SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to ________
Commission file number 1-9172
NACCO Industries, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 34-1505819
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5875 LANDERBROOK DRIVE, MAYFIELD HEIGHTS, OHIO 44124-4017
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(Address of principal executive offices) (Zip code)
(440) 449-9600
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ____
Number of shares of Class A Common Stock outstanding at October 31, 2002:
6,575,078
Number of shares of Class B Common Stock outstanding at October 31, 2002:
1,623,951
NACCO INDUSTRIES, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2002 (Unaudited) and December 31, 2001
Unaudited Condensed Consolidated Statements of
Operations for the Three Months and Nine Months Ended
September 30, 2002 and 2001
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2002 and 2001
Unaudited Condensed Consolidated Statements of Changes
in Stockholders' Equity for the Nine Months Ended
September 30, 2002 and 2001
Notes to Unaudited Condensed Consolidated Financial
Statements
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Item 4 Controls and Procedures
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
Certifications
PART I
FINANCIAL INFORMATION
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Unaudited) (Audited)
SEPTEMBER 30 DECEMBER 31
2002 2001
---------- ----------
(In millions, except share data)
ASSETS
Current Assets
Cash and cash equivalents $ 34.2 $ 71.9
Accounts receivable, net 290.3 264.5
Inventories 394.3 360.6
Deferred income taxes 31.7 40.2
Prepaid expenses and other 33.5 32.8
---------- ----------
784.0 770.0
Property, Plant and Equipment, Net 682.5 732.0
Goodwill, Net 426.9 427.9
Coal Supply Agreements and Other Intangibles, Net 85.7 85.2
Other Non-current Assets 158.0 146.8
---------- ----------
Total Assets $ 2,137.1 $ 2,161.9
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 261.6 $ 235.3
Revolving credit agreements 53.5 59.7
Revolving credit agreement expected to be refinanced within 12 months 87.3 265.0
Current maturities of long-term debt 32.3 41.9
Current obligations of project mining subsidiaries 33.4 37.9
Other current liabilities 230.8 234.5
---------- ----------
698.9 874.3
Long-term Debt- not guaranteed by the parent company 368.9 248.1
Obligations of Project Mining Subsidiaries - not guaranteed by
the parent company or its North American Coal subsidiary 274.5 271.3
Self-insurance Reserves and Other 244.6 235.5
Minority Interest 2.5 3.4
Stockholders' Equity
Common stock:
Class A, par value $1 per share, 6,572,712 shares outstanding
(2001 - 6,559,925 shares outstanding) 6.6 6.5
Class B, par value $1 per share, convertible
into Class A on a one-for-one basis, 1,626,317 shares
outstanding (2001 - 1,635,720 shares outstanding) 1.6 1.6
Capital in excess of par value 4.8 4.7
Retained earnings 582.5 571.3
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment (19.0) (28.2)
Reclassification of hedging activities into earnings 7.5 .9
Cumulative effect of change in accounting for derivatives and hedging --- (3.4)
Deferred loss on cash flow hedging (21.5) (9.3)
Minimum pension liability adjustment (14.8) (14.8)
---------- ----------
547.7 529.3
---------- ----------
Total Liabilities and Stockholders' Equity $ 2,137.1 $ 2,161.9
========== ==========
See notes to unaudited condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ------------ ------------
(In millions, except per share data)
Net sales $ 623.3 $ 591.9 $ 1,802.3 $ 1,963.9
Other revenues .8 5.6 7.9 18.8
---------- ---------- ------------ ------------
Revenues 624.1 597.5 1,810.2 1,982.7
Cost of sales 502.2 510.3 1,474.1 1,648.9
---------- ---------- ------------ ------------
Gross Profit 121.9 87.2 336.1 333.8
Selling, general and administrative expenses 86.6 92.4 256.4 279.8
Amortization of goodwill --- 4.0 --- 12.0
Restructuring charges --- 8.3 --- 8.3
---------- ---------- ------------ ------------
Operating Profit (Loss) 35.3 (17.5) 79.7 33.7
Other income (expenses)
Interest expense (19.6) (15.2) (51.3) (41.4)
Insurance recovery --- .3 --- 8.0
Losses on interest rate swap agreements (2.1) (1.1) (4.9) (1.6)
Income (loss) from unconsolidated affiliates (2.2) .8 (1.1) 2.7
Other - net (1.2) (3.2) (2.5) (5.0)
---------- ---------- ------------ ------------
(25.1) (18.4) (59.8) (37.3)
---------- ---------- ------------ ------------
Income (Loss) Before Income Taxes, Minority Interest
and Cumulative Effect of Accounting Changes 10.2 (35.9) 19.9 (3.6)
Income tax provision (benefit) 2.6 (8.2) 3.7 4.0
---------- ---------- ------------ ------------
Income (Loss) Before Minority Interest and
Cumulative Effect of Accounting Changes 7.6 (27.7) 16.2 (7.6)
Minority interest income .4 .2 .9 .6
---------- ---------- ------------ ------------
Income (Loss) Before Cumulative Effect of
Accounting Changes 8.0 (27.5) 17.1 (7.0)
Cumulative effect of accounting changes (net of $0.8
tax benefit) --- --- --- (1.3)
---------- ---------- ------------ ------------
Net Income (Loss) $ 8.0 $ (27.5) $ 17.1 $ (8.3)
========== ========== ============ ============
Comprehensive Income (Loss) $ 1.9 $ (27.1) $ 24.1 $ (31.2)
========== ========== ============ ============
Earnings per Share:
Income (Loss) Before Cumulative Effect of Accounting
Changes $ 0.98 $ (3.36) $ 2.09 $ (0.85)
Cumulative effect of accounting changes (net-of-tax) --- --- --- (0.16)
---------- ---------- ------------ ------------
Net Income (Loss) $ 0.98 $ (3.36) $ 2.09 $ (1.01)
========== ========== ============ ============
Dividends per share $ .245 $ .235 $ .725 $ .695
========== ========== ============ ============
Weighted average shares outstanding 8.198 8.194 8.197 8.189
========== ========== ============ ============
See notes to unaudited condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
2002 2001
-------- --------
(In millions)
Operating Activities
Net income (loss) $ 17.1 $ (8.3)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, depletion and amortization 70.2 87.5
Deferred income taxes 10.8 (1.9)
Minority interest (.9) (.6)
Cumulative effect of accounting changes (net-of-tax) --- 1.3
Restructuring charges --- 8.3
Other non-cash items 5.6 2.6
Working capital changes
Accounts receivable (1.7) 50.4
Inventories (37.1) (43.5)
Other current assets (1.7) (.2)
Accounts payable and other liabilities 12.3 (56.6)
-------- --------
Net cash provided by operating activities 74.6 39.0
Investing Activities
Expenditures for property, plant and equipment (45.0) (79.1)
Proceeds from the sale of assets 27.6 9.1
Acquisitions of businesses, net of cash acquire d --- (3.6)
Investments in unconsolidated affiliates --- (.3)
Proceeds from unconsolidated affiliates .7 ---
Other - net (1.1) (4.0)
-------- --------
Net cash used for investing activities (17.8) (77.9)
Financing Activities
Additions to long-term debt and revolving credit agreements 296.6 116.9
Reductions of long-term debt and revolving credit agreements (345.5) (43.6)
Additions to obligations of project mining subsidiaries 42.9 61.8
Reductions of obligations of project mining subsidiaries (68.3) (86.1)
Cash dividends paid (5.9) (5.7)
Deferred financing costs (16.5) (.5)
Other - net --- .5
-------- --------
Net cash provided by (used for) financing activities (96.7) 43.3
Effect of exchange rate changes on cash 2.2 (.2)
-------- --------
Cash and Cash Equivalents
Increase (decrease) for the period (37.7) 4.2
Balance at the beginning of the period 71.9 33.7
-------- --------
Balance at the end of the period $ 34.2 $ 37.9
======== ========
See notes to unaudited condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NINE MONTHS ENDED
SEPTEMBER 30
-----------------
2002 2001
-------- --------
(In millions, except per
share data)
Class A Common Stock
Beginning balance $ 6.5 $ 6.5
Shares issued under stock option and compensation plans .1 .1
-------- --------
6.6 6.6
-------- --------
Class B Common Stock 1.6 1.6
-------- --------
Capital in Excess of Par Value
Beginning balance 4.7 3.6
Shares issued under stock option and compensation plans .1 1.0
-------- --------
4.8 4.6
-------- --------
Retained Earnings
Beginning balance 571.3 614.9
Net income (loss) 17.1 (8.3)
Cash dividends on Class A and Class B common stock:
2002 $0.725 per share (5.9) ---
2001 $0.695 per share --- (5.7)
-------- --------
582.5 600.9
-------- --------
Accumulated Other Comprehensive Income (Loss)
Beginning balance (54.8) (20.2)
Foreign currency translation adjustment 9.2 (8.5)
Cumulative effect of change in accounting for derivatives and hedging 3.4 (3.4)
Reclassification from Cumulative effect of change in accounting for derivatives
and hedging to Deferred loss on cash flow hedging (3.4) ---
Reclassification of hedging activity into earnings 6.6 .6
Current period cash flow hedging activity (8.8) (11.6)
-------- --------
(47.8) (43.1)
-------- --------
Total Stockholders' Equity $ 547.7 $ 570.6
======== ========
See notes to unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
SEPTEMBER 30, 2002
(Tabular Amounts in Millions)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of NACCO Industries, Inc. ("NACCO," the parent company) and its
wholly owned subsidiaries ("NACCO Industries, Inc. and Subsidiaries," or the
"Company"). Intercompany accounts and transactions have been eliminated. NACCO
is a holding company with subsidiaries that operate in three principal
industries: lift trucks, housewares and lignite mining. The Company manages its
subsidiaries by industry; however, the Company segments its lift truck
operations into two components: wholesale manufacturing and retail distribution.
NMHG Holding Co. ("NMHG Parent"), through its wholly owned subsidiaries, NACCO
Materials Handling Group, Inc. ("NMHG Wholesale") and NMHG Distribution Co.
("NMHG Retail") (collectively "NMHG") designs, engineers, manufactures, sells,
services and leases a full line of lift trucks and service parts marketed
worldwide under the Hyster(R) and Yale(R) brand names. NMHG Wholesale includes
the manufacture and sale of lift trucks and related service parts, primarily to
independent and wholly owned Hyster and Yale retail dealerships. NMHG Retail
includes the sale, service and rental of Hyster and Yale lift trucks and related
service parts by wholly owned retail dealerships. NACCO Housewares Group
("Housewares") consists of Hamilton BeachoProctor-Silex, Inc. ("HBoPS"), a
leading manufacturer and marketer of small electric motor and heat-driven
appliances as well as commercial products for restaurants, bars and hotels, and
The Kitchen Collection, Inc. ("KCI"), a national specialty retailer of
brand-name kitchenware, small electrical appliances and related accessories. The
North American Coal Corporation ("NACoal") mines and markets lignite primarily
as fuel for power providers.
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position of the
Company as of September 30, 2002 and the results of its operations for the three
and nine month periods ended September 30, 2002 and 2001 and the results of its
cash flows and changes in stockholders' equity for the nine month periods ended
September 30, 2002 and 2001 have been included.
Operating results for the three and nine month periods ended September 30, 2002
are not necessarily indicative of the results that may be expected for the
remainder of the year ending December 31, 2002. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
Note 2 - Inventories
Inventories are summarized as follows:
(UNAUDITED) (AUDITED)
SEPTEMBER 30 DECEMBER 31
2002 2001
-------- --------
Manufactured inventories:
Finished goods and service parts -
NMHG $ 101.5 $ 99.6
Housewares 90.7 54.0
-------- --------
192.2 153.6
Raw materials and work in process -
NMHG Wholesale 110.3 111.4
Housewares 9.4 10.5
-------- --------
119.7 121.9
-------- --------
Total manufactured inventories 311.9 275.5
Retail inventories:
NMHG Retail 29.1 35.8
Housewares 23.7 17.6
-------- --------
Total retail inventories 52.8 53.4
Total inventories at FIFO 364.7 328.9
Coal - NACoal 16.7 17.5
Mining supplies - NACoal 21.3 23.8
-------- --------
Total inventories at weighted average 38.0 41.3
LIFO reserve -
NMHG (10.9) (12.3)
Housewares 2.5 2.7
-------- --------
(8.4) (9.6)
-------- --------
$ 394.3 $ 360.6
======== ========
The cost of certain manufactured and retail inventories has been determined
using the LIFO method. At September 30, 2002 and December 31, 2001, 60 percent
of total inventories were determined using the LIFO method. An actual valuation
of inventory under the LIFO method can be made only at the end of the year based
on the inventory levels and costs at that time. Accordingly, interim LIFO
calculations must necessarily be based on management's estimates of expected
year-end inventory levels and costs. Because these estimates are subject to
change and may be different than the actual inventory levels and costs at
year-end, interim results are subject to the final year-end LIFO inventory
valuation.
Note 3 - Restructuring Charge
The changes to the Company's restructuring accruals since December 31, 2001 are
as follows:
Curtailment
Losses -
Pension and
Other
Asset Lease Post-Employment
Severance Impairment Impairment Benefits Other Total
--------- ---------- ---------- -------- ----- -----
NMHG Wholesale
Balance at December 31, 2001 $ 5.3 $ --- $ --- $ 7.5 $ --- $ 12.8
Foreign currency effect .3 --- --- --- --- .3
Payments (3.3) --- --- --- --- (3.3)
------- -------- -------- -------- ------ ------
Balance at September 30, 2002 $ 2.3 $ --- $ --- $ 7.5 $ --- $ 9.8
======= ======== ======== ======== ====== ======
NMHG Retail
Balance at December 31, 2001 $ 3.9 $ --- $ .4 $ --- $ --- $ 4.3
Foreign currency effect .2 --- --- --- --- .2
Payments (1.5) --- (.2) --- --- (1.7)
------- -------- -------- -------- ------ ------
Balance at September 30, 2002 $ 2.6 $ --- $ .2 $ --- $ --- $ 2.8
======= ======== ======== ======== ====== ======
Housewares
Balance at December 31, 2001 $ 3.4 $ 5.0 $ 3.3 $ --- $ .7 $ 12.4
Payments/assets disposed (2.9) (4.4) (1.6) --- (.1) (9.0)
------- -------- -------- -------- ------ ------
Balance at September 30, 2002 $ .5 $ .6 $ 1.7 $ --- $ .6 $ 3.4
======= ======== ======== ======== ====== ======
NMHG Wholesale: The reserve balance at NMHG Wholesale consists of two
restructuring programs: the 2001 closure of the Danville, Illinois facility and
the restructuring of the European wholesale operations initiated in 2001. The
Danville program, which was approved and accrued in December 2000, was
essentially completed in 2001. In the first nine months of 2002, final severance
payments of $2.1 million were made to 217 employees. The reserve balance for
curtailment losses relating to pension and other post-employment benefits
relates entirely to the closure of the Danville facility and will not be paid
until employees reach retirement age. In the first nine months of 2002, NMHG
Wholesale recognized a charge of approximately $1.9 million, which had not
previously been accrued and is not included in the table above, related
primarily to the costs of the idle Danville facility. Cost savings primarily
from reduced employee wages and benefits of approximately $9.0 million pre-tax
were realized in the first nine months of 2002 related to this program. Cost
savings primarily from reduced employee wages and benefits are estimated to be
$2.9 million pre-tax, net of idle facility costs, for the remainder of 2002,
$11.4 million pre-tax, net of idle facility costs, in 2003 and $13.4 million
pre-tax annually thereafter, as a result of anticipated improved manufacturing
efficiencies and reduced fixed factory overhead. Although a significant portion
of the projected savings is the result of a reduction in fixed factory costs,
the overall benefit estimates could vary depending on unit volumes and the
resulting impact on manufacturing efficiencies.
In 2001, NMHG Wholesale recognized a restructuring charge of approximately $4.5
million pre-tax for severance and other employee benefits to be paid to 285
direct and indirect factory labor and administrative personnel in Europe. Of
this amount, $3.2 million remained unpaid as of December 31, 2001. Payments of
$1.2 million were made in the first nine months of 2002 to 58 employees. The
majority of the headcount reductions were made by the end of the first nine
months of 2002. Pursuant to local country requirements, the remaining headcount
reductions will be initiated in the fourth quarter of 2002, with the initiation
of severance payments thereafter. Cost savings primarily from reduced employee
wages and benefits of approximately $4.4 million pre-tax were realized in the
first nine months of 2002 related to this program. Cost savings primarily from
reduced employee wages and benefits for the remainder of 2002 are estimated to
be $2.2 million pre-tax and $8.4 million pre-tax annually thereafter. Although a
majority of the projected savings is the result of a reduction in fixed factory
costs, the overall benefit estimates could vary depending on unit volumes and
the resulting impact on manufacturing efficiencies.
NMHG Retail: NMHG Retail recognized a restructuring charge of approximately $4.7
million pre-tax in 2001, of which $0.4 million relates to lease termination
costs and $4.3 million relates to severance and other employee benefits to be
paid to 138 service technicians, salesmen and administrative personnel at wholly
owned dealers in Europe. During 2001, severance payments of $0.4 million were
made to approximately 40 employees. In the first nine months of 2002, severance
payments of $1.5 million were made to 87 employees. A majority of the headcount
reductions were made by the end of the first half of 2002. Cost savings
primarily from reduced employee wages, employee benefits and lease costs of
approximately $1.9 million pre-tax were realized in the first nine months of
2002 related to this program and are estimated to be $0.9 million pre-tax for
the remainder of 2002. Cost savings primarily from reduced employee wages,
employee benefits and lease costs are estimated to be $2.9 million pre-tax
annually beginning in 2003. Estimated benefits could be reduced by additional
severance payments, if any, made to employees above the statutory or
contractually required amount that was accrued in 2001.
Housewares: In 2001, HB/PS recognized a charge of $0.8 million classified as
restructuring related to severance benefits to be paid to personnel located at
the company's headquarters. Severance benefits of $0.3 million were paid to
headquarters' personnel in 2001, which reduced the required accrual to $0.5
million at December 31, 2001. Final severance benefits of $0.5 million relating
to the headquarters restructuring plan were paid in the first half of 2002. Cost
savings from reduced employee wages and benefits related to this plan were
approximately $2.0 million pre-tax in the first nine months of 2002 and are
estimated to be $0.7 million pre-tax for the remainder of 2002.
Also in 2001, HB/PS recognized a charge of $11.9 million classified as
restructuring related to management's plan to restructure HB/PS' manufacturing
activities in Mexico. Of the $11.9 million accrued, $2.9 million related to
severance benefits. HB/PS began consolidation and outsourcing of certain of its
Mexican manufacturing activities related to this restructuring program and made
severance payments of $2.4 million to approximately 800 manufacturing personnel
at HB/PS' facilities in Mexico during the first nine months of 2002. This
reduced the ending severance reserve balance relating to manufacturing personnel
to $0.5 million at September 30, 2002. The remaining severance payments to
employees are expected to be made by December 31, 2002. Lease payments on idle
facilities and disposition of impaired assets are expected to be completed in
2003. In addition, manufacturing inefficiencies of approximately $1.2 million
and severance payments of approximately $0.5 million that had not previously
been accrued and are not included in the table above were expensed in the first
nine months of 2002. Cost savings primarily from reduced employee wages,
employee benefits and lease costs related to this plan were approximately $5.5
million pre-tax in the first nine months of 2002 and are estimated to be $2.9
million pre-tax for the remainder of 2002. Although a significant portion of the
projected savings is the result of a reduction in fixed factory costs, the
overall benefit estimates could vary depending on unit volumes and the resulting
savings from the outsourcing of certain products.
Note 4 - Accounting for Goodwill
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." This
Statement establishes accounting and reporting standards for goodwill and other
intangible assets and supersedes APB Opinion No. 17, "Intangible Assets."
Goodwill and other intangibles that have indefinite lives will no longer be
amortized, but will be subject to annual impairment tests. All other intangible
assets will continue to be amortized over their estimated useful lives, which
are no longer limited to 40 years. Effective January 1, 2002, the Company
discontinued amortization of its goodwill in accordance with this Statement. The
amortization periods of the Company's other intangible assets were not revised
as a result of the adoption of this Statement. Adjusted net income (loss) and
earnings (loss) per share, assuming the adoption of this Statement in the prior
year, is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
2002 2001 2002 2001
------- --------- -------- --------
(In millions)
Reported net income (loss) $ 8.0 $ (27.5) $ 17.1 $ (8.3)
Add back: goodwill amortization --- 4.0 --- 12.0
------- --------- -------- --------
Adjusted net income (loss) $ 8.0 $ (23.5) $ 17.1 $ 3.7
======= ======== ======== ========
(In dollars)
Reported earnings (loss) per share $ .98 $ (3.36) $ 2.09 $ (1.01)
Add back: goodwill amortization --- .49 --- 1.47
-------- --------- --------- ---------
Adjusted earnings (loss) per share $ .98 $ (2.87) $ 2.09 $ .46
======== ========= ========= ========
In addition, this Statement requires goodwill to be tested for impairment at the
beginning of the fiscal year of adoption, January 1, 2002 for the Company, and,
thereafter, at least annually at a level of reporting defined in the Statement
as a "reporting unit," using a two-step process. The first step requires
comparison of the reporting unit's fair market value to its carrying value. If
the fair market value of the reporting unit exceeds its carrying value, no
further analysis is necessary and goodwill is not impaired. If the carrying
value of the reporting unit exceeds its fair market value, then the second step,
as defined in the Statement, must be completed. The second step, if necessary,
requires the determination of the fair market value of each existing asset and
liability of the applicable reporting unit to enable the derivation of the
"implied" fair market value of goodwill. If the implied fair market value of
goodwill is less than the carrying value of goodwill, then an impairment loss
must be recognized.
During the second quarter of 2002, the Company completed its impairment testing
of goodwill as described above. For each of the Company's reporting units, the
fair market value of the reporting unit exceeded the reporting unit's carrying
value; therefore, there is no goodwill impairment as of the testing date,
January 1, 2002.
The process to test goodwill for impairment included an allocation of goodwill
among the Company's reporting units. As a result of this allocation process,
goodwill that was previously reported in the Company's reportable segment, NMHG
Retail, was reallocated to NMHG Wholesale. This reallocation was primarily based
on an analysis of the synergy benefits that arose as a result of the
acquisitions of the retail dealerships. As a result, goodwill of approximately
$40.3 million that was previously reported in NMHG Retail is now reported in
NMHG Wholesale.
Following is a summary of the changes in goodwill during the first nine months
of 2002:
Carrying Amount of Goodwill
---------------------------
NMHG NMHG NACCO
Wholesale Retail Housewares Consolidated
--------- ------ ---------- ------------
Balance at December 31, 2001 $ 304.6 $ 39.6 $ 83.7 $ 427.9
Reclassification to other intangibles --- (1.8) --- (1.8)
Reallocation among segments 40.3 (40.3) --- ---
Impairment of investment (1.6) --- --- (1.6)
Foreign currency translation (.1) 2.5 --- 2.4
--------- ------- -------- ---------
Balance at September 30, 2002 $ 343.2 $ --- $ 83.7 $ 426.9
========= ======= ======== =========
During 2002, $1.8 million that was previously preliminarily classified as
goodwill relating to an acquisition of a retail dealership in 2001 was
reclassified to other intangibles.
During the third quarter of 2002, NMHG Wholesale recognized an impairment charge
of $1.6 million relating to the goodwill associated with the 2000 acquisition of
a 25 percent interest in a parts distributor. This investment is accounted for
using the equity method. As such, the impairment of the goodwill relating to
this investment was recognized in accordance with APB Opinion No. 18, "The
Equity Method of Accounting for Investments in Common Stock," as an other than
temporary impairment in the value of the investment. The impairment charge is
recognized in the 2002 statement of operations on the line "income (loss) from
unconsolidated affiliates."
The balance of other intangible assets, which continue to be subject to
amortization, is as follows at September 30, 2002:
Other Intangibles
-----------------
Gross Carrying Accumulated Net
Amount Amortization Balance
------ ------------ -------
Balance at September 30, 2002
Coal supply agreements $ 85.8 $ (2.2) $ 83.6
Other intangibles 2.4 (.3) 2.1
--------- --------- ---------
$ 88.2 $ (2.5) $ 85.7
========= ========= =========
Balance at December 31, 2001
Coal supply agreements $ 85.8 $ (.6) $ 85.2
Other intangibles --- --- ---
--------- --------- ---------
$ 85.8 $ (.6) $ 85.2
========= ========= =========
Amortization expense for the three and nine months ended September 30, 2002 was
$0.7 million and $1.9 million, respectively. Expected annual amortization
expense of other intangible assets for the next five years is as follows: $2.8
million in 2002, $3.1 million in 2003, $3.2 million in 2004, $3.2 million 2005
and $3.2 million in 2006.
Note 5 - Debt Financing
NMHG: On May 9, 2002, NMHG replaced its primary financing agreement, an
unsecured floating-rate revolving line of credit with availability of $350.0
million, certain other lines of credit with availability of $28.6 million and a
program to sell accounts receivable in Europe, with the proceeds from the sale
of $250.0 million of 10% unsecured Senior Notes due 2009 and borrowings under a
secured, floating-rate revolving credit facility which expires in May 2005. The
proceeds from the Senior Notes were reduced by an original issue discount of
$3.1 million.
The $250.0 million of 10% Senior Notes mature on May 15, 2009. The Senior Notes
are senior unsecured obligations of NMHG Holding Co. and are guaranteed by
substantially all of NMHG's domestic subsidiaries. NMHG Holding Co. has the
option to redeem all or a portion of the Senior Notes on or after May 15, 2006
at the redemption prices set forth in the Indenture governing the Senior Notes.
Availability under the new revolving credit facility is up to $175.0 million and
is governed by a borrowing base derived from advance rates against the inventory
and accounts receivable of the "borrowers." Adjustments to reserves booked
against these assets, including inventory reserves, will change the eligible
borrowing base and thereby impact the liquidity provided by the facility. The
borrowers, as defined in the new revolving credit facility, include NMHG Holding
Co. and certain domestic and foreign subsidiaries of NMHG Holding Co. Borrowings
bear interest at a floating rate, which can be either a base rate or LIBOR, as
defined, plus an applicable margin. The initial applicable margins, effective
through September 30, 2002, for base rate loans and LIBOR loans are 2.00% and
3.00%, respectively. The new revolving credit facility also requires a fee of
0.5% per annum on the unused commitment. Subsequent to September 30, 2002, the
margins and unused commitment fee will be subject to quarterly adjustment based
on a leverage ratio.
At September 30, 2002, the borrowing base under the new revolving credit
facility was $93.6 million, which has been reduced by the commitments or
availability under certain foreign credit facilities and an excess availability
requirement of $15.0 million. Borrowings outstanding under this facility were
$22.0 million at September 30, 2002. Therefore, at September 30, 2002, the
excess availability under the new revolving credit facility was $71.6 million.
The domestic floating rate of interest applicable to this facility on September
30, 2002 was 5.61%, including the applicable floating rate margin. The new
revolving credit facility includes a subfacility for foreign borrowers which can
be denominated in British pounds sterling or euros. The foreign floating rate of
interest applicable to this subfacility on September 30, 2002 was 6.96%,
including the applicable floating rate margin. Included in the borrowing
capacity is a $15.0 million overdraft facility available to foreign borrowers.
The initial applicable margin, effective through September 30, 2002, for
overdraft loans is 3.25% above the London base rate, as defined. The new
revolving credit facility is guaranteed by certain domestic and foreign
subsidiaries of NMHG
Holding Co. and is secured by substantially all of the assets, other than
property, plant and equipment, of the borrowers and guarantors, both domestic
and foreign, under the facility.
The terms of the new revolving credit facility provide that availability is
reduced by the commitments or availability under a foreign credit facility of
the borrowers and certain foreign working capital facilities. A foreign credit
facility commitment of approximately U.S. $18.3 million on September 30, 2002,
denominated in Australian dollars, reduced the amount of availability under the
new revolving credit facility. In addition, availability under the new revolving
credit facility was reduced by $5.5 million for a working capital facility
denominated in Chinese yuan. If the commitments or availability under these
facilities are increased, availability under the new revolving credit facility
will be reduced. The $93.6 million of borrowing base capacity under the new
revolving credit facility at September 30, 2002 reflected reductions for these
foreign credit facilities.
Both the new revolving credit facility and terms of the Senior Notes include
restrictive covenants which, among other things, limit the payment of dividends
to NACCO. The new revolving credit facility also requires NMHG to meet certain
financial tests, including, but not limited to, minimum excess availability,
maximum capital expenditures, maximum leverage ratio and minimum fixed charge
coverage ratio tests. The borrowers must maintain aggregate excess availability
under the new revolving credit facility of at least $15.0 million.
NMHG paid financing fees of approximately $15.1 million related to this
refinancing. These fees were deferred and are being amortized as interest
expense in the statement of operations over the respective terms of the new
financing facilities.
As a result of the refinancing of NMHG's floating-rate revolving credit
facility, NMHG terminated all of its interest rate swap agreements with all
related cash outflows occurring during the third quarter of 2002. NMHG
terminated interest rate swap agreements with a total notional amount of $285.0
million and a total net payable balance of $11.5 million at the respective dates
of termination. Prior to the refinancing, however, certain of these interest
rate swap agreements qualified for hedge accounting treatment in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended. As such, the mark-to-market of these interest rate swap agreements were
previously recognized as a component of other comprehensive income (loss) in
stockholders' equity.
Prior to the cessation of hedge accounting resulting from the May 9, 2002
refinancing, the balance in other comprehensive income (loss) for NMHG's
interest rate swap agreements that qualified for hedge accounting was a pre-tax
loss of $4.2 million ($2.6 million after-tax). This balance is being amortized
into the statement of operations over the original remaining lives of the
terminated interest rate swap agreements in accordance with the provisions in
SFAS No. 133, as amended. The amount of amortization of accumulated other
comprehensive income included in the statement of operations on the line "losses
on interest rate swap agreements" during the three and nine months ended
September 30, 2002 was a pre-tax expense of $0.8 million and $1.7 million,
respectively.
The mark-to-market of the interest rate swap agreements that was included in the
statement of operations during the three and nine months ended September 30,
2002 because these derivatives did not qualify for hedge accounting treatment
during that period was an expense of $1.3 million and $3.2 million,
respectively, and is included on the line, "losses on interest rate swap
agreements."
Housewares: Effective May 29, 2002, KCI entered into a financing arrangement
that provides for a secured, floating-rate revolving line of credit (the
"Facility") with availability up to $15.0 million, based on a formula using
KCI's eligible inventory, as defined. The Facility includes restrictive
covenants that, among other things, limit capital expenditures and require that
borrowings do not exceed $6.5 million for 30 consecutive days during January and
February. The Facility also requires KCI to maintain certain debt and interest
coverage ratios and maintain a minimum level of tangible net worth, as defined.
The term of this facility is three years. This financing replaces KCI's previous
source of financing, which was intercompany borrowings from HB/PS or the parent
company. At September 30, 2002, the borrowing base as defined in the agreement
was $11.4 million. Borrowings outstanding at September 30, 2002 were $6.3
million at an effective interest rate of LIBOR plus 1.35%, or 3.19%.
During the second quarter of 2002, HB/PS' revolving line of credit was revised
to reduce the amount available from $160.0 million to $150.0 million. This
reduction in capacity was primarily driven by a reduction in the need for HB/PS
to advance funds to its affiliate, KCI. At September 30, 2002, the entire amount
outstanding under HB/PS' revolving line of credit of $87.3 million is classified
as a current liability due to the expiration of the facility within the next 12
months, in May 2003. HB/PS intends to refinance this revolving line of credit
prior to its expiration and, subsequent to September 30, 2002, has entered into
an agreement with a financial institution to do so on a best efforts basis.
However, there can be no assurance that a new line of credit can be obtained on
favorable terms or at all.
Note 6 - Sale/Leaseback Transaction
During the third quarter of 2002, NACoal's project mining subsidiary received
proceeds of $19.9 million for the sale of certain mining equipment. Concurrent
with the sale, the mining equipment was leased back under capital lease
agreements. The undiscounted future minimum capital lease obligation incurred
related to these transactions is $35.0 million.
Note 7 - Segment Information
Financial information for each of the Company's reportable segments, as defined
by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is presented in the following table.
NMHG Wholesale derives a portion of its revenues from transactions with NMHG
Retail. The amount of these revenues, which are based on current market prices
on similar third-party transactions, are indicated in the following table on the
line "NMHG Eliminations" in the revenues section. No other intersegment sales
transactions occur.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -------------------------
2002 2001 2002 2001
-------- ---------- ---------- ----------
REVENUES FROM EXTERNAL CUSTOMERS
NMHG Wholesale $ 342.3 $ 314.4 $ 1,017.2 $ 1,149.3
NMHG Retail 59.7 74.6 174.5 228.2
NMHG Eliminations (16.4) (28.9) (45.6) (77.1)
-------- ---------- ---------- ----------
NMHG Consolidated 385.6 360.1 1,146.1 1,300.4
Housewares 148.4 155.0 404.5 433.4
NACoal 90.1 82.4 259.5 248.8
NACCO and Other --- --- .1 .1
-------- ---------- ---------- ----------
$ 624.1 $ 597.5 $ 1,810.2 $ 1,982.7
======== ========== ========== ==========
GROSS PROFIT
NMHG Wholesale $ 56.4 $ 27.8 $ 162.8 $ 154.4
NMHG Retail 13.5 12.0 36.4 44.0
NMHG Eliminations .9 1.1 1.8 3.3
-------- ---------- ---------- ----------
NMHG Consolidated 70.8 40.9 201.0 201.7
Housewares 34.8 26.9 84.6 75.1
NACoal 16.4 19.5 50.6 57.1
NACCO and Other (.1) (.1) (.1) (.1)
-------- ---------- ---------- ----------
$ 121.9 $ 87.2 $ 336.1 $ 333.8
======== ========== ========== ==========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
NMHG Wholesale $ 42.9 $ 39.8 $ 128.5 $ 127.0
NMHG Retail 14.6 24.1 41.6 64.3
NMHG Eliminations (.4) (.1) (1.0) (.6)
-------- ---------- ---------- ----------
NMHG Consolidated 57.1 63.8 169.1 190.7
Housewares 24.3 22.9 73.5 71.4
NACoal 4.3 3.4 11.1 9.3
NACCO and Other .9 2.3 2.7 8.4
-------- ---------- ---------- ----------
$ 86.6 $ 92.4 $ 256.4 $ 279.8
======== ========== ========== ==========
FINANCIAL SUMMARY - continued
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
AMORTIZATION OF GOODWILL *
NMHG Wholesale $ --- $ 2.9 $ --- $ 8.7
NMHG Retail --- .3 --- 1.0
------- ------- ------- -------
NMHG Consolidated --- 3.2 --- 9.7
Housewares --- .8 --- 2.3
------- ------- ------- -------
$ --- $ 4.0 $ --- $ 12.0
======= ======= ======= =======
OPERATING PROFIT (LOSS)
NMHG Wholesale $ 13.5 $ (18.5) $ 34.3 $ 15.1
NMHG Retail (1.1) (17.1) (5.2) (26.0)
NMHG Eliminations 1.3 1.2 2.8 3.9
------- ------- ------- -------
NMHG Consolidated 13.7 (34.4) 31.9 (7.0)
Housewares 10.5 3.2 11.1 1.4
NACoal 12.1 16.1 39.5 47.8
NACCO and Other (1.0) (2.4) (2.8) (8.5)
------- ------- ------- -------
$ 35.3 $ (17.5) $ 79.7 $ 33.7
======= ======= ======= =======
OPERATING PROFIT (LOSS) EXCLUDING
GOODWILL AMORTIZATION
NMHG Wholesale $ 13.5 $ (15.6) $ 34.3 $ 23.8
NMHG Retail (1.1) (16.8) (5.2) (25.0)
NMHG Eliminations 1.3 1.2 2.8 3.9
------- ------- ------- -------
NMHG Consolidated 13.7 (31.2) 31.9 2.7
Housewares 10.5 4.0 11.1 3.7
NACoal 12.1 16.1 39.5 47.8
NACCO and Other (1.0) (2.4) (2.8) (8.5)
------- ------- ------- -------
$ 35.3 $ (13.5) $ 79.7 $ 45.7
======= ======= ======= =======
INTEREST EXPENSE
NMHG Wholesale $ (8.1) $ (2.8) $ (18.3) $ (8.8)
NMHG Retail (.8) (1.6) (2.5) (4.2)
NMHG Eliminations (1.5) (1.0) (3.7) (3.6)
------- ------- ------- -------
NMHG Consolidated (10.4) (5.4) (24.5) (16.6)
Housewares (2.1) (2.2) (5.9) (5.7)
NACoal (2.9) (3.7) (8.8) (7.0)
Eliminations .1 .1 .3 .3
------- ------- ------- -------
(15.3) (11.2) (38.9) (29.0)
Project mining subsidiaries (4.3) (4.0) (12.4) (12.4)
------- ------- ------- -------
$ (19.6) $ (15.2) $ (51.3) $ (41.4)
======= ======= ======= =======
INTEREST INCOME
NMHG Wholesale $ .4 $ 1.1 $ 1.6 $ 2.9
NMHG Retail --- --- --- .1
------- ------- ------- -------
NMHG Consolidated .4 1.1 1.6 3.0
NACoal --- .1 .1 .4
NACCO and Other .1 --- .3 ---
Eliminations (.1) (.1) (.3) (.3)
------- ------- ------- -------
$ .4 $ 1.1 $ 1.7 $ 3.1
======= ======= ======= =======
*Amortization of goodwill is not recognized in 2002 as a result of the adoption
of SFAS No. 142 on January 1, 2002. See Note 4 for further discussion.
FINANCIAL SUMMARY - continued
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
OTHER-NET, INCOME (EXPENSE)
NMHG Wholesale $ (5.5) $ (5.7) $ (8.8) $ (4.2)
NMHG Retail (.1) .3 (1.1) .3
NMHG Eliminations --- --- --- ---
------- ------- ------- -------
NMHG Consolidated (5.6) (5.4) (9.9) (3.9)
Housewares (.7) (.7) (1.5) (.7)
NACoal (.1) (.3) (.4) (1.0)
NACCO and Other .5 2.1 1.6 6.6
------- ------- ------- -------
$ (5.9) $ (4.3) $ (10.2) $ 1.0
======= ======= ======= =======
INCOME TAX PROVISION (BENEFIT)
NMHG Wholesale $ (.1) $ (6.0) $ .8 $ 6.7
NMHG Retail .4 (5.2) (1.8) (8.8)
NMHG Eliminations (1.0) (.1) (1.3) ---
------- ------- ------- -------
NMHG Consolidated (.7) (11.3) (2.3) (2.1)
Housewares 3.1 --- 1.5 (2.3)
NACoal 1.1 2.1 3.7 7.1
NACCO and Other (.9) 1.0 .8 1.3
------- ------- ------- -------
$ 2.6 $ (8.2) $ 3.7 $ 4.0
======= ======= ======= =======
NET INCOME (LOSS)
NMHG Wholesale $ .8 $ (19.7) $ 8.9 $ (2.4)
NMHG Retail (2.4) (13.2) (7.0) (21.0)
NMHG Eliminations .8 .3 .4 .3
------- ------- ------- -------
NMHG Consolidated (.8) (32.6) 2.3 (23.1)
Housewares 4.6 .3 2.2 (2.7)
NACoal 3.7 6.1 14.3 20.7
NACCO and Other .5 (1.3) (1.7) (3.2)
------- ------- ------- -------
$ 8.0 $ (27.5) $ 17.1 $ (8.3)
======= ======= ======= =======
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
NMHG Wholesale $ 7.4 $ 11.1 $ 22.6 $ 33.3
NMHG Retail 3.0 3.9 8.5 10.8
------- ------- ------- -------
NMHG Consolidated 10.4 15.0 31.1 44.1
Housewares 3.4 5.3 10.5 16.3
NACoal 2.1 1.4 6.2 3.9
NACCO and Other .1 .1 .1 .2
------- ------- ------- -------
16.0 21.8 47.9 64.5
Project mining subsidiaries 7.5 7.8 22.3 23.0
------- ------- ------- -------
$ 23.5 $ 29.6 $ 70.2 $ 87.5
======= ======= ======= =======
CAPITAL EXPENDITURES
NMHG Wholesale $ 1.9 $ 14.7 $ 9.7 $ 36.2
NMHG Retail 1.1 2.6 2.4 6.5
------- ------- ------- -------
NMHG Consolidated 3.0 17.3 12.1 42.7
Housewares 1.3 3.4 3.8 11.8
NACoal 2.4 3.3 5.5 12.2
NACCO and Other .2 .1 .9 .1
------- ------- ------- -------
6.9 24.1 22.3 66.8
Project mining subsidiaries 17.5 5.7 22.7 12.3
------- ------- ------- -------
$ 24.4 $ 29.8 $ 45.0 $ 79.1
======= ======= ======= =======
FINANCIAL SUMMARY - continued
SEPTEMBER 30 DECEMBER 31
2002 2001
---------- ----------
TOTAL ASSETS
NMHG Wholesale $ 1,048.3 $ 1,164.9
NMHG Retail 187.0 215.6
NMHG Parent/Eliminations (63.4) (175.4)
---------- ----------
NMHG Consolidated 1,171.9 1,205.1
Housewares 373.2 347.5
NACoal 226.9 250.3
NACCO and Other 59.0 60.4
---------- ----------
1,831.0 1,863.3
Project mining subsidiaries 380.5 383.1
---------- ----------
2,211.5 2,246.4
Consolidating Eliminations (74.4) (84.5)
---------- ----------
$ 2,137.1 $ 2,161.9
========== ==========
Note 8 - Accounting Standards Not Yet Adopted
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 requires gains and losses on extinguishments of debt to be
reclassified as income or loss from continuing operations rather than as
extraordinary items as previously required by SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt." SFAS No. 145 also amends SFAS No. 13 to
require certain modifications to capital leases to be treated as sale-leaseback
transactions and modifies the accounting for subleases when the original lessee
remains a secondary obligor, or guarantor. SFAS No.145 also rescinded SFAS No.
44, which addressed the accounting for intangible assets of motor carriers and
made numerous technical corrections.
The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are
effective for fiscal years beginning after May 15, 2002, with restatement of
prior periods for any gain or loss on the extinguishment of debt that was
classified as an extraordinary item in prior periods, as necessary. The
remaining provisions of SFAS No. 145 are effective for transactions and
reporting subsequent to May 15, 2002. The adoption of SFAS No. 145 did not have
a material impact to the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 is effective for exit or disposal activities initiated
after December 31, 2002. SFAS No. 146 requires that liabilities for one-time
termination benefits that will be incurred over future service periods should be
measured at the fair value as of the termination date and recognized over the
future service period. This statement also requires that liabilities associated
with disposal activities should be recorded when incurred. These liabilities
should be adjusted for subsequent changes resulting from revisions to either the
timing or amount of estimated cash flows, discounted at the original
credit-adjusted risk-free rate. Interest on the liability would be accreted and
charged to expense as an operating item. The Company does not expect the
adoption of this statement to have a material impact to the Company's financial
position or results of operations.
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Per Share Data)
==========================================
Critical Accounting Policies and Estimates
==========================================
Please refer to the discussion of the Company's Critical Accounting Policies and
Estimates as disclosed on pages 19 and 20 in the Company's Form 10-K for the
fiscal year ended December 31, 2001. In addition to those policies and estimates
set forth in the Form 10-K, as a result of the adoption of SFAS No. 142, as
discussed in Note 4 to the Unaudited Condensed Consolidated Financial Statements
in this Form 10-Q, the Company also considers the accounting for its goodwill,
which is a significant asset to the Company, to be a critical accounting policy.
Changes in management's judgments and estimates could significantly affect the
Company's analysis of the impairment of goodwill. To test goodwill for
impairment, the Company is required to estimate the fair market value of each of
its reporting units. Using management judgments, a model was developed to
estimate the fair market value of the reporting units. This fair market value
model incorporated the Company's estimates of future cash flows, estimated
allocations of certain assets and cash flows among reporting units, estimates of
future growth rates and management's judgment regarding the applicable discount
rates to use to discount those estimated cash flows. Changes to these judgments
and estimates could result in a significantly different estimate of the fair
market value of the reporting units which could result in an impairment of
goodwill.
=================
FINANCIAL SUMMARY
=================
See Note 7 to the Unaudited Condensed Consolidated Financial Statements included
in this Form 10-Q for financial information by segment.
The parent company charges fees to its operating subsidiaries for services
provided by the corporate headquarters. These services represent most of the
parent company's operating expenses. The classification in the statement of
operations by the segments, however, changed in the first quarter of 2002 to
reflect a portion of the fees in selling, general and administrative expenses
and a portion of the fees in other-net, as directed by the parent company for
purposes of internal analysis. Following is a table for comparison of parent
company fees:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2002 2001 2002 2001
-------- -------- -------- --------
NACCO fees included in selling, general and
administrative expenses
NMHG Wholesale $ 1.1 $ --- $ 3.4 $ ---
Housewares .5 --- 1.5 ---
NACoal .3 --- .6 ---
-------- -------- -------- --------
$ 1.9 $ --- $ 5.5 $ ---
======== ======== ======== ========
NACCO fees included in other-net, income
(expense)
NMHG Wholesale $ .6 $ 1.9 $ 1.8 $ 5.7
Housewares .2 .6 .6 1.9
NACoal .1 .3 .3 .8
-------- -------- -------- --------
$ .9 $ 2.8 $ 2.7 $ 8.4
======== ======== ======== ========
Total NACCO fees charged to segments
NMHG Wholesale $ 1.7 $ 1.9 $ 5.2 $ 5.7
Housewares .7 .6 2.1 1.9
NACoal .4 .3 .9 .8
-------- -------- -------- --------
$ 2.8 $ 2.8 $ 8.2 $ 8.4
======== ======== ======== ========
================
NMHG HOLDING CO.
================
NMHG designs, engineers, manufactures, sells, services and leases a full line of
lift trucks and service parts marketed worldwide under the Hyster(R) and Yale(R)
brand names.
FINANCIAL REVIEW
The segment and geographic results of operations for NMHG were as follows for
the three months and nine months ended September 30:
THREE MONTHS NINE MONTHS
----------------------- -------------------------
2002 2001 2002 2001
-------- ---------- ---------- ----------
Revenues
Wholesale
Americas $ 229.4 $ 216.4 $ 695.3 $ 824.0
Europe, Africa and Middle East 95.0 79.3 271.8 273.5
Asia-Pacific 17.9 18.7 50.1 51.8
-------- ---------- ---------- ----------
342.3 314.4 1,017.2 1,149.3
-------- ---------- ---------- ----------
Retail (net of eliminations)
Americas 6.4 6.6 20.4 24.0
Europe, Africa and Middle East 15.7 21.6 48.0 71.9
Asia-Pacific 21.2 17.5 60.5 55.2
-------- ---------- ---------- ----------
43.3 45.7 128.9 151.1
-------- ---------- ---------- ----------
NMHG Consolidated $ 385.6 $ 360.1 $ 1,146.1 $ 1,300.4
======== ========== ========== ==========
Operating profit (loss)
Wholesale
Americas $ 14.3 $ (9.2) $ 36.3 $ 25.1
Europe, Africa and Middle East (.6) (8.5) (1.6) (8.2)
Asia-Pacific (.2) (.8) (.4) (1.8)
-------- ---------- ---------- ----------
13.5 (18.5) 34.3 15.1
-------- ---------- ---------- ----------
Retail (net of eliminations)
Americas (1.2) (.3) (1.4) (1.3)
Europe, Africa and Middle East (.2) (16.6) .8 (24.3)
Asia-Pacific 1.6 1.0 (1.8) 3.5
-------- ---------- ---------- ----------
.2 (15.9) (2.4) (22.1)
-------- ---------- ---------- ----------
NMHG Consolidated $ 13.7 $ (34.4) $ 31.9 $ (7.0)
======== ========== ========== ==========
Operating profit (loss) excluding
goodwill amortization
Wholesale
Americas $ 14.3 $ (7.2) $ 36.3 $ 31.0
Europe, Africa and Middle East (.6) (7.6) (1.6) (5.6)
Asia-Pacific (.2) (.8) (.4) (1.6)
-------- ---------- ---------- ----------
13.5 (15.6) 34.3 23.8
-------- ---------- ---------- ----------
Retail (net of eliminations)
Americas (1.2) (.2) (1.4) (1.0)
Europe, Africa and Middle East (.2) (16.5) .8 (24.0)
Asia-Pacific 1.6 1.1 (1.8) 3.9
-------- ---------- ---------- ----------
.2 (15.6) (2.4) (21.1)
-------- ---------- ---------- ----------
NMHG Consolidated $ 13.7 $ (31.2) $ 31.9 $ 2.7
======== ========== ========== ==========
NMHG HOLDING CO. - continued
FINANCIAL REVIEW - continued
THREE MONTHS NINE MONTHS
-------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Interest Expense
Wholesale $ (8.1) $ (2.8) $ (18.3) $ (8.8)
Retail (net of eliminations) (2.3) (2.6) (6.2) (7.8)
------- ------- ------- -------
NMHG Consolidated $ (10.4) $ (5.4) $ (24.5) $ (16.6)
======= ======= ======= =======
Other-net
Wholesale $ (5.1) $ (4.6) $ (7.2) $ (1.3)
Retail (net of eliminations) (.1) .3 (1.1) .4
------- ------- ------- -------
NMHG Consolidated $ (5.2) $ (4.3) $ (8.3) $ (.9)
======= ======= ======= =======
Net income (loss)
Wholesale $ .8 $ (19.7) $ 8.9 $ (2.4)
Retail (net of eliminations) (1.6) (12.9) (6.6) (20.7)
------- ------- ------- -------
NMHG Consolidated $ (.8) $ (32.6) $ 2.3 $ (23.1)
======= ======= ======= =======
Effective tax rate
Wholesale See (a) 23.2% 9.1% See (a)
Retail (including eliminations) 27.3% 29.1% 32.0% 29.8%
NMHG Consolidated 36.8% 25.6% See (a) See (a)
(a) The effective tax rate is not meaningful.
In the third quarter of 2002, NMHG Wholesale recognized a tax benefit of $0.1
million on a relatively small amount of pre-tax income primarily due to a
true-up in the estimated effective tax rate for the nine months ended September
30, 2002. The effective tax rate for the nine months ended September 30, 2002 is
9.1 percent for NMHG Wholesale and is not meaningful for NMHG Consolidated due
to a $1.9 million tax benefit recognized in the first quarter of 2002 related to
the recognition of previously generated losses in China, combined with a
relatively low level of pre-tax income in the first nine months of 2002. These
factors resulted in a net tax benefit for NMHG Consolidated that exceeds the
pre-tax loss. For the nine months ended September 30, 2001, the effective tax
rate for NMHG Wholesale and NMHG Consolidated is not meaningful. The tax benefit
on the pre-tax loss in the first nine months of 2001 is offset by nondeductible
goodwill amortization and other nondeductible items creating a tax provision
instead of a tax benefit on the NMHG Consolidated pre-tax loss.
Third Quarter of 2002 Compared with Third Quarter of 2001
NMHG Wholesale: Revenues increased to $342.3 million in the third quarter of
2002, an increase of 9 percent from $314.4 million in the third quarter of 2001.
The increase in revenues was due primarily to increased unit volumes in the
Americas and Europe, favorable currency movements in Europe and a shift in mix
to higher-priced units. Unit shipments increased 6 percent to 15,299 units in
the third quarter of 2002 as compared with 14,452 units in the third quarter of
2001.
Operating profit increased to $13.5 million in the third quarter of 2002 from an
operating loss of $18.5 million in the third quarter of 2001. Operating profit
improved primarily due to (i) lower manufacturing costs driven by the completion
of the Danville restructuring program in the fourth quarter of 2001 and global
procurement and cost control programs, (ii) a favorable shift in mix to
higher-margin lift trucks, (iii) a non-comparable restructuring expense of $3.6
million recognized in the third quarter of 2001 for a European restructuring
program and (iv) the elimination of goodwill amortization of $2.9 million. See
Note 3 and Note 4 to the Unaudited Condensed Consolidated Financial Statements
in this Form 10-Q for a discussion of the NMHG Wholesale restructuring programs
and the adoption of SFAS No. 142, respectively.
NMHG HOLDING CO. - continued
FINANCIAL REVIEW - continued
Net income of $0.8 million for the third quarter of 2002 improved from a net
loss of $19.7 million in the third quarter of 2001 due to the factors affecting
operating profit. These improvements were partially offset by increased interest
expense, the negative effect of interest rate swap agreements, the amortization
of deferred financing fees and a $1.9 million after-tax impairment of certain
investments in unconsolidated affiliates.
Both the increase in interest rates and the amortization of deferred financing
fees relate to the refinancing of NMHG's debt during the second quarter of 2002,
which is discussed further in the NMHG Holding Co. Liquidity and Capital
Resources section of this Form 10-Q.
The worldwide backlog level increased to 18,700 units at September 30, 2002 from
14,400 units at September 30, 2001 and 17,500 units at the end of the second
quarter of 2002 primarily due to an increase in demand.
NMHG Retail (net of eliminations): Revenues decreased to $43.3 million in the
third quarter of 2002 from $45.7 million in the third quarter of 2001. This
decrease is primarily due to the sale of certain European retail dealerships in
the fourth quarter of 2001 (the "sold operations"), which were included in the
results for the third quarter of 2001, partially offset by increased rental
revenues in Asia-Pacific. Revenues generated in the third quarter of 2001 by the
sold operations were $5.7 million, net of intercompany eliminations.
Operating profit increased to $0.2 million from an operating loss of $15.9
million in the third quarter of 2001. The operating loss in the third quarter of
2001 included several special adjustments, primarily in Europe, including a $4.7
million restructuring charge for downsizing retail operations in Europe and
charges of approximately $7.6 million to establish full accounting consistency
among owned dealers on a global basis, true up those dealers previously
reporting on a one-month lag to report on months consistent with the rest of
NMHG and to reduce asset values and increase reserves reflective of the weakened
capital goods market. In addition, the operating loss in the third quarter of
2001 includes an operating loss incurred by the sold operations. The operating
results in the third quarter of 2002 as compared with the third quarter of 2001
also benefit from lower operating costs in Europe resulting from restructuring
programs implemented in 2001 and the elimination of goodwill amortization.
Net loss improved to $1.6 million in the third quarter of 2002 from $12.9
million in the third quarter of 2001 primarily as a result of the items
affecting operating income.
First Nine Months of 2002 Compared with First Nine Months of 2001
NMHG Wholesale: Revenues decreased to $1,017.2 million in the first nine months
of 2002 from $1,149.3 million in the first nine months of 2001. The decline in
revenues was primarily driven by decreased unit volume in the first half of the
year, partially offset by increased volume in the third quarter of 2002. Unit
shipments declined 15 percent to 46,405 units in the first nine months of 2002
as compared with 54,478 units in the first nine months of 2001.
Despite the volume decline, operating profit increased to $34.3 million in the
first nine months of 2002 from $15.1 million in the first nine months of 2001.
The increase in operating profit was primarily driven by a shift in mix to
higher-margin lift trucks; the positive impact from improvement programs
initiated in 2001, including the completion of the Danville, Illinois, plant
closure in the fourth quarter of 2001 and the benefits of procurement,
restructuring and cost control programs; and the elimination of goodwill
amortization, partially offset by reduced unit volume.
Net income increased to $8.9 million in the first nine months of 2002 from a net
loss of $2.4 million in the first nine months of 2001 as a result of the factors
affecting operating profit, partially offset by additional interest and
other-net expenses due to the factors discussed for the third quarter operating
results, above.
NMHG HOLDING CO. - continued
FINANCIAL REVIEW - continued
Also affecting the year over year comparability of net income is a pre-tax
insurance recovery of $8.0 million ($5.0 million after-tax) included in other
income (expense) in the first nine months of 2001 relating to flood damage in
September 2000 at NMHG's Sumitomo-NACCO joint venture in Japan and a $1.3
million after-tax charge in 2001 for the cumulative effect of accounting changes
for derivatives and pension costs.
NMHG Retail (net of eliminations): Revenues decreased to $128.9 million for the
first nine months of 2002 from $151.1 million for the first nine months of 2001.
Revenues declined primarily due to the elimination of the sold operations, which
generated revenues of $18.1 million, net of intercompany eliminations, for the
first nine months of 2001. Operating loss in the first nine months of 2002 was
$2.4 million compared with an operating loss of $22.1 million in the first nine
months of 2001. Operating results improved primarily due to (i) several unusual
adjustments recognized in 2001, as noted in the discussion of the third quarter
operating results, (ii) lower operating costs in Europe resulting from
restructuring programs implemented in 2001, (iii) the elimination of losses
incurred by the sold operations in 2001 and (iv) the elimination of goodwill
amortization of $1.0 million. Net loss was $6.6 million for the nine months
ended September 30, 2002 compared with $20.7 million for the first nine months
of 2001, primarily due to the factors affecting operating loss.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $9.7 million for NMHG
Wholesale and $2.4 million for NMHG Retail during the first nine months of 2002.
These capital expenditures include investments in machinery and equipment,
tooling for new products, information systems and lease and rental fleet. It is
estimated that NMHG's capital expenditures for the remainder of 2002 will be
approximately $5.5 million for NMHG Wholesale and $0.8 million for NMHG Retail.
Planned expenditures for the remainder of 2002 include tooling for new products,
investments in worldwide information systems and additions to retail lease and
rental fleet. The principal sources of financing for these capital expenditures
are internally generated funds and bank borrowings.
On May 9, 2002, NMHG replaced its primary financing agreement, an unsecured
floating-rate revolving line of credit with availability of $350.0 million,
certain other lines of credit with availability of $28.6 million and a program
to sell accounts receivable in Europe, with the proceeds from the sale of $250.0
million of 10% unsecured Senior Notes due 2009 and borrowings under a secured,
floating-rate revolving credit facility which expires in May 2005. The proceeds
from the Senior Notes were reduced by an original issue discount of $3.1
million.
The $250.0 million of 10% Senior Notes mature on May 15, 2009. The Senior Notes
are senior unsecured obligations of NMHG Holding Co. and are guaranteed by
substantially all of NMHG's domestic subsidiaries. NMHG Holding Co. has the
option to redeem all or a portion of the Senior Notes on or after May 15, 2006
at the redemption prices set forth in the Indenture governing the Senior Notes.
Availability under the new revolving credit facility is up to $175.0 million and
is governed by a borrowing base derived from advance rates against the inventory
and accounts receivable of the "borrowers." Adjustments to reserves booked
against these assets, including inventory reserves, will change the eligible
borrowing base and thereby impact the liquidity provided by the facility. The
borrowers, as defined in the new revolving credit facility, include NMHG Holding
Co. and certain domestic and foreign subsidiaries of NMHG Holding Co. Borrowings
bear interest at a floating rate, which can be either a base rate or LIBOR, as
defined, plus an applicable margin. The initial applicable margins, effective
through September 30, 2002, for base rate loans and LIBOR loans are 2.00% and
3.00%, respectively. The new revolving credit facility also requires a fee of
0.5% per annum on the unused commitment. Subsequent to September 30, 2002, the
margins and unused commitment fee will be subject to quarterly adjustment based
on a leverage ratio.
NMHG HOLDING CO. - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
At September 30, 2002, the borrowing base under the new revolving credit
facility was $93.6 million, which has been reduced by the commitments or
availability under certain foreign credit facilities and an excess availability
requirement of $15.0 million. Borrowings outstanding under this facility were
$22.0 million at September 30, 2002. Therefore, at September 30, 2002, the
excess availability under the new revolving credit facility was $71.6 million.
The domestic floating rate of interest applicable to this facility on September
30, 2002 was 5.61%, including the applicable floating rate margin. The new
revolving credit facility includes a subfacility for foreign borrowers which can
be denominated in British pounds sterling or euros. The foreign floating rate of
interest applicable to this subfacility on September 30, 2002 was 6.96%,
including the applicable floating rate margin. Included in the borrowing
capacity is a $15.0 million overdraft facility available to foreign borrowers.
The initial applicable margin, effective through September 30, 2002, for
overdraft loans is 3.25% above the London base rate, as defined. The new
revolving credit facility is guaranteed by certain domestic and foreign
subsidiaries of NMHG Holding Co. and secured by substantially all of the assets,
other than property, plant and equipment, of the borrowers and guarantors, both
domestic and foreign, under the facility.
The terms of the new revolving credit facility provide that availability is
reduced by the commitments or availability under a foreign credit facility of
the borrowers and certain foreign working capital facilities. A foreign credit
facility commitment of approximately U.S. $18.3 million on September 30, 2002,
denominated in Australian dollars, reduced the amount of availability under the
new revolving credit facility. In addition, availability under the new revolving
credit facility was reduced by $5.5 million for a working capital facility
denominated in Chinese yuan. If the commitments or availability under these
facilities are increased, availability under the new revolving credit facility
will be reduced. The $93.6 million of borrowing base capacity under the new
revolving credit facility at September 30, 2002 reflected reductions for these
foreign credit facilities.
Both the new revolving credit facility and terms of the Senior Notes include
restrictive covenants which, among other things, limit the payment of dividends
to NACCO. The new revolving credit facility also requires NMHG to meet certain
financial tests, including, but not limited to, minimum excess availability,
maximum capital expenditures, maximum leverage ratio and minimum fixed charge
coverage ratio tests. The borrowers must maintain aggregate excess availability
under the new revolving credit facility of at least $15.0 million.
NMHG paid financing fees of approximately $15.1 million related to this
refinancing. These fees were deferred and are being amortized as interest
expense in the statement of operations over the respective terms of the new
financing facilities.
As a result of the refinancing of NMHG's floating-rate revolving credit
facility, NMHG terminated all of its interest rate swap agreements with all
related cash outflows occurring during the third quarter of 2002. NMHG
terminated interest rate swap agreements with a total notional amount of $285.0
million and a total net payable balance of $11.5 million at the respective dates
of termination. See further discussion in Note 5 to the Unaudited Condensed
Consolidated Financial Statements included in this Form 10-Q.
Since December 31, 2001, in the ordinary course of business, NMHG Retail
continued to make payments under existing operating lease agreements and enter
into new operating lease agreements, primarily for rental equipment. As a result
of obligations incurred by entering into new leases, partially offset by lease
payments made in the ordinary course of business and the sale of one of its
remaining German dealerships in the third quarter of 2002, the Company's future
minimum lease payments increased $13.6 million from $141.6 million at December
31, 2001.
In addition, NMHG had contingent obligations for guarantees related to third
party financing of NMHG's lift trucks in the amount of $134.9 million at
September 30, 2002 compared with contingent obligations of a similar nature of
$158.0 million at December 31, 2001.
NMHG HOLDING CO. - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
NMHG believes that funds available under the new revolving credit facility,
other available lines of credit and operating cash flows are sufficient to
finance all of its operating needs and commitments arising during the
foreseeable future.
NMHG Wholesale's capital structure is presented below:
SEPTEMBER 30 DECEMBER 31
2002 2001
-------- --------
NMHG Wholesale:
Total net tangible assets $ 271.6 $ 375.2
Advances to (from) NMHG Retail (15.5) 70.2
Goodwill at cost 486.5 446.0
-------- --------
Net assets before goodwill amortization 742.6 891.4
Accumulated goodwill amortization (143.3) (141.4)
Advances from NACCO --- (8.0)
Advances from NMHG Parent (247.2) ---
Other debt (24.1) (300.9)
Minority interest (1.4) (2.3)
-------- --------
Stockholder's equity $ 326.6 $ 438.8
======== ========
Debt to total capitalization 45% 41%
The decrease in net tangible assets of $103.6 million is primarily due to a
$79.2 million decrease in investments in NMHG Retail which was allocated to NMHG
Holding Co., the parent, and is not held by NMHG Wholesale. The remaining $24.4
million decrease in net tangible assets is due to a $30.1 million decrease in
cash and cash equivalents, a $12.1 million decrease in property, plant and
equipment and a $4.3 million decrease in net deferred tax assets combined with
an $11.4 million increase in intercompany interest payable, somewhat offset by a
$30.3 increase in total receivables. Accounts receivable increased primarily due
to the second quarter 2002 termination of an agreement to sell European accounts
receivable as part of NMHG's debt refinancing.
As a result of NMHG's debt refinancing, certain of NMHG Wholesale's borrowings
that were previously from external sources are now financed with an intercompany
advance from NMHG Parent. As such, advances from NMHG Parent replaced the
majority of NMHG Wholesale's "other debt." Furthermore, at September 30, 2002,
NMHG Wholesale has a net payable to NMHG Retail instead of a net receivable from
NMHG Retail due to changes in the internal capitalization between NMHG
Wholesale, NMHG Retail and NMHG Parent. Part of the reason for this
recapitalization was due to a reallocation of goodwill from NMHG Retail to NMHG
Wholesale of approximately $40.3 million as part of the adoption of SFAS No.
142. See further discussion in Note 4 to the Unaudited Condensed Consolidated
Financial Statements in this Form 10-Q.
Stockholder's equity decreased due to a dividend to NMHG Parent of $117.7
million and a dividend to NACCO of $15.0 million, partially offset by an $8.2
million favorable adjustment to the foreign currency cumulative translation
balance, net income for the first nine months of 2002 of $8.9 million and a $3.7
million decrease in the deferred loss on derivatives.
NMHG HOLDING CO. - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
NMHG Retail's capital structure is presented below:
SEPTEMBER 30 DECEMBER 31
2002 2001
------- --------
NMHG Retail:
Total net tangible assets $ 80.3 $ 109.5
Advances to (from) NMHG Wholesale 15.5 (70.2)
Goodwill and other intangibles at cost 1.8 45.2
------- --------
Net assets before goodwill amortization 97.6 84.5
Accumulated goodwill and other intangible amortization (.2) (5.6)
Advances from NMHG Parent (16.8) ---
Other debt (48.3) (53.5)
------- --------
Stockholder's equity $ 32.3 $ 25.4
======= ========
Debt to total capitalization 67% 68%
The decrease in total net tangible assets of $29.2 million is primarily due to a
$14.9 million decrease in net intercompany and other receivables and a $7.3
million decline in inventory. The decrease in net intercompany accounts
receivable is primarily due to the settlement of fiscal 2001 intercompany tax
advances with NMHG Wholesale. Other receivables decreased primarily due to
proceeds received in the first quarter of 2002 for the 2001 sold operations. A
portion of these proceeds was used to pay down debt.
As noted above, changes in the internal capitalization between NMHG Wholesale,
NMHG Retail and NMHG Parent resulted in a net advance to NMHG Wholesale at
September 30, 2002 as compared with a net advance from NMHG Wholesale at
December 31, 2001. This recapitalization is primarily due to the transfer of net
goodwill to NMHG Wholesale.
The increase in stockholder's equity is due to a $12.6 million reallocation of
equity to NMHG Parent and a $1.0 million favorable adjustment to the foreign
currency cumulative translation balance, partially offset by a $6.6 million net
loss for the first nine months of 2002. The reallocation of equity among
segments does not affect NMHG's consolidated equity position.
======================
NACCO HOUSEWARES GROUP
======================
Because the Housewares business is seasonal, a majority of revenues and
operating profit occurs in the second half of the year when sales of small
electric appliances to retailers and consumers increase significantly for the
fall holiday selling season.
FINANCIAL REVIEW
The results of operations for Housewares were as follows for the three and nine
months ended September 30:
THREE MONTHS NINE MONTHS
------------------ ------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 148.4 $ 155.0 $ 404.5 $ 433.4
Operating profit $ 10.5 $ 3.2 $ 11.1 $ 1.4
Operating profit excluding
goodwill amortization $ 10.5 $ 4.0 $ 11.1 $ 3.7
Interest expense $ (2.1) $ (2.2) $ (5.9) $ (5.7)
Other-net $ (.7) $ (.7) $ (1.5) $ (.7)
Net income (loss) $ 4.6 $ .3 $ 2.2 $ (2.7)
Effective tax rate 40.5% See (a) 40.3% 46.0%
(a) The effective tax rate for the quarter ended September 30, 2001 is not
meaningful due to the small level of pre-tax income and income tax expense
recognized during the quarter.
Third Quarter of 2002 Compared with Third Quarter of 2001
Housewares' revenues decreased to $148.4 million in the third quarter of 2002
from $155.0 million in the third quarter of 2001 primarily due to lower unit
volume at HB/PS as a result of HB/PS' strategic decision to withdraw from
selected low-margin, opening-price-point business. Decreased revenues were
partially offset by increased sales of higher price-point products and increased
sales at KCI. KCI recorded increases in comparable store sales, average sales
transactions per store and the total number of sales transactions per store for
the third quarter of 2002, compared with the third quarter of 2001. KCI operated
174 stores at September 30, 2002, compared with 165 stores at September 30,
2001.
Operating profit increased to $10.5 million in the third quarter of 2002 as
compared with an operating profit of $3.2 million in the third quarter of 2001.
This improvement in operating profit was primarily due to improved manufacturing
and distribution efficiencies and general cost reductions at HB/PS as a result
of restructuring activities initiated in 2001, the favorable resolution of
certain product liability claims, the elimination of goodwill amortization of
$0.8 million in the third quarter of 2002 as a result of the adoption of SFAS
No. 142 and increased sales volume at KCI. See Note 3 and Note 4 to the
Unaudited Condensed Consolidated Financial Statements in this Form 10-Q for a
discussion of HB/PS' restructuring programs and the adoption of SFAS No. 142,
respectively.
Net income of $4.6 million for the third quarter of 2002 improved as compared
with net income of $0.3 million for the third quarter of 2001 due to the factors
affecting operating profit, partially offset by unfavorable foreign currency
movements from transactions denominated in the Mexican peso.
NACCO HOUSEWARES GROUP - continued
FINANCIAL REVIEW - continued
First Nine Months of 2002 Compared with First Nine Months of 2001
Housewares' revenues decreased to $404.5 million in the first nine months of
2002, a decrease of 7 percent from $433.4 million in the first nine months of
2001. The decline in revenues was primarily due to lower unit volume at HBoPS as
a result of HB/PS' strategic decision to withdraw from selected low-margin,
opening-price-point business. Also, sales of HB/PS' home health products
decreased in the first nine months of 2002, compared with the first nine months
of 2001, due to reduced advertising and promotions of TrueAir(TM) home odor
eliminators as well as increased competition in this market segment. These
declines in revenues were partially offset by increased sales of General
Electric-branded products to Wal*Mart. Increased revenues at KCI were primarily
due to higher overall consumer spending in outlet malls and from decreased
competition following the bankruptcy of a major competitor. For the first nine
months of 2002, KCI revenues were also positively affected by increases in
comparable stores' average sales transaction value and the total number of sales
transactions per store, compared with the first nine months of 2001.
For the nine months ended September 30, 2002, Housewares recognized operating
profit of $11.1 million compared with an operating profit of $1.4 million for
the first nine months of 2001. Improved operating profit resulted primarily from
improved manufacturing and distribution efficiencies and general cost reductions
at HB/PS as a result of restructuring activities initiated in 2001, lower
advertising expenditures, increased sales volume at KCI, the favorable
resolution of certain product liability claims and the elimination of goodwill
amortization. These improvements were partially offset by a decrease in HBoPS'
average sales price of products and the second quarter 2002 charge of $3.6
million related to a partial write-down of pre-bankruptcy receivables from
Kmart.
Net income of $2.2 million for the first nine months of 2002 improved as
compared with a net loss of $2.7 million for the first nine months of 2001 due
to the factors affecting operating profit, partially offset by unfavorable
foreign currency movements from transactions denominated in the Mexican peso.
The decrease in the effective tax rate for the nine months ended September 30,
2002 as compared with the nine months ended September 30, 2001 was primarily due
to the effect of nondeductible goodwill amortization expense in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Housewares' expenditures for property, plant and equipment were $3.8 million
during the first nine months of 2002 and are estimated to be $2.8 million for
the remainder of 2002. These planned capital expenditures are primarily for
tooling and equipment designed for new products, as well as tooling and
equipment intended to reduce manufacturing costs and increase efficiency at
HB/PS. These expenditures are funded primarily from internally generated funds
and short-term borrowings.
During the second quarter of 2002, HB/PS' revolving line of credit (the "HB/PS
Facility") was revised to reduce the amount available from $160.0 million to
$150.0 million. This reduction in capacity was primarily driven by a reduction
in the need for HB/PS to advance funds to its affiliate, KCI. As discussed
below, during the second quarter of 2002, KCI entered into a separate financing
arrangement with a third-party financing company such that borrowings from HB/PS
should not be necessary in the near-term. The HB/PS Facility is secured by
substantially all of HB/PS' assets, provides lower interest rates if HB/PS
achieves certain interest coverage ratios and allows for interest rates quoted
under a competitive bid option. At September 30, 2002, the entire amount
outstanding under HB/PS' revolving line of credit of $87.3 million is classified
as a current liability due to the expiration of the facility within the next 12
months, in May 2003. HB/PS intends to refinance this revolving line of credit
prior to its expiration and, subsequent to September 30, 2002, has entered into
an agreement with a financial institution to do so on a best efforts basis.
However, there can be no assurance that a new line of credit can be obtained on
favorable terms or at all. At September 30, 2002, HB/PS had $62.2 million of
unrestricted availability under this facility. In addition, HB/PS has separate
uncommitted facilities of which $10.1 million was available at September 30,
2002.
NACCO HOUSEWARES GROUP - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
Effective May 29, 2002, KCI entered into a financing arrangement that provides
for a secured, floating-rate revolving line of credit (the "Facility") with
availability up to $15.0 million, based on a formula using KCI's eligible
inventory, as defined in the Facility. The Facility includes restrictive
covenants that, among other things, limit capital expenditures and require that
borrowings do not exceed $6.5 million for 30 consecutive days during January and
February. The Facility also requires KCI to maintain certain debt and interest
coverage ratios and maintain a minimum level of tangible net worth, as defined
in the Facility. The term of this facility is three years. This financing
replaces KCI's previous source of financing, which was intercompany borrowings
from HB/PS or the parent company. At September 30, 2002, the borrowing base as
defined in the agreement was $11.4 million. Borrowings outstanding at September
30, 2002 were $6.3 million at an effective interest rate of LIBOR plus 1.35%, or
3.19%.
With the exception of the new financing arrangement at KCI, which is due in
2005, there have been no significant changes in the total amount of Housewares'
contractual obligations or commercial commitments or the timing of cash flows in
accordance with those obligations, as reported in the Company's 10-K for the
year ended December 31, 2001.
With the expectation that the HB/PS Facility will be refinanced prior to its
expiration in May 2003, Housewares believes that funds available under its
credit facilities and operating cash flows are sufficient to finance all of its
operating needs and commitments arising during the foreseeable future.
Housewares' capital structure is presented below:
SEPTEMBER 30 DECEMBER 31
2002 2001
-------- --------
Total net tangible assets $ 158.8 $ 168.7
Goodwill at cost 123.5 123.5
-------- --------
Net assets before goodwill amortization 282.3 292.2
Accumulated goodwill amortization (39.8) (39.8)
Advances from NACCO --- (3.0)
Other debt (98.7) (103.8)
-------- --------
Stockholder's equity $ 143.8 $ 145.6
======== ========
Debt to total capitalization 41% 42%
The decline in total net tangible assets of $9.9 million since December 31, 2001
is primarily due to a $5.3 million decrease in cash and cash equivalents, a $3.5
million decrease in long-term accounts receivable, an $8.7 million decrease in
property, plant and equipment, a $6.6 million increase in net derivative
liabilities due to unfavorable mark-to-market adjustments and a $29.5 million
increase in accounts payable, partially offset by a $41.5 million increase in
inventories. The decline in accounts receivable is due to a $3.6 million
write-down in the second quarter of 2002 of pre-bankruptcy receivables from
Kmart. Increases in inventory and payables are primarily due to the seasonality
of the Housewares business.
Debt and advances from NACCO declined primarily as a result of the decrease in
net tangible assets. The decline in stockholder's equity at September 30, 2002
compared with December 31, 2001 is due to $2.2 million of net income for the
first nine months of 2002 offset by a $4.0 million increase in accumulated other
comprehensive loss relating to an unfavorable mark-to-market of derivatives.
===================================
THE NORTH AMERICAN COAL CORPORATION
===================================
NACoal mines and markets lignite for use primarily as fuel for power providers.
The lignite is surface mined in North Dakota, Texas, Louisiana and Mississippi.
Total coal reserves approximate 2.6 billion tons, with 1.2 billion tons
committed to customers pursuant to long-term contracts. NACoal operates six
wholly owned lignite mines: The Coteau Properties Company ("Coteau"), The
Falkirk Mining Company ("Falkirk"), The Sabine Mining Company ("Sabine"), San
Miguel Lignite Mine ("San Miguel"), Red River Mining Company ("Red River") and
Mississippi Lignite Mining Company ("MLMC"). NACoal also provides dragline
mining services ("Florida dragline operations") for a limerock quarry near
Miami, Florida. The operating results of Coteau, Falkirk and Sabine are included
in "project mining subsidiaries." The operating results of all other operations
are included in "other mining operations."
NACoal's subsidiaries, Coteau, Falkirk and Sabine, are termed "project mining
subsidiaries" because they mine lignite for utility customers pursuant to
long-term contracts at a price based on actual cost plus an agreed pre-tax
profit per ton. Due to the cost-plus nature of these contracts, revenues and
operating profits are affected by increases and decreases in operating costs, as
well as by tons sold. Net income of the project mining subsidiaries, however, is
not significantly affected by changes in such operating costs, which include
costs of operations, interest expense and certain other items. Because of the
nature of the contracts at these mines and because the operating results of the
project mining subsidiaries represent a substantial portion of NACoal's revenues
and profits, operating results are best analyzed in terms of lignite tons sold,
income before taxes and net income.
FINANCIAL REVIEW
Lignite tons sold by NACoal's operating lignite mines were as follows for the
three and nine months ended September 30:
THREE MONTHS NINE MONTHS
------------ --------------
2002 2001 2002 2001
---- ---- ---- ----
Coteau 3.9 3.8 11.4 11.4
Falkirk 2.2 2.0 5.6 5.5
Sabine 1.1 1.1 3.1 2.6
San Miguel .8 1.0 2.4 2.6
MLMC .8 .2 2.0 .4
Red River .1 .2 .4 .7
--- --- ---- ----
Total lignite 8.9 8.3 24.9 23.2
=== === ==== ====
The Florida dragline operations delivered 2.7 million and 7.9 million cubic
yards of limerock in the three and nine months ended September 30, 2002,
respectively. This compares with 2.3 million and 6.3 million cubic yards of
limerock in the three and nine months ended September 30, 2001, respectively.
THE NORTH AMERICAN COAL CORPORATION - continued
FINANCIAL REVIEW - continued
Revenues, income before taxes, provision for taxes and net income were as
follows for the three and nine months ended September 30:
THREE MONTHS NINE MONTHS
--------------------- ----------------------
2002 2001 2002 2001
------- -------- -------- --------
Revenues
Project mines $ 69.8 $ 64.1 $ 198.0 $ 194.4
Other mining operations 19.7 12.7 55.9 35.6
------- -------- -------- --------
89.5 76.8 253.9 230.0
Liquidated damages payments recorded by MLMC --- 5.1 3.3 15.3
Arbitration award received by San Miguel --- --- --- 1.1
Royalties and other .6 .5 2.3 2.4
------- -------- -------- --------
$ 90.1 $ 82.4 $ 259.5 $ 248.8
======= ======== ======== ========
Income before taxes
Project mines $ 7.6 $ 7.3 $ 21.1 $ 20.2
Other mining operations 2.0 5.9 8.8 18.0
------- -------- -------- --------
Total from operating mines 9.6 13.2 29.9 38.2
Royalties and other expenses, net (3.2) (3.3) (6.8) (5.8)
Other operating expenses (1.6) (1.7) (5.1) (4.6)
------- -------- -------- --------
4.8 8.2 18.0 27.8
Provision for taxes 1.1 2.1 3.7 7.1
------- -------- -------- --------
Net income $ 3.7 $ 6.1 $ 14.3 $ 20.7
======= ======== ======== ========
Effective tax rate 22.9% 25.6% 20.6% 25.5%
Third Quarter of 2002 Compared with Third Quarter of 2001
Revenues for the third quarter of 2002 increased to $90.1 million, an increase
of 9 percent from $82.4 million in the third quarter of 2001. Increased revenues
in the third quarter of 2002 as compared with the third quarter of 2001 is
primarily due to an increase in tons sold at MLMC due to the commencement of
commercial operations of the customer's power plant in 2002 and an increase in
pass-through costs billed to the project mining subsidiaries' customers,
partially offset by the absence of liquidated damages payments, which were
received by MLMC in the third quarter of 2001 due to the delay of commercial
operations of the customer's power plant, and a slight decrease in tonnage
volume at Red River.
Income before taxes decreased to $4.8 million in the third quarter of 2002 from
$8.2 million in the third quarter of 2001. This decrease is primarily due to (i)
increased operating costs at MLMC due to the significant increase in production
and delivery of lignite to the customer during the third quarter of 2002 as
compared with operating costs incurred when receiving liquidated damages
payments in the third quarter of 2001 and (ii) lower tonnage volume at Red
River, partially offset by a decrease in interest expense due to lower average
borrowings outstanding and a decrease in interest rates. Net income in the third
quarter of 2002 decreased to $3.7 million from $6.1 million in the third quarter
of 2001 as a result of these factors.
THE NORTH AMERICAN COAL CORPORATION - continued
FINANCIAL REVIEW - continued
First Nine Months of 2002 Compared with First Nine Months of 2001
Revenues for the first nine months of 2002 increased to $259.5 million, an
increase of 4 percent from $248.8 million in the first nine months of 2001.
Increased revenues in the first nine months of 2002 as compared with the first
nine months of 2001 is primarily due to an increase in tons sold at MLMC due to
the commencement of commercial operations of the customer's power plant in 2002
and increased tons sold at Sabine, partially offset by (i) a decrease in
liquidated damages payments which were received by MLMC in the first nine months
of 2001 due to the delay of commercial operations of the customer's power plant,
(ii) a decrease in tonnage volume at Red River and (iii) a decrease in
pass-through costs billed to the project mining subsidiaries' customers.
Income before taxes decreased to $18.0 million for the first nine months of 2002
from $27.8 million for the first nine months of 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 the first
nine months of 2002 as compared with operating costs incurred when receiving
liquidated damages payments during the first nine months of 2001, (ii) lower
tonnage volume at Red River and (iii) increased interest expense primarily due
to the capitalization of interest costs during the first quarter of 2001 as part
of the development of the initial mining area at MLMC. These decreases were
partially offset by a $1.4 million gain on the sale of undeveloped Eastern coal
reserves in the second quarter of 2002 that were not aligned with NACoal's
development strategies.
Net income in the first nine months of 2002 decreased to $14.3 million from
$20.7 million in the first nine months of 2001 as a result of these factors,
partially offset by a decrease in the effective tax rate. The decrease in the
effective tax rate for the first nine months of 2002 as compared with the first
nine months of 2001 is primarily due to a greater proportion of income from
operations eligible to record a benefit from percentage depletion.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $28.2 million during the
first nine months of 2002. NACoal estimates that its capital expenditures for
the remainder of 2002 will be $16.5 million, of which $11.5 million relates to
the development, establishment and improvement of the project mining
subsidiaries' mines and are financed or guaranteed by the utility customers. The
remaining $5.0 million of capital expenditures for 2002 primarily relates to
continued capital expenditures at MLMC and will be funded primarily from
internally generated funds and short-term borrowings.
NACoal's non-project-mine financing needs are provided by a revolving line of
credit of up to $60.0 million and a remaining term loan of $100.0 million (the
"NACoal Facility"). The NACoal Facility requires annual term loan repayments of
$15.0 million, with a final term loan repayment of $55.0 million in October
2005. The revolving credit facility of $60.0 million is available until the
facility's expiration in October 2005. The NACoal Facility has performance-based
pricing which sets interest rates based upon achieving various levels of Debt to
EBITDA ratios, as defined therein. At September 30, 2002, NACoal had $53.2
million of its revolving credit facility available.
Since December 31, 2001, there have been no significant changes in the total
amount of NACoal's contractual obligations or commercial commitments, or the
timing of cash flows in accordance with those obligations, as reported in the
Company's 10-K for the year ended December 31, 2001.
The financing of the project mining subsidiaries, which is either provided or
guaranteed by the utility customers, includes long-term equipment leases, notes
payable and non-interest-bearing advances from customers. The obligations of the
project mining subsidiaries do not affect the short-term or long-term liquidity
of NACoal and are without recourse to NACCO or NACoal. These arrangements allow
the project mining subsidiaries to pay dividends to NACoal in amounts based on
their earnings.
THE NORTH AMERICAN COAL CORPORATION - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
NACoal believes that funds available under its revolving credit facility,
operating cash flows and financing provided by the project mining subsidiaries'
customers are sufficient to finance all of its term loan principal repayments
and its operating needs and commitments arising during the foreseeable future.
NACoal's capital structure, excluding the project mining subsidiaries, is
presented below:
SEPTEMBER 30 DECEMBER 31
2002 2001
-------- --------
Investment in project mining subsidiaries $ 4.9 $ 4.9
Other net tangible assets 98.2 127.6
Coal supply agreements, net 83.6 85.2
-------- --------
Net tangible assets 186.7 217.7
Advances from NACCO (20.1) (12.3)
Debt (106.9) (156.5)
-------- --------
Stockholder's equity $ 59.7 $ 48.9
======== ========
Debt to total capitalization 68% 78%
The decrease in other net tangible assets and debt is primarily due to the first
quarter 2002 refinancing of a lease covering several large pieces of equipment
at MLMC which was previously classified as a capital lease and, as a result of
the refinancing, now qualifies as an operating lease. The total lease obligation
and the timing of payments did not change significantly as a result of this
refinancing. The increase in stockholder's equity is due to $14.3 million of net
income for the first nine months of 2002 partially offset by dividends paid to
NACCO and an increase in accumulated other comprehensive loss relating to an
unfavorable mark-to-market of derivatives.
===============
NACCO AND OTHER
===============
FINANCIAL REVIEW
NACCO and Other includes the parent company operations and Bellaire Corporation
("Bellaire"), a non-operating subsidiary of NACCO. Although Bellaire has no
significant ongoing operations, it does have significant long-term liabilities
related to closed mines, primarily from former eastern U.S. underground
coal-mining activities. On average, annual after-tax cash outflows related to
Bellaire's obligations are approximately $2.5 million.
In 2000, the Company recognized an extraordinary gain of $29.9 million, net of
$16.1 million in taxes, related to an estimated decrease in Bellaire's
obligation to the United Mine Workers of America Combined Benefit Fund ("UMWA").
This obligation was initially recognized by Bellaire as an extraordinary charge
in 1992 to accrue for the estimated costs resulting from the Coal Industry
Retiree Health Benefit Act of 1992 ("Coal Act"). See additional discussion in
the Company's Form 10-K for the fiscal year ended December 31, 2001. The
decrease to the Company's estimate of the UMWA obligation in 2000 was made, in
part, because of a U.S. District Court's ruling that was upheld by the U.S.
Court of Appeals for the Sixth Circuit in 2000 which invalidated the Social
Security Administration's ("SSA") assignment of certain retired coal miners to
Bellaire. This ruling reduced the Company's estimate of the total beneficiaries
assigned to Bellaire as part of the Coal Act. Subsequent to December 31, 2001,
the Company learned that the U.S. Supreme Court decided to review circuit court
rulings whose decisions in this matter were in conflict. The U.S Court of
Appeals for the Sixth Circuit ruled that the SSA assignments were invalid; while
the U.S Court of Appeals for the Fourth Circuit ruled that the SSA assignments
were valid. On October 8, 2002 the US Supreme Court reviewed this case. The
Company expects a decision in late 2002 or early 2003. If the U.S. Supreme Court
decides that the SSA assignments are valid, the Company will be required to
revise its estimate of its obligation under the Coal Act which may result in an
unfavorable adjustment to the Consolidated Financial Statement, which could be
material.
The results of operations at NACCO and Other were as follows for the three and
nine months ended September 30:
THREE MONTHS NINE MONTHS
----------------- -----------------
2002 2001 2002 2001
------ ------ ------ ------
Revenues $ --- $ --- $ .1 $ .1
Operating loss $ (1.0) $ (2.4) $ (2.8) $ (8.5)
Other income, net $ .6 $ 2.1 $ 1.9 $ 6.6
Net income (loss) $ .5 $ (1.3) $ (1.7) $ (3.2)
The decrease in operating loss and other income, net in the three and nine month
periods of 2002 as compared with the same periods of 2001 is primarily due to a
change in the classification of certain of NACCO's fees charged to the operating
segments. In 2002, $1.9 million and $5.5 million for the three and nine months
ended September 30, 2002, respectively, of income from fees charged to the
operating segments is included in operating loss, but was classified in other
income, net in the same periods of 2001.
LIQUIDITY AND CAPITAL RESOURCES
Although NACCO's subsidiaries have entered into substantial borrowing
agreements, NACCO has not guaranteed the long-term debt or any borrowings of its
subsidiaries. The borrowing agreements at NMHG, Housewares and NACoal allow for
the payment to NACCO of dividends and advances under certain circumstances.
Dividends, advances and management fees from its subsidiaries are the primary
sources of cash for NACCO.
The Company believes that funds available under credit facilities, anticipated
funds to be generated from operations and the utility customers' funding of the
project mining subsidiaries are sufficient to finance all of its scheduled
principal repayments, operating needs and commitments arising during the
foreseeable future.
NACCO AND OTHER - continued
FINANCIAL REVIEW - continued
NACCO's consolidated capital structure is presented below:
SEPTEMBER 30 DECEMBER 31
2002 2001
---------- ----------
Total net tangible assets $ 621.4 $ 676.2
Coal supply agreements and other intangibles, net 85.7 85.2
Goodwill at cost 610.0 614.7
---------- ----------
Net assets before goodwill amortization 1,317.1 1,376.1
Accumulated goodwill amortization (183.1) (186.8)
Total debt, excluding current and long-term portion of
obligations of project mining subsidiaries (542.0) (614.7)
Closed mine obligations (Bellaire), including the
United Mine Worker retirees' medical fund, net-of-tax (41.8) (41.9)
Minority interest (2.5) (3.4)
---------- ----------
Stockholders' equity $ 547.7 $ 529.3
========== ==========
Debt to total capitalization 50% 54%
EFFECTS OF FOREIGN CURRENCY
NMHG and Housewares operate internationally and enter into transactions
denominated in foreign currencies. As such, the Company's financial results are
subject to the variability that arises from exchange rate movements. The effects
of foreign currency fluctuations on revenues, operating income and net income at
NMHG and Housewares are addressed in the discussion of operating results, above.
See also Item 3, "Quantitative and Qualitative Disclosures About Market Risk,"
in this Form 10-Q.
OUTLOOK
NMHG Wholesale
NMHG Wholesale expects improved operating results in the fourth quarter of 2002,
compared with the fourth quarter of 2001, due to anticipated increased lift
truck shipments and lower operating expenses as a result of previously initiated
cost reduction programs, including restructuring programs, procurement
initiatives and other strategic programs. NMHG Wholesale also expects to
continue incurring increased interest expense and amortization of deferred
financing fees as a result of the May 2002 refinancing of NMHG's debt.
NMHG Retail
NMHG Retail expects to continue its programs to improve the performance of its
wholly owned dealerships as part of its objective for reaching at least
break-even results.
OUTLOOK - continued
Housewares
HB/PS anticipates that ongoing programs to reduce manufacturing overhead costs
and improve manufacturing efficiency, product quality and customer service will
continue to have a positive impact on results in the fourth quarter of 2002.
HB/PS is cautiously optimistic that markets for consumer goods will improve in
the fourth quarter of 2002 compared with the fourth quarter of 2001. Shipments
in the fourth quarter of 2002 at both HB/PS and KCI could possibly be reduced by
delays due to congestion at West Coast ports.
NACoal
NACoal anticipates that coal deliveries in the fourth quarter of 2002 will
increase, compared with the fourth quarter of 2001, although wet conditions at
several mines and some customers' power plant outages that extended into October
2002 could mitigate the amount of the increase. Increased customer requirements
at MLMC in the fourth quarter are expected to result in improved lignite coal
deliveries compared with the fourth quarter of 2001. Red River is expected to
deliver fewer tons in the fourth quarter of 2002 due to lower customer
requirements.
NACCO Consolidated - Pension Cost
Based on actuarial calculations performed in accordance with SFAS No. 87,
"Employers' Accounting for Pensions," as of September 30, 2002, the measurement
date for the Company's pension plans, the Company expects an increase in its
pension expense for 2003, as compared with 2002, of $4.2 million, of which
approximately $1.8 million is expected to be reimbursed by NACoal's project
mining subsidiaries' customers. In addition, the Company will recognize an
additional minimum pension liability adjustment in the fourth quarter of 2002 to
reflect the amount that the pension plans' accumulated benefit obligation
exceeds the plans' assets in excess of amounts previously accrued for pension
costs. A large portion of this minimum pension liability adjustment will be
reflected as a reduction to stockholders' equity as a component of accumulated
other comprehensive income (loss).
The statements contained in this Form 10-Q that are not historical facts are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are made subject to certain risks and uncertainties
which could cause actual results to differ materially from those presented in
these forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Such risks and uncertainties
with respect to each subsidiary's operations include, without limitation:
NMHG: (1) changes in demand for lift trucks and related aftermarket parts and
service on a worldwide basis, especially in the U.S. where the company derives a
majority of its sales, (2) changes in sales prices, (3) delays in delivery or
changes in costs of raw materials or sourced products and labor, (4) delays in
manufacturing and delivery schedules, (5) exchange rate fluctuations, changes in
foreign import tariffs and monetary policies and other changes in the regulatory
climate in the foreign countries in which NMHG operates and/or sells products,
(6) product liability or other litigation, warranty claims or returns of
products, (7) delays in or increased costs of restructuring programs, (8) the
effectiveness of the cost reduction programs implemented globally, including the
successful implementation of procurement initiatives, (9) acquisitions and/or
dispositions of dealerships by NMHG, (10) costs related to the integration of
acquisitions, (11) the impact of the introduction of the euro, including
increased competition, foreign currency exchange movements and/or changes in
operating costs and (12) the uncertain impact on the economy or the public's
confidence in general from terrorist activities and the consequent climate of
war.
Housewares: (1) changes in the sales prices, product mix or levels of consumer
purchases of kitchenware and small electric appliances, (2) bankruptcy of or
loss of major retail customers or suppliers, (3) changes in costs of raw
materials or sourced products, (4) delays in delivery or the unavailability of
raw materials or key component parts, including delays due to congestion at West
Coast ports, (5) exchange rate fluctuations, changes in the foreign import
tariffs and monetary policies and other changes in the regulatory climate in the
foreign countries in which HB/PS buys, operates and/or sells products, (6)
product liability, regulatory actions or other litigation, warranty claims or
returns of products, (7) increased competition, (8) customer acceptance of,
changes in costs of, or delays in the development of new
products, including the GE-branded products sold to Wal*Mart and new home
environment products, (9) weather conditions or other events that would affect
the number of customers visiting KCI stores and (10) the uncertain impact on the
economy or the public's confidence in general from terrorist activities and the
consequent climate of war.
NACoal: (1) weather conditions and other events that would change the level of
customers' fuel requirements, (2) weather or equipment problems that could
affect lignite deliveries to customers, (3) changes in maintenance, fuel or
other similar costs, (4) costs to pursue international opportunities and (5)
changes in the U.S. economy or in the power industry that would affect demand
for NACoal's reserves.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See pages 40, F-10, F-11 and F-20 of the Company's Form 10-K for the fiscal year
ended December 31, 2001, for a discussion of its derivative hedging policies and
use of financial instruments.
Interest Rate Risk: On May 9, 2002, NMHG refinanced a majority of its
floating-rate debt financing with the issuance of bonds at a fixed rate of
interest, thereby reducing the Company's exposure from its debt financing to
changes in the market rate of interest. As a result of this refinancing during
2002, NMHG terminated all of its interest rate swap agreements. The combined
notional amount and fair market value of the interest rate swap agreements
terminated was $285.0 million and a payable of $11.5 million, respectively, on
the respective dates of termination. Therefore, at September 30, 2002, the
market risk exposure from changes in fair market value with respect to interest
rate swap agreements held by the Company has decreased as compared with December
31, 2001, due to the termination of these interest rate swap agreements. See
also discussion in Note 5 to the Unaudited Condensed Consolidated Financial
Statements in this Form 10-Q.
For purposes of specific risk analysis, the Company uses sensitivity analysis to
measure the potential loss in fair value of financial instruments sensitive to
changes in interest rates. Assuming a hypothetical 10 percent decrease in
interest rates, the fair market value of interest rate sensitive financial
instruments outstanding at December 31, 2001, which primarily represented
interest rate swap agreements, would have declined by $4.1 million as compared
with their fair market value at December 31, 2001. The effect of terminating the
interest rate swap agreements reduces this exposure by approximately $1.6
million, such that a 10 percent decrease in interest rates would reduce the fair
market value by $2.5 million as compared with the fair market value at December
31, 2001.
There have been no other material changes in the Company's market risk exposures
since December 31, 2001.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures: We maintain a set of
disclosure controls and procedures designed to ensure that information required
to be disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Principal Executive Officer and the
Principal Financial Officer, of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, these officers have concluded that the
Company's disclosure controls and procedures are effective.
Changes in internal controls: Subsequent to the date of their evaluation, there
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls, including any corrective
action with regard to significant deficiencies and material weaknesses.
Part II
OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits. None
(b) Reports on Form 8-K.
Current Report on Form 8-K filed with the
Commission on August 14, 2002 (Item 9)
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NACCO Industries, Inc.
--------------------------------------
(Registrant)
Date November 13, 2002 /s/ Kenneth C. Schilling
------------------------------ ---------------------------------------
Kenneth C. Schilling
Vice President and Controller
(Authorized Officer and Principal
Financial and Accounting Officer)
Certifications
I, Alfred M. Rankin, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of NACCO Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Alfred M. Rankin, Jr.
------------------------- ------------------------------
Alfred M. Rankin, Jr.
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
I, Kenneth C. Schilling, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NACCO Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Kenneth C. Schilling
------------------------- --------------------------------
Kenneth C. Schilling
Vice President and Controller
(Principal Financial Officer)