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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002 Commission File No. 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH
EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Class A Common Stock, New York Stock Exchange
Par Value $1.00 Per Share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class B Common Stock, Par Value $1.00 Per Share
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
requirement for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES [X] NO [ ]
Aggregate market value of Class A Common Stock and Class B Common Stock held by
non-affiliates as of June 28, 2002 (the last business day of the registrant's
most recently completed second fiscal quarter):
$293,576,453
Number of shares of Class A Common Stock outstanding at February 28, 2003:
6,578,144
Number of shares of Class B Common Stock outstanding at February 28, 2003:
1,623,594
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Company's Proxy Statement for its 2003 annual
meeting of stockholders are incorporated herein by reference in Part III.
PART I
ITEM 1. BUSINESS
GENERAL
NACCO Industries, Inc. ("NACCO" or the "Company") is a holding company
whose principal operating subsidiaries function in three distinct industries:
lignite mining, lift trucks and housewares.
(a) North American Coal. The Company's wholly owned subsidiary, The North
American Coal Corporation, and its affiliated coal companies (collectively,
"NACoal"), mine and market lignite primarily as fuel for power providers. NACoal
also provides dragline mining services for a limerock quarry near Miami,
Florida.
(b) NACCO Materials Handling Group. NACCO Materials Handling Group
consists of the Company's wholly owned subsidiary, NMHG Holding Co., and its
wholly owned subsidiaries (collectively, "NMHG"), including NACCO Materials
Handling Group, Inc. ("NMHG Wholesale") and NMHG Distribution Co. ("NMHG
Retail"). NMHG, through NMHG Wholesale and NMHG Retail, designs, engineers,
manufactures, sells, services and leases a comprehensive line of lift trucks and
aftermarket parts and service marketed globally under the Hyster(R) and Yale(R)
brand names.
(c) NACCO Housewares Group. NACCO Housewares Group ("Housewares") consists
of two of the Company's wholly owned subsidiaries: Hamilton BeachoProctor-Silex,
Inc. ("HB-PS"), a leading manufacturer, marketer and distributor of small
electric motor and heat-driven household appliances as well as commercial
products for restaurants, bars and hotels, and The Kitchen Collection, Inc.
("KCI"), a national specialty retailer of brand-name kitchenware, small
electrical appliances and related accessories.
Additional information relating to financial and operating data on a segment
basis (including NACCO and Other) and by geographic region is set forth under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in Part II hereof and in Note 19 to the
Consolidated Financial Statements contained in Part IV hereof.
NACCO was incorporated as a Delaware corporation in 1986 in connection
with the formation of a holding company structure for a predecessor corporation
organized in 1913. As of February 28, 2003, the Company and its subsidiaries had
approximately 11,500 employees.
The Company makes its annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and any amendments to those reports
available, free of charge, through its website, http://www.nacco.com, as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the Securities and Exchange Commission.
SIGNIFICANT EVENTS
In the fourth quarter of 2001, NACoal's Mississippi Lignite Mining Company
("MLMC") mine commenced limited deliveries of lignite to its customer. The
customer's power plant did not reach Commercial Operations Date ("COD"), as
defined in the lignite sales agreement, until March 1, 2002. As a result, in
January 2001 MLMC began to collect contractual liquidated damages, which when
combined with a final settlement from its customer amounted to $26.3 million for
the delay in COD.
On May 9, 2002, NMHG replaced its primary financing agreement, an
unsecured, floating-rate revolving line of credit with availability of up to
$350 million, certain other lines of credit with availability of $4.6 million
and a program to sell accounts receivable in Europe with the proceeds from the
private placement of $250 million of 10% Senior Notes due 2009 ("Senior Notes")
and borrowings under a secured, floating-rate revolving credit facility which
expires in May 2005. Availability under the new revolving credit facility is up
to $175.0 million. On September 18, 2002, NMHG exchanged outstanding Senior
Notes with Senior Notes registered pursuant to the federal securities laws.
On December 9, 2002, NMHG announced that it will phase out its Lenoir,
North Carolina lift truck component facility and restructure its Irvine,
Scotland lift truck assembly and component facility. These actions are designed
to complete the restructuring of the Company's global manufacturing facility
structure.
On January 3, 2003, NMHG Retail sold Hyster MidEast, its sole company
owned retail dealership in North America, to MH Logistics Corporation, which
already owned three Hyster dealerships.
In 2002, HB-PS substantially completed the previously announced
restructuring of its manufacturing activities in Mexico, resulting in the
outsourcing of certain of the company's products and the consolidation of
production in three of the company's Juarez manufacturing plants into one of
those plants.
On December 17, 2002, HB-PS replaced its primary financing agreement with
borrowings under a new senior secured, floating-rate revolving credit facility
which expires in December 2005. The new revolving credit facility provides
availability of up to $140 million.
BUSINESS SEGMENT INFORMATION
A. NORTH AMERICAN COAL
GENERAL
NACoal is engaged in the mining and marketing of lignite primarily as fuel
for power providers. Sales by NACoal are made primarily through wholly owned
project mining subsidiaries pursuant to long-term, cost plus a profit per ton
contracts. The utility customers have provided, arranged and/or guaranteed the
financing of the development and operation of the project mining subsidiaries.
There is no recourse to NACCO or NACoal for the financing of these subsidiary
mines. The balance of NACoal's lignite sales are from non-project mining
subsidiaries for which NACoal has arranged and provided the necessary financing.
NACoal also provides dragline mining services for a limerock quarry near Miami,
Florida and earns royalty income from the lease of various coal and gas
properties. At December 31, 2002, NACoal's operating mines consist of mines
where the reserves were acquired and developed by NACoal, except for the South
Hallsville No. 1 Mine and the San Miguel Lignite Mine where reserves are owned
by the customers of these mines. For further information as to the financing of
the project mining subsidiaries, see Note 12 to the Consolidated Financial
Statements contained in Part IV hereof.
SALES, MARKETING AND OPERATIONS
The principal customers of NACoal are electric utilities, an independent
power provider and a synfuels plant. Sales to Dakota Coal Company, which
supplies coal to four facilities, accounted for 46%, 40% and 47% of NACoal's
revenues in 2002, 2001 and 2000, respectively. The distribution of sales in the
last five years has been as follows:
DISTRIBUTION
----------------------------------
ELECTRIC
TOTAL UTILITIES/
TONS SOLD INDEPENDENT SYNFUELS
(MILLIONS) POWER PROVIDER PLANT
---------- -------------- -----
2002 34.2 82% 18%
2001 31.4 80% 20%
2000 31.6 80% 20%
1999 31.3 80% 20%
1998 31.7 80% 20%
The contracts under which the project mining subsidiaries were organized
provide that, under certain conditions of default, the customer(s) involved may
elect to acquire the assets (subject to the liabilities) or the capital stock of
the subsidiary for an amount effectively equal to book value. NACoal does not
know of any conditions of default that currently exist. In one case, the
customer may elect to acquire the stock of the subsidiary after a specified
period of time without reference to default, in exchange for certain payments on
coal thereafter mined. In another case, the customer may elect to terminate the
contract for convenience. NACoal does not know of any current intention of any
customer to acquire the stock of a subsidiary or terminate a contract for
convenience.
The location, mine type, reserve data, coal quality characteristics,
customer, sales tonnage and contract expiration date for the mines operated by
NACoal in 2002 were as follows:
2
DEVELOPED LIGNITE MINING OPERATIONS
PROVEN AND PROBABLE RESERVES (1)
COMMITTED AVERAGE
UNDER SULFUR
CONTRACT UNCOMMITTED AVERAGE CONTENT
PROJECT MINING (MILLIONS (MILLIONS BTUS PER UNIT
SUBSIDIARIES MINE LOCATION TTYPE OF MINE OF TONS) OF TONS) PER POUND OF WEIGHT
- ------------ ---- -------- ------------- ----- ----- --------- ---------
The Coteau Properties
Company Freedom Mine (2) Beulah, ND Surface Lignite 584.0 8.4 6,767 0.8%
The Falkirk Mining
Company Falkirk Mine (2) Underwood, ND Surface Lignite 484.5 ---- 6,200 0.6%
The Sabine Mining Company South Hallsville Hallsville, TX Surface Lignite (4) (4) (4) (4)
No. 1 Mine (2)
OTHER
- -----
San Miguel Lignite Mining San Miguel Jourdanton, TX Surface Lignite (5) (5) (5) (5)
Operations Lignite
Mine
Red River Mining Company Oxbow Mine Coushatta, LA Surface Lignite 6.8 56.3 6,722 0.7%
Mississippi Lignite
Mining Company Red Hills Mine Ackerman, MS Surface Lignite 163.9 126.7 5,200 0.6%
----- -----
Total Developed 1,239.2 191.4
UNDEVELOPED MINING OPERATIONS
- -----------------------------
North Dakota ---- ---- ---- ---- 565.1 6,500 0.8%
Texas ---- ---- ---- ---- 192.9 6,800 1.0%
Eastern ---- ---- ---- 60.6 49.6 12,070 3.3%
Mississippi ---- ---- ---- ---- 143.4 5,200 0.6%
Tennessee ---- ---- ---- ---- 81.2 5,200 0.7%
---- ----
Total Undeveloped 60.6 1,032.2
Total Developed/ 1,299.8 1,223.6
Undeveloped
2002 SALES
PROJECT MINING TONNAGE CONTRACT
SUBSIDIARIES CUSTOMER(S) (PLANT) (MILLIONS) EXPIRES
- ------------ ------------------- ---------- -------
The Coteau Properties
Company Dakota Coal Company 6.2 2007 (3)
(Great Plains Synfuels
Plant)
Dakota Coal Company 5.5 2007 (3)
(Antelope Valley Station)
Dakota Coal Company 3.0 2007 (3)
(Leland Olds Station)
Dakota Coal Company 1.1 2003
(Stanton Station of United
Power Association)
The Falkirk Mining
Company United Power Association/ 7.6 2020
Cooperative Power
Association
(Coal Creek Station)
The Sabine Mining Company Southwestern Electric 4.0 2020
Power Company
(Henry W. Pirkey Power
Plant)
OTHER
- -----
San Miguel Lignite Mining San Miguel Electric 3.3 2007
Operations Cooperative, Inc.
(San Miguel Power Plant)
Red River Mining Company CLECO Utility Group, Inc./ 0.6 2010
Southwestern Electric
Power Company
(Dolet Hills Power Plant)
Mississippi Lignite Choctaw Generation Limited
Mining Company Partnership 2.9 2032
(Red Hills Power Plant)
UNDEVELOPED MINING OPERATIONS
- -----------------------------
North Dakota ---- ---- ----
Texas ---- ---- ----
Eastern ---- ---- ----
Mississippi ---- ---- ----
Tennessee ---- ---- ----
(1) The projected extraction loss is approximately ten percent (10%) of the
proven and probable reserves, except with respect to the reserves for the
Eastern Undeveloped Mining Operations, in which case the extraction loss
is approximately thirty percent (30%) of the proven and probable reserves.
(2) The contracts for these mines require the customer to cover the cost of
the ongoing replacement and upkeep of the plant and equipment of the mine.
(3) Although the term of the existing coal sales agreement terminates in 2007,
the term may be extended for six (6) additional periods of five years, or
until 2037, at the option of The Coteau Properties Company.
(4) The reserves of the South Hallsville No. 1 Mine are owned and controlled
by the customer and, therefore, have not been listed in the table.
(5) The reserves of the San Miguel Lignite Mine are owned and controlled by
the customer and, therefore, have not been listed in the table.
3
GOVERNMENT REGULATION
NACoal, like other coal producers, continues to be subject to Federal and
state health, safety and environmental regulations. NACoal's active operations
are required to make certain additional capital expenditures to comply with such
governmental regulations. For the project mining subsidiaries these expenditures
will be recovered under the terms of the coal sales agreements with the utility
customers.
NACoal's management believes that the Clean Air Act Amendments, which
became effective in 1990, have not had and will not have a material adverse
effect on its current operations, because substantially all of the power
generating facilities operated or supplied by NACoal's customers meet or exceed
the requirements of the Clean Air Act.
COMPETITION
The coal industry competes with other sources of energy, particularly oil,
gas, hydro-electric power and nuclear power. Among the factors that affect
competition are the price and availability of oil and natural gas, environmental
considerations, the time and expenditures required to develop new energy
sources, the cost of transportation, the cost of compliance with governmental
regulation of operations, the impact of Federal and state energy policies and
the current trend toward deregulation of energy markets. The ability of NACoal
to market and develop its reserves will depend upon the interaction of these
factors.
There is no official source of information on the subject, but NACoal
believes that it was one of the ten largest coal producers in the United States
in 2002 based on total coal tons sold.
EMPLOYEES
As of February 28, 2003, NACoal had approximately 1,200 employees.
B. NACCO MATERIALS HANDLING GROUP
1. NMHG WHOLESALE
GENERAL
NMHG Wholesale designs, engineers, manufactures and sells a comprehensive
line of lift trucks and aftermarket parts on a global basis under the Hyster and
Yale brand names.
MANUFACTURING AND ASSEMBLY
NMHG Wholesale manufactures components, such as masts and transmissions,
and assembles products in the market of sale to minimize freight cost and
balance currency mix. In some instances, however, it utilizes one worldwide
location to manufacture specific components or assemble specific products. NMHG
Wholesale operates 14 manufacturing and assembly operations worldwide with six
plants in the Americas, five in Europe, including the Middle East and Africa,
and three in Asia-Pacific.
Sales of lift trucks represented approximately 81% of NMHG Wholesale's
annual revenues in each of 2002, 2001 and 2000.
MARKETING
NMHG Wholesale's marketing organization is structured in three regional
divisions: the Americas; Europe, which includes the Middle East and Africa; and
Asia-Pacific. In each region, certain marketing support functions for the Hyster
and Yale brands are combined into a single shared services organization. These
activities include sales and service training, information systems support,
product launch coordination, direct advertising, specialized sales material
development, help desks, order entry, marketing strategy and field service
support. Only the specific aspects of NMHG Wholesale's sales and marketing
activities that interact directly with dealers and customers, such as dealer
consulting and new lift truck units and aftermarket parts transaction support,
are brand specific.
DISTRIBUTION NETWORK
NMHG Wholesale distributes lift trucks and aftermarket parts through two
channels: dealers and a National Accounts organization.
4
DEALERS
INDEPENDENT DEALERS
The majority of NMHG Wholesale's dealers are independently owned and
operated. In the Americas, NMHG Wholesale had 60 independent Hyster dealers and
75 independent Yale dealers as of December 31, 2002. In Europe, including the
Middle East and Africa, Hyster had 78 independent dealers with locations in 97
countries and Yale had 75 independent dealers with locations in 39 countries as
of December 31, 2002. Hyster had 15 independent dealers in Asia-Pacific as of
December 31, 2002. Yale was represented by 11 independent dealers in
Asia-Pacific as of December 31, 2002.
OWNED DEALERS
From time to time, NMHG has acquired, on an interim basis, certain
independent Hyster, Yale and competitor dealers and rental companies to
strengthen or protect Hyster's and Yale's presence in select territories. See
"2. NMHG Retail" for a description of NMHG's owned dealers.
NATIONAL ACCOUNTS
NMHG Wholesale operates a National Accounts organization for both Hyster
and Yale focused on large customers with centralized purchasing and
geographically dispersed operations in multiple dealer territories. The National
Accounts organization accounted for 18% of new lift truck unit volume in 2002.
The dealer network described above supports the National Accounts organization
by providing aftermarket parts and service on a local basis. Dealers receive a
commission for the support they provide in connection with National Accounts
sales and for the preparation and delivery of lift trucks to customer locations.
In addition to selling new lift trucks, the National Accounts organization
markets services including full maintenance leases and total fleet management.
CUSTOMERS
NMHG Wholesale's customer base is diverse and fragmented, including, among
others, food distributors, trucking and automotive companies, lumber, metal
products, rental, paper and building materials suppliers, warehouses, light and
heavy manufacturers, retailers and container handling companies.
AFTERMARKET PARTS
NMHG Wholesale offers a line of aftermarket parts to service its large
installed base of lift trucks currently in use in the industry. NMHG Wholesale
offers online technical reference databases to obtain the required aftermarket
parts for a job and an aftermarket parts ordering system. Aftermarket parts
sales represented approximately 19% of NMHG Wholesale's annual revenues in each
of 2002, 2001 and 2000.
NMHG Wholesale sells Hyster and Yale branded aftermarket parts to dealers
for Hyster and Yale lift trucks. NMHG Wholesale also sells aftermarket parts
under the UNISOURCE(TM), MULTIQUIP(TM) and PREMIER(TM) brands to Hyster and Yale
dealers for the service of competitor lift trucks.
FINANCING OF SALES
NMHG Wholesale is engaged in a joint venture with General Electric Capital
Corporation ("GECC") to provide dealer and customer financing of new lift trucks
in the United States. NMHG owns 20% of the joint venture entity, NMHG Financial
Services, Inc. ("NFS"), and receives fees and remarketing profits under an
agreement that expires in 2003. NMHG accounts for its ownership of NFS using the
equity method of accounting.
In addition, NMHG Wholesale has also entered into an International
Operating Agreement with GECC under which GECC provides leasing and financing
services to Hyster and Yale dealers and their customers outside of the United
States. GECC pays NMHG a referral fee once certain financial thresholds are
reached. This agreement expires in 2003.
Under the agreements with NFS and with GECC pursuant to the International
Operating Agreement, NMHG's dealers and certain customers are extended credit
for the purchase of lift trucks to be placed in the dealer's floor plan
inventory or the financing of lift trucks that are sold or leased to customers.
For some of these arrangements, NMHG provides residual value guarantees or
standby recourse or repurchase obligations to NFS or to GECC. In substantially
all of these transactions, NMHG maintains perfected security interests in the
lift trucks financed, so that in the event of a default, NMHG has the ability to
foreclose on the leased property and sell it through the Hyster or Yale dealer
network. Furthermore, NMHG has established reserves for exposures under these
agreements. NMHG expects to renew or replace these agreements at the end of
2003.
5
BACKLOG
As of December 31, 2002, NMHG Wholesale's backlog of unfilled orders
placed with its manufacturing and assembly operations for new lift trucks was
approximately 18,800 units, or $340 million, of which substantially all is
expected to be filled during fiscal 2003. This compares to the backlog as of
December 31, 2001 of approximately 15,100 units, or $266 million. Backlog
represents unfilled lift truck orders to NMHG Wholesale's manufacturing and
assembly facilities from dealers, National Accounts customers and contracts with
the United States government.
KEY SUPPLIERS
In 2002, no single supplier accounted for more than 7% of NMHG Wholesale's
purchases. NMHG Wholesale believes there are competitive alternatives to all
suppliers.
COMPETITION
Competition in the lift truck industry is based primarily on strength and
quality of dealers, brand loyalty, customer service, availability of products
and aftermarket parts, comprehensive product line offering, product performance,
product quality and features and the cost of ownership over the life of the lift
truck. NMHG's management believes that it is competitive in all of these areas.
The lift truck industry also competes with alternative methods of
materials handling, including conveyor systems and automated guided vehicle
systems.
NMHG's aftermarket parts offerings compete with parts manufactured by
other lift truck manufacturers as well as companies that focus solely on the
sale of generic parts.
PATENTS, TRADEMARKS AND LICENSES
NMHG Wholesale is not materially dependent upon patents or patent
protection. NMHG Wholesale is the owner of the Hyster trademark. NMHG uses the
Yale trademark on a perpetual royalty-free basis in connection with the
manufacture and sale of lift trucks and related components. NMHG believes that
the Hyster and Yale trademarks are material to its business.
2. NMHG RETAIL
GENERAL
From time to time, NMHG, through NMHG Retail, has acquired, on an interim
basis, certain independent Hyster, Yale and competitor dealers and rental
companies to strengthen or protect Hyster's or Yale's presence in select
territories. NMHG's long-term strategy is to identify strategic buyers for owned
dealers that represent "best-in-class" dealers to support the Hyster and Yale
brands. In early 2003, NMHG sold its sole company owned retail dealership in
North America to MH Logistics Corporation, which already owned three Hyster
dealerships.
As of December 31, 2002, NMHG Retail had eight dealerships and rental
companies in Europe and nine dealerships and rental companies in Asia-Pacific.
COMPANY OPERATIONS
An NMHG Retail dealership is authorized to sell and rent either Hyster or
Yale brand materials handling equipment. These dealerships will typically also
sell allied lines of equipment from other manufacturers pursuant to dealer
agreements. Allied equipment includes such items as sweepers, aerial work
platforms, personnel carts, rough terrain forklifts and other equipment as well
as racking and shelving. The number and type of products available will vary
from dealership to dealership. A source of revenue for dealerships is the sale
of parts and service for equipment sold by the dealership. Service is performed
both in-shop and on-site. In addition to the outright sale of new and used
equipment, dealerships provide equipment for lease and for short- or long-term
rental.
NMHG Retail dealerships are granted a primary geographic territory by NMHG
Wholesale in which they operate. NMHG Retail operations are conducted at branch
facilities located in major cities within NMHG Retail's assigned area of
operations.
COMPETITION
The materials handling equipment sales and rental industry is highly
fragmented and competitive. NMHG Retail's competitors include dealers owned by
original equipment manufacturers, original equipment manufacturer direct sales
efforts, independently owned competitive dealerships and forklift rental
outlets, independent parts operations, independent service shops and, to a
lesser extent, independent Hyster or Yale dealers. The forklift truck industry
also competes with alternative methods of materials handling, including conveyor
systems, automated guided vehicle systems and manual labor.
6
CUSTOMERS
NMHG Retail's customer base is highly diversified and ranges from Fortune
100 companies to small businesses in a substantial number of manufacturing and
service industries. No single customer accounted for more than 10% of NMHG
Retail's revenues during 2002. NMHG Retail's customer base varies widely by
branch and is determined by several factors, including the equipment mix and
marketing focus of the particular branch and the business composition of the
local economy.
FINANCING OF SALES
NMHG Retail dealerships have a preferred relationship with GECC. NMHG
Retail dealerships may obtain wholesale and retail financing for the sale and
leasing of equipment through GECC. This affords these dealerships with a wide
variety of financial products at competitive rates. See also "1. NMHG Wholesale
- - Financing of Sales" above.
RESEARCH AND DEVELOPMENT
NMHG's research and development capability is organized around four major
engineering centers, all coordinated on a global basis from NMHG's Portland,
Oregon headquarters. Comparable products are designed for each brand
concurrently and generally each center is focused on the global requirements for
a single product line. NMHG's counterbalanced development center, which has
global design responsibility for several classes of lift trucks primarily used
in industrial applications, is located in Portland, Oregon. NMHG's big truck
development center is located in Nijmegen, The Netherlands, adjacent to a
dedicated global big truck assembly facility. Big trucks are primarily used in
handling shipping containers and in specialized heavy lifting applications.
Warehouse trucks, which are primarily used in distribution applications, are
designed based on regional differences in stacking and storage practices. As a
result, NMHG designs warehouse equipment for sale in the Americas market in
Greenville, North Carolina adjacent to the Americas assembly facility for
warehouse equipment. NMHG designs warehouse equipment for the European market in
Masate, Italy.
NMHG's engineering centers utilize a three-dimensional CAD/CAM system and
are electronically connected to one another, to all of NMHG's manufacturing and
assembly facilities and to some suppliers. This allows for collaboration in
technical engineering designs and collaboration with suppliers. Additionally,
NMHG solicits customer feedback throughout the design phase to improve product
development efforts. NMHG invested $43.7 million, $44.7 million and $43.9
million on product design and development activities in 2002, 2001 and 2000,
respectively.
SUMITOMO-NACCO JOINT VENTURE
NMHG has a 50% ownership interest in Sumitomo-NACCO Materials Handling
Group ("S-N"), a limited liability company that was formed in 1970 to
manufacture and distribute lift trucks in Japan. Sumitomo Heavy Industries, Inc.
owns the remaining 50% interest in S-N. Each shareholder of S-N is entitled to
appoint directors representing 50% of S-N's board of directors. All matters
related to policies and programs of operation, manufacturing and sales
activities require mutual agreement between NMHG and Sumitomo Heavy Industries,
Inc. prior to a vote of S-N's board of directors. As a result, NMHG accounts for
its ownership in S-N using the equity method of accounting. NMHG purchases
Hyster and Yale branded lift trucks and related components and aftermarket parts
from S-N under normal trade terms for sale outside of Japan.
EMPLOYEES
As of February 28, 2003, NMHG had approximately 7,000 employees,
approximately 5,950 of whom were employed by the wholesale operations and
approximately 1,050 of whom were employed by owned dealers. A majority of the
employees in the Danville, Illinois parts depot operations (approximately 135
employees) are unionized, as are tool room employees (approximately 15
employees) located in Portland, Oregon. NMHG's contracts with the Danville and
Portland unions each expire in 2003. Negotiations with respect to these
contracts have not yet commenced. Employees at the facilities in Berea,
Kentucky; Sulligent, Alabama; and Greenville and Lenoir, North Carolina are not
represented by unions.
In Europe, some employees in the Craigavon, Northern Ireland and Irvine,
Scotland facilities are unionized. Employees in the Nijmegen, The Netherlands
facility are not represented by unions. The employees in Nijmegen have organized
a works council, as required by Dutch law, which performs a consultative role on
employment matters. In Mexico, shop employees are unionized. All of the European
employees are part of European Works Council that performs a consultative role
on business and employment matters.
NMHG believes its current labor relations with both union and non-union
employees are generally satisfactory. However, there can be no assurances that
NMHG will be able to successfully renegotiate its union contracts without work
stoppages or on acceptable terms.
7
ENVIRONMENTAL MATTERS
NMHG's manufacturing operations are subject to laws and regulations
relating to the protection of the environment, including those governing the
management and disposal of hazardous substances. NMHG Retail's operations are
particularly affected by laws and regulations relating to the disposal of
cleaning solvents and wastewater and the use of and disposal of petroleum
products from underground and above-ground storage tanks. NMHG's policies stress
compliance and NMHG believes it is currently in substantial compliance with
existing environmental laws. If NMHG fails to comply with these laws or its
environmental permits, then it could incur substantial costs, including cleanup
costs, fines and civil or criminal sanctions. In addition, future changes to
environmental laws could require NMHG to incur significant additional expense or
restrict operations. Based on current information, management does not expect
compliance with environmental requirements to have a material adverse effect on
NMHG's financial condition or results of operations.
In addition, NMHG's products may be subject to laws and regulations
relating to the protection of the environment, including those governing vehicle
exhaust. Regulatory agencies in the United States and Europe have issued or
proposed various regulations and directives designed to reduce emissions from
spark ignited engines and diesel engines used in off-road vehicles, such as
industrial lift trucks. These regulations will require NMHG and other lift truck
manufacturers to incur costs to modify designs and manufacturing processes, and
to perform additional testing and reporting. While there can be no assurance,
NMHG believes that the impact of expenditures to comply with these requirements
will not have a material adverse effect on its business.
NMHG is investigating or remediating historical contamination caused by
its operations or those of businesses it acquired at some current and former
sites. NMHG has also been named as a potentially responsible party for cleanup
costs under the so-called Superfund law at several third-party sites where NMHG
(or its predecessors) disposed of wastes in the past. Under Superfund and often
under similar state laws, the entire cost of cleanup can be imposed on any one
of the statutorily liable parties, without regard to fault. While NMHG is not
currently aware that any material outstanding claims or obligations exist with
regard to these sites, the discovery of additional contamination at these or
other sites could result in significant cleanup costs.
In connection with any acquisition made by NMHG, NMHG could under some
circumstances be held financially liable for or suffer other adverse effects due
to environmental violations or contamination caused by a prior owner of the
business. In addition, under some of the agreements through which NMHG has sold
businesses or assets, NMHG has retained responsibility for certain contingent
environmental liabilities arising from pre-closing operations. These liabilities
may not arise, if at all, until years later.
GOVERNMENT AND TRADE REGULATIONS
Since June 1988, Japanese-built internal combustion engine lift trucks
imported into the United States, with lifting capacities between 2,000 and
15,000 pounds, including finished and unfinished lift trucks, chassis, frames
and frames assembled with one or more component parts, have been subject to an
anti-dumping duty order. Anti-dumping duty rates in effect through 2002 range
from 7.39% to 56.81% depending on manufacturer or importer. The anti-dumping
duty rate applicable to imports from S-N is 51.33%. NMHG does not currently
import for sale in the United States any lift trucks or components subject to
the anti-dumping duty order. This anti-dumping duty order will remain in effect
until the Japanese manufacturers and importers satisfy the U.S. Department of
Commerce that they have not individually sold merchandise subject to the order
in the United States below fair market value for at least three consecutive
years, or unless the Commerce Department or the U.S. International Trade
Commission finds that changed circumstances exist sufficient to warrant the
retirement of the order. All of NMHG's major Japanese competitors have either
built or acquired manufacturing or assembly facilities over the past decade in
the United States and any products manufactured at these facilities are not
subject to the anti-dumping duty order. The legislation implementing the Uruguay
round of GATT negotiations passed in 1994 provided for the anti-dumping order to
be reviewed for possible retirement in 2000. NMHG opposed retirement of the
order and the 2000 review did not result in retirement of the anti-dumping duty.
The anti-dumping order will again be reviewed for possible retirement in 2005.
There are no formal restraints on foreign lift truck manufacturers in the
European Union. Several Japanese manufacturers have established manufacturing or
assembly facilities within the European Union.
C. NACCO HOUSEWARES GROUP
GENERAL
NACCO Housewares Group consists of HB-PS and KCI. HB-PS is a leading
manufacturer, marketer and distributor of small electric motor and heat-driven
household appliances as well as commercial products for restaurants, bars and
hotels. HB-PS' products are marketed primarily to retail merchants and wholesale
distributors. KCI is a national specialty retailer of brand-name kitchenware,
small electrical appliances and related accessories that operated 173 retail
stores as of December 31, 2002. Stores are located primarily in factory outlet
complexes that feature merchandise of highly recognizable name-brand
manufacturers, including HB-PS.
8
SALES AND MARKETING
HB-PS manufactures, markets and distributes a wide range of small electric
household appliances, including motor-driven appliances such as blenders,
mixers, can openers and food processors, and heat-driven appliances such as
coffeemakers, irons, toasters, slow cookers, indoor grills and toaster ovens.
HB-PS also manufactures and markets a line of humidifiers, air purifiers and
odor eliminators. In addition, HB-PS makes commercial products for restaurants,
bars and hotels. HB-PS generally markets its "better" and "best" segments under
the Hamilton Beach(R) brand and uses the Proctor-Silex(R) brand for the "good"
and "better" segments. HB-PS also markets a home odor elimination product under
the TrueAir(TM) brand name. In addition, HB-PS supplies Wal*Mart with GE-branded
kitchen electric and garment-care appliances under Wal*Mart's license agreement
with General Electric Company. HB-PS markets its products primarily in North
America, but also sells products in Latin America, Asia-Pacific and Europe.
Sales are generated predominantly by a network of inside sales employees to mass
merchandisers, national department stores, variety store chains, drug store
chains, specialty home retailers and other retail outlets. Principal customers
during 2002 included Wal*Mart, Kmart, Target, Canadian Tire, Family Dollar,
Sears, Bed, Bath & Beyond, Dollar General, Home Depot and Zellers. Sales to one
of HB-PS' customers exceeded 10 percent of Housewares' revenues in each of the
years 2002, 2001 and 2000. The loss of this customer would be material to
Housewares. Sales promotion activities are primarily focused on cooperative
advertising.
Because of the seasonal nature of the markets for small electric
appliances, HB-PS' management believes that backlog is not a meaningful
indicator of performance and is not a significant indicator of annual sales. As
of December 31, 2002, backlog for HB-PS was approximately $8.7 million. This
compares with the backlog as of December 31, 2001 of approximately $3.2 million.
This backlog represents customer orders, which may be canceled at any time prior
to shipment.
HB-PS' warranty program to the consumer consists generally of a limited
warranty lasting for varying periods of up to three years for electric
appliances. Under its warranty program, HB-PS may repair or replace, at its
option, those products found to contain manufacturing defects.
Revenues and operating profit for Housewares are traditionally greater in
the second half of the year as sales of small electric appliances to retailers
and consumers increase significantly with the fall holiday selling season.
Because of the seasonality of purchases of its products, HB-PS incurs
substantial short-term debt to finance inventories and accounts receivable in
anticipation of the fall holiday selling season.
PRODUCT DESIGN AND DEVELOPMENT
Housewares spent $7.0 million in 2002, $7.3 million in 2001 and $8.0
million in 2000 on product design and development activities. All of these
expenditures were made by HB-PS.
RAW MATERIALS
The principal raw materials used to manufacture and distribute HB-PS'
products are plastic, glass, steel and packaging materials. HB-PS' management
believes that adequate quantities of raw materials are available from various
suppliers.
COMPETITION
The small electric household appliance industry is highly competitive.
Based on publicly available information about the industry, HB-PS' management
believes it is one of the largest full-line manufacturers and marketers of small
electric kitchen appliances in North America based on key product categories.
As retailers generally purchase a limited selection of small electric
appliances, HB-PS competes with other suppliers for retail shelf space and
focuses its primary marketing efforts on retailers rather than consumers. Since
1996, HB-PS has also conducted consumer advertising for the Hamilton Beach
brand. In 2002, this advertising focused on the Hamilton Beach and TrueAir
brands. HB-PS' management believes that the principal areas of competition with
respect to its products are quality, price, product design, product features,
merchandising, promotion and warranty. HB-PS' management believes that it is
competitive in all of these areas.
As the outlet channel of the retail industry is approaching maturity, the
management of KCI continues to explore alternate areas of growth and
diversification. For the past several years, KCI has been testing alternative
store formats both within the outlet industry and the more traditional retail
environments. Because not all of these formats have met KCI's rigorous financial
performance standards, KCI continues to explore alternate channels of
distribution, including distribution through the Internet.
9
GOVERNMENT REGULATION
HB-PS, in common with other manufacturers, is subject to numerous Federal
and state health, safety and environmental regulations. HB-PS' management
believes that the impact of expenditures to comply with such laws will not have
a material adverse effect on HB-PS. HB-PS' products are subject to testing or
regulation by Underwriters' Laboratories, the Canadian Standards Association and
various entities in foreign countries that review product design.
PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
HB-PS holds patents and trademarks registered in the United States and
foreign countries for various products. HB-PS' management believes that its
business is not dependent upon any individual patent, trademark, copyright or
license, but that the Hamilton Beach and Proctor-Silex trademarks are material
to its business.
EMPLOYEES
As of February 28, 2003, Housewares' work force consisted of approximately
3,300 employees, most of whom are not represented by unions. In Canada,
approximately 16 hourly employees at HB-PS' Picton, Ontario distribution
facility are unionized. These employees are represented by an employee
association which performs a consultative role on employment matters. On
February 1, 2003, a collective bargaining agreement, which expires on January
31, 2005, was executed for HB-PS' Saltillo, Mexico manufacturing facility. Under
this agreement, a new wage agreement must be in place by January 31, 2004. As of
February 28, 2003, there were approximately 1,180 employees subject to the terms
of the Saltillo agreement. The management of HB-PS and KCI believe their current
labor relations with both union and non-union employees are satisfactory.
However, there can be no assurances that HB-PS will be able to successfully
renegotiate its union contracts without work stoppages or on acceptable terms. A
prolonged work stoppage at a unionized facility could materially adversely
affect Housewares' business and results of operations.
ITEM 2. PROPERTIES
A. NACCO
NACCO currently leases its corporate headquarters office space in Mayfield
Heights, Ohio.
B. NACOAL
NACoal currently leases its corporate headquarters office space in Dallas,
Texas. NACoal's proven and probable coal reserves and deposits (owned in fee or
held under leases which generally remain in effect until exhaustion of the
reserves if mining is in progress) are estimated at approximately 2.5 billion
tons, all of which are lignite deposits, except for approximately 110 million
tons of bituminous coal. Reserves are estimates of quantities of coal, made by
NACoal's geological and engineering staff, that are considered mineable in the
future using existing operating methods. Developed reserves are those which have
been allocated to mines which are in operation; all other reserves are
classified as undeveloped. Information concerning mine type, reserve data and
coal quality characteristics for NACoal's properties are set forth on the table
on page 3 under "Item 1. Business -- A. North American Coal -- Sales, Marketing
and Operations."
10
C. NMHG
1. NMHG WHOLESALE
The following table presents the principal assembly, manufacturing,
distribution and office facilities that NMHG owns or leases for use in the
wholesale operations:
- ------------------------------------------------------------------------------------------------------------------
OWNED/
REGION FACILITY LOCATION LEASED FUNCTION(S)
- ------------------ ----------------------- ------------- ------------------------------------------------------
AMERICAS Berea, Kentucky Owned Assembly of lift trucks
Danville, Illinois Owned Americas parts distribution center
Greenville, Owned Divisional headquarters and marketing and sales
North Carolina operations for Hyster and Yale in Americas; Americas
warehouse development center; assembly of lift trucks
Lenoir, Owned Manufacture and assembly of component parts for lift
North Carolina trucks
Portland, Oregon Owned Counterbalanced development center for design and
testing of lift trucks, prototype equipment and
component parts
Portland, Oregon Leased Manufacture of production tooling and prototype units
Portland, Oregon Leased Global headquarters
Ramos Arizpe, Mexico Owned Manufacture of component parts for lift trucks
Assembly of lift trucks and marketing operations for
Sao Paolo, Brazil Owned Brazil
Sulligent, Alabama Owned Manufacture of component parts for lift trucks
- ------------------------------------------------------------------------------------------------------------------
EUROPE Craigavon, Owned Manufacture of lift trucks; cylinder and transmission
Northern Ireland assembly; mast fabrication and assembly
for Europe
Fleet, England Leased Hyster and Yale marketing and sales operations in
Europe
Irvine, Scotland Owned Divisional headquarters; assembly of lift trucks
mast manufacturing and assembly
Modena, Italy Leased Assembly of lift trucks
Masate, Italy Leased Assembly of lift trucks; European warehouse
development center
Nijmegen, Big trucks development center; manufacture and
The Netherlands Owned assembly of big trucks and component parts; European
parts distribution center
- ------------------------------------------------------------------------------------------------------------------
ASIA Shanghai, China Owned (1) Assembly of lift trucks by Shanghai Hyster joint
venture
Sydney, Australia Leased Divisional headquarters and sales and marketing for
Asia-Pacific; distribution of aftermarket parts
- ------------------------------------------------------------------------------------------------------------------
(1) This facility is owned by Shanghai Hyster Forklift Ltd., NMHG's Chinese
joint venture company.
S-N's operations are supported by two facilities. S-N's headquarters are
located in Obu, Japan at a facility owned by S-N. The Obu facility also has
assembly and distribution capabilities. In Cavite, the Philippines, S-N owns a
facility for the manufacture of frames for S-N products.
11
2. NMHG RETAIL
NMHG's 17 owned dealerships operate from 51 locations. Of these locations, 23
are in Europe and 28 are in Asia-Pacific, as shown below:
EUROPE ASIA-PACIFIC
------ -------------
France (15) Australia (27)
Germany (3) Singapore (1)
The Netherlands (1)
United Kingdom (4)
Dealership locations generally include facilities for displaying
equipment, storing rental equipment, servicing equipment, aftermarket parts
storage and sales and administrative offices. NMHG owns four of these locations
and leases 47 locations. Some of the leases were entered into or assumed in
connection with acquisitions and many of the lessors under these leases are
former owners of businesses that NMHG acquired.
NMHG Retail geographic headquarters are shared with NMHG Wholesale in
Fleet, England and Sydney, Australia.
D. NACCO HOUSEWARES GROUP
The following table presents the principal manufacturing, distribution and
office facilities owned or leased by HB-PS:
- ------------------------------------------------------------------------------------------------------------------------
FACILITY LOCATION OWNED/ FUNCTION(S)
LEASED
- -------------------------------------- ----------- --------------------------------------------------------------------
El Paso, Texas Leased Distribution center
Glen Allen, Virginia Leased Corporate headquarters
Juarez, Chihuahua, Mexico Leased Manufacturing and assembly of retail products
Memphis, Tennessee Leased Distribution center
Picton, Ontario, Canada Leased Distribution center
Southern Pines, North Carolina Leased Assembly of commercial products; service center for customer
returns; catalog sales center; parts distribution center
Toronto, Ontario, Canada Leased Proctor-Silex Canada sales and administration headquarters
Washington, North Carolina Leased Customer service center
Saltillo, Coahuila, Mexico Owned Manufacture and assembly of retail products
- ------------------------------------------------------------------------------------------------------------------------
Sales offices are also leased in several cities in the United States,
Canada and Mexico.
KCI currently leases its corporate headquarters building, a
warehouse/distribution facility and a retail store in Chillicothe, Ohio. KCI
leases the remainder of its retail stores. A typical store is approximately
3,000 square feet.
12
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to any material
pending legal proceeding other than ordinary routine litigation incidental to
its respective business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The information under this Item is furnished pursuant to Instruction 3 to
Item 401(b) of Regulation S-K.
There exists no arrangement or understanding between any executive officer
and any other person pursuant to which such executive officer was elected. Each
executive officer serves until his successor is elected and qualified.
The tables on the following pages set forth the name, age, current
position and principal occupation and employment during the past five years of
the Company's executive officers.
13
EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE CURRENT POSITION OTHER POSITIONS
- ---- --- ---------------- ---------------
Alfred M. Rankin, Jr. 61 Chairman, President and Chief Executive
Officer of NACCO (since prior to 1998)
Charles A. Bittenbender 53 Vice President, General Counsel and
Secretary of NACCO (since prior to 1998)
Kenneth C. Schilling 43 Vice President and Controller of NACCO
(since prior to 1998)
Vice President - Corporate Development
J.C. Butler, Jr. 42 and Treasurer of NACCO (since prior to
1998)
Lauren E. Miller 48 Vice President - Consulting Services of
NACCO (since prior to 1998)
Constantine E. Tsipis 44 Assistant General Counsel and Assistant From prior to 1998 to May 2000, Assistant
Secretary of NACCO (since May 2000) General Counsel of NACCO.
14
PRINCIPAL OFFICERS OF THE COMPANY'S SUBSIDIARIES
A. NACOAL
NAME AGE CURRENT POSITION OTHER POSITIONS
- ---- --- ---------------- ---------------
Clifford R. Miercort 63 President and Chief Executive Officer
of NACoal (since prior to 1998)
Charles B. Friley 61 Senior Vice President - Finance and From prior to 1998 to August 1999, Vice
Chief Financial Officer of NACoal President and Chief Financial Officer of
(since August 1999) NACoal.
Robert L. Benson 55 Vice President - Eastern and Southern From prior to 1998 to September 2001,
Operations of NACoal (since September Operations Manager, NACoal.
2001); General Manager of Mississippi
Lignite Mining Company (a subsidiary of
NACoal) (since prior to 1998)
Thomas A. Koza 56 Vice President - Law and Administration
and Secretary of NACoal (since prior to
1998)
Clark A. Moseley 51 Vice President - Business Development From prior to 1998 to January 2002, Vice
and Engineering of NACoal (since President - Engineering of NACoal.
January 2002)
Bob D. Carlton 46 Controller of NACoal (since August From prior to 1998 to June 2001, Tax
2002) and Director of Tax of NACoal Manager of NACoal.
(since June 2001)
K. Donald Grischow 55 Treasurer of NACoal (since prior to From prior to 1998 to August 2002,
1998) Controller of NACoal.
15
PRINCIPAL OFFICERS OF THE COMPANY'S SUBSIDIARIES
B. NMHG
NAME AGE CURRENT POSITION OTHER POSITIONS
- ---- --- ---------------- ---------------
Reginald R. Eklund 62 President and Chief Executive Officer
of NMHG (since prior to 1998)
Michael P. Brogan 53 Senior Vice President, Product From May 1999 to June 2000, Vice
Development and Procurement of NMHG President, Warehouse Product Strategy of
(since June 2000) NMHG. From prior to 1998 to May 1999,
Managing Director of NACCO Materials
Handling S.R.L. (Italy) (a subsidiary of
NMHG Wholesale).
Richard H. Close 44 Vice President of NMHG; Managing From March 1999 to July 2001, Managing
Director, NMHG Europe, Africa and Director of Lex Industrial Machinery (a
Middle East (since August 2001) provider of industrial machinery
management solutions). From prior to 1998
to March 1999, Franchise Director of Lex
Retail Group (a provider of vehicle
management solutions).
Gregory J. Dawe 54 Vice President, Manufacturing & Quality From prior to 1998 to January 2002, Vice
Strategy of NMHG (since January 2002) President, Manufacturing, Americas of NMHG.
Daniel P. Gerrone 53 Controller of NMHG (since August 2002) From January 2000 to August 2002,
Director, Accounting of NMHG. From May
1999 to January 2000, Senior Analyst,
Portland General Electric Company (an
electric utility company). From prior to
1998 to May 1999, Director of Financial
Reporting and Budgeting, Pacific Gas
Transmission Company (a natural gas
transmission company).
Ron J. Leptich 59 Vice President, Engineering and Big
Trucks of NMHG (since prior to 1998)
Geoffrey D. Lewis 45 Vice President, Corporate Development, From prior to 1998 to June 1999, Vice
General Counsel and Secretary of NMHG President, General Counsel and Secretary
(since June 1999) of NMHG.
Jeffrey C. Mattern 50 Treasurer of NMHG (since prior to 1998)
Frank G. Muller 61 Executive Vice President and Chief From prior to 1998 to July 2002, Vice
Operating Officer of NMHG (since July President of NMHG; President, Americas of
2002) NMHG.
Victoria L. Rickey 50 Vice President, Chief Strategy Officer From prior to 1998 to July 2001, Vice
of NMHG (since July 2001) President of NMHG; Managing Director, NMHG
Europe, Africa and Middle East.
Michael K. Smith 58 Vice President, Finance & Information From prior to 1998 to July 2002, Vice
Systems and Chief Financial Officer of President, Finance & Information Systems,
NMHG (since July 2002) Americas of NMHG.
Colin Wilson 48 Vice President of NMHG; President, From prior to 1998 to July 2002, Vice
Americas of NMHG (since July 2002) President, Marketing, Americas of NMHG.
16
PRINCIPAL OFFICERS OF THE COMPANY'S SUBSIDIARIES
C. NACCO HOUSEWARES GROUP
1. HB-PS
NAME AGE CURRENT POSITION OTHER POSITIONS
- ---- --- ---------------- ---------------
Michael J. Morecroft 61 President and Chief Executive Officer From prior to 1998 to January 2001, Senior
of HB-PS (since January 2001) Vice President - Engineering/Product
Development of HB-PS.
David S. Baran 41 Vice President - Manufacturing of HB-PS From June 2001 to August 2001, General
(since August 2001) Manager, Juarez Operations of HB-PS. From
January 2000 to June 2001, Director of
Operations, Danaher Corporation (designer,
manufacturer and marketer of industrial and
consumer products). From prior to 1998 to
December 1999, Plant Manager, GE Industrial
Systems (supplier of products and service
solutions for residential, commercial,
industrial, institutional and utility
applications).
Keith B. Burns 46 Vice President - Engineering and New From April 1999 to March 2001, Vice
Product Development of HB-PS (since President, Purchasing of HB-PS. From
March 2001) November 1998 to April 1999, Director of
Product Engineering of HB-PS. From prior to
1998 to October 1998, Manager, Product
Engineering of HB-PS.
Kathleen L. Diller 51 Vice President, General Counsel and From May 1998 to August 2001, Assistant
Secretary of HB-PS (since August 2001) General Counsel and Assistant Secretary,
Cooper Tire & Rubber Company (developer,
manufacturer and marketer of primarily
rubber-based products for the transportation
industry). From prior to 1998 to April
1998, Senior Division Counsel, Owens Corning
(manufacturer of building materials systems
and composites systems).
Charles B. Hoyt 55 Senior Vice President - Finance and
Chief Financial Officer of HB-PS (since
prior to 1998)
Paul C. Smith 56 Senior Vice President - Sales of HB-PS
(since prior to 1998)
James H. Taylor 45 Vice President and Treasurer of HB-PS
(since prior to 1998)
Gregory H. Trepp 41 Vice President - Marketing of HB-PS From August 1999 to July 2002, Vice
(since July 2002) President - Product Management of HB-PS.
From prior to 1998 to July 1999, Director of
Marketing of HB-PS.
2. KCI
NAME AGE CURRENT POSITION OTHER POSITIONS
- ---- --- ---------------- ---------------
Randolph J. Gawelek 55 President and Chief Executive Officer From March 1999 to August 1999, President,
of KCI (since August 1999) Secretary and Treasurer of KCI. From
December 1998 to March 1999, Executive Vice
President, Secretary and Treasurer of KCI.
From prior to 1998 to December 1998,
Executive Vice President and Secretary of
KCI.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
NACCO Industries, Inc. Class A common stock is traded on the New York
Stock Exchange under the ticker symbol NC. Because of transfer restrictions, no
trading market has developed, or is expected to develop, for the Company's Class
B common stock. The Class B common stock is convertible into Class A common
stock on a one-for-one basis. The high and low market prices for the Class A
common stock and dividends per share for both classes of common stock for each
quarter during the past two years are presented in the table below:
2002
--------------------------------------------------------
SALES PRICE
-------------------------------------- CASH
HIGH LOW DIVIDEND
------------------- ----------------- ---------------
FIRST QUARTER $67.50 $52.78 23.50(CENT)
SECOND QUARTER $76.20 $56.95 24.50(CENT)
THIRD QUARTER $60.36 $38.55 24.50(CENT)
FOURTH QUARTER $49.56 $36.39 24.50(CENT)
2001
--------------------------------------------------------
Sales Price
-------------------------------------- Cash
High Low Dividend
------------------- ----------------- ---------------
First quarter $71.00 $42.50 22.50(cent)
Second quarter $79.10 $60.59 23.50(cent)
Third quarter $82.80 $44.25 23.50(cent)
Fourth quarter $65.00 $45.25 23.50(cent)
At December 31, 2002, there were approximately 400 Class A common
stockholders of record and 300 Class B common stockholders of record. See Note
21 to the Consolidated Financial Statements contained in Part IV hereof for a
discussion of the amount of NACCO's investment in subsidiaries that was
restricted at December 31, 2002.
18
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31
-----------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(In millions, except per share and employee data)
OPERATING STATEMENT DATA:
Revenues $ 2,548.1 $ 2,637.9 $ 2,871.3 $ 2,635.9 $ 2,569.3
Goodwill amortization $ -- $ 15.9 $ 15.7 $ 15.2 $ 14.7
Operating profit $ 131.8 $ 5.7 $ 117.9 $ 131.3 $ 198.1
Operating profit excluding goodwill
amortization(1) $ 131.8 $ 21.6 $ 133.6 $ 146.5 $ 212.8
Income (loss) before extraordinary
gain (loss) and cumulative effect
of accounting changes $ 49.6 $ (34.7) $ 37.8 $ 54.3 $ 102.3
Extraordinary gain (loss), net-of-tax(2) (7.2) -- 29.9 -- --
Cumulative effect of accounting
changes, net-of-tax (3) -- (1.3) -- (1.2) --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 42.4 $ (36.0) $ 67.7 $ 53.1 $ 102.3
============ ============ ============ ============ ============
Net income (loss) excluding goodwill
amortization(1) $ 42.4 $ (20.1) $ 83.4 $ 68.3 $ 117.0
============ ============ ============ ============ ============
Basic earnings per share:
Income (loss) before extraordinary
gain (loss) and cumulative effect
of accounting changes $ 6.05 $ (4.24) $ 4.63 $ 6.67 $ 12.56
Extraordinary gain (loss), net-of-tax (.88) -- 3.66 -- --
Cumulative effect of accounting
changes, net-of-tax -- (.16) -- (.15) --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 5.17 $ (4.40) $ 8.29 $ 6.52 $ 12.56
============ ============ ============ ============ ============
Basic earnings per share excluding
goodwill amortization:(1)
Net income (loss) $ 5.17 $ (4.40) $ 8.29 $ 6.52 $ 12.56
Goodwill amortization -- 1.95 1.92 1.86 1.80
------------ ------------ ------------ ------------ ------------
Net income (loss) excluding goodwill
amortization $ 5.17 $ (2.45) $ 10.21 $ 8.38 $ 14.36
============ ============ ============ ============ ============
Diluted earnings per share:
Income (loss) before extraordinary
gain (loss) and cumulative effect
of accounting changes $ 6.05 $ (4.24) $ 4.63 $ 6.66 $ 12.53
Extraordinary gain (loss), net-of-tax (.88) -- 3.66 -- --
Cumulative effect of accounting
changes, net-of-tax -- (.16) -- (.15) --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 5.17 $ (4.40) $ 8.29 $ 6.51 $ 12.53
============ ============ ============ ============ ============
Diluted earnings per share excluding
goodwill amortization:(1)
Net income (loss) $ 5.17 $ (4.40) $ 8.29 $ 6.51 $ 12.53
Goodwill amortization -- 1.95 1.92 1.86 1.80
------------ ------------ ------------ ------------ ------------
Net income (loss) excluding goodwill
amortization $ 5.17 $ (2.45) $ 10.21 $ 8.37 $ 14.33
============ ============ ============ ============ ============
19
ITEM 6. SELECTED FINANCIAL DATA - CONTINUED
Year Ended December 31
------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(In millions, except per share and employee data)
BALANCE SHEET DATA AT DECEMBER 31:
Total assets $ 2,123.9 $ 2,161.9 $ 2,193.9 $ 2,013.0 $ 1,898.3
Long-term debt $ 406.5 $ 248.1 $ 450.0 $ 326.3 $ 256.4
Stockholders' equity $ 559.4 $ 529.3 $ 606.4 $ 562.2 $ 518.3
CASH FLOW DATA:
Provided by operating activities $ 173.9 $ 136.0 $ 133.0 $ 129.1 $ 144.3
Used for investing activities $ (19.6) $ (95.1) $ (234.2) $ (161.4) $ (121.8)
Provided by (used for) financing
activities $ (166.4) $ (1.6) $ 98.3 $ 35.3 $ (12.1)
OTHER DATA:
Per share data:
Cash dividends $ .970 $ .930 $ .890 $ .850 $ .810
Market value at December 31 $ 43.77 $ 56.79 $ 43.69 $ 55.56 $ 92.00
Stockholders' equity at December 31 $ 68.21 $ 64.58 $ 74.21 $ 68.92 $ 63.83
Actual shares outstanding at
December 31 8.201 8.196 8.171 8.157 8.120
Average shares outstanding 8.198 8.190 8.167 8.150 8.147
Total employees at December 31 12,200 13,500 17,200 16,000 14,100
(1) On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
Beginning January 1, 2002, the Company discontinued amortization of its
goodwill in accordance with this Statement.
(2) An extraordinary loss was recognized in 2002 as a result of an increase to
Bellaire Corporation's ("Bellaire") estimated closed mine obligations
relating to amounts owed to the United Mine Workers of America Combined
Benefit Fund ("UMWA") arising as a result of the Coal Industry Retiree
Health Benefit Act of 1992 (the "Coal Act"). An extraordinary gain was
recognized in 2000 as a result of a reduction to Bellaire's estimated
closed mine obligations relating to amounts owed to UMWA arising as a
result of the Coal Act. See also discussion in "NACCO & Other" in
Management's Discussion and Analysis in this Form 10-K.
(3) Cumulative effects of changes in accounting were recognized in 2001 as a
result of the adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and for a change in calculating
pension costs. See discussion in Note 2 to the Consolidated Financial
Statements of this Form 10-K.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Unit, Store and
Percentage Data)
NACCO Industries, Inc. ("NACCO," the parent company) and its wholly owned
subsidiaries (collectively, the "Company") operate in three distinct industries:
lignite mining, lift trucks and housewares. Results of operations and financial
condition are discussed separately by segment, which corresponds with the
industry groupings, except that the Company manages its lift truck operations as
two reportable segments: wholesale manufacturing and retail distribution.
Results by segment are also summarized in Note 19 to the Consolidated Financial
Statements.
The North American Coal Corporation ("NACoal") mines and markets lignite
primarily as fuel for power providers. NMHG Holding Co. ("NMHG Parent"), through
its wholly owned subsidiaries, NACCO Materials Handling Group, Inc. ("NMHG
Wholesale") and NMHG Distribution Co. ("NMHG Retail") (collectively "NMHG")
designs, engineers, manufactures, sells, services and leases a full line of lift
trucks and service parts marketed worldwide under the Hyster(R) and Yale(R)
brand names. NMHG Wholesale includes the manufacture and sale of lift trucks and
related service parts, primarily to independent and wholly owned Hyster and Yale
retail dealerships and rental companies. NMHG Retail includes the sale, leasing
and service of Hyster and Yale lift trucks and related service parts by wholly
owned retail dealerships and rental companies. NACCO Housewares Group
("Housewares") consists of Hamilton BeachoProctor-Silex, Inc. ("HB-PS"), a
leading manufacturer, marketer and distributor of small electric motor and
heat-driven household appliances as well as commercial products for restaurants,
bars and hotels, and The Kitchen Collection, Inc. ("KCI"), a national specialty
retailer of brand-name kitchenware, small electrical appliances and related
accessories.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities (if any). On an ongoing basis,
the Company evaluates its estimates, including those related to product
discounts and returns, bad debts, inventories, income taxes, warranty
obligations, product liabilities, restructuring, closed-mine obligations,
pensions and other post-retirement benefits, and contingencies and litigation.
The Company bases its estimates on historical experience, actuarial valuations
and various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from those estimates.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
PRODUCT LIABILITIES: The Company provides for the estimated cost of
personal and property damage relating to the Company's products. Reserves are
made for estimates of the costs for known claims and estimates of the costs of
incidents that have occurred but for which a claim has not yet been reported to
the Company, in excess of available insurance coverage. While the Company
engages in extensive product quality reviews and customer education programs,
the Company's product liability provision is affected by the number and
magnitude of claims of alleged product-related damage and the cost to defend
those claims. In addition, the provision for product liabilities is also
affected by changes in assumptions for medical costs, inflation rates, trends in
damages awarded by juries and estimates of the number of claims that have been
incurred but not yet reported. Changes to the estimate of any of these factors
could result in a material change to the Company's product liability provision
causing a related increase or decrease in reported net operating results in the
period of change in the estimate.
CLOSED-MINE OBLIGATIONS: The Company's wholly owned subsidiary, Bellaire
Corporation ("Bellaire"), is a non-operating subsidiary with legacy liabilities
relating to closed mining operations, primarily former Eastern U.S. underground
mining operations. These legacy liabilities include obligations for Black Lung
and other retiree medical benefits, environmental clean-up and obligations to
the United Mine Workers of America Combined Benefit Fund arising as a result of
the Coal Industry Retiree Health Benefit Act of 1992. Provisions made by
Bellaire for these liabilities include estimates of the number of beneficiaries
assigned to Bellaire, medical cost trend rates, inflation rates,
actuarially-determined mortality tables, cost of ongoing environmental clean-up,
discount factors and legal costs to defend claims. In addition, these
liabilities can be influenced by judicial proceedings, legislative actions and
changes in regulations made by government agencies. The Company continually
monitors the regulatory climate which could influence these liabilities as well
as the assumptions used to develop accruals for these liabilities. Changes in
any of these factors could materially change the Company's estimates for these
closed-mine obligations causing a related increase or decrease in reported net
operating results in the period of change in the estimate. See Note 3 and Note 4
to the Consolidated Financial Statements for further discussion of closed-mine
obligations.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Unit, Store and
Percentage Data)
GOODWILL: In accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," the Company is
required to test goodwill for impairment at least annually. Changes in
management's judgments and estimates could significantly affect the Company's
analysis of the impairment of goodwill. To test goodwill for impairment, the
Company is required to estimate the fair value of each of its reporting units.
Since quoted market prices in an active market are not available for the
Company's reporting units, the Company uses other valuation techniques. The
Company has developed a model to estimate the fair value of the reporting units,
primarily incorporating a discounted cash flow valuation technique. This model
incorporates the Company's estimates of future cash flows, allocations of
certain assets and cash flows among reporting units, future growth rates and
management's judgment regarding the applicable discount rates to use to discount
those estimated cash flows. Changes to these judgments and estimates could
result in a significantly different estimate of the fair value of the reporting
units which could result in an impairment of goodwill.
REVENUE RECOGNITION: Revenues are generally recognized when title
transfers or risk of loss passes as customer orders are completed and shipped.
Under its mining contracts, the Company recognizes revenue as the coal is
delivered. Reserves for discounts, returns and product warranties are maintained
for anticipated future claims. The accounting policies used to develop these
product discounts, returns and warranties include:
PRODUCT DISCOUNTS: The Company records estimated reductions to revenues
for customer programs and incentive offerings including special pricing
agreements, price competition, promotions and other volume-based
incentives. If market conditions were to decline or if competition was to
increase, the Company may take actions to increase customer incentive
offerings possibly resulting in an incremental reduction of revenues at
the time the incentive is offered.
PRODUCT RETURNS: Products generally are not sold with the right of return.
However, based on the Company's historical experience, a portion of
products sold are estimated to be returned due to reasons such as buyer
remorse, duplicate gifts received, product failure and excess inventory
stocked by the customer which, subject to certain terms and conditions,
the Company will agree to accept. The Company records estimated reductions
to revenues at the time of sale based on this historical experience and
the limited right of return provided to certain customers. If future
trends were to change significantly from those experienced in the past,
incremental reductions to revenues may result based on this new
experience.
PRODUCT WARRANTIES: The Company provides for the estimated cost of product
warranties at the time revenues are recognized. While the Company engages
in extensive product quality programs and processes, including actively
monitoring and evaluating the quality of its component suppliers, the
Company's warranty obligation is affected by product failure rates, labor
costs and replacement component costs incurred in correcting a product
failure. Should actual product failure rates, labor costs or replacement
component costs differ from the Company's estimates, revisions to the
estimated warranty liability would be required which would affect net
income.
ALLOWANCES FOR DOUBTFUL ACCOUNTS: The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. These allowances are based on both recent
trends of certain customers estimated to be a greater credit risk as well as
general trends of the entire customer pool. If the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
INVENTORY RESERVES: The Company writes down its inventory to the lower of
cost or market, which includes an estimate for obsolescence or excess inventory
based upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required. Upon a subsequent sale or
disposal of the impaired inventory, the corresponding reserve for impaired value
is relieved to ensure that the cost basis of the inventory reflects any
write-downs.
DEFERRED TAX VALUATION ALLOWANCES: The Company records a valuation
allowance to reduce its deferred tax assets to the amount that is more likely
than not to be realized. While the Company has considered future taxable income
and ongoing prudent and feasible tax planning strategies in assessing the need
for the valuation allowance, in the event the Company were to determine that it
would be able to realize its deferred tax assets in the future in excess of its
net recorded amount (including the valuation allowance), an adjustment to the
deferred tax asset would increase income in the period such determination was
made. Conversely, should the Company determine that it would not be able to
realize all or part of its net deferred tax asset in the future, an adjustment
to the deferred tax asset would be expensed in the period such determination was
made.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Unit, Store and
Percentage Data)
FINANCIAL SUMMARY
Selected consolidated operating results of the Company were as follows:
2002 2001 2000
-------- -------- --------
CONSOLIDATED OPERATING RESULTS:
Income (loss) before extraordinary gain (loss) and
cumulative effect of accounting changes $ 49.6 $ (34.7) $ 37.8
Extraordinary gain (loss), net-of-tax(1) (7.2) -- 29.9
Cumulative effect of accounting changes, net-of-tax(2) -- (1.3) --
-------- -------- --------
Net income (loss) $ 42.4 $ (36.0) $ 67.7
======== ======== ========
EARNINGS PER SHARE:
Income (loss) before extraordinary gain (loss) and
cumulative effect of accounting changes $ 6.05 $ (4.24) $ 4.63
Extraordinary gain (loss), net-of-tax(1) (.88) -- 3.66
Cumulative effect of accounting changes, net-of-tax(2) -- (.16) --
-------- -------- --------
Net income (loss) $ 5.17 $ (4.40) $ 8.29
======== ======== ========
(1) An extraordinary loss was recognized in 2002 as a result of an increase to
Bellaire's estimated closed mine obligations relating to amounts owed to
the United Mine Workers of America Combined Benefit Fund ("UMWA") arising
as a result of the Coal Industry Retiree Health Benefit Act of 1992 (the
"Coal Act"). An extraordinary gain was recognized in 2000 as a result of a
reduction to Bellaire's estimated closed mine obligations relating to
amounts owed to UMWA arising as a result of the Coal Act. See also
discussion in "NACCO & Other."
(2) Cumulative effects of changes in accounting were recognized in 2001 as a
result of the adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and for a change in calculating
pension costs. See discussion in Note 2 to the Consolidated Financial
Statements.
The following schedule identifies the components of the changes in
consolidated revenues, operating profit (loss) and income (loss) before
extraordinary loss and cumulative effect of accounting changes for 2002
compared with 2001:
Income (loss) before
Operating extraordinary loss and
Profit cumulative effect of
Revenues (Loss) accounting changes
------------ ------------- ----------------------
2001 $ 2,637.9 $ 5.7 $ (34.7)
Increase (decrease) in 2002
NACoal 16.0 (11.8) (6.0)
NMHG Wholesale (47.1) 47.6 34.3
NMHG Retail (36.9) 36.2 26.1
Housewares (21.8) 49.3 30.0
NACCO & Other --- 4.8 (.1)
------------ ------------- ---------------
2002 $ 2,548.1 $ 131.8 $ 49.6
============ ============= ===============
Following is a discussion of operating results by segment, including those
items that materially affect the year-to-year comparison within each of the
segment discussions.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Unit, Store and
Percentage Data)
THE NORTH AMERICAN COAL CORPORATION
NACoal mines and markets lignite primarily as fuel for power providers.
The lignite is surface mined in North Dakota, Texas, Louisiana and Mississippi.
Total coal reserves approximate 2.5 billion tons, with 1.3 billion tons
committed to customers pursuant to long-term contracts. NACoal operates six
wholly owned lignite mines: The Coteau Properties Company ("Coteau"), The
Falkirk Mining Company ("Falkirk"), The Sabine Mining Company ("Sabine"), San
Miguel Lignite Mine ("San Miguel"), Red River Mining Company ("Red River") and
Mississippi Lignite Mining Company ("MLMC"). NACoal also provides dragline
mining services ("Florida dragline operations") for a limerock quarry near
Miami, Florida. The operating results of Coteau, Falkirk and Sabine are included
in "project mining subsidiaries." The operating results of all other operations
are included in "other mining operations."
FINANCIAL REVIEW
NACoal's subsidiaries, Coteau, Falkirk and Sabine, are termed "project
mining subsidiaries" because they mine lignite for utility customers pursuant to
long-term contracts at a price based on actual cost plus an agreed pre-tax
profit per ton. Due to the cost-plus nature of these contracts, revenues and
operating profits are affected by increases and decreases in operating costs, as
well as by tons sold. Net income of 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 three mines, operating results for NACoal are best
analyzed in terms of lignite tons sold, income before taxes and net income.
MLMC was notified by its customer that the customer's power plant had
reached the Commercial Operations Date ("COD"), as defined in the lignite sales
agreement, during the first quarter of 2002. Because of a delay in the COD, MLMC
received liquidated damages payments, as provided in the lignite sales
agreement, beginning on January 1, 2001 and continuing into the first quarter of
2002. In addition, MLMC received a final liquidated damages settlement of $2.5
million in the fourth quarter of 2002. MLMC does not anticipate receiving
additional liquidated damages payments or related settlements from its customer
relating to the delay in COD. Although MLMC had delivered nominal quantities of
lignite in 2001 and during the first quarter of 2002, in the second quarter of
2002 MLMC began delivery of lignite to its customer in quantities that, on an
annual basis, approximate the anticipated annual full production level of 3.6
million tons.
Lignite tons sold by NACoal's operating lignite mines were as follows for
the year ended December 31:
2002 2001 2000
------------ ------------- ------------
Coteau 15.8 15.7 16.2
Falkirk 7.6 7.7 7.7
Sabine 4.0 3.2 3.5
San Miguel 3.3 3.4 3.4
MLMC 2.9 .5 ---
Red River .6 .9 .8
------------ ------------- ------------
Total lignite 34.2 31.4 31.6
============ ============= ============
The Florida dragline operations mined 10.6 million, 8.7 million and 7.9
million cubic yards of limerock for the years ended December 31, 2002, 2001 and
2000, respectively.
Total coal reserves declined to 2.5 billion at December 31, 2002 and 2.6
billion at December 31, 2001 from 2.8 billion at December 31, 2000 primarily due
to the expiration of non-renewable coal leases in undeveloped areas and due to
tons mined.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Unit, Store and
Percentage Data)
Revenues, income before taxes, income tax provision (benefit) and net
income were as follows for the year ended December 31:
2002 2001 2000
--------- --------- ---------
Revenues
Project mining subsidiaries $ 263.1 $ 260.9 $ 250.5
Other mining operations 77.2 47.6 36.8
--------- --------- ---------
340.3 308.5 287.3
Liquidated damages payments recorded by MLMC 5.8 20.5 --
Arbitration award received by San Miguel -- 1.1 --
Royalties and other 3.2 3.2 1.9
--------- --------- ---------
$ 349.3 $ 333.3 $ 289.2
========= ========= =========
Income before taxes
Project mining subsidiaries $ 26.1 $ 25.8 $ 25.5
Other mining operations(1) 14.2 23.9 (1.6)
--------- --------- ---------
Total income from operating mines 40.3 49.7 23.9
Royalty income and other income (expense), net (12.1) (9.3) (4.0)
Other operating expenses (6.4) (5.8) (7.4)
--------- --------- ---------
Income before tax provision (benefit) 21.8 34.6 12.5
Income tax provision (benefit) 2.2 9.0 (.1)
--------- --------- ---------
Net income $ 19.6 $ 25.6 $ 12.6
========= ========= =========
Effective tax rate 10.1% 26.0% (.7)%
(1) Income before taxes for the Other mining operations includes the effect of
liquidated damages and related settlements at MLMC and the San Miguel 2001
arbitration award.
2002 COMPARED WITH 2001
Revenues for 2002 increased to $349.3 million, an increase of 4.8% from
$333.3 million in 2001. Increased revenues in 2002 as compared with 2001 are
primarily due to an increase in tons sold at MLMC due to the commencement of
commercial operations of the customer's power plant in 2002 and increased tons
sold at Sabine, partially offset by (i) a $14.7 million decrease in liquidated
damages payments and related settlements received by MLMC, (ii) a decrease in
pass-through costs billed to the project mining subsidiaries' customers and
(iii) a decrease in tons sold at Red River. As provided in the lignite sales
agreement with its customer, MLMC received liquidated damages payments and
related settlements during 2001 and 2002 due to a delay in the COD of its
customer's power plant. MLMC was notified by its customer that the customer's
power plant had reached the COD during the first quarter of 2002. As such, MLMC
does not anticipate further liquidated damages payments or related settlements
in 2003 or beyond.
Income before taxes decreased to $21.8 million in 2002 from $34.6 million
in 2001. This decrease is primarily due to (i) increased operating costs at MLMC
primarily due to the significant increase in production and delivery of lignite
to the customer during 2002 as compared with lower operating costs recognized
when receiving liquidated damages payments during 2001, (ii) lower tons sold at
Red River and (iii) a $3.0 million charge for the write-off of an investment in
undeveloped reserves that are no longer expected to be developed. These
decreases were partially offset by a $1.4 million gain on the sale of
undeveloped Eastern coal reserves in 2002 that were not aligned with NACoal's
development strategies.
Net income in 2002 decreased to $19.6 million from $25.6 million in 2001
as a result of the factors affecting income before taxes, partially offset by a
decrease in the effective tax rate. The decrease in the effective tax rate for
2002 as compared with 2001 is primarily due to an adjustment of $2.0 million in
2002 for the favorable resolution of certain tax issues that were provided for
in prior years and for other tax matters and due to a greater proportion of
income from operations in 2002 eligible to record a benefit from percentage
depletion.
2001 COMPARED WITH 2000
Revenues for 2001 increased to $333.3 million, up 15.2% from $289.2
million in 2000. Revenues increased in 2001 as compared with 2000 primarily due
to (i) $20.5 million of contractual liquidated damages payments recorded by MLMC
due to a delay of the commercial operation of the customer's power plant, (ii)
increased revenues from project mines, (iii) initial lignite sales at MLMC and
(iv) a slight increase in tons sold at Red River. Net tonnage volume decreased
at the project mining subsidiaries due to a customer's plant outage at Falkirk
and reduced customer requirements at Coteau and Sabine. Although tonnage volume
decreased, revenues from the project mining subsidiaries increased primarily as
a result of an increase in pass-through costs at Sabine.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions, Except Per Share, Unit, Store and
Percentage Data)
Income before taxes increased to $34.6 million in 2001 from $12.5 million
in 2000. This increase was primarily due to (i) the contractual liquidated
damages payments recorded by MLMC, (ii) initial lignite sales at MLMC and (iii)
increased tonnage volume at Red River. These increases were partially offset by
higher interest expense. Net income in 2001 increased to $25.6 million from
$12.6 million in 2000 as a result of these factors, partially offset by an
increase in the 2001 effective tax rate as compared with 2000. The effective tax
rate increase in 2001 as compared with 2000 was primarily due to a greater
proportion of income from operations that, at the time, were not eligible to
record a permanent tax benefit from percentage depletion. The effective tax rate
in 2000 reflects an income tax benefit on pre-tax income primarily due to both
the increased effect of percentage depletion and a nonrecurring adjustment for
the resolution of certain tax issues provided for in prior years.
LIQUIDITY AND CAPITAL RESOURCES
NACoal's non-project mine financing needs are provided by a revolving line
of credit of up to $60.0 million and a term loan with a principal balance of
$85.0 million at December 31, 2002 (the "NACoal Facility"). The NACoal Facility
requires annual term loan principal repayments of $15.0 million, with a final
term loan principal repayment of $55.0 million in October 2005. The revolving
credit facility of $60.0 million is available until the facility's expiration in
October 2005. The NACoal Facility has performance-based pricing, which sets
interest rates based upon achieving various levels of Debt to EBITDA ratios, as
defined. The NACoal Facility establishes financial targets which must be
satisfied before NACoal can make certain payments and dividends to NACCO or make
significant investments. See further discussion of the terms of the NACoal
Facility in Note 10 to the Consolidated Financial Statements. NACoal had $53.1
million of its $60.0 million revolving credit facility available at December 31,
2002.
Following is a table which summarizes the contractual obligations of
NACoal, excluding the obligations of the project mining subsidiaries. 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 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. As such, these contractual obligations,
which are discussed in further detail in Note 12 to the Consolidated Financial
Statements, have been excluded from the table below.
PAYMENTS DUE BY PERIOD
NACOAL, EXCLUDING PROJECT MINES, --------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2003 2004 2005 2006 2007 THEREAFTER
- -------------------------------------- ------ ------ ------ ------ ------ ------ ----------
NACoal Facility $ 92.0 $ 16.9 $ 15.1 $ 60.0 $ -- $ -- $ --
Off-balance-sheet operating leases 86.2 13.1 12.0 12.0 11.5 11.5 26.1
------ ------ ------ ------ ------ ------ ------
Total contractual cash obligations $178.2 $ 30.0 $ 27.1 $ 72.0 $ 11.5 $ 11.5 $ 26.1
====== ====== ====== ====== ====== ====== ======
An event of default, as defined in the NACoal Facility agreement and in
NACoal's operating lease agreements, could cause an acceleration of the payment
schedule. No such event of default has occurred or is anticipated to occur.
NACoal believes that funds available under its revolving credit agreement,
operating cash flows and financing provided by the project mining subsidiaries'
customers are sufficient to finance all of its term loan principal repayments
and its operating needs and commitments arising during the foreseeable future.
Following is a table which summarizes actual and planned capital
expenditures:
PLANNED ACTUAL ACTUAL
CAPITAL EXPENDITURES 2003 2002 2001
- --------------------------------------------- -------- -------- --------
NACoal, excluding project mining subsidiaries $ 9.5 $ 7.8 $ 18.9
Project mining subsidiaries 27.1 25.4 18.3
-------- -------- --------
Total NACoal $ 36.6 $ 33.2 $ 37.2
======== ======== ========
Capital expenditures for NACoal, excluding the project mining
subsidiaries, decreased in 2002 as compared with 2001 primarily due to reduced
mine development activities at MLMC in 2002. Capital expenditures at the project
mining subsidiaries, which are funded by the project mining subsidiaries'
customers, increased in 2002 as compared with 2001 primarily due to the
acquisition of new mining equipment.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NACCO INDUST