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 March 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9172
NACCO Industries, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1505819
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5875 LANDERBROOK DRIVE, MAYFIELD HEIGHTS, OHIO 44124-4017
(Address of principal executive offices) Zip code
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 April 30, 1999:
6,503,809
Number of shares of Class B Common Stock outstanding at April 30, 1999:
1,650,833
<PAGE>
NACCO INDUSTRIES, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1999 (Unaudited) and December 31, 1998
Unaudited Condensed Consolidated Statements of
Income for the Three Months Ended March 31, 1999 and 1998
Unaudited Condensed Consolidated Statements of
Cash Flows for the Three Months Ended March 31, 1999
and 1998
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)
MARCH 31 DECEMBER 31
1999 1998
---------- ----------
(In millions)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 40.6 $ 34.7
Accounts receivable, net 278.1 275.1
Inventories 360.2 356.2
Prepaid expenses and other 38.4 37.2
---------- ----------
717.3 703.2
Property, Plant and Equipment, Net 593.8 593.4
Deferred Charges
Goodwill, net 446.4 441.0
Deferred costs and other 70.9 70.3
Deferred income taxes 32.4 31.9
---------- ----------
549.7 543.2
Other Assets 68.4 58.5
---------- ----------
Total Assets $ 1,929.2 $ 1,898.3
========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited) (Audited)
MARCH 31 DECEMBER 31
1999 1998
---------- ----------
(In millions)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 244.7 $ 252.9
Revolving credit agreements 41.8 31.2
Current maturities of long-term debt 27.3 28.4
Income taxes 10.8 10.9
Accrued payroll 32.4 44.7
Other current liabilities 177.9 180.5
---------- ----------
534.9 548.6
Long-term Debt- not guaranteed by
the parent company 303.6 256.4
Obligations of Project Mining Subsidiaries -
not guaranteed by the parent company or
its North American Coal subsidiary 306.1 313.2
Self-insurance Reserves and Other 237.6 238.9
Minority Interest 23.5 22.9
Stockholders' Equity
Common stock:
Class A, par value $1 per share, 6,503,345
shares outstanding (1998 - 6,468,620
shares outstanding) 6.5 6.5
Class B, par value $1 per share, convertible
into Class A on a one-for-one basis,
1,651,297 shares outstanding
(1998 - 1,651,615 shares outstanding) 1.6 1.6
Capital in excess of par value 2.6 .2
Retained earnings 514.9 504.9
Accumulated other comprehensive income:
Foreign currency translation adjustment 1.9 8.9
Minimum pension liability adjustment (4.0) (3.8)
---------- ----------
523.5 518.3
---------- ----------
Total Liabilities and Stockholders' Equity $ 1,929.2 $ 1,898.3
========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
THREE MONTHS ENDED
MARCH 31
------------------
1999 1998
---------- ----------
(In millions, except per
share data)
<S> <C> <C>
Revenues $ 613.5 $ 599.3
Cost of sales 497.8 480.3
---------- ----------
Gross Profit 115.7 119.0
Selling, administrative and general expenses 80.5 66.2
Amortization of goodwill 3.8 3.7
---------- ----------
Operating Profit 31.4 49.1
Other income (expense)
Interest expense (10.2) (8.0)
Other - net (.4) (.9)
---------- ----------
(10.6) (8.9)
Income Before Income Taxes, Minority Interest and
Cumulative Effect of Accounting Change 20.8 40.2
Provision for income taxes 7.9 15.6
---------- ----------
Income Before Minority Interest and Cumulative 12.9 24.6
Effect of Accounting Change
Minority interest -- (.5)
---------- ----------
Income Before Cumulative Effect of Accounting Change 12.9 24.1
Cumulative effect of accounting change (net of $0.6 tax benefit) (1.2) --
---------- ----------
Net Income $ 11.7 $ 24.1
========== ==========
Comprehensive income $ 4.5 $ 22.5
========== ==========
Basic and Diluted Earnings per Share:
Income Before Cumulative Effect of Accounting Change $ 1.59 $ 2.95
Cumulative effect of accounting change (net-of-tax) (.15) --
---------- ----------
Net Income $ 1.44 $ 2.95
=========== ==========
Dividends per share $ .205 $ .195
========== = =========
</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)
THREE MONTHS ENDED
MARCH 31
1999 1998
------- -------
(In millions)
<S> <C> <C>
Operating Activities
Net income $ 11.7 $ 24.1
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization 29.2 21.6
Deferred income taxes 1.5 (1.6)
Minority interest -- (.5)
Cumulative effect of accounting change 1.2 --
Other non-cash items .2 1.1
Working Capital Changes:
Accounts receivable (4.8) (12.0)
Inventories (4.2) (31.8)
Other current assets 1.5 6.7
Accounts payable and other liabilities (12.9) 1.4
------- -------
Net cash provided by operating activities 23.4 9.0
Investing Activities
Expenditures for property, plant and equipment (22.1) (17.2)
Proceeds from the sale of assets .4 1.1
Acquisitions of businesses (35.4) --
Investments in unconsolidated affiliates (1.8) (2.0)
Other - net 1.4 --
------- -------
Net cash used for investing activities (57.5) (18.1)
Financing Activities
Additions to long-term debt and revolving credit
agreements 58.9 25.8
Reductions of long-term debt and revolving credit
agreements -- (12.8)
Additions to obligations of project mining subsidiaries 2.2 14.3
Reductions of obligations of project mining subsidiaries (9.5) (22.0)
Financing of other short-term obligations (10.1) (3.8)
Cash dividends paid (1.7) (1.6)
Other - net 1.7 .2
------- -------
Net cash provided by financing activities 41.5 .1
Effect of exchange rate changes on cash (1.5) .1
------- -------
Cash and Cash Equivalents
Increase (decrease) for the period 5.9 (8.9)
Balance at the beginning of the period 34.7 24.1
------- -------
Balance at the end of the period $ 40.6 $ 15.2
======= =======
</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
NACCO Industries, Inc. ("NACCO") is a holding company with four operating
subsidiaries that function in three principal business segments: lift trucks,
housewares and lignite mining. NACCO Materials Handling Group, Inc. ("NMHG")
designs, engineers and manufactures a full line of lift trucks and replacement
parts marketed worldwide under the Hyster(R) and Yale(R) brand names. NACCO
Housewares Group ("Housewares") consists of Hamilton Beach/Proctor-Silex, Inc.
("HB/PS"), a leading manufacturer and marketer of small electric motor and
heat-driven appliances as well as commercial products for restaurants, bars and
hotels, and The Kitchen Collection, Inc. ("KCI"), a national specialty retailer
of brand-name kitchenware, small electric appliances and related accessories.
The North American Coal Corporation ("NACoal") mines and markets lignite
primarily as fuel for power generation by electric utilities.
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 March 31, 1999 and the results of
its operations and cash flows for the three month periods ended March 31, 1999
and 1998 have been included.
Operating results for the three month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the remainder of
the year ended December 31, 1999. 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,
1998.
Note 2 - 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>
Three Months Ended
March 31
------------------
1999 1998
---- -----
<S> <C> <C>
Basic common shares (weighted average) 8.137 8.159
Dilutive stock options .009 .018
----- -----
Diluted common shares 8.146 8.177
===== =====
</TABLE>
<PAGE>
Note 3 - Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
-------- --------
(Unaudited) (Audited)
<S> <C> <C>
Manufacturing inventories:
Finished goods and service parts-
NMHG $ 135.9 $ 125.3
Housewares 49.2 41.5
-------- --------
185.1 166.8
-------- --------
Raw materials and work in process-
NMHG 119.7 136.6
Housewares 17.6 17.5
-------- --------
137.3 154.1
-------- --------
LIFO reserve-
NMHG (13.3) (12.6)
Housewares 1.7 1.8
-------- --------
(11.6) (10.8)
-------- --------
Total manufacturing inventories 310.8 310.1
Coal - NACoal 11.9 9.5
Mining supplies - NACoal 19.5 19.4
Retail inventories - Housewares 18.0 17.2
-------- --------
$ 360.2 $ 356.2
======== ========
</TABLE>
The cost of manufacturing inventories has been determined by the last-in,
first-out (LIFO) method for 72 percent of such inventories as of March 31, 1999
and December 31, 1998.
Note 4 - Restructuring Charge
In 1998, HB/PS recorded a pre-tax charge of $3.2 million to recognize severance
payments to be made to approximately 450 manufacturing employees in connection
with transitioning activities to HB/PS' Mexican facilities. During the first
quarter of 1999, an additional $1.0 million pre-tax charge was made for
severance payments to be made to an additional 130 manufacturing employees in
connection with transitioning additional manufacturing activities to HB/PS'
Mexican facilities. Payments of $0.5 million have been made to approximately 200
employees during the first quarter of 1999. These payments reduced the reserve
for restructuring to $3.7 million as of March 31, 1999.
<PAGE>
Note 5 - New Accounting Standards
As of January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants' ("AICPA") Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use," and
SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-1 requires
capitalization on a prospective basis of certain development costs of software
to be used internally. The Company does not expect the change to this new
accounting standard to have a material impact on its financial position or
results of operations in the foreseeable future.
SOP 98-5 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. Prior to
January 1, 1999, the Company's NACoal subsidiary had deferred certain start-up
costs related to the development of lignite mining activities and amortized
these costs over the estimated useful life of the related coal lands. Under the
new accounting standard, these costs, which are primarily training, travel and
administrative expenses, are no longer allowed to be deferred, but, rather, they
must be expensed as incurred. As such, the Company has recognized the effect of
expensing these previously deferred start-up costs of $1.2 million, net-of-tax,
as a cumulative effect of accounting change in the accompanying Statement of
Income for the three months ended March 31, 1999.
Note 6 - Accounting Standard 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.
<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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
1999 1998
-------- ---------
<S> <C> <C>
REVENUES
NMHG $ 438.5 $ 431.9
Housewares 111.4 99.0
NACoal 63.6 68.4
NACCO and Other -- --
-------- ---------
$ 613.5 $ 599.3
======== =========
GROSS PROFIT
NMHG $ 83.5 $ 87.4
Housewares 19.7 18.0
NACoal 12.5 13.8
NACCO and Other -- (.2)
-------- ---------
$ 115.7 $ 119.0
======== =========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
NMHG $ 55.7 $ 43.2
Housewares 18.9 17.9
NACoal 3.3 2.9
NACCO and Other 2.6 2.2
-------- ---------
$ 80.5 $ 66.2
======== =========
AMORTIZATION OF GOODWILL
NMHG $ 3.0 $ 2.9
Housewares .8 .8
-------- ---------
$ 3.8 $ 3.7
======== =========
OPERATING PROFIT (LOSS)
NMHG $ 24.8 $ 41.3
Housewares -- (.7)
NACoal 9.2 10.9
NACCO and Other (2.6) (2.4)
-------- ---------
$ 31.4 $ 49.1
======== =========
OPERATING PROFIT (LOSS) EXCLUDING GOODWILL AMORTIZATION
NMHG $ 27.8 $ 44.2
Housewares .8 .1
NACoal 9.2 10.9
NACCO and Other (2.6) (2.4)
-------- ---------
$ 35.2 $ 52.8
======== =========
</TABLE>
<PAGE>
FINANCIAL SUMMARY - continued
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
1999 1998
------- -------
<S> <C> <C>
INTEREST EXPENSE
NMHG $ (4.3) $ (3.4)
Housewares (1.4) (1.3)
NACoal (.2) (.2)
NACCO and Other (.2) (.3)
Eliminations .2 .3
------- -------
(5.9) (4.9)
Project mining subsidiaries (4.3) (3.1)
------- -------
$ (10.2) $ (8.0)
======= =======
INTEREST INCOME
NMHG $ .9 $ .4
NACoal .1 .2
Eliminations (.2) (.3)
------- -------
.8 .3
Project mining subsidiaries .1 .3
------- -------
$ .9 $ .6
======= =======
OTHER-NET, INCOME (EXPENSE), EXCLUDING INTEREST INCOME
NMHG $ (1.1) $ (1.3)
Housewares -- (.4)
NACoal (.2) (.4)
NACCO and Other -- .6
------- -------
$ (1.3) $ (1.5)
======= =======
PROVISION FOR INCOME TAXES
NMHG $ 8.4 $ 14.7
Housewares (.6) (1.1)
NACoal .9 2.2
NACCO and Other (.8) (.2)
------- -------
$ 7.9 $ 15.6
======= =======
NET INCOME (LOSS)
NMHG $ 12.1 $ 22.3
Housewares (.8) (1.3)
NACoal 2.7 5.5
NACCO and Other (2.3) (2.4)
------- -------
$ 11.7 $ 24.1
======= =======
</TABLE>
<PAGE>
FINANCIAL SUMMARY - continued
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
1999 1998
------- -------
<S> <C> <C>
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
NMHG $ 17.1 $ 9.1
Housewares 4.1 4.6
NACoal .8 .7
NACCO and Other .1 --
------- -------
22.1 14.4
Project mining subsidiaries 7.1 7.2
------- -------
$ 29.2 $ 21.6
======= =======
CAPITAL EXPENDITURES
NMHG $ 15.8 $ 9.9
Housewares 2.2 5.0
NACoal 1.5 1.4
------- -------
19.5 16.3
Project mining subsidiaries 2.6 .9
------- -------
$ 22.1 $ 17.2
======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
---------- ----------
<S> <C> <C>
TOTAL ASSETS
NMHG $ 1,147.5 $ 1,100.4
Housewares 323.8 334.0
NACoal 49.6 43.1
NACCO and Other 35.1 53.6
---------- ----------
1,556.0 1,531.1
Project mining subsidiaries 407.6 418.6
---------- ----------
1,963.6 1,949.7
Consolidating eliminations (34.4) (51.4)
---------- ----------
$ 1,929.2 $ 1,898.3
========== ==========
</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 months ended
March 31:
<TABLE>
<CAPTION>
Three Months
------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues
Americas $ 304.3 $ 309.2
Europe, Africa and Middle East 117.4 106.7
Asia-Pacific 16.8 16.0
----------- -----------
$ 438.5 $ 431.9
=========== ===========
Operating profit (loss)
Americas $ 22.9 $ 32.1
Europe, Africa and Middle East 2.3 8.9
Asia-Pacific (.4) .3
----------- -----------
$ 24.8 $ 41.3
=========== ===========
Operating profit (loss) excluding
goodwill amortization
Americas $ 24.9 $ 34.1
Europe, Africa and Middle East 3.3 9.8
Asia-Pacific (.4) .3
----------- -----------
$ 27.8 $ 44.2
=========== ===========
Net income $ 12.1 $ 22.3
=========== ===========
</TABLE>
<PAGE>
NACCO MATERIALS HANDLING GROUP, INC. - continued
FINANCIAL REVIEW - continued
First Quarter of 1999 Compared with First Quarter of 1998
The following schedule identifies the components of the changes in revenues,
operating profit and net income for the first quarter of 1999 compared with the
first quarter of 1998:
<TABLE>
<CAPTION>
Operating Net
Revenues Profit Income
---------- ----------- ---------
<S> <C> <C> <C>
1998 $ 431.9 $ 41.3 $ 22.3
Increase (decrease) in 1999 from:
Unit volume (12.4) (4.6) (2.9)
Sales mix .1 (1.7) (1.1)
Average sales price (7.0) (7.0) (4.5)
Service parts 2.0 (.1) (.1)
Retail sales, net of intercompany 21.5 (3.1) (2.8)
Foreign currency 2.4 (2.1) (1.4)
Manufacturing cost --- 1.5 1.1
Other operating expense --- .6 .4
Other income and expense --- --- .4
Differences between effective
and statutory tax rates --- --- .7
-------- --------- -------
1999 $ 438.5 $ 24.8 $ 12.1
======== ========= =======
</TABLE>
At NMHG, revenues increased as a result of retail sales made by recently
acquired dealerships, partially offset by a decrease in revenue from wholesale
operations. Revenue, operating profit and net income from wholesale operations
declined primarily due to decreased demand for higher priced lift trucks and a
decrease in price due to increased competition. Also contributing to the decline
in operating profit and net income was a loss from retail sales due to start-up
and acquisition costs at recently acquired retail dealerships. Excluding the
effect of retail activity, worldwide volume decreased 2 percent to 19,319 units
shipped during the first quarter of 1999 from 19,757 units shipped during the
first quarter of 1998. Overall, unit sales volume, including retail sales,
remained relatively flat at 19,748 units sold in 1999 compared with 19,757 units
sold in 1998. Retail sales from recently acquired dealerships and increased
wholesale unit volume in Asia-Pacific and China were offset by decreased
wholesale demand in the Americas and Europe.
Lower pricing significantly reduced operating profit and net income due to price
pressure in the Americas market. In addition, operating results declined due to
a shift in sales mix to lower margin parts and units, especially in Europe.
Manufacturing costs and other operating costs decreased in the first quarter of
1999, compared with the same period a year ago. Reduced materials pricing,
warranty costs and variable compensation costs offset manufacturing
inefficiencies caused by reduced volume and certain capacity restraints.
Backlog levels indicate a declining trend in volume, as production remains
steady, but the rate of incoming orders declines. The backlog fell to 18,100
units at March 31, 1999 as compared with 19,500 units at December 31, 1998 and
22,700 units at the end of the first quarter of 1998. This decline is consistent
with the Company's expectation that the worldwide demand for lift trucks in 1999
will fall moderately below 1998's record levels.
<PAGE>
NACCO MATERIALS HANDLING GROUP, INC. - continued
FINANCIAL REVIEW - continued
During 1998, NMHG began a strategy of acquiring Hyster and Yale retail
dealerships on a permanent basis to strengthen its position in the lift truck
business. This newly adopted strategy resulted in the acquisition and
consolidation of several lift truck dealerships in 1998 and in the first quarter
of 1999. Retail dealerships, both those acquired in 1998 and during the first
quarter of 1999, increased NMHG's revenue by $21.5 million, decreased operating
profit by $3.1 million and decreased net income by $2.8 million, net of
intercompany transactions. NMHG expects that it may be necessary to acquire
additional retail dealerships over the next several years to strengthen its
distribution network. The acquisition of retail dealerships during the first
quarter of 1999 was not material to the financial position or operating results
of the Company.
Other Income and Expense and Income Taxes
The components of other income (expense) and the effective tax rate for the
three months ended March 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Interest expense $ (4.3) $ (3.4)
Other-net (.2) (.9)
----------- -----------
$ (4.5) $ (4.3)
=========== ===========
Effective tax rate 41.4% 39.7%
</TABLE>
Interest expense for the three month period ended March 31, 1999 increased as
compared with the same period last year primarily due to increased debt levels
necessary to finance acquisitions of retail dealerships and an intercompany loan
to NACCO.
The increase in the effective tax rate for the three months ended March 31, 1999
compared with the same period in 1998 is due to the effect of a higher level of
nondeductible expenses, including goodwill amortization, on a lower comparable
level of pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $15.8 million during the
first three months of 1999. These capital expenditures include investments in
tooling for new products, machinery and equipment and investments in existing
retail dealerships, including $4.8 million for lease and rental fleet. It is
estimated that NMHG's capital expenditures for the remainder of 1999 will be
approximately $50.7 million. These planned expenditures relate primarily to
additional investments in the newly constructed China facility, and machinery
and equipment for other existing facilities. During the remainder of 1999, NMHG
anticipates continuing investments in business acquisitions in amounts which may
exceed the first quarter acquisition investment of $35.4 million. The principal
sources of financing for these capital expenditures are internally generated
funds and bank borrowings.
NMHG has a $350.0 million revolving credit facility that expires June 2002, but
may be extended annually, for one-year periods, upon the mutual consent of NMHG
and the bank group. In addition, the NMHG facility has performance-based pricing
which sets interest rates based upon the achievement of certain financial
performance targets. At March 31, 1999, NMHG had available $101.6 million of its
$350.0 million revolving credit facility. NMHG also has separate facilities
totaling $31.8 million, of which $27.8 million was available at March 31, 1999
and maintains additional uncommitted lines of credit, of which $51.5 million was
available at March 31, 1999. 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>
MARCH 31 DECEMBER 31
1999 1998
------------ -----------
<S> <C> <C>
Total net tangible assets $ 343.5 $ 300.0
Advances to parent company 15.0 18.0
Goodwill at cost 463.6 454.0
------------ -----------
Total assets before goodwill amortization 822.1 772.0
Accumulated goodwill amortization (109.3) (105.9)
Total debt (241.1) (200.2)
Minority Interest (4.9) (3.9)
------------ -----------
Stockholders' equity $ 466.8 $ 462.0
============ ===========
Debt to total capitalization 34% 30%
</TABLE>
The increase in net tangible assets of $43.5 million is primarily due to
acquisitions of retail dealerships, which increased net tangible assets by
approximately $30.0 million. The remaining $13.5 million increase in net
tangible assets is primarily due to an increase in cash on hand due to improved
timing of cash received from the sale of receivables in Europe.
Goodwill and debt have increased due to acquisitions of retail dealerships
during the first quarter of 1999.
<PAGE>
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 NACCO Housewares Group were as follows for the
three months ended March 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Revenues $ 111.4 $ 99.0
Operating profit (loss) -- (.7)
Operating profit excluding
goodwill amortization .8 .1
Net loss (.8) (1.3)
</TABLE>
First Quarter of 1999 Compared with First Quarter of 1998
The following schedule identifies the components of the changes in revenues,
operating profit (loss) and net income (loss) for the first quarter of 1999
compared with the first quarter of 1998:
<TABLE>
<CAPTION>
Operating Net
Profit Income
Revenues (Loss) (Loss)
-------- ------ ------
<S> <C> <C> <C>
1998 $ 99.0 $ (.7) $ (1.3)
Increase (decrease) in 1999 from:
Unit volume and sales mix 12.3 4.7 3.0
Average sales price (1.3) (1.3) (.9)
Retail sales 1.4 .3 .2
Manufacturing cost -- (2.2) (1.4)
Other operating expense -- (.8) (.3)
Differences between effective
and statutory tax rates -- -- (.1)
- ---- -------- ------ ------
1999 $ 111.4 $ -- $ (.8)
======== ====== ======
</TABLE>
<PAGE>
NACCO HOUSEWARES GROUP - continued
FINANCIAL REVIEW - continued
Housewares' revenues improved in the first quarter of 1999 due primarily to unit
volume growth at HBPS, especially for coffeemakers, irons, blenders, toasters
and indoor grills. Net loss decreased during the first quarter due to unit
volume growth and a more profitable sales mix, compared with the first quarter
of 1998. This decline in net loss was partially offset by: (i) costs associated
with moving additional manufacturing assembly operations to HBPS plants in
Mexico, including a $1.0 million pre-tax charge for severance, (ii) unabsorbed
fixed overhead costs at some U.S. manufacturing facilities, (iii) lower sales
prices due primarily to competition from Chinese imports and (iv) costs
associated with consolidating warehouse operations into a new facility in
Memphis, Tennessee. KCI's revenues increased and net loss decreased as a result
of increases in the size of an average sale transaction and the total number of
customer transactions. KCI operated 143 stores at March 31, 1999, compared with
142 stores at the end of the first quarter of 1998.
Other Income and Expense and Income Taxes
The components of other income (expense) and the effective tax rate are as
follows for the three months ended March 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Interest expense $ (1.4) $ (1.3)
Other-net -- (.4)
------- -------
$ (1.4) $ (1.7)
======= =======
Effective tax rate 42.9% 46.7%
</TABLE>
The decrease in the effective tax rate is primarily due to the effect of a
constant level of nondeductible goodwill amortization on a higher comparable
level of pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
Housewares' expenditures for property, plant and equipment were $2.2 million
during the first three months of 1999 and are estimated to be $20.9 million for
the remainder of 1999. The primary purpose of these capital expenditures is to
purchase equipment intended 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' credit agreement provides for a revolving credit facility ("HB/PS
Facility") that: (i) permits advances up to $160.0 million, (ii) is secured by
substantially all of HB/PS' assets, (iii) provides lower interest rates if HB/PS
achieves certain interest coverage ratios and (iv) allows for interest rates
quoted under a competitive bid option. The HB/PS Facility expires in May 2003.
At March 31, 1999, HB/PS had $78.1 million available under this facility. In
addition, HB/PS has separate uncommitted facilities that permitted $8.7 million
of additional borrowings at March 31, 1999.
In 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 have
been financed through advances from HB/PS. Accordingly, in 1998, KCI terminated
its external revolving credit facility. 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>
MARCH 31 DECEMBER 31
1999 1998
-------- --------
<S> <C> <C>
Total net tangible assets $ 155.7 $ 153.3
Goodwill at cost 123.5 123.5
-------- --------
Total assets before goodwill amortization 279.2 276.8
Accumulated goodwill amortization (31.4) (30.6)
Total debt (100.5) (96.0)
-------- --------
Stockholder's equity $ 147.3 $ 150.2
======== ========
Debt to total capitalization 41% 39%
</TABLE>
<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, San Miguel and Red River 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 and will continue
through 1999, with initial production scheduled for the second half of 2000.
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 affected 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 months ended March 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Coteau Properties 4.3 4.2
Falkirk Mining 1.8 2.0
Sabine Mining .5 .5
San Miguel .8 .8
Red River Mining .1 .2
--- ---
Total Lignite 7.5 7.7
=== ===
</TABLE>
The Florida dragline operations delivered 2.1 million and 1.9 million cubic
yards of limerock in the three months ended March 31, 1999 and March 31, 1998,
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 months ended March 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Revenues
Project mines $ 55.0 $ 57.0
Other mining operations 8.1 9.4
------- -------
63.1 66.4
Royalties and other .5 2.0
------- -------
$ 63.6 $ 68.4
======= =======
Income before taxes
Project mines $ 6.5 $ 6.4
Other mining operations .6 1.4
------- -------
Total from operating mines 7.1 7.8
Royalty and other income, net .4 1.8
Other operating expenses (2.7) (1.9)
------- -------
4.8 7.7
Provision for taxes .9 2.2
------- -------
Income before cumulative effect of accounting change 3.9 5.5
Cumulative effect of accounting change (1.2) --
------- -------
Net income $ 2.7 $ 5.5
======= =======
</TABLE>
First Quarter of 1999 Compared with First Quarter of 1998
The following schedule identifies the components of the changes in revenues,
income before taxes and net income for the first quarter of 1999 compared with
the first quarter of 1998:
<TABLE>
<CAPTION>
Income
Before Net
Revenues Taxes Income
---------- --------- --------
1998 $ 68.4 $ 7.7 $ 5.5
<S> <C> <C> <C>
Increase (decrease) in 1999 from:
Project mines
Tonnage volume (2.1) (.2) (.1)
Agreed profit per ton .3 .3 .2
Pass-through costs (.1) -- --
Other mining operations
Tonnage volume (1.5) (1.5) (1.0)
Average selling price .1 .1 --
Operating costs -- .3 .2
Other expense -- .4 .3
------- ------ ------
Changes from operating mines (3.3) (.6) (.4)
Royalties and other income, net (1.5) (1.8) (1.2)
Other operating expenses -- (.5) (.3)
Cumulative effect of accounting change -- -- (1.2)
Differences between effective and
statutory tax rates -- -- .3
------- ------ ------
1999 $ 63.6 $ 4.8 $ 2.7
======= ====== ======
</TABLE>
<PAGE>
THE NORTH AMERICAN COAL CORPORATION - continued
FINANCIAL REVIEW - continued
Net income declined primarily due to a one-time cumulative effect charge for a
change in accounting for start-up costs and reduced royalties from
third-parties. Costs associated with the development of international mining
opportunities also contributed to the decline in net income. Although tonnage
volume and, thus, revenues were down slightly at the project mines, net income
was not significantly affected due to the cost-plus nature of the sales
contracts with those customers. Revenues, income before taxes and net income
from other mining operations, however, did decline primarily due to decreased
tonnage at Red River and increased operating costs at San Miguel. Operating
costs at San Miguel may continue to increase in 1999 as compared with the prior
year due to the expiration of certain third-party warranties covering routine
maintenance costs.
Other Income and Expense and Income Taxes
The components of other income (expense) and the effective tax rate for the
three months ended March 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Interest expense
Project mining subsidiaries $ (4.3) $ (3.1)
Other mining operations (.2) (.2)
------- -------
$ (4.5) $ (3.3)
======= =======
Other-net
Project mining subsidiaries $ .1 $ .1
Other mining operations (.1) --
------- -------
$ -- $ .1
======= =======
Effective tax rate 18.8% 28.6%
</TABLE>
The decrease in the effective tax rate primarily results from additional
percentage depletion eligible to reduce NACoal's effective tax.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $4.1 million during the
first three months of 1999. It is estimated that NACoal's capital expenditures
for the remainder of 1999 will be $17.3 million, of which $16.6 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 three months of 1999, NACoal invested $1.9 million in a
joint venture with Phillips Coal Company to develop a new lignite mine in
Mississippi. During the remainder of 1999, NACoal anticipates investing an
additional $15.8 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 $38.3 million of its revolving credit facility available
at March 31, 1999.
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>
MARCH 31 DECEMBER 31
1999 1998
------- -------
<S> <C> <C>
Investment in project mining subsidiaries $ 2.9 $ 3.6
Other net tangible assets 21.0 14.2
------- -------
Total tangible assets 23.9 17.8
Advances to (from) parent company 2.9 (2.5)
Debt related to parent advances (2.9) --
Other debt (8.8) (.2)
------- -------
Total debt (11.7) (.2)
------- -------
Stockholder's equity $ 15.1 $ 15.1
======= =======
Debt to total capitalization 44% 1%
</TABLE>
The increase in Other net tangible assets is primarily due to a $1.9 million
increase in the investment in the joint venture with Phillips Coal Company, a
$1.6 million increase in accounts receivable and a $2.3 million reduction in
accounts payable. Borrowings increased to finance loans made to NACCO and
investments in the joint venture with Phillips Coal Company.
<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 historically have not been material.
The results of operations at NACCO and Other were as follows for the three
months ended March 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Revenues $ -- $ --
Operating loss $ (2.6) $ (2.4)
Other income-net $ -- $ .6
Net loss $ (2.3) $ (2.4)
</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 and Housewares 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>
MARCH 31 DECEMBER 31
1999 1998
---------- ----------
<S> <C> <C>
Total net tangible assets $ 528.5 $ 473.2
Goodwill at cost 587.1 577.5
---------- ----------
Total assets before goodwill amortization 1,115.6 1,050.7
Accumulated goodwill amortization (140.7) (136.5)
Total debt, excluding current and long-term portion of
obligations of project mining subsidiaries (353.3) (296.4)
Closed mine obligations (Bellaire), including the
United Mine Worker retirees' medical fund, net-of-tax (74.6) (76.6)
Minority interest (23.5) (22.9)
---------- ----------
Stockholders' equity $ 523.5 $ 518.3
========== ==========
Debt to total capitalization 39% 35%
</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.
EFFECTS OF FOREIGN CURRENCY
NMHG and Housewares operate internationally and enter into transactions
denominated in foreign currencies. As such, the Company is subject to the
variability that arises from exchange rate movements. The effects of foreign
currency fluctuations on revenues, operating income and net income at NMHG are
disclosed above. At Housewares, foreign currency effects had an immaterial
impact on operating results between comparable periods of 1999 and 1998. See
Item 3, "Quantitative and Qualitative Disclosures About Market Risk."
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).
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 June 1999; HB/PS has completed
renovation and testing of all IT systems; and NACoal plans to complete
renovation and testing of all mission-critical IT systems by July 1999.
<PAGE>
YEAR 2000 ISSUE - continued
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. All of HB/PS' computer-controlled manufacturing equipment and other non-IT
systems have been validated to be Y2K compliant, with the exception of certain
computer-controlled equipment in its Mexican plants which are targeted to be
compliant by July 1999. At NACoal, assessment and testing of critical
computer-controlled equipment and other non-IT systems are scheduled to be
completed by July 1999. Preliminary testing at NACoal has indicated that no
significant Y2K issues are expected in its mining equipment and other non-IT
systems.
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 80 percent of NMHG's critical suppliers
are currently Y2K compliant or have a plan in place to be compliant by the end
of 1999. The remainder of NMHG's critical suppliers have not yet responded to
the survey. NMHG plans to build a safety stock in Europe to mitigate the risk
that suppliers will not be Y2K ready. At HB/PS, supplier surveys have been
returned and evaluated, indicating that approximately 75 percent of HB/PS'
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' critical suppliers have
not yet responded to the survey. HB/PS continues to pursue responses from those
suppliers. HB/PS plans to perform tests of Y2K compliance of critical suppliers
in July 1999. NACoal has surveyed its critical vendors, but only 50 percent have
responded. NACoal plans to pursue responses and create contingency plans to
mitigate any problems with critical vendors. Of those who have responded,
approximately 80 percent have indicated that they have a plan to be Y2K ready by
the end of 1999.
The Company has contacted its critical utility providers, financial institutions
and customers to assess their Y2K readiness. The majority of these third-party
partners have indicated that they are ready or have a plan in place to be Y2K
ready by December 31, 1999. The Company continues to monitor their progress and
remains in contact with critical partners, such as NACoal's power plant
customers. The Company will develop contingency plans as it becomes aware of the
potential for critical third-party partners' non-compliance.
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 ready. 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 $5.0
million. The Company estimates an additional $2.0 million will be expended
during the remainder of 1999 relating to this issue. These costs have been and
are expected to be funded by cash flows from operations.
<PAGE>
YEAR 2000 ISSUE - continued
Contingency Plans
While some contingency plans have been formalized, 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 ready. The
Company may incur additional interest expense during the fourth quarter of 1999
and the first quarter of 2000 to finance any safety stock deemed necessary. 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.
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
ready.
Risks of the Company's Y2K Issues
Although the Company believes that it has 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 fully implemented its Y2K compliance plan. Therefore,
there can be no assurance that the Y2K issue will not have a material adverse
effect on the Company's financial position, results of operations or cash flows.
See "Outlook" for additional risks and uncertainties associated with Y2K
compliance.
EURO CONVERSION
See the Company's 1998 Annual Report, which is incorporated by reference into
the Company's Form 10-K for the fiscal year ended December 31, 1998, for a
summary of the Euro Conversion. 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 of the Euro on competition due to price
transparency and foreign currency risk cannot yet be determined and may have an
adverse effect, possibly material, on the Company's operations, financial
position or cash flows. Conversely, introduction of the Euro may also have
positive effects, such as reduced foreign currency risk, lower costs due to
reduced hedging activity, and reduced prices of raw materials resulting from
increased competition among suppliers. The Company continues to monitor and
assess the potential risks imposed by the Euro.
<PAGE>
OUTLOOK
NMHG: NMHG anticipates that 1999 lift truck industry bookings in the Americas
market will decline moderately from 1998 record levels. The European lift truck
market is also expected to decline from record demand in 1998, reflecting
softening economies in Europe, while demand in the Asia-Pacific market, which
represents less than 5 percent of sales, is expected to be flat or increase
slightly. As a result, NMHG anticipates continued competitive price and
margin pressure. NMHG also expects to continue incurring costs during 1999
related to the start-up of its retail operations. NMHG anticipates that its
sales mix will improve during the remainder of 1999, that manufacturing
efficiencies will improve, compared with the first quarter of 1999, and that
additional benefits will be realized from NMHG's cost reduction programs,
including its new Mexican plant in Saltillo.
Housewares: HB/PS expects to continue increasing production capacity during 1999
at its Mexican facilities by transferring additional assembly operations from
the U.S. As a result, manufacturing efficiencies are expected to increase over
the remainder of this year. HB/PS began shipping from its newly opened
distribution center in Memphis, Tennessee during the second quarter of 1999. The
center is expected to create distribution efficiencies in 1999.
NACoal: NACoal expects that customer demand for lignite for the remainder of
1999 will be consistent with 1998 levels, except at the Red River mining
operation in Louisiana, where a customer's unplanned power plant outage is
temporarily interrupting lignite deliveries to the plant. NACoal also
anticipates that royalty payments over the remainder of the year will be
comparable with the first quarter of 1999 and well below the levels in 1998.
NACoal expects to continue incurring expenses in 1999 for the development of
international mining opportunities and the Mississippi-based Red Hills mine, in
which it owns a 25 percent interest, which is scheduled to begin production in
the second half of 2000.
The statements contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere throughout 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 which speak only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Such risks and uncertainties
with respect to each subsidiary's operations includes without limitation:
NMHG: (1) changes in demand for lift 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, (7) costs related to business acquisitions, (8) costs related to the
integration of acquisitions and (9) increased competition, foreign currency risk
and/or operating costs resulting from the introduction of the Euro.
<PAGE>
OUTLOOK - continued
Housewares: (1) delays or increased costs in the start-up of operations
transferred into Mexican plants during 1999, (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 the foreign import tariffs and monetary policies,
and other changes in the regulatory climate in the foreign countries in which
HBPS buys, operates and/or sells products, (5) product liability or other
litigation, warranty claims or other returns of products, (6) increased
competition from Chinese imports and (7) 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) weather or equipment problems that could
affect lignite deliveries to customers, (3) costs to pursue international mining
opportunities and (4) delays or increases in the cost of the start-up 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 ready when necessary, (3) inability of NACoal's
customers to be Y2K ready 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 ready 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
See pages 37 and 38 of the Company's 1998 Annual Report, which is incorporated
by reference into the Company's Form 10-K for the fiscal year ended December 31,
1998, 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, 1998.
<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 32 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 first quarter of 1999.
<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 May 13, 1999 /s/ Kenneth C. Schilling
------------------------------ ----------------------------
Kenneth C. Schilling
Vice President and Controller
(Authorized Officer and Principal
Financial and Accounting Officer)
<PAGE>
Exhibit Index
Exhibit
Number* Description of Exhibits
(27) Financial Data Schedule
(99.1) Other Exhibits Not Required To Otherwise Be Filed
(1) Comments of Alfred M. Rankin, Jr., Chairman, President and
Chief Executive Officer, At the NACCO Industries, Inc. Annual
Meeting of Stockholders May 12, 1999, is attached hereto as
Exhibit 99.1.
*Numbered in accordance with Item 601 of Regulation S-K.
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<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Mar-31-1999
<CASH> 41
<SECURITIES> 0
<RECEIVABLES> 278
<ALLOWANCES> 0
<INVENTORY> 360
<CURRENT-ASSETS> 717
<PP&E> 594
<DEPRECIATION> 574
<TOTAL-ASSETS> 1,929
<CURRENT-LIABILITIES> 535
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 515
<TOTAL-LIABILITY-AND-EQUITY> 1,929
<SALES> 614
<TOTAL-REVENUES> 614
<CGS> 498
<TOTAL-COSTS> 498
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 21
<INCOME-TAX> 8
<INCOME-CONTINUING> 13
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1)
<NET-INCOME> 12
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.44
</TABLE>
Comments of Alfred M. Rankin, Jr.
Chairman, President and Chief Executive Officer
NACCO Industries, Inc. Annual Meeting of Stockholders
May 12, 1999
In 1998 NACCO Industries enjoyed the best year in its history. The
Company benefited from robust demand for lift trucks, increased sales of kitchen
appliances and increased lignite deliveries. Earnings in 1998 were $102.3
million, up 66 percent from $61.8 million in 1997 and up from $65.5 million
before special items in 1995, our previous best year. Earnings per share were
$12.53, compared with $7.55 in 1997. Our revenues increased 13 percent to $2.5
billion, compared with $2.2 billion in 1997. Earnings, earnings per share and
revenues were all NACCO records.
Return on equity in properly capitalized tangible assets, a key driver
of the value of our Company, was 48 percent in 1998, compared with 39 percent in
1997. The S&P 500 average was 19 percent in 1998. Return on equity in total
assets, which includes unamortized goodwill, was 18 percent in 1998, compared
with 14 percent in 1997.
Our 1998 results were driven by NMHG where an unusually favorable set
of circumstances in the lift truck market, combined with excellent strategies
and follow-through, led to record earnings. All of our businesses took advantage
of ongoing cost reduction programs to drive market share and gain economies of
scale.
Before discussing more fully the operations and results at each of our
subsidiaries, I want to emphasize that certain aspects of my remarks this
morning include forward looking statements. Information concerning factors that
could cause actual results to differ from these forward looking statements are
described in Management's Discussion and Analysis on page 37 of our 1998 annual
report.
NACCO Materials Handling Group
NACCO Materials Handling Group was the key driver of our improved
financial performance in 1998. NMHG's net income for the year was $75.1 million,
up from $38.7 million in 1997, on revenues which increased 15 percent to $1.7
billion in 1998. Despite intense competition, NMHG's market share expanded in
virtually every global region - to a leading 29 percent share in the Americas
market, to 10 percent in Europe and to 10 percent in Asia-Pacific. Overall, our
worldwide market share was 16 percent in 1998.
NMHG's success last year resulted from several important factors.
First, we went into the year with a large backlog of lift truck orders
that included a good mix of higher margin, more fully priced trucks.
Second, and very significantly, during 1998, NMHG became a much more
operationally efficient organization. We now have in place a sound, focused
infrastructure with consolidated new product development centers, a world
headquarters focused on global strategic issues, and full-service geographic
operating units with consolidated marketing activities. We have continued to
shorten our product development cycle, moved manufacturing to low-cost
countries, such as Mexico, and aggressively introduced state-of-the-art
manufacturing with Demand Flow Technology. We've outsourced some activities and
insourced others. Our Value Improvement Program, which includes quality
improvement, has taken hold and become a fundamental part of our thinking
process. And our marketing activities have been carried out with professionalism
and creativity which have helped facilitate market share gains.
Perhaps the most significant development at NMHG in 1998 was the
implementation of a new retail distribution strategy which included permanently
acquiring selected Hyster and Yale dealerships worldwide. We believe that owning
selected dealerships will strengthen our distribution system by helping ensure a
long-term focus on building market position in new unit sales and incremental
parts and service business by bringing our management skills, business
discipline and economy of scale focus to these businesses.
North American Coal
At North American Coal in 1998, all of our existing mines operated at
or near capacity, with high levels of productivity. Our five operating mines
sold 31.7 million tons of lignite in 1998, compared with 29.9 million tons sold
in 1997. We are particularly proud of the performance by our San Miguel, Texas,
mine. Despite record-breaking rainfall from last August through November,
deliveries at San Miguel exceeded projections by 17 percent and costs were kept
within budget. Our dragline limerock operations in Florida delivered 8.3 million
cubic yards of limerock, compared with 7.6 million cubic yards in 1997.
Net income was $20.3 million, compared with $19.0 million in 1997. Net
income increased primarily as a result of increased lignite volume, a lower tax
rate and increased royalty income.
In 1998 we began construction of the Red Hills lignite mine near
Ackerman, Mississippi. This mine is a joint venture, in which we own a 25
percent interest, with Phillips Coal Company. We expect to begin operations in
the second half of next year, and we anticipate production will eventually reach
3 million tons annually.
North American Coal's long tradition of protecting the environment and
the safety of our mine employees was recognized again in 1998. Our mines
received 5 environmental and safety awards from various state and national
regulatory agencies. We are particularly proud to have received The Nature
Conservancy of Texas' prestigious Corporate Conservation Leadership Award for
"outstanding commitment to protecting our natural heritage."
NACCO Housewares Group
In the second quarter of 1998, we began reporting the results of our
Hamilton Beach/Proctor-Silex and Kitchen Collection subsidiaries on a combined
basis as NACCO Housewares Group. This change reflects our plan to take advantage
of the potential synergies between the two companies.
Revenues for NACCO Housewares Group increased 8 percent to $537.6 million
in 1998. Net income increased 45 percent to $15.2 million.
Our focus on market share at Hamilton Beach/Proctor-Silex had a
positive impact on operations. The company's North American market share
increased in 1998 despite intense competition and modest growth in the small
appliance segment. Our share gains in 1998 were the result of introducing a
steady stream of new products with innovative designs and features, positioning
Hamilton Beach and Proctor-Silex branded products at different levels of price,
performance and features, and providing category management skills to our retail
customers.
Another key element of our operating strategy is to be a world low-cost
manufacturer of kitchen electric appliances. The centerpiece of our plan is our
new Saltillo, Mexico, manufacturing facility. The transition of manufacturing
activities to Saltillo was carefully planned and executed during 1997 and 1998
to achieve maximum benefits with minimum disruption of production schedules. We
expect our Saltillo facility to reach full production this year which we in turn
expect to generate increasing cost benefits.
Kitchen Collection store sales improved slightly over 1997, as growth
opportunities in the mature factory outlet mall industry were limited. While
outlet malls remain our core market, we continue to test Kitchen Collection
stores in traditional shopping centers located in medium size markets. We are
also selling our products through the Internet, which we believe will become an
increasingly important distribution channel in the future.
1999 First Quarter Results
As we anticipated, our first quarter operating results in 1999 were
significantly lower in comparison to the record results in the first quarter of
1998. Net income was $11.7 million, or $1.44 per share compared with net income
of $24.1 million, or $2.95 per share, on revenues which increased 2 percent to
$613.5 million.
First quarter results were most affected by NACCO Materials Handling
Group, which had net income of $12.1 million, compared to $22.3 million in 1998,
on essentially flat revenues of $438.5 million.
NMHG's retail operations had a $2.7 million net loss, reflecting a
build-up of retail management infrastructure and start-up costs for acquiring
dealerships worldwide. This new strategy indicates the willingness we have shown
over the years to absorb short-term charges to earnings, which we believe are
better characterized as investments in the future.
On the wholesale side of our business, we saw significant price
pressure and resulting margin pressure in world markets as a result of a strong
U.S. dollar and British pound sterling and low capacity utilization,
particularly in Asia. Further, we sold fewer lift trucks in the quarter and our
sales mix shifted to lower margin trucks. Finally, changes in the rate of lift
truck model production at several of our factories resulted in some
manufacturing inefficiencies.
NACCO Housewares Group's sales growth momentum continued into the first
quarter of 1999 as revenues increased 13 percent to $111.4 million. The
Housewares Group narrowed its first quarter loss to $800,000 from $1.3 million
in the first quarter of 1998. Operating results of the Housewares Group are, of
course, seasonally weakest during the first quarter of the year.
Our improved operating results in the first quarter were due to unit
volume growth and a more profitable sales mix at Hamilton Beach/Proctor-Silex.
The incremental impact of additional sales volume on net income was strong.
These results were partially offset by costs incurred for consolidating
distribution activities into a new warehouse in Memphis, Tennessee, and
transferring product lines to our Mexican plants in Saltillo and Juarez.
North American Coal reported net income of $2.7 million in the first
quarter of 1999, compared with net income of $5.5 million in the first quarter
of 1998. The primary drivers of North American Coal's operating results were a
$1.2 million charge, as required under a new accounting pronouncement, to write
off mine start-up costs previously capitalized, lower customer requirements at
two of our mines and lower royalties from our eastern underground reserves mined
by third parties. We also continued to incur increased costs for the development
of international mining opportunities.
Outlook
NACCO Industries is approaching the 21st century with a strong and
stable core of cash-generating businesses, all of which are well positioned for
long-term, sustainable competitive advantage.
At NACCO Materials Handling Group, we expect to incur further
investment costs related to the start-up of our retail operations during 1999.
We anticipate continuing competitive price and margin pressure since the dollar
and pound are expected to remain strong against the yen and the euro. Later this
summer we expect to begin manufacturing lift trucks at a new facility in
Shanghai, China. This joint venture project is a strategic initiative designed
to help us meet the growing needs of multinational companies doing business in
China. In addition, we will remain vigilant in looking for opportunities to
strengthen our business worldwide.
At Hamilton Beach/Proctor-Silex, we expect the transfer of production
to our Saltillo and Juarez, Mexico, facilities to be completed this year. As a
result, manufacturing efficiency is expected to increase over the remainder of
the year. We expect to continue introducing new products that will help drive
sales growth and market share. We also expect to continue providing our
customers with outstanding service and a high degree of marketing
professionalism.
North American Coal's operating mines are expected to continue
generating steady income and substantial free cash flow in 1999, except as
customer power plant outages reduce lignite requirements. However, we anticipate
that royalty payments over the remainder of 1999 will be comparable with the
first quarter of 1999, and well below the 1998 level. For the past several
years, North American Coal has been aggressively pursuing opportunities to
transfer its world class mining capabilities to the international arena. We
believe there are significant opportunities for growth through joint ventures in
regions with newly privatizing markets, particularly in India and Turkey. We
hope to finalize at least one of these excellent power plant/mining projects in
these countries this year, or in early 2000.
In summary, our strategy of achieving long-term sustainable competitive
advantage is working. We have a stable core of sound businesses with leading
market shares and high returns on equity. All of our businesses continue to
generate substantial free cash flow.
The key challenge we face as a company in meeting our long-term return
on equity objectives will be to use cash flow wisely for a combination of
internal investments in our business units, debt reduction, acquisitions to
support our business units, and returning funds to stockholders through
dividends and future share repurchases.
NACCO's share price does not suggest the excellent results that we
enjoyed in 1998, reflecting the fact that our kind of company has not been in
market favor recently. Using a common investment community valuation approach
called Total Enterprise Value as a multiple of Earnings Before Interest, Taxes,
Depreciation and Amortization, our share price and debt level at year end 1998
reflected a multiple of 4.2 times Based on 12 months of earnings ended March 31,
1999, our multiple stood at 4.1 times, compared with an S&P Industrials median
of 15 times.
By meeting our return on equity objective of at least 14 percent and
retaining our current high portion of those earnings in the Company, the
earnings to which price/earnings and Total Enterprise Value-EBITDA ratios are
applied should increase on average by at least 12 percent annually. Assuming
market multiples do not decline further, this should lead to a comparable stock
price appreciation over time with the further possibility of more appropriate
Total Enterprise Value-EBITDA ratios. Notwithstanding the current market
favoritism for large capitalization growth stocks, we continue to believe NACCO
represents an attractive investment. We will continue to meet with prospective
investors and analysts to make sure our story is thoughtfully understood.
In closing, I want to welcome Dick Osborne to our board. Dick has been
chairman and chief executive officer of ASARCO Incorporated. We are privileged
to have him as a director.
This concludes my formal remarks. I will be happy to answer any
questions that you may have.
