucks. These increases were partially offset by a $7.9 million decrease in
parts sales as a result of a partial shift to direct ship sales, resulting in
revenue recognition on a net rather than gross basis. Lift truck shipments
increased 5.6% to 16,163 units in the third quarter of 2003 from 15,299 units in
the third quarter of 2002.
Operating profit decreased $6.4 million to $7.1 million in the third quarter of
2003 from $13.5 million in the third quarter of 2002. Operating profit as a
percentage of revenues was 1.9% in the third quarter of 2003 versus 3.9% in the
third quarter of 2002. The decrease in operating profit was due to a $19.1
million increase in cost of goods sold and a $12.2 million increase in selling,
general and administrative expenses partially offset by increases in operating
profit attributable to the $24.9 million increase in revenues discussed above
and improved parts margins. The increase in cost of goods sold was directly
related to the increase in revenues and a $2.6 million increase in restructuring
charges as a result of additional expenses related to the previously announced
phase-out of the Lenoir, North Carolina lift truck component facility. The total
additional restructuring expenses recognized in the third quarter was $2.9
million. These expenses were not eligible for accrual in 2002. See additional
discussion of the NMHG Wholesale restructuring programs under the heading "NMHG
Restructuring Plans" in this Form 10-Q. The increase in selling, general and
administrative expenses was principally due to the timing of marketing programs
and employee expenses and increased product development costs.
Net income increased $0.8 million to $1.6 million in the third quarter of 2003
from $0.8 million in the third quarter of 2002. The decrease in operating profit
discussed above was more than offset by two non-comparable charges taken in the
third quarter of 2002: a $3.0 million pre-tax charge for the impairment of
certain investments in unconsolidated affiliates and a $1.7 million pre-tax
charge for (i) the mark-to-market of interest rate swap agreements that no
longer qualified for hedge accounting following the refinancing of NMHG's debt
in May 2002 and (ii) the recognition of previously deferred losses on these
interest rate swap agreements. Additionally, NMHG Wholesale's net income for the
third quarter of 2003 was positively effected by a $0.9 million decrease in
interest expense, primarily due to the cost of interest rate swap agreements
prior to their termination during the third quarter of 2002, and a $0.4 million
decrease in income taxes primarily due to reductions in 2003's effective tax
rates during the quarter ended September 30, 2003, as detailed in the tax
reconciliation table above.
22
NMHG HOLDING CO. - continued
FINANCIAL REVIEW - continued
The worldwide backlog level increased to 20,100 units at September 30, 2003 from
18,700 units at September 30, 2002 and 19,400 units at June 30, 2003 primarily
due to an increase in demand.
NMHG RETAIL (NET OF ELIMINATIONS): Revenues decreased $2.6 million, or 6.0%, to
$40.7 million in the third quarter of 2003 from $43.3 million in the third
quarter of 2002. This decrease was primarily due to the January 3, 2003 sale of
NMHG Retail's only wholly owned U.S. dealer, partially offset by higher revenues
in Europe and Asia-Pacific principally resulting from foreign currency effects.
NMHG Retail-Americas' revenues were $6.4 million in the third quarter of 2002.
Operating loss for the third quarter of 2003 was $1.3 million as compared with
an operating profit of $0.2 million in the third quarter of 2002. Operating
profit (loss) as a percentage of revenues was (3.2%) in the third quarter of
2003 versus 0.5% in the third quarter of 2002. The decrease in operating profit
was due to the $2.6 million decrease in revenues discussed above and a $1.8
million increase in cost of goods sold offset by a $2.9 million decrease in
selling, general and administrative expenses. The increase in cost of goods sold
was primarily due to increased costs related to rental and service contracts as
a result of increased repair and maintenance expenditures. This was partially
offset by the favorable effect of selling the unprofitable wholly owned U.S.
dealer, which had an operating loss of $1.2 million in the third quarter of
2002.
Net income increased $2.6 million to $1.0 million in the third quarter of 2003
from a net loss of $1.6 million in the third quarter of 2002 primarily due to a
$2.8 million tax benefit realized in the third quarter of 2003 in NMHG Retail's
Asia-Pacific operations. As a result of non-U.S. tax law changes, NMHG now
expects to utilize certain foreign net operating loss carryforwards previously
reserved.
FIRST NINE MONTHS OF 2003 COMPARED WITH FIRST NINE MONTHS OF 2002
NMHG WHOLESALE: Revenues increased $121.8 million, or 12.0%, to $1,139.0 million
in the first nine months of 2003 from $1,017.2 million in the first nine months
of 2002. The increase in revenues was primarily the result of a $72.5 million
increase in unit volume and $54.6 million in favorable foreign currency
movements. Unit shipments increased 9.0% to 50,576 units in the first nine
months of 2003 as compared with 46,405 in the first nine months of 2002.
Operating profit increased $2.0 million to $36.3 million in the first nine
months of 2003 from $34.3 million in the first nine months of 2002. Operating
profit as a percentage of revenues was 3.2% in the first nine months of 2003
versus 3.4% in the first nine months of 2002. The increase in operating profit
was the result of the $121.8 million increase in revenues discussed above and
increases attributable to a shift in mix to higher-margin lift trucks and
improved margins on part sales. These factors were partially offset by a $94.0
million increase in cost of goods sold and a $25.8 million increase in selling,
general and administrative expenses. The increase in cost of goods sold was
directly related to the increase in revenues and a $4.3 million increase in
restructuring charges. Restructuring charges increased primarily as a result of
additional expenses related to the previously announced phase-out of the Lenoir,
North Carolina lift truck component facility. These expenses were not eligible
for accrual in 2002. See additional discussion of the NMHG Wholesale
restructuring programs under the heading "NMHG Restructuring Plans" in this Form
10-Q. The increase in selling, general and administrative expenses was mainly
due to increased marketing and product development expenses as well as
unfavorable foreign currency effects, largely as a result of the weakening U.S.
dollar against the euro.
23
NMHG HOLDING CO. - continued
FINANCIAL REVIEW - continued
Net income increased $3.7 million to $12.6 million in the first nine months of
2003 from $8.9 million in the first nine months of 2002. The increase in net
income was due to the factors affecting operating profit discussed above as well
as a $3.8 million pre-tax decrease in the loss on interest rate swap agreements
during the first nine months of 2002 due to (i) the inclusion in the
year-to-date 2002 results of an expense for the mark-to-market of interest rate
swap agreements that no longer qualified for hedge accounting following the
refinancing of NMHG's debt in May 2002 and (ii) the recognition of previously
deferred losses on these interest rate swap agreements. Additionally, the
year-to-date 2002 results include a $3.0 million pre-tax charge for the
impairment of certain investments in unconsolidated affiliates. These factors
were partially offset by a $3.4 million increase in interest expense, including
the amortization of deferred financing fees, and the inclusion in the
year-to-date 2002 results of a $1.9 million tax benefit related to the
recognition of previously generated losses in China.
NMHG RETAIL (NET OF ELIMINATIONS): Revenues decreased $12.6 million, or 9.8%, to
$116.3 million in the first nine months of 2003 from $128.9 million in the first
nine months of 2002. The decrease in revenues was primarily due to the January
3, 2003 sale of NMHG Retail's only wholly owned U.S. dealer. Excluding the
results of the Americas' operations, revenues increased $6.6 million, primarily
due to $22.7 million in favorable foreign currency effects, partially offset by
a $5.6 million decrease in revenues from service contracts, $3.4 million in
reduced parts sales and $2.9 million in lower used truck sales.
Operating loss decreased $0.2 million to $2.2 million in the first nine months
of 2003 from $2.4 million in the first nine months of 2002. Operating loss as a
percentage of revenues was (1.9%) for both the nine months ended September 30,
2003 and September 30, 2002. The decrease in operating loss was primarily due to
the $3.9 million favorable effect of disposing of unprofitable wholly owned
dealerships, including NMHG Retail's only wholly-owned U.S. dealer, partially
offset by a decrease in profits from the sale of used lift trucks and a decrease
related to reduced service contract revenues.
Net loss decreased $5.6 million to $1.0 million in the nine months ended
September 30, 2003 from a net loss of $6.6 million in the first nine months of
2002. The decrease in net loss was primarily due to the $2.8 million tax benefit
realized at the Company's Asia-Pacific operations (see further discussion in the
NMHG Retail section of the quarter-to-quarter comparison above) and a $2.0
million decrease in interest expense.
NMHG 2002 RESTRUCTURING PROGRAM
As announced in December 2002, NMHG Wholesale is phasing out its Lenoir, North
Carolina, lift truck component facility and restructuring other manufacturing
and administrative operations, primarily its Irvine, Scotland, lift truck
assembly and component facility. During the fourth quarter of 2002, NMHG
Wholesale recognized a restructuring charge of approximately $12.5 million
pre-tax. Of this amount, $3.8 million related to a non-cash asset impairment
charge for a building, machinery and tooling, which was determined based on the
then current market values for similar assets and broker quotes as compared with
the net book value of these assets; and $8.7 million related to severance and
other employee benefits to be paid to approximately 615 manufacturing and
administrative employees. Payments began during the second quarter of 2003. As
of September 30, 2003, payments of $1.2 million were made to approximately 150
employees. Payments are expected to continue through 2005. In addition, $0.3
million of the amount accrued at December 31, 2002 was reversed in the first
nine months of 2003 as a result of a reduction in the estimate of employees
eligible to receive severance payments.
Approximately $5.4 million of pre-tax restructuring related costs primarily
related to manufacturing inefficiencies, which were not eligible for accrual in
December 2002, were expensed in the first nine months of 2003. Of the $5.4
million additional costs incurred during 2003, $5.1 million is classified as
cost of sales and the remaining $0.3 million is classified as selling, general
and administrative expenses in the Unaudited Condensed Consolidated Statement of
Income for the nine months ended September 30, 2003. Additional costs, not
eligible for accrual, for severance and manufacturing inefficiencies are
expected to be approximately $4.3 million for the remainder of 2003, $8.5
million in 2004 and $5.9 million in 2005. Initial net benefits from this
restructuring program are expected to be realized in 2004 with a full twelve
months of estimated annual pre-tax benefits of approximately $14.8 million
expected beginning in 2005. 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 effect on manufacturing
efficiencies.
24
NMHG HOLDING CO. - continued
FINANCIAL REVIEW - continued
This restructuring program will allow the Company to re-focus its operating
activities, including the manufacture of new product lines in Europe. As a
result, the Company expects to receive government grants during 2003 through
2005 totaling approximately $6.5 million. Of this total amount, $0.8 million was
recognized in the third quarter of 2003.
NMHG 2001 RESTRUCTURING PROGRAMS
During 2001, management committed to the restructuring of certain operations in
Europe for both the Wholesale and Retail segments of the business. As such, 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. As
of December 31, 2002, payments of $3.4 million to approximately 245 employees
had been made and $0.2 million of the amount originally accrued was reversed in
2002. Although the majority of the headcount reductions were made by the end of
2002, final payments of $0.9 million were made to 16 employees during the first
nine months of 2003. As a result of the reduced headcount in Europe, NMHG
Wholesale realized pre-tax cost savings primarily from reduced employee wages
and benefits of $6.9 million for the first nine months of 2003 and estimates
pre-tax savings of $2.3 million for the remainder of 2003. Annual pre-tax cost
savings of $9.2 million are expected to continue subsequent to 2003 as a result
of this program. 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 effect on manufacturing efficiencies
or due to changes in foreign currency rates.
NMHG Retail recognized a restructuring charge of approximately $4.7 million
pre-tax in 2001, of which $0.4 million related to lease termination costs and
$4.3 million related to severance and other employee benefits to be paid to
approximately 140 service technicians, salesmen and administrative personnel at
wholly owned dealers in Europe. As of December 31, 2002, severance payments, net
of currency effects, of $2.8 million had been made to approximately 110
employees. Although the majority of the headcount reductions were made by the
end of 2002, during the first nine months of 2003, severance payments of $0.4
million were made to seven employees. In addition, $0.7 million pre-tax of the
amount accrued at December 31, 2002 was reversed in the first nine months of
2003 as a result of a reduction in the estimate of the total number of employees
to receive severance as well as a decrease in the average amount to be paid to
each employee. The remaining severance payments are expected to be completed
during 2004. In addition, the lease impairment accrual was increased by $0.2
million during 2003 as a result of additional lease expense. Cost savings
primarily from reduced employee wages, employee benefits and lease costs of
approximately $2.3 million pre-tax were realized in the first nine months of
2003 and are expected to be approximately $0.8 million pre-tax for the remainder
of 2003 related to this program. Annual pre-tax cost savings of $3.1 million are
expected to continue subsequent to 2003. 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 or due to changes in
foreign currency rates.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $14.5 million for NMHG
Wholesale and $3.9 million for NMHG Retail during the first nine months of 2003.
These capital expenditures included tooling for new products, machinery,
equipment and lease and rental fleet. It is estimated that NMHG Wholesale's
capital expenditures for the remainder of 2003 will be approximately $11.9
million, of which approximately $1.2 million relates to the NMHG 2002
restructuring program, primarily for new tooling and equipment. NMHG Retail's
capital expenditures for the remainder of 2003 are not expected to be
significant. Planned expenditures for the remainder of 2003 include tooling for
new products, capital expenditures arising as a result of the manufacturing
restructuring programs and replacement of machinery and equipment. The principal
sources of financing for these capital expenditures will be internally generated
funds and bank borrowings.
Since December 31, 2002, there have been no 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, 2002.
25
NMHG HOLDING CO. - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
During 2002, NMHG issued $250.0 million of 10% unsecured Senior Notes that
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 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. The proceeds from the Senior Notes were
reduced by an original issue discount of $3.1 million.
Additionally, NMHG has a secured, floating-rate revolving credit facility which
expires in May 2005. Availability under the revolving credit facility is up to
$175.0 million and is governed by a borrowing base derived from advance rates
against the inventory and accounts receivable of the borrowers, as defined in
the revolving credit facility. 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. At September 30,
2003, the borrowing base under the revolving credit facility was $94.1 million,
which reflects reductions for the commitments or availability under certain
foreign credit facilities and for an excess availability requirement of $15.0
million. Borrowings outstanding under this facility were $13.9 million at
September 30, 2003. Therefore, at September 30, 2003, the excess availability
under the revolving credit facility was $80.2 million. The floating rate of
interest applicable to this facility on September 30, 2003 was 5.875%, including
the applicable floating rate margin.
In addition to the amount outstanding under the Senior Notes and the revolving
credit facility, NMHG had borrowings of approximately $33.4 million outstanding
at September 30, 2003 under various foreign working capital facilities and other
domestic term loans.
NMHG believes that funds available under the revolving credit facility, other
available lines of credit and operating cash flows will provide sufficient
liquidity to meet its operating needs and commitments arising during the next
twelve months and until the expiration of NMHG's revolving credit facility in
May 2005.
NMHG's capital structure is presented below:
SEPTEMBER 30 DECEMBER 31
2003 2002
------------ -----------
Total net tangible assets $ 374.7 $ 362.8
Goodwill and other intangibles at cost 495.2 487.7
-------- --------
Net assets before amortization of goodwill and other
intangibles 869.9 850.5
Accumulated goodwill and other intangibles amortization (145.7) (142.3)
Total debt (316.5) (324.8)
Minority interest (.3) (1.1)
-------- --------
Stockholder's equity $ 407.4 $ 382.3
======== ========
Debt to total capitalization 44% 46%
The increase in total net tangible assets of $11.9 million was primarily due to
a $41.6 million increase in inventory primarily as a result of the timing of
production, assembly of components, and shipments of finished goods due to the
implementation of the 2002 restructuring program, and a $36.8 million increase
in trade and intercompany accounts receivable due to increased volume. These
increases were partially offset by a $31.1 million decrease in cash, primarily
as a result of the reduction of debt, a $14.6 million increase in trade and
intercompany accounts payable primarily as a result of timing of payments, an
$8.6 million decrease in net assets as a result of the sale of NMHG Retail's
only wholly owned U.S. dealer on January 3, 2003 and an $8.6 million decrease in
property, plant and equipment. Stockholder's equity at September 30, 2003
increased $25.1 million as a result of net income of $11.6 million, a favorable
foreign currency translation adjustment of $18.1 million and a $0.4 million
favorable adjustment to the deferred loss on hedges. These increases were
partially offset by a dividend to NACCO of $5.0 million.
26
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 nine
months ended September 30:
THREE MONTHS NINE MONTHS
--------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues $ 151.2 $ 148.4 $ 385.5 $ 404.5
Operating profit $ 11.4 $ 10.5 $ 12.0 $ 11.1
Interest expense $ (1.7) $ (2.1) $ (5.0) $ (5.9)
Other-net $ (1.1) $ (.7) $ (1.5) $ (1.5)
Net income $ 5.2 $ 4.6 $ 3.3 $ 2.2
Effective tax rate 39.5% 40.5% 40.0% 40.3%
THIRD QUARTER OF 2003 COMPARED WITH THIRD QUARTER OF 2002
Revenues increased $2.8 million, or 1.9% to $151.2 million in the third quarter
of 2003 from $148.4 million in the third quarter of 2002. Revenues increased
primarily due to increased sales volume of $4.7 million and favorable Canadian
translation of $1.5 million at HB/PS. These increases were partially offset by a
$3.3 million decrease at HB/PS due to a reduction in the average sales price and
a $0.5 million reduction in revenues at KCI. KCI recorded decreases in
comparable store sales and the total number of sales transactions per store as a
result of reduced customer visits primarily due to the weak retail sales
environment and increases in gas prices. Although total store transactions
decreased, the average sales transaction increased slightly. KCI operated 179
stores at September 30, 2003 compared with 174 stores at September 30, 2002.
Operating profit increased $0.9 million to $11.4 million in the third quarter of
2003 from $10.5 million in the third quarter of 2002. Operating profit as a
percentage of revenues was 7.5% in the third quarter of 2003 as compared to 7.1%
for the third quarter of 2002. Operating profit increased primarily due to the
$2.8 million increase in revenues discussed above and a $0.4 million decrease in
selling, general, and administrative expenses primarily due to reduced legal
fees. These increases were partially offset by a $2.3 million increase in cost
of goods sold, primarily due to the increase in revenues and higher shipping
costs for sourced products from the Far East, partially offset by favorable
exchange rates.
Net income increased $0.6 million to $5.2 million in the third quarter of 2003
from net income of $4.6 million for the third quarter of 2002 due to the factors
affecting operating profit and a reduction in interest expense of $0.4 million,
primarily as a result of lower outstanding borrowings.
FIRST NINE MONTHS OF 2003 COMPARED WITH FIRST NINE MONTHS OF 2002
Revenues decreased $19.0 million, or 4.7% to $385.5 million in the first nine
months of 2003, from $404.5 million in the first nine months of 2002. The
decline in revenues was primarily due to an $11.2 million decrease due to lower
unit volume as a result of the weak retail sales environment and an $8.8 million
decrease due to a reduction in the average sales price at HB/PS. Lower unit
volume was primarily the result of a net reduction in sales to the big three
retailers: Wal*Mart, Kmart and Target, partially offset by an increase in volume
of home health products. Additionally, revenue increased $2.7 million as a
result of favorable Canadian exchange rates.
27
NACCO HOUSEWARES GROUP - continued
FINANCIAL REVIEW - continued
Operating profit increased $0.9 million to $12.0 million in the nine months
ended September 30, 2003 from $11.1 million in the first nine months of 2002.
Operating profit as a percentage of revenues in the first nine months of 2003
was 3.1% versus 2.7% in the first nine months of 2002. Operating profit
increased primarily due to an $18.1 million decrease in cost of goods sold and a
$1.8 million decrease in selling, general, and administrative expenses. The
decrease in cost of goods sold was primarily related to the $19.0 million
decrease in revenues discussed above and favorable Canadian exchange rates
partially offset by unfavorable outsourcing costs primarily as a result of
increased shipping costs from the Far East. Selling, general, and administrative
expenses decreased due to a $2.3 million reduction in bad debt expense and
reduced legal fees, partially offset by increased costs at KCI. Costs increased
at KCI due to higher payroll as a result of the increase in the number of stores
and cost of living increases as well as higher store maintenance expenses. Bad
debt expense decreased due to a $3.6 million charge in the second quarter of
2002 related to the partial write-down of pre-bankruptcy receivables from Kmart.
Net income increased $1.1 million to $3.3 million in the first nine months of
2003 from $2.2 million in the first nine months of 2002. Net income increased
due to the factors affecting operating profit and a $0.9 million reduction in
interest expense as a result of lower outstanding borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Housewares' expenditures for property, plant and equipment were $4.3 million
during the first nine months of 2003 and are estimated to be $3.8 million for
the remainder of 2003. These capital expenditures are primarily for tooling and
equipment designed for new products, as well as upgrades to information systems.
These expenditures will be funded primarily from internally generated funds and
bank borrowings.
HB/PS' credit agreement provides for a revolving credit facility with
availability of up to $140.0 million, which is governed by a borrowing base
derived from advance rates against the inventory, accounts receivable and
certain trademarks of HB/PS. A portion of the availability can be denominated in
Canadian dollars to provide funding to HB/PS' Canadian subsidiary. The borrowing
base is reduced by specific reserves for inventory, accounts receivable,
obligations outstanding under letters of credit and interest rate derivatives,
among others, and an excess availability requirement of $10.0 million.
Adjustments to reserves booked against inventory and accounts receivable will
change the eligible borrowing base and thereby impact the liquidity provided by
the facility.
Borrowings bear interest at a floating rate, which can be either a base rate or
LIBOR, as defined, plus an applicable margin. The applicable margins, effective
September 30, 2003, for base rate loans and LIBOR loans were 0.50% and 1.75%,
respectively. This is a decline from the applicable margins effective as of
December 31, 2002, which were 1.50% and 2.75%, respectively. The margin for
Canadian base rate loans was 1.00% at September 30, 2003. The revolving credit
facility also requires the payment of a fee on the unused commitment. The unused
commitment fee has declined from 0.50% per annum at December 31, 2002 to 0.375%
per annum at September 30, 2003. The margins and unused commitment fee are
subject to quarterly adjustment based on a leverage ratio. The revolving credit
facility is secured by substantially all of HB/PS' assets. The facility expires
in December 2005.
At September 30, 2003, the borrowing base under the revolving credit facility
was $111.0 million, which reflects reductions for reserves and the excess
availability requirement of $10.0 million. Borrowings outstanding under this
facility were $60.1 million at September 30, 2003. Therefore, at September 30,
2003, the excess availability under the revolving credit facility was $50.9
million. The floating rate of interest applicable to this facility on September
30, 2003 was 3.21%, including the applicable floating rate margin.
28
NACCO HOUSEWARES GROUP - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
KCI's credit agreement provides for a secured, floating-rate revolving line of
credit (the "KCI Facility") with availability up to $15.0 million, based on a
formula using KCI's eligible inventory, as defined. At September 30, 2003, the
borrowing base as defined in the agreement was $11.3 million. Borrowings
outstanding at September 30, 2003 were $5.8 million at an effective interest
rate of LIBOR plus 1.35%, or 2.5%. The KCI Facility expires in May 2005.
Since December 31, 2002, 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, 2002.
Housewares believes that funds available under its credit facilities and
operating cash flows will provide sufficient liquidity to meet its operating
needs and commitments arising during the next twelve months and until the
current facilities expiration dates in 2005.
Housewares' capital structure is presented below:
SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31
2003 2002 2002
------------ ------------ -----------
Total net tangible assets $ 138.4 $ 158.3 $ 127.6
Goodwill and other intangibles at cost 124.1 124.1 124.1
------- ------- -------
Net assets before goodwill amortization 262.5 282.4 251.7
Accumulated goodwill and other intangibles
amortization (40.1) (39.9) (39.9)
Total debt (66.2) (98.7) (57.9)
------- ------- -------
Stockholder's equity $ 156.2 $ 143.8 $ 153.9
======= ======= =======
Debt to total capitalization 30% 41% 27%
Inventory, accounts receivable and accounts payable increase annually at
September 30 primarily due to the seasonality of the Housewares business;
therefore we have provided a discussion of the changes in Housewares' capital
structure at September 30, 2003 as compared with both September 30, 2002 and
December 31, 2002.
SEPTEMBER 30, 2003 COMPARED WITH SEPTEMBER 30, 2002
Total net tangible assets decreased $19.9 million at September 30, 2003 as
compared to September 30, 2002 primarily due to an $18.1 million increase in
accounts payable, primarily as a result of improved terms with suppliers. Debt
declined $32.5 million as a result of the decrease in net tangible assets. The
increase in stockholder's equity was primarily the result of $18.9 million in
net income partially offset by $5.0 million in dividends paid to NACCO and a
$2.6 million increase in accumulated other comprehensive loss relating to a
minimum pension liability adjustment recognized in the 12 month period September
30, 2002 through September 30, 2003.
SEPTEMBER 30, 2003 COMPARED WITH DECEMBER 31, 2002
Total net tangible assets increased $10.8 million at September 30, 2003 as
compared to December 31, 2002 primarily due to a $33.2 million increase in
inventory and a $12.7 million increase in accounts receivable, partially offset
by a $30.6 million increase in accounts payable.
29
THE NORTH AMERICAN COAL CORPORATION
NACoal mines and markets lignite coal for use primarily as fuel for power
providers. The lignite coal is surface mined in North Dakota, Texas, Louisiana
and Mississippi. Total coal reserves approximate 2.5 billion tons, with 1.3
billion tons committed to customers pursuant to long-term contracts. NACoal
operates six wholly owned lignite coal 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 coal 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.
NACoal has entered into an agreement to provide dragline mining services for a
limerock mine in Florida. The contract provides for minimum deliveries of 3.0
million cubic yards of limerock annually. This operation is expected to commence
mining during the fourth quarter of 2003.
FINANCIAL REVIEW
Lignite tons sold by NACoal's operating lignite coal mines were as follows for
the three and nine months ended September 30:
THREE MONTHS NINE MONTHS
----------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
Coteau 4.1 3.9 11.8 11.4
Falkirk 2.0 2.2 5.9 5.6
Sabine 1.2 1.1 3.3 3.1
San Miguel .8 .8 2.3 2.4
MLMC .9 .8 2.7 2.0
Red River .1 .1 .4 .4
---- ---- ---- ----
Total lignite 9.1 8.9 26.4 24.9
==== ==== ==== ====
The Florida dragline operations delivered 2.5 million and 7.7 million cubic
yards of limerock in the three and nine months ended September 30, 2003,
respectively. This compares with 2.7 million and 7.9 million cubic yards of
limerock in the three and nine months ended September 30, 2002, respectively.
30
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 nine months ended September 30:
THREE MONTHS NINE MONTHS
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
Revenues
Project mining operations $ 74.1 $ 69.8 $ 204.6 $ 198.0
Other mining operations 22.2 19.7 66.2 55.9
------- ------- ------- -------
96.3 89.5 270.8 253.9
Liquidated damages payments recorded by MLMC -- -- -- 3.3
Royalties and other .7 .6 1.8 2.3
------- ------- ------- -------
$ 97.0 $ 90.1 $ 272.6 $ 259.5
======= ======= ======= =======
Income before taxes
Project mining operations $ 7.2 $ 7.6 $ 21.6 $ 21.1
Other mining operations 2.9 2.0 5.7 8.8
------- ------- ------- -------
Total from operating mines 10.1 9.6 27.3 29.9
Royalties and other expenses, net (2.6) (3.2) (6.3) (6.8)
Other operating expenses (1.9) (1.6) (6.7) (5.1)
------- ------- ------- -------
5.6 4.8 14.3 18.0
Provision for taxes 1.8 1.1 2.7 3.7
------- ------- ------- -------
Income before cumulative effect of accounting change 3.8 3.7 11.6 14.3
Cumulative effect of accounting change, net-of-tax -- -- (1.3) --
------- ------- ------- -------
Net income $ 3.8 $ 3.7 $ 10.3 $ 14.3
======= ======= ======= =======
Effective tax rate (a) 32.1% 22.9% 18.9% 20.6%
(a) The effective tax rate for NACoal is lower than the statutory federal tax
rate of 35% primarily due to the benefit received from percentage
depletion.
THIRD QUARTER OF 2003 COMPARED WITH THIRD QUARTER OF 2002
Revenues increased $6.9 million, or 7.7%, to $97.0 million in the third quarter
of 2003 from $90.1 million in the third quarter of 2002. Revenues at the project
mining subsidiaries increased $4.2 million primarily due to a $3.4 million
increase in pass-through costs billed to the project mining subsidiaries'
customers and $1.3 million as a result of increased tonnage. Revenues at other
mining operations increased $2.4 million as a result of increased tonnage and
favorable pricing.
Income before taxes increased $0.8 million to $5.6 million in the third quarter
of 2003 from $4.8 million in the third quarter of 2002. Income before taxes as a
percentage of revenues was 5.8% in the third quarter of 2003 versus 5.3% in the
third quarter of 2002. This $0.8 million improvement in income before taxes was
primarily due to the $6.9 million increase in revenues discussed above and a
$0.9 million reduction in interest expense partially offset by a $6.3 million
increase in cost of goods sold as a result of increased tonnage, increased
repairs and maintenance expenses and a $0.7 million increase in selling,
general, and administrative expenses primarily due to increased insurance
expense. Interest expense declined as a result of lower outstanding borrowings
and a decrease in interest rates.
Net income increased $0.1 million to $3.8 million in the third quarter of 2003
from $3.7 million in the third quarter of 2002. Net income increased as a result
of the factors effecting income before taxes partially offset by an increase in
the effective tax rate. The effective tax rate increased to 32.1% in the third
quarter of 2003 from 22.9% in the third quarter of 2002 primarily as a result of
a change since June 30, 2003 in NACoal's computation of its forecasted effective
tax rate, due to permanent differences between book and tax accounting,
primarily with respect to percentage depletion and state income taxes.
31
THE NORTH AMERICAN COAL CORPORATION - continued
FINANCIAL REVIEW - continued
FIRST NINE MONTHS OF 2003 COMPARED WITH FIRST NINE MONTHS OF 2002
Revenues increased $13.1 million, or 5.0% to $272.6 million in the first nine
months of 2003 from $259.5 million in the first nine months of 2002. Revenues at
the project mining subsidiaries increased $6.6 million primarily due to an $8.9
million increase as a result of increased tonnage partially offset by a $2.0
decrease in pass-through costs billed to the project mining subsidiaries'
customers. Revenues at other mining operations increased $9.8 million primarily
as a result of increased tonnage. The increase in tonnage at the non-project
mines is primarily due to an increase in tons sold at MLMC as a result of a full
nine months of commercial operations of the customer's power plant in 2003.
These increases were partially offset by a $3.3 million decrease in liquidated
damages payments received by MLMC in the first nine months of 2002 due to the
delay of commercial operations of the customer's power plant.
Income before taxes decreased $3.7 million to $14.3 million in the first nine
months of 2003 from $18.0 million in the first nine months of 2002. Income
before taxes as a percentage of revenues was 5.2% in the first nine months of
2003 versus compared to 6.9% in the first nine months of 2002. Income before
taxes decreased primarily due to (i) a $15.7 million increase in cost of goods
sold primarily due to higher costs associated with increased tonnage and
increased repairs and maintenance costs and (ii) a $3.5 million increase in
selling, general, and administrative expenses. Selling, general and
administrative expenses increased primarily due to a $1.4 million gain on the
sale of undeveloped Eastern coal reserves recognized in the first nine months of
2002, increased insurance and employee-related expenses and increased
amortization expense for the coal supply agreement intangible. The increase in
amortization was due to the increase in tonnage at MLMC as the coal supply
agreement is being amortized based on the units of production method. These
increased costs were offset by the $13.1 million increase in revenues discussed
above, a $2.0 million reduction in interest expense as a result of lower
outstanding borrowings and a decrease in average interest rates and a $0.4
million increase in other income.
Net income decreased $4.0 million, to $10.3 million in the first nine months of
2003 from $14.3 million in the first nine months of 2002 due to the factors
affecting income before taxes discussed above and a $1.3 million after-tax
charge for the cumulative effect of a change in accounting related to the
adoption of SFAS No. 143 offset by a $1.0 million reduction in income taxes. See
Note 4 to the Unaudited Condensed Consolidated Financial Statements for a
discussion related to SFAS No. 143.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $33.1 million during the
first nine months of 2003. In April 2003, $15.8 million of equipment previously
financed under operating leases was refinanced with collateralized debt. The
equipment consisted of mining equipment, such as trucks, bulldozers, graders and
a backhoe. These April 2003 purchases were financed with three collateralized
notes payable that expire, in accordance with their respective terms, in either
2007 or 2008 and require monthly principal and interest payments at a
weighted-average fixed interest rate of 5.46%. NACoal estimates that its capital
expenditures for the remainder of 2003 will be $8.0 million, of which $6.5
million relates to the development, establishment and improvement of the project
mining subsidiaries' mines and will be financed or guaranteed by the utility
customers.
In addition to the new collateralized debt discussed above, NACoal's
non-project-mine financing needs are provided by a revolving line of credit of
up to $60.0 million and a term loan with a principal balance of $85.0 million at
September 30, 2003 (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 line of credit of up to $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. The margins and
commitment fee are subject to quarterly adjustment based on the level of debt to
EBITDA. At September 30, 2003, the stated interest rate, including the
applicable margin, for the revolving line of credit and for the term loan was
LIBOR plus 1.85% and LIBOR plus 2.25%, respectively. The revolving credit
facility fee is 0.40% at September 30, 2003. At September 30, 2003, NACoal had
outstanding borrowings under its revolving line of credit of $0.9 million,
leaving $59.1 million available.
32
THE NORTH AMERICAN COAL CORPORATION - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
Since December 31, 2002, 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, 2002. In April 2003, NACoal
refinanced several equipment operating leases at MLMC with collateralized debt.
Total contractual obligations of NACoal and the timing of payments did not
change significantly as a result of this refinancing. See additional discussion
related to this refinancing below.
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 line of credit,
operating cash flows and financing provided by the project mining subsidiaries'
customers will provide sufficient liquidity to finance all of its term loan
principal repayments and its operating needs and commitments arising during the
next twelve months and until the expiration date of the current facility in
October 2005.
NACoal's capital structure, excluding the project mining subsidiaries, is
presented below:
SEPTEMBER 30 DECEMBER 31
2003 2002
------------ -----------
Investment in project mining subsidiaries $ 4.6 $ 4.9
Other net tangible assets 108.7 93.2
Coal supply agreements, net 80.6 82.8
------------ -----------
Net assets 193.9 180.9
Advances from NACCO (27.8) (25.7)
Other debt (100.1) (92.0)
------------ -----------
Total debt (127.9) (117.7)
------------ -----------
Stockholder's equity $ 66.0 $ 63.2
============ ===========
Debt to total capitalization 66% 65%
The increase in other net tangible assets and debt was primarily due to the
April 2003 refinancing of several equipment operating leases at MLMC with $15.8
million of collateralized debt. As a result of the refinancing, these pieces of
equipment are now included in property, plant and equipment on the balance
sheet. Total contractual obligations of NACoal and the timing of payments did
not change significantly as a result of this refinancing. The change in
stockholder's equity was the result of net income of $10.3 million and a $1.6
million increase in accumulated other comprehensive income related to hedging
activity, partially offset by $9.1 million in dividends paid to NACCO.
33
NACCO AND OTHER
FINANCIAL REVIEW
NACCO and Other includes the parent company operations and Bellaire Corporation
("Bellaire"), a non-operating subsidiary of NACCO. While Bellaire's results are
immaterial, it does have significant long-term liabilities related to closed
mines, primarily from former eastern U.S. underground coal-mining activities.
See additional discussion in Note 4 to the Unaudited Condensed Consolidated
Financial Statements. Cash payments related to Bellaire's obligations, net of
internally generated cash, are funded by NACCO and historically have not been
material.
The results of operations at NACCO and Other were as follows for the three and
nine months ended September 30:
THREE MONTHS NINE MONTHS
------------------------ -----------------------
2003 2002 2003 2002
--------- --------- --------- --------
Revenues $ -- $ -- $ .1 $ .1
Operating loss $ (.3) $ (1.0) $ (.4) $ (2.8)
Other income (loss), net $ (.2) $ .6 $ (1.3) $ 1.9
Net income (loss) $ .1 $ .5 $ .2 $ (1.7)
The change in operating loss and other income (loss) was primarily due to a
change in the classification of a portion of NACCO's fees charged to the
operating segments. In 2002, $0.9 million and $2.7 million for the three and
nine months ended September 30, 2002, respectively, of income from fees charged
to the operating segments was included in other income (loss). In 2003, all fees
charged to the operating segments are included in operating loss. In addition,
total fees charged to the operating segments increased by $0.3 million and $1.2
million for the three and nine months ended September 30, 2003 as compared with
the same periods of 2002.
The increase in net income (loss) in the nine months ended September 30, 2003 as
compared to the nine months ended September 30, 2002 was primarily due to a $2.5
million after-tax cumulative effect benefit recorded by Bellaire for the
adoption of SFAS No. 143 in the first quarter of 2003. See Note 4 to the
Unaudited Condensed Consolidated Financial Statements for a discussion of the
adoption of SFAS No. 143.
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 management fees, 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 next
twelve months.
34
NACCO AND OTHER - continued
FINANCIAL REVIEW - continued
NACCO's consolidated capital structure is presented below:
SEPTEMBER 30 DECEMBER 31
2003 2002
------------- -----------
Total net tangible assets $ 608.8 $ 570.8
Coal supply agreements and other intangibles, net 82.5 85.0
Goodwill at cost 616.0 609.0
------------ ----------
Net assets before goodwill amortization 1,307.3 1,264.8
Accumulated goodwill amortization (184.4) (181.6)
Total debt, excluding current and long-term portion of
obligations of project mining subsidiaries (482.8) (474.7)
Closed mine obligations (Bellaire), including the
United Mine Worker retirees' medical fund, net-of-tax (41.1) (48.0)
Minority interest (.3) (1.1)
------------ ----------
Stockholders' equity $ 598.7 $ 559.4
============ ==========
Debt to total capitalization 45% 46%
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 profit and net income at
NMHG and Housewares are addressed in the discussion of operating results, above.
See also Item 3, "Quantitative and Qualitative Disclosures About Market Risk,"
in this Form 10-Q.
OUTLOOK
NMHG WHOLESALE
NMHG Wholesale expects overall lift truck shipments to increase in the fourth
quarter of 2003 compared with the fourth quarter of 2002. While global market
prospects remain uncertain, lift truck markets in the Americas are anticipated
to continue to improve gradually in the last quarter of 2003. Markets in Europe
and Asia-Pacific are expected to remain relatively flat. Markets are expected to
improve moderately in 2004.
NMHG Wholesale expects that fourth quarter results will continue to be reduced
by ongoing costs for a product development program that is anticipated to mature
in 2004-2006 and additional costs related to the Lenoir, North Carolina and
Irvine, Scotland manufacturing restructuring programs announced in December
2002. In 2004, high product development and introduction costs are expected to
continue and manufacturing restructuring costs are anticipated to decline.
35
OUTLOOK - continued
NMHG RETAIL
NMHG Retail expects to continue its programs to improve the performance of its
wholly owned dealerships for the remainder of 2003 and in 2004 as part of its
objective to achieve and sustain at least break-even results. In future periods,
the Company does not expect to recognize a tax benefit of the magnitude realized
in the third quarter of 2003.
HOUSEWARES
Housewares is cautiously optimistic that markets for consumer goods will improve
in the fourth quarter of 2003 and in full year 2004 compared with the fourth
quarter of 2002 and with full year 2003, respectively.
HB/PS continues to implement programs, begun in earlier years, which are
designed to reduce operating costs and enhance manufacturing and distribution
efficiencies. Also, HB/PS believes that new product offerings, such as the
Hamilton Beach(R) BrewStation(TM) coffeemaker, the Hamilton Beach(R)
WaffleStix(TM) waffle baker and an expanded line of TrueAir(TM) home health
products, will improve revenues during the 2003 holiday selling season and in
2004.
KCI expects to continue programs designed to enhance its operating results,
including improving its merchandise mix, closing non-performing stores and
prudently opening new stores, expanding the offerings of Hamilton Beach(R) and
Proctor-Silex(R)-branded products and aggressively managing costs.
NACOAL
NACoal anticipates increased lignite coal deliveries in 2003, compared with
2002, primarily due to an expected increase in lignite coal production at MLMC.
However, certain favorable items which improved financial results in 2002,
including the receipt of liquidated damages payments and related settlements,
are not expected to recur in 2003. Further, maintenance requirements and the
adoption of SFAS No. 143 will continue to increase costs in the fourth quarter
of 2003 compared with 2002. In 2004, royalty income is expected to increase.
In the first quarter of 2003, NACoal entered into a new limerock mining contract
which calls for minimum deliveries of 3.0 million cubic yards annually. This
operation is expected to commence mining in the fourth quarter of 2003. North
American Coal expects to continue its efforts to develop other new domestic
mining projects.
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) customer acceptance
of, changes in costs of, or delays in the development of new products, (10)
acquisitions and/or dispositions of dealerships by NMHG, and (11) the uncertain
impact on the economy or the public's confidence in general from terrorist
activities and the impact of the situation in Iraq.
36
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, (9) weather conditions or other events that would affect the number of
customers visiting Kitchen Collection Stores and (10) the uncertain impact on
the economy or the public's confidence in general from terrorist activities and
the impact of the situation in Iraq.
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 and develop new mining opportunities
and (5) changes in the U.S. economy, in U.S. regulatory requirements or in the
power industry that would affect demand for North American Coal's reserves.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See pages 47, F-11, F-25 and F-26 of the Company's Form 10-K for the fiscal year
ended December 31, 2002, for a discussion of its derivative hedging policies and
use of financial instruments. There have been no material changes in the
Company's market risk exposures since December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: The Company maintains a set of
disclosure controls and procedures designed to ensure that information required
to be disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. An evaluation was carried out under the supervision and with the
participation of the Company's management, including the Principal Executive
Officer and the Principal Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, these officers have concluded that the
Company's disclosure controls and procedures are effective.
CHANGES IN INTERNAL CONTROLS: Subsequent to the date of their evaluation, there
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls, including any corrective
action with regard to significant deficiencies and material weaknesses.
37
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
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits. See Exhibit index on page 40 of this quarterly report on
Form 10-Q.
(b) Reports on Form 8-K.
Current Report on Form 8-K furnished to the Commission on July 23,
2003 (Items 7 and 12)
38
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 November 13, 2003 /s/ Kenneth C. Schilling
--------------------------------------
Kenneth C. Schilling
Vice President and Controller
(Authorized Officer and Principal
Financial and Accounting Officer)
39
Exhibit Index
Exhibit
Number* Description of Exhibits
- ------- -----------------------
31.1 Certification of Alfred M. Rankin pursuant to Rule 13a-14(a)/15d-14(a)
of the Exchange Act
31.2 Certification of Kenneth C. Schilling pursuant to Rule
13a-14(a)/15d-14(a) of the Exchange Act
32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed and
dated by Alfred M. Rankin and Kenneth C. Schilling
*Numbered in accordance with Item 601 of Regulation S-K.
40