SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9172
NACCO Industries, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1505819
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5875 LANDERBROOK DRIVE, MAYFIELD HEIGHTS, OHIO 44124
(Address of principal executive offices) Zip code
Registrant's telephone number, including area code (440) 449-9600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the last 90 days.
YES X NO ____
Number of shares of Class A Common Stock outstanding at October 31, 1998:
6,465,560
Number of shares of Class B Common Stock outstanding at October 31, 1998:
1,652,349
<PAGE>
NACCO INDUSTRIES, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1998 (Unaudited) and
December 31, 1997
Unaudited Condensed Consolidated Statements of
Income for the Three Months and Nine Months Ended
September 30, 1998 and 1997
Unaudited Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended September 30,
1998 and 1997
Notes to Unaudited Condensed Consolidated
Financial Statements
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About
Market Risk
Part II. OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signature
Exhibit Index
<PAGE>
PART I
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited) (Audited)
SEPTEMBER 30 DECEMBER 31
1998 1997
---------- ----------
ASSETS (In millions)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 17.5 $ 24.1
Accounts receivable, net 279.1 240.8
Inventories 387.2 302.9
Prepaid expenses and other 37.0 31.8
---------- ----------
720.8 599.6
Property, Plant and Equipment, Net 559.1 541.7
Deferred Charges
Goodwill, net 438.3 449.3
Deferred costs and other 68.5 63.5
Deferred income taxes 26.6 24.1
---------- ----------
533.4 536.9
Other Assets 65.0 50.9
---------- ----------
Total Assets $ 1,878.3 $ 1,729.1
========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited) (Audited)
SEPTEMBER 30 DECEMBER 31
1998 1997
---------- ----------
(In millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable $ 244.6 $ 244.7
Revolving credit agreements 68.2 23.5
Current maturities of long-term debt 24.0 18.9
Income taxes 1.1 12.8
Accrued payroll 36.7 36.4
Other current liabilities 175.9 170.2
---------- ----------
550.5 506.5
Long-term Debt- not guaranteed by
the parent company 259.3 230.2
Obligations of Project Mining Subsidiaries -
not guaranteed by the parent company or
its North American Coal subsidiary 325.6 328.0
Self-insurance Reserves and Other 233.1 222.7
Minority Interest 18.0 16.6
Stockholders' Equity
Common stock:
Class A, par value $1 per share, 6,464,160
shares outstanding (1997 - 6,477,414
shares outstanding) 6.5 6.5
Class B, par value $1 per share, convertible
into Class A on a one-for-one basis,
1,653,749 shares outstanding
(1997 - 1,676,146 shares outstanding) 1.6 1.7
Capital in excess of par value .1 .1
Retained earnings 475.0 412.9
Foreign currency translation adjustment
and other 8.6 3.9
---------- ----------
491.8 425.1
---------- ----------
Total Liabilities and Stockholders' Equity $ 1,878.3 $ 1,729.1
========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In millions, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 583.7 $ 557.4 $ 1,797.2 $ 1,578.2
Cost of sales 465.5 451.6 1,439.7 1,289.9
---------- ---------- ---------- ----------
Gross Profit 118.2 105.8 357.5 288.3
Selling, general and administrative expenses 71.1 64.3 206.9 189.1
Amortization of goodwill 3.8 4.0 11.2 11.9
---------- ---------- ---------- ----------
Operating Profit 43.3 37.5 139.4 87.3
Other income (expense)
Interest expense (8.9) (8.8) (25.2) (28.1)
Other - net (1.5) (3.4) 1.9 (2.2)
---------- ---------- ---------- ----------
(10.4) (12.2) (23.3) (30.3)
Income Before Income Taxes and
Minority Interest 32.9 25.3 116.1 57.0
Provision for income taxes 12.2 10.6 43.9 24.2
---------- ---------- ---------- ----------
Income Before Minority Interest 20.7 14.7 72.2 32.8
Minority interest (.3) (.2) (1.4) (.6)
---------- ---------- ---------- ----------
Net Income $ 20.4 $ 14.5 $ 70.8 $ 32.2
========== ========== ========== ==========
Comprehensive Income $ 26.2 $ 12.1 $ 75.5 $ 23.1
========== ========== ========== ==========
Net Income per share: basic $ 2.50 $ 1.78 $ 8.68 $ 3.94
========== ========== ========== ==========
Net Income per share: diluted $ 2.50 $ 1.78 $ 8.66 $ 3.93
========== ========== ========== ==========
Dividends per share $ .2050 $ .1950 $ .6050 $ .5775
========== ========== ========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
-----------------
1998 1997
-------- --------
(In millions)
<S> <C> <C>
Operating Activities
Net income $ 70.8 $ 32.2
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization 63.9 65.9
Deferred income taxes (7.2) (4.2)
Other non-cash items 7.8 (.2)
Working Capital Changes:
Accounts receivable (34.6) (8.1)
Inventories (81.6) (25.3)
Other current assets (2.8) 3.3
Accounts payable and other liabilities 1.1 52.7
-------- --------
Net cash provided by operating activities 17.4 116.3
Investing Activities
Expenditures for property, plant and equipment (72.7) (44.0)
Proceeds from the sale of assets 2.9 2.9
Investments in unconsolidated affiliates (13.0) (1.7)
Acquisitions of businesses -- (12.4)
Other - net (1.0) 1.3
-------- --------
Net cash used for investing activities (83.8) (53.9)
Financing Activities
Additions to long-term debt and revolving credit
agreements 100.1 49.0
Reductions of long-term debt and revolving credit
agreements (22.7) (99.5)
Additions to obligations of project mining subsidiaries 60.2 42.2
Reductions of obligations of project mining subsidiaries (61.0) (56.1)
Financing of other short-term obligations (5.7) (.3)
Cash dividends paid (4.9) (4.7)
Other - net (6.5) (1.4)
-------- --------
Net cash provided by (used for) financing activities 59.5 (70.8)
Effect of exchange rate changes on cash .3 (2.1)
-------- --------
Cash and Cash Equivalents
Decrease for the period (6.6) (10.5)
Balance at the beginning of the period 24.1 47.8
-------- --------
Balance at the end of the period $ 17.5 $ 37.3
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions)
Note 1 - Basis of Presentation
NACCOIndustries, Inc. ("NACCO") is a holding company with four operating
subsidiaries: NACCO Materials Handling Group, Inc. ("NMHG"), Hamilton
Beach/Proctor-Silex, Inc. ("HB/PS"), The North American Coal Corporation
("NACoal"), and The Kitchen Collection, Inc. ("KCI"). See a discussion of
reportable segments in Note 2, below.
The accompanying unaudited condensed consolidated financial statements include
the accounts of NACCO and its majority owned subsidiaries ("NACCO Industries,
Inc. and Subsidiaries," or the "Company"). Intercompany accounts have been
eliminated.
These financial statements have been prepared in accordance with generally
accepted accounting principles 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 generally accepted
accounting principles. 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, 1998 and the results
of its operations for the three and nine month periods and cash flows for the
nine month periods ended September 30, 1998 and 1997 have been included.
Operating results for the nine month period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the remainder of
the year ended December 31, 1998. 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,
1997.
Certain amounts in the prior periods' unaudited condensed consolidated financial
statements have been reclassified to conform to the current period's
presentation.
Note 2 - Segment Reporting
In the second quarter of 1998, management made the determination that two of
NACCO's subsidiaries, HB/PS and KCI, would work more closely together to
identify and maximize the benefits of such a relationship. Operating as NACCO
Housewares Group ("Housewares"), financial results of HB/PS and KCI will be
evaluated by management as a combined operating unit. Because of this and in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information," operating
results of these two subsidiaries will be combined as Housewares for purposes of
segment reporting. The composition of NACCO's other reportable segments, NMHG,
NACoal and NACCO and Other, remains consistent with prior periods' segment
reporting.
SFAS No. 131, issued in June 1997, establishes standards for segment reporting
and identifies the interim and annual disclosure requirements for those
segments. Interim disclosures required by SFAS No. 131 are included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, beginning on page 10 of this Form 10-Q. Segment information for 1997
has been restated to reflect the combination of HB/PS and KCI as one reportable
segment, Housewares. Any additional annual disclosures required by SFAS No. 131
will be reflected in the Company's 1998 Annual Report on Form 10-K.
<PAGE>
Note 3 - Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which requires
disclosure of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as changes
in stockholders' equity from nonowner sources and, for the Company, includes net
income, changes in the foreign currency translation adjustment and changes in
the minimum pension liability adjustment.
Note 4 - Earnings per Share
Earnings per share is calculated in accordance with the provisions of SFAS No.
128, "Earnings per Share." For purposes of calculating the basic and diluted
earnings per share, no adjustments have been made to the reported amounts of net
income. The share amounts used are as follows:
<TABLE>
<CAPTION>
(Weighted Average Shares)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic common shares 8.150 8.153 8.156 8.177
Dilutive stock options .019 .015 .019 .011
===== ===== ===== =====
Diluted common shares 8.169 8.168 8.175 8.188
===== ===== ===== =====
</TABLE>
Note 5 - Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
-------- ---------
(Unaudited) (Audited)
<S> <C> <C>
Manufacturing inventories:
Finished goods and service parts-
NMHG $ 104.1 $ 86.9
Housewares 73.7 31.8
-------- --------
177.8 118.7
-------- --------
Raw materials and work in process-
NMHG 149.4 135.6
Housewares 22.1 15.1
-------- --------
171.5 150.7
-------- --------
LIFO reserve-
NMHG (12.6) (13.4)
Housewares 1.1 1.1
-------- --------
(11.5) (12.3)
-------- --------
Total manufacturing inventories 337.8 257.1
Coal - NACoal 11.0 10.7
Mining supplies - NACoal 19.1 19.2
Retail inventories - Housewares 19.3 15.9
-------- --------
$ 387.2 $ 302.9
======== ========
</TABLE>
The cost of manufacturing inventories has been determined by the last-in,
first-out (LIFO) method for 71 percent and 70 percent of such inventories as of
September 30, 1998 and December 31, 1997, respectively.
<PAGE>
Note 6 - Restructuring Accrual
In the second quarter of 1998, HB/PS recorded a pre-tax charge of $3.1 million
to recognize severance payments to be made to approximately 450 manufacturing
employees in connection with transitioning activities to HB/PS's Saltillo,
Mexico facility. No significant payments related to this accrual have been made
as of September 30, 1998.
In the fourth quarter of 1997, NMHG approved and began implementation of a plan
to restructure certain activities. As such, NMHG recognized an accrual for
severance payments to be made to certain NMHG employees and for lease
termination costs. Severance payments were made to approximately 130 NMHG
employees during the first nine months of 1998. In the third quarter of 1998,
NMHG recognized a reduction to the accrual of approximately $1.5 million, as
severance payments were less than previously anticipated. In addition, NMHG
recognized an additional charge during the third quarter of 1998 of
approximately $3.0 million, which is classified as Selling, general and
administrative expenses in the accompanying Statement of Income, relating to
increases in temporary labor, moving and training costs associated with the
restructuring program.
The changes to NMHG's restructuring accrual as announced in the fourth quarter
of 1997 and to HB/PS's restructuring accrual as announced in the second quarter
of 1998 are as follows:
<TABLE>
<CAPTION>
HB/PS NMHG
--------- -----------------
Employee Employee
Severance Severance Other
--------- --------- ------
<S> <C> <C> <C>
Balance at December 31, 1997 $ -- $ 5.9 $ 1.0
First and second quarter payments -- (.9) (.1)
First and second quarter provision 3.1 -- --
----- ------ -----
Balance at June 30, 1998 $ 3.1 $ 5.0 $ .9
Third quarter payments -- (1.6) --
Third quarter provision (reversal) .1 (2.3) .8
----- ------ -----
Balance at September 30, 1998 $ 3.2 $ 1.1 $ 1.7
====== ====== ======
</TABLE>
Note 7 - Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires companies to recognize all derivatives on
the balance sheet as assets and liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. This Statement is effective for fiscal years beginning
after June 15, 1999. The Company will adopt this Statement on January 1, 2000
and is in the process of determining the effect that adoption will have on its
financial statements.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for the
Company as of January 1, 1999. This SOP requires capitalization of certain
development costs of software to be used internally.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective for the Company as of January 1, 1999. This SOP
requires start-up and organization costs to be expensed as incurred and also
requires previously deferred start-up costs to be recognized as a cumulative
effect adjustment in the statement of income upon adoption.
These SOPs, which the Company plans to adopt as of January 1, 1999, are not
expected to have a material effect on the Company's financial statements.
<PAGE>
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Per Share Data)
FINANCIAL SUMMARY
==================
NACCO's operations and financial condition are best discussed in terms of its
reportable segments, which function in distinct business environments. See Note
2 to the condensed consolidated financial statements for a discussion of NACCO's
change in reportable segments and restatement of 1997 segment information.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ----------------------
1998 1997 1998 1997
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
NMHG $ 374.6 $ 352.3 $ 1,243.7 $ 1,062.0
Housewares 136.8 134.8 348.7 325.0
NACoal 72.3 70.2 204.7 191.0
NACCO and Other -- .1 .1 .2
-------- ---------- ---------- ----------
$ 583.7 $ 557.4 $ 1,797.2 $ 1,578.2
======== ========== ========== ==========
GROSS PROFIT
NMHG $ 72.4 $ 61.3 $ 247.1 $ 185.6
Housewares 31.9 28.5 71.3 63.6
NACoal 14.0 16.0 39.3 39.2
NACCO and Other (.1) -- (.2) (.1)
-------- ---------- ---------- ----------
$ 118.2 $ 105.8 $ 357.5 $ 288.3
======== ========== ========== ==========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
NMHG $ 45.8 $ 40.7 $ 134.7 $ 122.3
Housewares 19.5 18.7 55.6 53.1
NACoal 3.3 2.8 9.1 7.6
NACCO and Other 2.5 2.1 7.5 6.1
-------- ---------- ---------- ----------
$ 71.1 $ 64.3 $ 206.9 $ 189.1
======== ========== ========== ==========
AMORTIZATION OF GOODWILL
NMHG $ 3.0 $ 3.0 $ 8.8 $ 8.8
Housewares .8 1.0 2.4 3.1
-------- ---------- ---------- ----------
$ 3.8 $ 4.0 $ 11.2 $ 11.9
======== ========== ========== ==========
OPERATING PROFIT (LOSS)
NMHG $ 23.6 $ 17.6 $ 103.6 $ 54.5
Housewares 11.6 8.8 13.3 7.4
NACoal 10.7 13.2 30.2 31.6
NACCO and Other (2.6) (2.1) (7.7) (6.2)
-------- ---------- ---------- ----------
$ 43.3 $ 37.5 $ 139.4 $ 87.3
======== ========== ========== ==========
OPERATING PROFIT (LOSS) EXCLUDING
GOODWILL AMORTIZATION
NMHG $ 26.6 $ 20.6 $ 112.4 $ 63.3
Housewares 12.4 9.8 15.7 10.5
NACoal 10.7 13.2 30.2 31.6
NACCO and Other (2.6) (2.1) (7.7) (6.2)
-------- ---------- ---------- ----------
$ 47.1 $ 41.5 $ 150.6 $ 99.2
======== ========== ========== ==========
</TABLE>
<PAGE>
FINANCIAL SUMMARY - continued
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST EXPENSE
NMHG $ (3.7) $ (3.1) $ (10.1) $ (11.6)
Housewares (2.0) (1.9) (5.2) (5.3)
NACoal (.1) (.6) (.5) (1.6)
NACCO and Other (.2) (.6) (.7) (1.8)
Eliminations .2 .6 .7 1.8
------- ------- ------- -------
(5.8) (5.6) (15.8) (18.5)
Project mining subsidiaries (3.1) (3.2) (9.4) (9.6)
----- ----- ----- -----
$ (8.9)$ (8.8) $ (25.2) $ (28.1)
======= ======= ======= =======
INTEREST INCOME
NMHG $ .7 $ .3 $ 1.5 $ 1.9
NACoal --- .5 .3 1.6
Eliminations (.2) (.6) (.7) (1.8)
------- ------- ------- -------
.5 .2 1.1 1.7
Project mining subsidiaries .2 .3 .8 .8
------- ------- ------- -------
$ .7 $ .5 $ 1.9 $ 2.5
======= ======= ======= =======
OTHER-NET, INCOME (EXPENSE), EXCLUDING
INTEREST INCOME
NMHG $ (1.2) $ (1.8) $ .9 $ (2.3)
Housewares (.1) (.1) (.3) (.1)
NACoal (.8) (2.0) (1.2) (2.6)
NACCO and Other (.1) --- .6 .3
------- ------- ------- -------
$ (2.2) $ (3.9 $ --- $ (4.7)
======= ======= ======= =======
PROVISION FOR INCOME TAXES
NMHG $ 7.5 $ 5.0 $ 37.1 $ 18.8
Housewares 4.2 3.1 3.4 1.0
NACoal 1.9 2.9 5.7 7.2
NACCO and Other (1.4) (.4) (2.3) (2.8)
------- ------- ------- -------
$ 12.2 $ 10.6 $ 43.9 $ 24.2
======= ======= ======= =======
NET INCOME (LOSS)
NMHG $ 11.9 $ 8.0 $ 58.8 $ 23.7
Housewares 5.3 3.7 4.4 1.0
NACoal 5.0 5.3 14.5 13.0
NACCO and Other (1.5) (2.3) (5.5) (4.9)
Minority interest (.3) (.2) (1.4) (.6)
------- ------- ------- -------
$ 20.4 $ 14.5 $ 70.8 $ 32.2
======= ======= ======= =======
</TABLE>
<PAGE>
FINANCIAL SUMMARY - continued
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------- ---------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
NMHG $ 8.9 $ 9.0 $ 26.7 $ 26.0
Housewares 4.2 5.0 12.7 15.5
NACoal .9 .6 2.4 1.7
NACCO and Other .1 .2 .3 .3
------- ------- ------- -------
14.1 14.8 42.1 43.5
Project mining subsidiaries 7.4 7.5 21.8 22.4
------- ------- ------- -------
$ 21.5 $ 22.3 $ 63.9 $ 65.9
======= ======= ======= =======
CAPITAL EXPENDITURES
NMHG $ 17.7 $ 5.6 $ 42.6 $ 14.1
Housewares 4.0 3.8 13.5 13.4
NACoal .4 5.5 2.2 7.2
NACCO and Other -- -- -- .1
------- ------- ------- -------
22.1 14.9 58.3 34.8
Project mining subsidiaries 9.5 6.1 14.4 9.2
------- ------- ------- -------
$ 31.6 $ 21.0 $ 72.7 $ 44.0
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
-------- --------
<S> <C> <C>
TOTAL ASSETS
NMHG $1,047.0 $ 942.4
Housewares 368.4 315.7
NACoal 43.4 51.5
NACCO and Other 48.9 59.4
-------- --------
1,507.7 1,369.0
Project mining subsidiaries 421.3 423.4
-------- --------
1,929.0 1,792.4
Consolidating eliminations (50.7) (63.3)
-------- --------
$1,878.3 $1,729.1
======== ========
</TABLE>
<PAGE>
NACCO MATERIALS HANDLING GROUP, INC.
====================================
NMHG, 98 percent-owned by NACCO, designs, manufactures and markets forklift
trucks and related service parts under the Hyster(R) and Yale(R) brand names.
FINANCIAL REVIEW
The results of operations for NMHG were as follows for the three and nine months
ended September 30:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
-------------------- ----------------------
1998 1997 1998 1997
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Americas $ 261.2 $ 249.8 $ 877.6 $ 719.0
Europe, Africa and Middle East 102.5 83.5 324.6 286.0
Asia-Pacific 10.9 19.0 41.5 57.0
-------- ---------- ---------- ----------
$ 374.6 $ 352.3 $ 1,243.7 $ 1,062.0
======== ========== ========== ==========
Operating profit (loss)
Americas $ 17.5 $ 14.7 $ 79.2 $ 42.5
Europe, Africa and Middle East 6.3 3.0 24.8 13.9
Asia-Pacific (.2) (.1) (.4) (1.9)
-------- ---------- ---------- ----------
$ 23.6 $ 17.6 $ 103.6 $ 54.5
======== ========== ========== ==========
Operating profit (loss) excluding
goodwill amortization
Americas $ 19.6 $ 16.7 $ 85.1 $ 48.4
Europe, Africa and Middle East 7.2 3.9 27.5 16.6
Asia-Pacific (.2) -- (.2) (1.7)
-------- ---------- ---------- ----------
$ 26.6 $ 20.6 $ 112.4 $ 63.3
======== ========== ========== ==========
Net income $ 11.9 $ 8.0 $ 58.8 $ 23.7
======== ========== ========== ==========
</TABLE>
<PAGE>
NACCO MATERIALS HANDLING GROUP, INC. - continued
FINANCIAL REVIEW - continued
Third Quarter of 1998 Compared with Third Quarter of 1997
The following schedule identifies the components of the changes in revenues,
operating profit and net income for the third quarter of 1998 compared with the
third quarter of 1997:
<TABLE>
<CAPTION>
Operating Net
Revenues Profit Income
-------- -------- ---------
<S> <C> <C> <C>
1997 $ 352.3 $ 17.6 $ 8.0
Increase (decrease) in 1998 from:
Unit volume 40.8 6.4 4.1
Sales mix (21.7) (1.0) (.7)
Average sales price (.7) (.7) (.5)
Service parts 6.5 2.2 1.4
Foreign currency (2.6) .3 .2
Manufacturing cost -- 4.2 2.7
Other operating expense -- (5.4) (3.4)
Other income and expense -- -- 1.1
Differences between effective
and statutory tax rates -- -- (1.0)
-------- ------- -------
1998 $ 374.6 $ 23.6 $ 11.9
======== ======= =======
</TABLE>
At NMHG, overall operating results during the third quarter of 1998 improved,
compared with the same period in 1997, primarily due to increased unit volume
and reduced manufacturing costs. Worldwide volume increased 14 percent to 17,759
units shipped during the third quarter of 1998 from 15,541 units shipped during
the third quarter of 1997. Increased demand in the Americas and Europe, fueled
by the strong economies in those regions, contributed to this volume growth.
Unit shipments in Asia-Pacific, however, declined as a result of the continued
weak economies in that region. Revenue growth from increased volume was
partially offset by sales mix, as Demand Flow Technology ("DFT") implementation
at several of NMHG's manufacturing plants temporarily restricted the company's
ability to ship higher-priced trucks. While revenue from sales mix declined
significantly, the rate of decline in operating profit and net income from sales
mix was tempered by increased shipments of higher margin products.
As a result of heightened levels of production and a slight reduction in
Americas' incoming orders, the backlog declined to 18,800 units at September 30,
1998 as compared with 22,800 units at September 30, 1997 and 20,800 units at
June 30, 1998.
Manufacturing costs decreased in the third quarter of 1998, compared with the
same period a year ago, due to reduced materials pricing and higher factory
throughput resulting in increased overhead absorption. However, the benefit from
these factors was somewhat offset by one-time charges associated with the
implementation of DFT in several manufacturing plants.
Other operating expenses increased during the third quarter of 1998 due to
increased incentive compensation and costs to support sales volume growth,
partially offset by employee attrition resulting from NMHG's restructuring
program.
<PAGE>
NACCO MATERIALS HANDLING GROUP, INC. - continued
FINANCIAL REVIEW - continued
First Nine Months of 1998 Compared with First Nine Months of 1997
The following schedule identifies the components of the changes in revenues,
operating profit and net income for the first nine months of 1998 compared with
the first nine months of 1997:
<TABLE>
<CAPTION>
Operating Net
Revenues Profit Income
-------- --------- ------
<S> <C> <C> <C>
1997 $ 1,062.0 $ 54.5 $ 23.7
Increase (decrease) in 1998 from:
Unit volume 189.5 30.8 20.0
Sales mix (8.7) 9.8 6.4
Average sales price .2 .2 .1
Service parts 19.6 4.0 2.6
Foreign currency (18.9) (6.4) (4.2)
Manufacturing cost -- 24.5 15.9
Other operating expense -- (13.8) (8.9)
Other income and expense -- -- 1.6
Differences between effective
and statutory tax rates -- -- 1.6
---------- -------- -------
1998 $ 1,243.7 $ 103.6 $ 58.8
========== ======== =======
</TABLE>
Operating results at NMHG for the first nine months of 1998 improved primarily
due to a 23 percent increase in NMHG's worldwide unit volume to 57,850 units
sold in the first nine months of 1998, compared with 46,975 units sold in the
first nine months of 1997. The strong U.S. economy coupled with economic
recovery in Europe fueled demand, resulting in increased volume. Unit volume in
Asia-Pacific, however, declined due to the continuing weak economies in that
region. Worldwide parts sales improved primarily due to successful ongoing
promotional programs implemented in the North American market.
Foreign currency negatively affected operating results due to the strengthening
of the British pound sterling against other European currencies, which caused
price and margin pressure on lift trucks denominated in the British pound
sterling. The decrease to operating profit caused by the stronger pound sterling
was partially offset by the reduced cost of Japanese yen-based materials caused
by the weakening of the yen against the U.S.
dollar and the pound sterling.
Reduced manufacturing costs as a result of product re-engineering and increased
overhead absorption from unit volume growth also contributed to improved
operating results. Other operating expenses increased during the first nine
months of 1998 due to higher incentive compensation expense and other costs
necessary to support sales volume growth. These increased operating expenses
were slightly offset by savings from attrition of employees due to restructuring
activities implemented since the fourth quarter of 1997.
<PAGE>
NACCO MATERIALS HANDLING GROUP, INC. - continued
FINANCIAL REVIEW - continued
Other Income and Expense and Income Taxes
The components of other income (expense) and the effective tax rate for the
three and nine months ended September 30 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest expense $ (3.7) $ (3.1) $ (10.1) $ (11.6)
Other-net (.5) (1.5) 2.4 (.4)
------- ------- ------- -------
$ (4.2) $ (4.6) $ (7.7) $ (12.0)
======= ======= ======= =======
Effective tax rate 38.7% 37.5% 38.7% 44.1%
</TABLE>
Interest expense for the three month period ended September 30, 1998 increased
as compared with the same period last year primarily due to increased debt
levels necessary to support increased working capital requirements and an
intercompany loan to NACCO. Interest expense for the first nine months of 1998
declined as compared with the same period of 1997 due to decreased average debt
levels and reduced interest rates. Other-net for the first nine months of 1998
improved due to a $4.6 million non-recurring legal settlement received in the
second quarter of 1998, partially offset by losses on foreign currency
transactions.
The decrease in the effective tax rate for the nine months ended September 30,
1998 compared with the same period in 1997 primarily results from a
determination made in the fourth quarter of 1997 to reinvest earnings of foreign
operations in such foreign operations for the foreseeable future. Accordingly,
NMHG did not provide for taxes on unremitted foreign earnings during the first
nine months of 1998. Also contributing to the decrease in the effective tax rate
is the effect of a constant level of nondeductible goodwill amortization on a
higher comparable level of pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $42.6 million during the
first nine months of 1998. It is estimated that NMHG's capital expenditures for
the remainder of 1998 will be approximately $33.1 million. These planned
expenditures relate to the relocation and centralization of NMHG's marketing and
engineering organizations and to investments in manufacturing facilities,
including plant expansions in Mexico and China, worldwide information systems
and tooling for new products. The principal sources of financing for these
capital expenditures are internally generated funds and bank borrowings.
At September 30, 1998, NMHG had available $170.2 million of its $350.0 million
revolving credit facility. The expiration date of the NMHG facility, currently
June 2002, may be extended, on an annual basis, for one additional year upon the
mutual consent of NMHG and the bank group. In addition, the NMHG facility has
performance-based pricing that sets interest rates based upon the achievement of
certain financial performance targets. NMHG also has separate facilities
totaling $43.5 million, of which $30.9 million was available at September 30,
1998. NMHG believes that funds available under its credit facilities and
operating cash flows are sufficient to finance all of its operating needs and
commitments arising during the foreseeable future.
<PAGE>
NACCO MATERIALS HANDLING GROUP, INC. - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
NMHG's capital structure is presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
-------- --------
<S> <C> <C>
Total net tangible assets $ 283.1 $ 188.3
Advances to parent company 16.0 --
Goodwill at cost 447.7 447.8
-------- --------
Total assets before goodwill amortization 746.8 636.1
Accumulated goodwill amortization (103.0) (94.4)
Total debt (194.5) (156.8)
-------- --------
Stockholders' equity $ 449.3 $ 384.9
======== ========
</TABLE>
Debt to total capitalization 30% 29%
The increase in net tangible assets of $94.8 million primarily results from a
$41.4 million increase in accounts receivable, a $31.8 million increase in
inventory and a $23.4 million increase in net property, plant and equipment.
The increase in accounts receivable reflects an increase in volume and a slight
increase in the aging of receivables. Increased inventory reflects a build-up of
inventory necessary to support increased sales volume, as well as an anticipated
build-up of inventory due to the phase-in of DFT.
<PAGE>
NACCO HOUSEWARES GROUP
======================
In the second quarter of 1998, the Company began reporting the results of HB/PS
and KCI on a combined basis as NACCO Housewares Group. This reporting change
better reflects the closer working relationship between these two subsidiaries
designed to maximize their available opportunities. See Note 2 to the condensed
consolidated financial statements for a discussion of NACCO's change in
reportable segments and restatement of 1997 segment information.
HB/PS, wholly owned by NACCO, is a leading manufacturer of small electric
appliances. KCI, wholly owned by NACCO, is a national specialty retailer of
kitchenware, tableware, small electric appliances and related accessories.
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 NACCO Housewares Group were as follows for the
three and nine months ended September 30:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
----------------- -----------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 136.8 $ 134.8 $ 348.7 $ 325.0
Operating profit $ 11.6 $ 8.8 $ 13.3 $ 7.4
Operating profit excluding
goodwill amortization $ 12.4 $ 9.8 $ 15.7 $ 10.5
Net income $ 5.3 $ 3.7 $ 4.4 $ 1.0
</TABLE>
Third Quarter of 1998 Compared with Third Quarter of 1997
The following schedule identifies the components of the changes in revenues,
operating profit and net income for the third quarter of 1998 compared with the
third quarter of 1997:
<TABLE>
<CAPTION>
Operating Net
Revenues Profit Income
-------- ------- -------
<S> <C> <C> <C>
1997 $ 134.8 $ 8.8 $ 3.7
Increase (decrease) in 1998 from:
Unit volume and sales mix 2.5 1.8 1.2
Average sales price (1.2) (1.2) (.8)
Retail sales .7 .3 .2
Manufacturing cost -- 2.4 1.6
Other operating expense -- (.5) (.3)
Differences between effective
and statutory tax rates -- -- (.3)
-------- ------- -------
1998 $ 136.8 $ 11.6 $ 5.3
======== ======= =======
</TABLE>
<PAGE>
NACCO HOUSEWARES GROUP - continued
FINANCIAL REVIEW - continued
Operating results at Housewares improved primarily due to improved operating
results at HB/PS. A shift in HB/PS's sales mix to higher margin products,
especially indoor grills, juice extractors, commercial irons and blenders,
contributed favorably to net income. Unit volume also contributed slightly to
the increase in revenue and net income, as units grew to 9.5 million units sold
in the third quarter of 1998 from 9.4 million units sold in the third quarter of
1997. The average sales price continues to decline as competition, especially
from Chinese imports, remains strong. Reduced manufacturing costs at HB/PS
resulted from an increase in production at more cost-efficient Mexican plants.
Revenues and net income from KCI were comparable to the prior year period. KCI
operated 148 stores at September 30, 1998, compared with 144 stores on September
30, 1997.
First Nine Months of 1998 Compared with First Nine Months of 1997
The following schedule identifies the components of the changes in revenues,
operating profit and net income for the first nine months of 1998 compared with
the first nine months of 1997:
<TABLE>
<CAPTION>
Operating Net
Revenues Profit Income
-------- ------- ------
<S> <C> <C> <C>
1997 $ 325.0 $ 7.4 $ 1.0
Increase (decrease) in 1998 from:
Unit volume and sales mix 25.8 7.8 5.1
Average sales price (2.6) (2.6) (1.7)
Retail sales .5 .3 .2
Manufacturing cost -- 2.1 1.3
Other operating expense -- (1.7) (1.1)
Differences between effective
and statutory tax rates -- -- (.4)
-------- ------- ------
1998 $ 348.7 $ 13.3 $ 4.4
======== ======= ======
</TABLE>
Operating results at Housewares improved primarily due to improved operating
results at HB/PS. Unit volume at HB/PS increased 9 percent to 24.4 million units
sold in the first nine months of 1998 from 22.3 million units sold in the first
nine months of 1997. Increased demand from key mass merchants, specifically for
blenders, irons, indoor grills and toasters, significantly contributed to unit
volume growth. A shift in sales mix to higher margin products contributed to net
income, while continued price decreases due to competition from Chinese imports
reduced net income.
Manufacturing costs declined due to increased production at more cost-efficient
Mexican plants and reduced materials costs. These reduced manufacturing expenses
were partially offset by cost increases related to transferring activities to
the manufacturing facility in Saltillo, Mexico, including a $3.1 million pre-tax
restructuring accrual recognized in the second quarter of 1998. Operating costs
for the first nine months of 1998 as compared with 1997 increased
proportionately to support the increased level of sales. Revenues and net loss
from KCI were comparable to the prior year period.
<PAGE>
NACCO HOUSEWARES GROUP - continued
FINANCIAL REVIEW - continued
Other Income and Expense and Income Taxes
The components of other income (expense) and the effective tax rate for the
three and nine months ended September 30 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest expense $ (2.0) $ (1.9) $ (5.2) $ (5.3)
Other-net (.1) (.1) (.3) (.1)
------- ------- ------- -------
$ (2.1) $ (2.0) $ (5.5) $ (5.4)
======= ======= ======= =======
Effective tax rate 43.5% 44.0% 43.3% 44.2%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Housewares' expenditures for property, plant and equipment were $13.5 million
during the first nine months of 1998 and are estimated to be $6.0 million for
the remainder of 1998. The primary purpose of these capital expenditures is to
reduce manufacturing costs and increase efficiency and to purchase tooling for
new and existing products. These expenditures are funded primarily from
internally generated funds and short-term borrowings.
HB/PS's credit agreement provides for a revolving credit facility ("HB/PS
Facility") that permits advances up to $160.0 million, is secured by
substantially all of HB/PS's assets and expires in May 2003. This facility also
provides lower interest rates if HB/PS achieves certain interest coverage ratios
and allows for interest rates quoted under a competitive bid option. At
September 30, 1998, HB/PS had $43.6 million available under the HB/PS Facility
and $6.7 million available under separate facilities.
In June 1998, the HB/PS Facility was amended to allow advances of up to $10.0
million from HB/PS to KCI. Subsequent to this amendment, KCI's cash requirements
are financed through advances from HB/PS. Accordingly, in the third quarter of
1998, KCI terminated its external revolving credit facility. At September 30,
1998, HB/PS had advances outstanding to KCI of $6.0 million.
Housewares believes that funds available under its credit facilities and
operating cash flows are sufficient to finance all of its operating needs and
commitments arising during the foreseeable future.
<PAGE>
NACCO HOUSEWARES GROUP - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
Housewares' capital structure is presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
-------- --------
<S> <C> <C>
Total net tangible assets $ 181.2 $ 127.8
Goodwill at cost 123.5 123.5
-------- --------
Total assets before goodwill amortization 304.7 251.3
Accumulated goodwill amortization (29.8) (27.6)
Total debt (134.6) (85.8)
-------- --------
Stockholder's equity $ 140.3 $ 137.9
======== ========
Debt to total capitalization 49% 38%
</TABLE>
Because of the seasonal nature of the Housewares business, inventory, accounts
payable and debt levels of this segment routinely reach seasonal peaks during
the second and third quarters.
<PAGE>
THE NORTH AMERICAN COAL CORPORATION
===================================
NACoal mines and markets lignite for use primarily as fuel for power generation
by electric utilities. The lignite is surface mined in North Dakota, Texas and
Louisiana. Total coal reserves approximate 2.0 billion tons, with 1.2 billion
tons committed to electric utility customers pursuant to long-term contracts.
NACoal operates five lignite mines, including three project mining subsidiaries
("Coteau," "Falkirk" and "Sabine"), a NACoal division ("San Miguel") and a joint
venture ("Red River"). NACoal also provides dragline mining services ("Florida
dragline operations") for a limerock quarry near Miami, Florida. The operating
results for the Florida dragline operations are included in Other mining
operations.
During 1997, the Mississippi Lignite Mining Company was formed as a joint
venture between NACoal and Phillips Coal Company. The new company, in which
NACoal has a 25 percent interest, will develop the Red Hills lignite mine near
Ackerman, Mississippi. Development of the mine site has begun. See "OUTLOOK" for
additional information.
FINANCIAL REVIEW
NACoal's three project mining subsidiaries (Coteau, Falkirk and Sabine), which
represent a significant portion of NACoal's operations, mine lignite for utility
customers pursuant to long-term contracts at a price based on actual cost plus
an agreed pretax profit per ton. Due to the cost-plus nature of these contracts,
revenues and operating profits are impacted by increases and decreases in
operating costs, as well as by tons sold. Net income of these project mines,
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, operating results are best
analyzed in terms of lignite tons sold, income before taxes and net income.
Lignite tons sold by NACoal's operating lignite mines were as follows for the
three and nine months ended September 30:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Coteau Properties 4.1 3.9 12.1 11.6
Falkirk Mining 1.9 1.7 5.0 4.8
Sabine Mining 1.2 1.2 2.6 3.0
Red River Mining .2 .3 .7 .8
San Miguel .8 1.0 2.6 1.0
--- --- ---- ----
Total Lignite 8.2 8.1 23.0 21.2
=== === ==== ====
</TABLE>
The Florida dragline operations delivered 2.1 and 6.1 million cubic yards of
limerock in the three and nine months ended September 30, 1998, respectively.
This compares to 2.0 and 5.6 million cubic yards delivered during the three and
nine months ended September 30, 1997, respectively.
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
1998 1997 1998 1997
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Project mines $ 61.3 $ 58.2 $ 171.1 $ 166.8
Other mining operations 9.8 10.3 28.9 20.1
------- -------- -------- --------
71.1 68.5 200.0 186.9
Royalties and other 1.2 1.7 4.7 4.1
------- -------- -------- --------
$ 72.3 $ 70.2 $ 204.7 $ 191.0
======= ======== ======== ========
Income before taxes
Project mines $ 6.8 $ 6.3 $ 18.2 $ 17.4
Other mining operations 1.6 2.3 4.4 4.0
------- -------- -------- --------
Total from operating mines 8.4 8.6 22.6 21.4
Royalties and other income, net .8 1.4 3.8 3.6
Other operating expenses (2.3) (1.8) (6.2) (4.8)
------- -------- -------- --------
6.9 8.2 20.2 20.2
Provision for taxes 1.9 2.9 5.7 7.2
------- -------- -------- --------
Net income $ 5.0 $ 5.3 $ 14.5 $ 13.0
======= ======== ======== ========
</TABLE>
Third Quarter of 1998 Compared with Third Quarter of 1997
The following schedule identifies the components of the changes in revenues,
income before taxes and net income for the three months ended September 30:
<TABLE>
<CAPTION>
Income
Before Net
Revenues Taxes Income
-------- ----- ------
<S> <C> <C> <C>
1997 $ 70.2 $ 8.2 $ 5.3
Increase (decrease) in 1998 from:
Project mines
Tonnage volume 2.3 .2 .1
Agreed profit per ton .3 .3 .2
Pass-through costs .5 -- --
Other mining operations
Tonnage volume (1.1) (.4) (.2)
Average selling price .6 .6 .4
Operating costs -- (1.2) (.8)
Other expense -- .3 .2
------- ------ ------
Changes from operating mines 2.6 (.2) (.1)
Royalties and other income, net (.5) (.6) (.4)
Other operating expenses -- (.5) (.3)
Differences between effective and
statutory tax rates -- -- .5
------- ------ ------
1998 $ 72.3 $ 6.9 $ 5.0
======= ====== ======
</TABLE>
<PAGE>
THE NORTH AMERICAN COAL CORPORATION - continued
FINANCIAL REVIEW - continued
Overall, the financial results of operating mines at NACoal for the third
quarter of 1998 are comparable to the same period a year ago. Improved operating
results from project mines, primarily due to increased tonnage volume, were
completely offset by reduced operating results from other mining operations,
primarily due to decreased tonnage volume and increased operating costs.
Increased operating costs due to ongoing growth initiatives and decreased
royalty income contributed to the decline in net income.
First Nine Months of 1998 Compared with First Nine Months of 1997
The following schedule identifies the components of the changes in revenues,
income before taxes and net income for the nine months ended September 30:
<TABLE>
<CAPTION>
Income
Before Net
Revenues Taxes Income
-------- ------- -------
<S> <C> <C> <C>
1997 $ 191.0 $ 20.2 $ 13.0
Increase (decrease) in 1998 from:
Project mines
Tonnage volume .2 -- --
Agreed profit per ton .8 .8 .5
Pass-through costs 3.3 -- --
Other mining operations
Tonnage volume 8.2 8.8 5.7
Average selling price .6 .6 .4
Operating costs -- (9.6) (6.2)
Other expense -- .6 .4
-------- ------- -------
Changes from operating mines 13.1 1.2 .8
Royalties and other income, net .6 .2 .1
Other operating expenses -- (1.4) (.9)
Differences between effective and
statutory tax rates -- -- 1.5
-------- ------- -------
1998 $ 204.7 $ 20.2 $ 14.5
======== ======= =======
</TABLE>
At the project mines, operating profit improved due to increased tons sold,
primarily at Coteau, and a project mine incentive payment. The benefit from
these factors was partially offset by decreased tons sold at Sabine due to a
customer's planned power plant outage. Results from other mining operations
improved due to the addition of the San Miguel lignite mining operation, which
began operations in July 1997, partially offset by decreased volume at Red
River. Favorable operating results from increased royalty income was offset by
increased costs of ongoing growth initiatives.
<PAGE>
THE NORTH AMERICAN COAL CORPORATION - continued
FINANCIAL REVIEW - continued
Other Income and Expense and Income Taxes
The components of other income (expense) and the effective tax rate for the
three and nine months ended September 30 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest expense
Project mining subsidiaries $ (3.1) $ (3.2) $ (9.4) $ (9.6)
Other mining operations (.1) (.6) (.5) (1.6)
------- ------- ------- -------
$ (3.2) $ (3.8) $ (9.9) $ (11.2)
======= ======= ======= =======
Other-net
Project mining subsidiaries $ .2 $ (.9) $ .8 $ --
Other mining operations (.8) (.3) (.9) (.2)
------- ------- ------- -------
$ (.6) $ (1.2) $ (.1) $ (.2)
======= ======= ======= =======
Effective tax rate 28.2% 35.5% 28.3% 35.4%
</TABLE>
The decrease in the effective tax rate results from additional percentage
depletion eligible to reduce NACoal's effective tax.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $16.6 million during the
first nine months of 1998. It is estimated that NACoal's capital expenditures
for the remainder of 1998 will be $8.3 million, of which $6.5 million relates to
the development, establishment and improvement of the project mining
subsidiaries' mines and are financed or guaranteed by the utility customers.
Also during the first nine months of 1998, NACoal invested $8.8 million in a
joint venture with Phillips Coal Company to develop a new lignite mine in
Mississippi. During the remainder of 1998, NACoal anticipates investing an
additional $4.4 million in this joint venture.
NACoal has in place a $50.0 million revolving credit facility. The expiration
date of this facility, which currently is September 2002, can be extended one
additional year, on an annual basis, upon the mutual consent of NACoal and the
bank group. NACoal had $45.4 million of its revolving credit facility available
at September 30, 1998.
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 equal to
their earnings.
<PAGE>
THE NORTH AMERICAN COAL CORPORATION - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
NACoal's capital structure, excluding the project mining subsidiaries, is
presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
------- -------
<S> <C> <C>
Investment in project mining subsidiaries $ 2.7 $ 4.3
Other net tangible assets 13.6 3.4
------- -------
Total tangible assets 16.3 7.7
Advances to parent company 3.4 21.9
Debt related to parent advances (3.4) (14.4)
Other debt (1.2) (.1)
------- -------
Total debt (4.6) (14.5)
------- -------
Stockholder's equity $ 15.1 $ 15.1
======= =======
Debt to total capitalization 23% 49%
</TABLE>
The increase in Other net tangible assets is primarily due to capital
investments in the Mississippi lignite mining operation, a joint venture with
Phillips Coal Company scheduled to begin production in the year 2000. Advances
to parent company and Debt related to parent advances declined in the third
quarter as a result of repayments made by NACCO.
<PAGE>
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 has significant long-term liabilities related to closed mines,
primarily from former eastern U.S. underground coal-mining activities. Cash
payments related to Bellaire's obligations, net of internally generated cash,
are funded by NACCO and are anticipated to be $0.9 million for the remainder of
1998.
The results of operations at NACCO and Other were as follows for the three and
nine months ended September 30:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues $ -- $ .1 $ .1 $ .2
Operating loss $ (2.6) $ (2.1) $ (7.7) $ (6.2)
Other income (expense), net $ (.3) $ (.6) $ (.1) $ (1.5)
Net loss $ (1.5) $ (2.3) $ (5.5) $ (4.9)
</TABLE>
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, HB/PS and KCI allow for the payment to NACCO
of dividends and advances under certain circumstances. There are no restrictions
on the transfer of assets from NACoal. Dividends, advances and management fees
from its subsidiaries are the primary sources of cash for NACCO.
NACCO's consolidated capital structure is presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
---------- --------
<S> <C> <C>
Total net tangible assets $ 482.1 $ 328.4
Goodwill at cost 571.2 571.3
---------- --------
Total assets before goodwill amortization 1,053.3 899.7
Accumulated goodwill amortization (132.8) (122.0)
Total debt, excluding current and long-term portion of
obligations of project mining subsidiaries (333.6) (257.0)
Closed mine obligations (Bellaire), including the
United Mine Worker retirees' medical fund, net-of-tax (77.1) (79.0)
Minority interest (18.0) (16.6)
---------- --------
Stockholders' equity $ 491.8 $ 425.1
========== ========
Debt to total capitalization 40% 37%
</TABLE>
<PAGE>
NACCO AND OTHER - continued
FINANCIAL REVIEW - continued
The Company believes it can adequately meet all of its current and long-term
commitments and operating needs. This outlook stems from amounts available under
revolving credit facilities and the utility customers' funding of the project
mining subsidiaries.
INTEREST RATE PROTECTION
NMHG, HB/PS, NACoal and KCI have entered into interest rate swap agreements for
portions of their floating rate debt. These interest rate swaps provide
protection against significant increases in interest rates and have terms
ranging from one to six years, with the counterparty's option to extend a small
portion of these contracts to eight years. The Company evaluates its exposure to
floating rate debt on an ongoing basis.
EFFECTS OF FOREIGN CURRENCY
NMHG and HB/PS operate internationally and enter into transactions denominated
in foreign currencies. As such, their financial results are subject to the
transaction exposures that arise from exchange rate movements between the dates
foreign currency transactions are committed and the dates they are consummated.
The effects of foreign currency fluctuations on revenues, operating income and
net income at NMHG are disclosed above. At HB/PS, foreign currency effects had
an immaterial impact on operating results between comparable periods of 1998 and
1997.
NMHG and HB/PS use forward foreign currency exchange contracts to partially
reduce risks related to transactions denominated in foreign currencies. These
contracts usually have maturities of one to twelve months and generally require
the companies to buy or sell Japanese yen, Australian dollars, Canadian dollars
or various European currencies for the functional currency in which the
applicable subsidiary operates at rates agreed to at the inception of the
contracts.
YEAR 2000 ISSUE
Year 2000 ("Y2K") issues exist because many information technology ("IT") and
non-information technology ("non-IT") systems were designed to recognize years
by reference to only the last two digits of the year. As a result, these systems
assume the relevant year begins with "19." These systems could fail or produce
erroneous information if they are not modified to recognize dates beginning with
"20."
State of Readiness
Each of the Company's subsidiaries has developed a formal compliance plan to
address the Y2K issue. The audit committee of the Board of Directors is
periodically updated on the Company's progress in addressing the Y2K issue. In
addition, NMHG and HB/PS have retained the services of Y2K consultants to review
their respective compliance plans and identify areas where the plans may need
improvement. The subsidiaries' compliance plans encompass the evaluation of IT
systems and non-IT systems, as well as an assessment of third parties'
compliance and the extent to which third party representations can be relied
upon. Furthermore, the execution of the Company's compliance plans has been
prioritized in terms of significance to the Company's ability to generate
revenues, income and cash flows. The following discussion addresses IT and
non-IT systems that may have a material effect on the Company's ability to
generate revenues, income and cash flows. The compliance plans are categorized
into one of four phases: (i) awareness, (ii) assessment, (iii) renovation, and
(iv) validation and implementation (testing).
<PAGE>
YEAR 2000 ISSUE - continued
IT Systems: The Company has completed its assessment of all of its IT systems
and the renovation of substantially all of its IT systems. NMHG plans to
complete renovation and testing of all IT systems by March 1999; HB/PS plans to
complete renovation and testing of all IT systems by March 1999; and NACoal
plans to complete renovation and testing of all IT systems by June 1999.
Non-IT Systems: The Company's Y2K compliance plan also addresses non-IT systems
with date-sensitive operating controls such as computer-controlled manufacturing
and mining equipment, heating, ventilating and cooling systems, fire alarms,
phone, voice mail, security and other similar systems. At NMHG, the assessment,
renovation and testing of non-IT systems is targeted to be completed by July
1999. As of March 1998, all of HB/PS's computer-controlled manufacturing
equipment was validated to be Y2K compliant. HB/PS plans to complete testing of
its remaining non-IT systems by December 1998. At NACoal, critical
computer-controlled equipment used to mine coal has been confirmed to be Y2K
compliant. NACoal plans to test compliance of this critical equipment by
December 1998. NACoal plans to assess its other non-IT systems by December 1998.
Third Parties: The Company has contacted substantially all of its third-party,
critical-component suppliers. At NMHG, supplier surveys have been returned and
evaluated, indicating that approximately 70 percent of NMHG's critical suppliers
will be Y2K compliant by December 1998, with the remainder targeting compliance
by the end of 1999. At HB/PS, supplier surveys have been returned and evaluated,
indicating that approximately 70 percent of HB/PS's critical suppliers are
currently Y2K compliant or have a plan in place to be compliant by the end of
1999. The remainder of HB/PS's critical suppliers have not yet responded to the
survey. The Company continues to pursue responses from those suppliers. HB/PS
plans to perform tests of Y2K compliance of critical suppliers in July 1999.
NACoal plans to complete the assessment of its vendors' readiness by December
1998.
Most of NACoal's customers have indicated that they have a plan in place to be
Y2K compliant by December 31, 1999. NACoal continues to monitor the status of
its customers' Y2K compliance. In addition, the Company is in the process of
contacting utility providers, financial institutions and customers to assess
their Y2K readiness.
Costs to Address Y2K Issues
The Company received and implemented computer software upgrades, under normal
maintenance agreements with third-party vendors, that enabled substantially all
of the Company's IT systems to be Y2K compliant. As such, costs to address the
Y2K issue have not been, and are not expected to be, material to the Company.
Internal and external costs incurred to date have been approximately $3.2
million. The Company estimates an additional $2.1 million will be expended
during the remainder of 1998 and 1999 relating to this issue. These costs have
been and are expected to be funded by cash flows from operations.
Contingency Plans
Some contingency plans have been formalized, however other contingency plans
continue to be formulated. Such contingency plans, both those formalized and
those under discussion, include, if necessary, building a safety stock of
critical components prior to January 1, 2000, requiring certain suppliers to
maintain a safety stock or locating alternate suppliers that are Y2K compliant.
The Company plans to replace, to the extent possible, those vendors who have not
responded to surveys or have indicated "no plan in place," by September 1999.
The Company plans to develop a risk assessment guide that will enable the
Company to identify customers who may have cash flow troubles due to
non-compliance. The Company may need to reduce the extension of credit, selling
terms or amount of shipments to those customers.
<PAGE>
YEAR 2000 ISSUE - continued
The Company's Y2K efforts are ongoing and its overall plan, as well as the
consideration of contingency plans, will continue to evolve as new information
becomes available. While the Company anticipates continuity of its business
activities, that continuity will be dependent upon its ability, and the ability
of third parties on which the Company relies, directly and indirectly, to be Y2K
compliant.
Risks of the Company's Y2K Issues
Although the Company believes that it has formulated a compliance plan that will
mitigate the risk that the Y2K issue will have a material adverse effect on the
Company, the ultimate impact of this issue on the Company is uncertain.
Suppliers' failure to deliver critical components, third-parties' failure to
supply power and/or telecommunication systems to manufacturing plants or mines,
or the Company's failure to complete, in a timely manner, the updating of
computer-controlled manufacturing equipment could result in delayed delivery of
products to customers, which could have a material adverse effect on earnings
and cash flow. In addition, customers' non-compliance could result in the loss
of customers or a customer's inability to purchase or pay for products, which
could have a material adverse effect on earnings and cash flow.
The Company has not yet finished its assessment, renovation and testing of all
areas of Y2K compliance. Therefore, there can be no assurance that the Y2K issue
will not have a material adverse effect on the Company's operations, results of
operations or cash flows. See below under "OUTLOOK" for additional risks and
uncertainties associated with Y2K compliance.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen countries that are members of the
European Union are scheduled to introduce a new currency unit called the "Euro,"
which will ultimately replace the national currencies of these eleven countries.
The conversion rates between the Euro and the participating nations' currencies
will be fixed irrevocably as of January 1, 1999, with the participating national
currencies being removed from circulation between January 1, 2002 and June 30,
2002 and replaced by Euro notes and coinage. During the "transition period" from
January 1, 1999 through December 31, 2001, public and private entities as well
as individuals may pay for goods and services using either checks, drafts, or
wire transfers denominated in Euro or the participating country's national
currency.
Under the regulations governing the transition to a single currency, there is a
"no compulsion, no prohibition" rule which states that no one is obligated to
use the Euro until the notes and coinage have been introduced on January 1,
2002. In keeping with this rule, by January 1, 1999 the Company expects to be
able to (i) receive Euro denominated payments, (ii) invoice in Euro as requested
by vendors and suppliers and (iii) perform appropriate conversion and rounding
calculations. Full conversion of all affected country operations to the Euro is
expected to be completed by the time national currencies are removed from
circulation. The cost of software and business process conversion required to
achieve such abilities is not expected to be material. However, there can be no
assurance that the Company and its significant vendors and suppliers in the
affected countries will be Euro compliant by January 1, 1999 or that any such
failure to be Euro compliant will not have a material adverse effect on the
Company's results of operations, financial condition or cash flows.
<PAGE>
EURO CONVERSION - continued
The Company does not anticipate that the introduction and use of the Euro will
materially affect the Company's foreign exchange and hedging activities or the
Company's use of derivative instruments, or will have a material adverse effect
on operating results or cash flows. However, the ultimate effect that the Euro
will have on competition due to price transparency, foreign currency risk and
third parties cannot yet be determined and may have an adverse effect, possibly
material, on the Company's operations, financial condition or cash flows. The
Company continues to monitor and assess the potential risks imposed by the Euro.
OUTLOOK
NMHG: Although industry lift truck bookings in the Americas are expected to
decline moderately in the fourth quarter of 1998, the rate of unit shipments is
expected to remain stable due to high backlog levels. In Europe, unit shipments
are expected to remain at a level consistent with the previous three quarters in
1998. However, shipments are expected to out-pace orders, resulting in
decreasing backlog levels. Industry shipments in the Asia-Pacific region are
expected to decline because of continuing weak economies throughout this region.
NMHG's cost reduction programs, including Value Improvement, DFT and
infrastructure reorganization, are expected to continue having an increasing
positive impact in 1998 and 1999.
Housewares: HB/PS's new Saltillo facility is expected to continue to increase
production in the fourth quarter of 1998 due to the transfer of additional
toaster and motor assembly operations. Most of the cost-savings impact from
Saltillo is expected to be realized in 1999. HB/PS expects competition from
Chinese imports to remain strong.
NACoal: NACoal's mining operations are expected to continue to provide a steady
volume of lignite deliveries in the fourth quarter of 1998. NACoal's San Miguel
mine will have a full year of lignite deliveries in 1998, compared with six
months of operations in 1997. NACoal expects royalty income to decline
moderately in the fourth quarter of 1998, compared with the fourth quarter of
1997. Development of the Red Hills lignite mine has begun and will continue
through 1999, with initial lignite production scheduled for the year 2000. The
mine is expected to produce approximately 3.0 million tons of lignite annually.
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
that could cause actual results to differ materially from those presented in
those 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 forklift trucks and related service parts on a
worldwide basis, (2) changes in sales prices, (3) delays in delivery or
increased 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 other returns of
products and (7) delays or increased costs of employee relocations and/or in the
execution of the restructuring program.
<PAGE>
OUTLOOK - continued
Housewares: (1) delays or increased costs in the start-up of operations in
Saltillo and/or in the execution of the restructuring program, (2) bankruptcy of
or loss of major retail customers, (3) changes in the sales price, product mix
or levels of consumer purchases of kitchenware and small electric appliances,
(4) exchange rate fluctuations, changes in 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, (5) product liability or other
litigation, warranty claims or other returns of products and (6) weather
conditions that would affect the number of customers visiting KCI stores.
NACoal: (1) weather conditions and other events that would change the level of
customers' fuel requirements, (2) equipment problems that could affect lignite
deliveries to customers and (3) delays and/or increased costs of construction of
the Red Hills lignite mine.
Y2K Compliance: (1) delays in the completion of the Company's Y2K compliance
plan within the expected time frames disclosed above, (2) inability of the
Company's suppliers or vendors (including utility providers and financial
institutions) to be Y2K compliant when necessary, (3) inability of NACoal's
customers to be Y2K compliant when necessary, (4) increased costs to address Y2K
issues, (5) the Company's inability to replace vendors that are not, or that
cannot give assurances that they will be, Y2K compliant, and (6) the Company's
inability to formulate in a timely manner any required contingency plan that
will solve or mitigate problems arising from any of the foregoing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable. Beginning with the Company's 1998 Annual Report on Form 10-K,
this information will be disclosed, as required.
<PAGE>
Part II
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 35 of this
quarterly report on Form 10-Q.
(b) Reports on Form 8-K. The Company did not file any reports on
Form 8-K during the third quarter of 1998.
<PAGE>
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, 1998 /s/ Kenneth C. Schilling
------------------------------ ----------------------------------
Kenneth C. Schilling
Vice President and Controller
Principal Financial and Accounting Officer)
<PAGE>
Exhibit Index
Exhibit
Number* Description of Exhibits
(27) Financial Data Schedule
*Numbered in accordance with Item 601 of Regulation S-K.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 279
<ALLOWANCES> 0
<INVENTORY> 387
<CURRENT-ASSETS> 721
<PP&E> 559
<DEPRECIATION> 530
<TOTAL-ASSETS> 1,878
<CURRENT-LIABILITIES> 551
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 484
<TOTAL-LIABILITY-AND-EQUITY> 1,878
<SALES> 1,797
<TOTAL-REVENUES> 1,797
<CGS> 1,440
<TOTAL-COSTS> 1,440
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 116
<INCOME-TAX> 44
<INCOME-CONTINUING> 71
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71
<EPS-PRIMARY> 8.68
<EPS-DILUTED> 8.66
</TABLE>
