SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9172
NACCO Industries, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1505819
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5875 LANDERBROOK DRIVE, MAYFIELD HEIGHTS, OHIO 44124
(Address of principal executive offices) Zip code
Registrant's telephone number, including area code (440) 449-9600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the last 90 days.
YES X NO
Number of shares of Class A Common Stock outstanding at April 30, 1998:
6,500,429
Number of shares of Class B Common Stock outstanding at April 30, 1998:
1,663,243
NACCO INDUSTRIES, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements Page Number
Condensed Consolidated Balance Sheets -
March 31, 1998 (Unaudited) and December 31, 1997 3-4
Unaudited Condensed Consolidated Statements of
Income for the Three Months Ended March 31, 1998
and 1997 5
Unaudited Condensed Consolidated Statements of Cash
Flows for the Three Months Ended March 31, 1998
and 1997 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7-9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-27
Part II. OTHER INFORMATION
Item 1 Legal Proceedings 28
Item 2 Change in Securities and Use of Proceeds 28
Item 3 Defaults Upon Senior Securities 28
Item 4 Submission of Matters to a Vote of
Security Holders 28
Item 5 Other Information 28
Item 6 Exhibits and Reports on Form 8-K 28
Signature 29
Exhibit Index 30
PART I
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Unaudited) (Audited)
MARCH 31 DECEMBER 31
1998 1997
---------- ----------
ASSETS (In millions)
Current Assets
Cash and cash equivalents $ 15.2 $ 24.1
Accounts receivable, net 255.4 240.8
Inventories 334.4 302.9
Prepaid expenses and other 34.8 31.8
-------- --------
639.8 599.6
Property, Plant and Equipment, Net 539.7 541.7
Deferred Charges
Goodwill, net 445.4 449.3
Deferred costs and other 66.1 63.5
Deferred income taxes 17.2 24.1
-------- --------
528.7 536.9
Other Assets 52.3 50.9
-------- --------
Total Assets $ 1,760.5 $ 1,729.1
======== ========
See notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Unaudited) (Audited)
MARCH 31 DECEMBER 31
1998 1997
---------- ----------
(In millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 253.2 $ 244.7
Revolving credit agreements 48.8 23.5
Current maturities of long-term debt 19.9 18.9
Income taxes 17.7 12.8
Accrued payroll 30.2 36.4
Other current liabilities 170.1 170.2
-------- --------
539.9 506.5
Long-term Debt - not guaranteed by
the parent company 217.3 230.2
Obligations of Project Mining Subsidiaries -
not guaranteed by the parent company or
its North American Coal subsidiary 320.4 328.0
Self-insurance Reserves and Other 218.7 222.7
Minority Interest 17.4 16.6
Stockholders' Equity
Common stock:
Class A, par value $1 per share, 6,495,709
shares outstanding (1997 - 6,477,414
shares outstanding) 6.5 6.5
Class B, par value $1 per share, convertible
into Class A on a one-for-one basis,
1,667,963 shares outstanding
(1997 - 1,676,146 shares outstanding) 1.7 1.7
Capital in excess of par value .9 .1
Retained earnings 435.4 412.9
Foreign currency translation adjustment
and other 2.3 3.9
-------- --------
446.8 425.1
-------- --------
Total Liabilities and Stockholders' Equity $ 1,760.5 $ 1,729.1
======== ========
See notes to unaudited condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Unaudited)
THREE MONTHS ENDED
MARCH 31
----------------------
1998 1997
--------- ---------
(In millions, except per
share data)
Revenues $ 599.3 $ 479.7
Cost of sales 480.3 397.6
--------- ---------
Gross Profit 119.0 82.1
Selling, administrative and general expenses 66.2 62.2
Amortization of goodwill 3.7 3.9
--------- ---------
Operating Profit 49.1 16.0
Other income (expense)
Interest expense (8.0) (10.0)
Other - net (.9) (.8)
--------- ---------
(8.9) (10.8)
--------- ---------
Income Before Income Taxes and Minority Interest 40.2 5.2
Provision for income taxes 15.6 2.3
--------- ---------
Income Before Minority Interest 24.6 2.9
Minority interest (.5) (.1)
--------- ---------
Net Income $ 24.1 $ 2.8
========= =========
Comprehensive income (loss) $ 22.5 $ (3.7)
========= =========
Net income per share: basic and diluted $ 2.95 $ .35
========= =========
Dividends per share $ .1950 $ .1875
========= =========
See notes to unaudited condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Unaudited)
THREE MONTHS ENDED
MARCH 31
1998 1997
------- -------
(In millions)
Operating Activities
Net income $ 24.1 $ 2.8
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization 21.6 21.5
Deferred income taxes (1.6) (1.7)
Other non-cash items 1.1 (.4)
Working Capital Changes:
Accounts receivable (12.0) 7.3
Inventories (31.8) (.8)
Other current assets 6.7 2.3
Accounts payable and other liabilities 1.4 (1.6)
------- -------
Net cash provided by operating activities 9.5 29.4
Investing Activities
Expenditures for property, plant and equipment (17.2) (8.7)
Proceeds from the sale of assets 1.1 .8
Investments in unconsolidated affiliates (2.0) (2.5)
------- -------
Net cash used for investing activities (18.1) (10.4)
Financing Activities
Additions to long-term debt and
revolving credit agreements 25.8 18.8
Reductions of long-term debt and
revolving credit agreements (12.8) (33.5)
Additions to obligations of project mining subsidiaries 14.3 14.8
Reductions of obligations of project mining subsidiaries (22.0) (24.1)
Financing of other short-term obligations (3.8) (6.4)
Cash dividends paid (1.6) (1.5)
Other - net (.3) .1
------- -------
Net cash used for financing activities (.4) (31.8)
Effect of exchange rate changes on cash .1 (1.7)
------- -------
Cash and Cash Equivalents
Decrease for the period (8.9) (14.5)
Balance at the beginning of the period 24.1 47.8
------- -------
Balance at the end of the period $ 15.2 $ 33.3
======= =======
See notes to unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Tabular Amounts in Millions)
Note 1 - Basis of Presentation
NACCO Industries, Inc. ("NACCO") is a holding company with four operating
subsidiaries: NACCO Materials Handling Group, Inc. ("NMHG"), Hamilton
Beach/Proctor-Silex, Inc. ("HBoPS"), The North American Coal Corporation
("NACoal") and The Kitchen Collection, Inc. ("KCI").
The accompanying unaudited condensed consolidated financial statements include
the accounts of NACCO and its majority owned subsidiaries (NACCO Industries,
Inc. and Subsidiaries - the "Company"). Intercompany accounts have been
eliminated.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the financial position of the Company as of March 31, 1998 and the results of
its operations and cash flows for the three month periods ended March 31, 1998
and 1997 have been included.
Operating results for the three month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
Certain amounts in the prior periods' unaudited condensed consolidated financial
statements have been reclassified to conform to the current period's
presentation.
Note 2 - Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which requires
disclosure of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as changes
in stockholders' equity from nonowner sources and, for the Company, includes net
income, changes in the foreign currency translation adjustment and changes in
the minimum pension liability adjustment.
Note 3 - Earnings per Share
Earnings per share is calculated in accordance with the provisions of SFAS No.
128, "Earnings per Share." For purposes of calculating the basic and diluted
earnings per share, no adjustments have been made to the reported amounts of net
income. The share amounts used are as follows:
Three Months Ended
March 31
------------------
1998 1997
---- ----
Basic common shares (weighted average) 8.159 8.196
Dilutive stock options .018 .009
----- -----
Diluted common shares 8.177 8.205
===== =====
Note 4 - Inventories
Inventories are summarized as follows:
March 31 December 31
1998 1997
-------- --------
(Unaudited) (Audited)
Manufacturing inventories:
Finished goods and service parts-
NMHG $ 97.7 $ 86.9
HB/PS 48.4 31.8
-------- --------
146.1 118.7
-------- --------
Raw materials and work in process-
NMHG 133.2 135.6
HB/PS 19.1 15.1
-------- --------
152.3 150.7
-------- --------
LIFO reserve-
NMHG (13.5) (13.4)
HB/PS .9 1.1
-------- --------
(12.6) (12.3)
-------- --------
Total manufacturing inventories 285.8 257.1
Coal-NACoal 8.9 10.7
Mining supplies-NACoal 19.2 19.2
Retail inventories-KCI 20.5 15.9
-------- --------
$ 334.4 $ 302.9
======== ========
The cost of manufacturing inventories has been determined by the last-in,
first-out (LIFO) method for 69 percent and 70 percent of such inventories as of
March 31, 1998 and December 31, 1997, respectively.
Note 5 - Restructuring Accrual
In the fourth quarter of 1997, NMHG approved and began implementation of a plan
to restructure certain activities. As such, the Company recognized an accrual
for lease termination costs and for severance payments to be made to certain
NMHG employees. The change to this accrual during the first quarter of 1998 is
as follows:
Employee
Severance Other
--------- -----
Balance at December 31, 1997 $ 5.9 $ 1.0
Payments .4 .3
----------- ----------
Balance at March 31, 1998 $ 5.5 $ .7
=========== ==========
Severance payments were made to approximately 25 NMHG employees during the first
quarter of 1998. Restructuring activities have proceeded as anticipated. No
material expenses were recognized during the first quarter of 1998 as a result
of the restructuring plan.
Note 6 - Accounting Standards Not Yet Adopted
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for the
Company as of January 1, 1999. This SOP requires capitalization of certain
development costs of software to be used internally, i.e., for manufacturing and
administrative processes.
Note 6 - Accounting Standards Not Yet Adopted - continued
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective for the Company as of January 1, 1999. This SOP
requires start-up and organization costs to be expensed as incurred and also
requires previously deferred start-up costs to be recognized as a cumulative
effect adjustment in the statement of income upon adoption.
These SOP's, which the Company plans to adopt as of January 1, 1999, are not
expected to have a material effect on the financial statements.
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
(Tabular Amounts in Millions, Except Per Share Data)
FINANCIAL SUMMARY
- -----------------
NACCO's four operating subsidiaries function in distinct business environments,
and the financial condition and results of operations are best discussed at the
subsidiary level as presented below.
THREE MONTHS ENDED
MARCH 31
------------------
1998 1997
-------- --------
REVENUES
NMHG $ 431.9 $ 333.3
HB/PS 85.5 75.3
NACoal 68.4 58.4
KCI 14.6 14.6
NACCO and Other -- .1
Eliminations (1.1) (1.0)
-------- --------
$ 599.3 $ 479.7
======== ========
GROSS PROFIT
NMHG $ 87.4 $ 55.7
HB/PS 11.9 9.2
NACoal 13.8 11.2
KCI 6.1 6.0
NACCO and Other (.2) --
-------- --------
$ 119.0 $ 82.1
======== ========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
NMHG $ 43.2 $ 40.6
HB/PS 11.0 10.3
NACoal 2.9 2.2
KCI 6.9 7.0
NACCO and Other 2.2 2.1
-------- --------
$ 66.2 $ 62.2
======== ========
AMORTIZATION OF GOODWILL
NMHG $ 2.9 $ 2.9
HB/PS .8 1.0
-------- --------
$ 3.7 $ 3.9
======== ========
OPERATING PROFIT (LOSS)
NMHG $ 41.3 $ 12.2
HB/PS .1 (2.1)
NACoal 10.9 9.0
KCI (.8) (1.0)
NACCO and Other (2.4) (2.1)
-------- --------
$ 49.1 $ 16.0
======== ========
OPERATING PROFIT (LOSS) EXCLUDING GOODWILL AMORTIZATION
NMHG $ 44.2 $ 15.1
HB/PS .9 (1.1)
NACoal 10.9 9.0
KCI (.8) (1.0)
NACCO and Other (2.4) (2.1)
-------- --------
$ 52.8 $ 19.9
======== ========
FINANCIAL SUMMARY - continued
THREE MONTHS ENDED
MARCH 31
------------------
1998 1997
-------- --------
INTEREST EXPENSE
NMHG $ (3.4) $ (4.7)
HB/PS (1.2) (1.5)
NACoal (.2) (.5)
KCI (.1) (.1)
NACCO and Other (.3) (.6)
Eliminations .3 .6
-------- --------
(4.9) (6.8)
Project mining subsidiaries (3.1) (3.2)
-------- --------
$ (8.0) $ (10.0)
======== ========
OTHER-NET, INCOME (EXPENSE)
NMHG $ (.9) $ (.9)
HB/PS (.4) --
NACoal .1 .6
NACCO and Other .6 .1
Eliminations (.3) (.6)
-------- --------
$ (.9) $ (.8)
======== ========
PROVISION FOR INCOME TAXES
NMHG $ 14.7 $ 3.1
HB/PS (.7) (1.6)
NACoal 2.2 2.0
KCI (.4) (.4)
NACCO and Other (.2) (.8)
-------- --------
$ 15.6 $ 2.3
======== ========
NET INCOME (LOSS)
NMHG $ 22.3 $ 3.5
HB/PS (.8) (2.0)
NACoal 5.5 3.9
KCI (.5) (.7)
NACCO and Other (1.9) (1.8)
Minority interest (.5) (.1)
-------- --------
$ 24.1 $ 2.8
======== ========
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
NMHG $ 9.1 $ 8.2
HB/PS 4.3 4.8
NACoal .7 .6
KCI .3 .3
-------- --------
14.4 13.9
Project mining subsidiaries 7.2 7.6
-------- --------
$ 21.6 $ 21.5
======== ========
CAPITAL EXPENDITURES
NMHG $ 9.9 $ 1.6
HB/PS 4.7 5.3
NACoal 1.4 .7
KCI .3 .3
-------- --------
16.3 7.9
Project mining subsidiaries .9 .8
-------- --------
$ 17.2 $ 8.7
======== ========
FINANCIAL SUMMARY - continued
MARCH 31 DECEMBER 31
1998 1997
-------- --------
TOTAL ASSETS
NMHG $ 983.9 $ 942.4
HB/PS 287.5 290.8
NACoal 54.1 51.5
KCI 27.9 24.9
NACCO and Other 58.2 59.4
-------- --------
1,411.6 1,369.0
Project mining subsidiaries 414.3 423.4
-------- --------
1,825.9 1,792.4
Consolidating eliminations (65.4) (63.3)
-------- --------
$1,760.5 $1,729.1
======== ========
NACCO MATERIALS HANDLING GROUP, INC.
====================================
NMHG, 98 percent-owned by NACCO, designs, manufactures and markets forklift
trucks and related service parts under the Hyster(R) and Yale(R) brand names.
FINANCIAL REVIEW
The results of operations for NMHG were as follows for the three months ended
March 31:
1998 1997
-------- --------
Revenues
Americas $ 309.2 $ 220.1
Europe, Africa and Middle East 106.7 93.7
Asia-Pacific 16.0 18.5
-------- --------
$ 431.9 $ 332.3
======== ========
Operating profit (loss)
Americas $ 32.1 $ 10.0
Europe, Africa and Middle East 8.9 3.2
Asia-Pacific .3 (1.0)
-------- --------
$ 41.3 $ 12.2
======== ========
Operating profit (loss) excluding
goodwill amortization
Americas $ 34.1 $ 12.0
Europe, Africa and Middle East 9.8 4.1
Asia-Pacific .3 (1.0)
-------- --------
$ 44.2 $ 15.1
======== ========
Net income $ 22.3 $ 3.5
======== ========
NACCO MATERIALS HANDLING GROUP, INC. - continued
FINANCIAL REVIEW - continued
First Quarter of 1998 Compared With First Quarter of 1997
The following schedule identifies the components of the changes in revenues,
operating profit and net income for the first quarter of 1998 compared with
1997:
Operating Net
Revenues Profit Income
-------- ------ ------
1997 $ 332.3 $ 12.2 $ 3.5
Increase (decrease) in 1998 from:
Unit volume 94.2 14.7 9.6
Sales mix 4.6 6.4 4.2
Average sales price .8 .8 .5
Service parts 9.6 1.7 1.1
Foreign currency (9.6) (4.7) (3.1)
Manufacturing cost -- 13.6 8.8
Other operating expense -- (3.4) (2.2)
Other income and expense -- -- .5
Differences between effective
and statutory tax rates -- -- (.6)
-------- ------- --------
1998 $ 431.9 $ 41.3 $ 22.3
======== ======= ========
Operating results at NMHG improved primarily due to a 36 percent increase in
worldwide unit volume to 19,757 units sold in the first quarter of 1998 from
14,529 units sold in the first quarter of 1997. Increased demand in the North
American market significantly contributed to this unit volume growth. European
unit volume also increased for the first quarter of 1998 due to stronger demand
in countries with improved economies. Asia-Pacific experienced a slight decline
in unit volume due to the weakened economies in that region. NMHG's worldwide
backlog at the end of the first quarter of 1998 was 22,700 units, compared with
16,500 units at the end of the first quarter of 1997 and 22,100 units at the end
of the fourth quarter of 1997.
Foreign currency negatively affected operating results primarily due to the
strengthening of the pound sterling against other European currencies which
caused price and margin pressure on sterling-based lift trucks. The impact on
operating profit from the strengthened pound sterling was partially offset by
reduced cost of yen-based materials caused by the weakening of the yen against
the U.S. dollar.
Reduced manufacturing costs as a result of product re-engineering and increased
overhead absorption from unit volume growth also contributed to improved
operating results. NMHG's restructuring plan, which began in the fourth quarter
of 1997, continued during the first quarter of 1998 as anticipated.
NACCO MATERIALS HANDLING GROUP, INC.- continued
FINANCIAL REVIEW - continued
Other Income and Expense and Income Taxes
The components of other income (expense) and the effective tax rate are as
follows for the three months ended March 31:
1998 1997
------ ------
Interest expense $ (3.4) $ (4.7)
Other-net (.9) (.9)
------ ------
$ (4.3) $ (5.6)
====== ======
Effective tax rate 39.7% 48.0%
The decrease in interest expense reflects lower borrowing levels in the first
quarter of 1998 compared with the same period in 1997. The decrease in the
effective tax rate primarily results from a determination made in the fourth
quarter of 1997 to reinvest earnings of foreign operations in such foreign
operations for the foreseeable future. Accordingly, NMHG no longer provides for
taxes on unremitted foreign earnings. Also contributing to the decrease in the
effective tax rate is the effect of a constant level of nondeductible goodwill
amortization on a higher comparable level of pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $9.9 million during the
first three months of 1998. It is estimated that NMHG's capital expenditures for
the remainder of 1998 will be approximately $65.0 million. These planned
expenditures relate to the centralization of NMHG's marketing and engineering
organizations, investments in manufacturing facilities, including plant
expansions in Mexico and China, worldwide information systems and tooling for
new products. The principal sources of financing for these capital expenditures
are internally generated funds and bank borrowings.
At March 31, 1998, NMHG had available $224.7 million of its $350.0 million
revolving credit facility. The expiration date of the NMHG facility, which is
currently June 2002, may be extended, on an annual basis, for one additional
year upon the mutual consent of NMHG and the bank group. In addition, the NMHG
facility has performance-based pricing which sets interest rates based upon the
achievement of certain financial performance targets. NMHG also has separate
facilities totaling $43.4 million, of which $28.2 million was available at March
31, 1998. NMHG believes it can meet all of its current and long-term commitments
and operating needs from operating cash flows and funds available under
revolving credit agreements.
NACCO MATERIALS HANDLING GROUP, INC.- continued
LIQUIDITY AND CAPITAL RESOURCES - continued
NMHG's capital structure is presented below:
MARCH 31 DECEMBER 31
1998 1997
-------- -----------
Total net tangible assets $ 208.6 $ 188.3
Goodwill at cost 447.7 447.8
-------- --------
Total assets before goodwill amortization 656.3 636.1
Accumulated goodwill amortization (97.4) (94.4)
Total debt (153.3) (156.8)
-------- --------
Stockholders' equity $ 405.6 $ 384.9
======== ========
Debt to total capitalization 27% 29%
The increase in total net tangible assets is due to an increase in accounts
receivable and inventory, partially offset by a decrease in cash and cash
equivalents and an increase in accounts payable and accrued income taxes. The
increases in accounts receivable, inventory and accounts payable reflect an
increase in sales volume for the first quarter of 1998 compared with the fourth
quarter of 1997, as well as a slight increase in the aging of receivables and
the number of days supply of inventory on hand. The decrease in cash and cash
equivalents results from capital expenditures and debt payments, partially
offset by positive cash flows from operations for the first quarter of 1998.
Increased accrued income taxes is due to the timing of tax payments and an
increase in pre-tax income.
HAMILTON BEACH/PROCTOR-SILEX, INC.
==================================
HB/PS, wholly owned by NACCO, is a leading manufacturer of small electric
appliances. Because the housewares business is seasonal, a majority of revenues
and operating profit is earned in the second half of the year when sales of
small electric appliances increase significantly for the fall holiday selling
season.
FINANCIAL REVIEW
The results of operations for HB/PS were as follows for the three months ended
March 31:
1998 1997
---- ----
Revenues $ 85.5 $ 75.3
Operating profit (loss) $ .1 $ (2.1)
Operating profit (loss) excluding
goodwill amortization $ .9 $ (1.1)
Net loss $ (.8) $ (2.0)
First Quarter of 1998 Compared With First Quarter of 1997
The following schedule identifies the components of the changes in revenues,
operating profit (loss) and net loss for the first quarter of 1998 compared with
1997:
Operating
Profit Net
Revenues (Loss) Loss
------------ ------------ ---------
1997 $ 75.3 $ (2.1) $ (2.0)
Increase (decrease) in 1998 from:
Unit volume and sales mix 11.3 3.0 2.0
Average sales price (1.1) (1.1) (.7)
Manufacturing cost --- .8 .5
Other operating expense --- (.5) (.3)
Other income and expense --- --- (.4)
Differences between effective
and statutory tax rates --- --- .1
--------- -------- -------
1998 $ 85.5 $ .1 $ (.8)
========= ======== =======
Operating results at HB/PS improved primarily due to a 20 percent increase in
unit volume to 7.1 million units sold in the first quarter of 1998 from 5.9
million units sold in the first quarter of 1997. Increased demand from key mass
merchants, specifically for blenders, toasters, irons and coffeemakers,
significantly contributed to this unit volume growth. The positive impact from
increased unit volume was partially offset by a decline in the average sales
price of irons, toasters, can openers and blenders due to competition,
especially from Chinese imports. Manufacturing costs declined from the prior
year due to increased overhead absorption from unit volume growth, partially
offset by additional start-up costs for the new manufacturing facility in
Saltillo, Mexico. Operating and other expenses increased during the first
quarter of 1998 as compared with the first quarter of 1997, primarily due to
annual wage increases and costs of additional advertising activities in 1998.
HAMILTON BEACH/PROCTOR-SILEX, INC. - continued
FINANCIAL REVIEW - continued
Other Income and Expense and Income Taxes
The components of other income (expense) and the effective tax rate are as
follows for the three months ended March 31:
1998 1997
---- ----
Interest expense $ (1.2) $ (1.5)
Other-net (.4) --
-------- --------
$ (1.6) $ (1.5)
======== ========
Effective tax rate 46.7% 44.1%
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $4.7 million during the
first three months of 1998 and are estimated to be $11.3 million for the
remainder of 1998. The primary purpose of these expenditures is to increase
manufacturing capacity and efficiency and to acquire tooling for new and
existing products. These expenditures are funded primarily from internally
generated funds and short-term borrowings.
HB/PS's credit agreement provides for a revolving credit facility that permits
advances up to $160.0 million. At March 31, 1998, HB/PS had $82.5 million
available under this facility, which expires in May 2003. The HBoPS facility
provides lower interest rates if HB/PS achieves a certain interest coverage
ratio and allows for interest rates quoted under a competitive bid option. At
March 31, 1998, HB/PS also had $10.7 million available under separate
facilities.
HB/PS's capital structure is presented below:
MARCH 31 DECEMBER 31
1998 1997
-------- -----------
Total net tangible assets $ 128.6 $ 115.5
Goodwill at Cost 118.9 118.9
-------- --------
Total assets before goodwill amortization 247.5 234.4
Accumulated goodwill amortization (27.3) (26.5)
Total debt (95.1) (80.8)
-------- --------
Stockholder's equity $ 125.1 $ 127.1
======== ========
Debt to total capitalization 43% 39%
Because of the seasonal nature of the housewares business, HB/PS's inventory and
debt levels begin increasing in the first quarter and reach seasonal peaks in
the second and third quarters. These balances typically reach seasonal lows by
the end of the fourth quarter.
THE NORTH AMERICAN COAL CORPORATION
===================================
NACoal mines and markets lignite for use primarily as fuel for power generation
by electric utilities. The lignite is surface mined in North Dakota, Texas and
Louisiana. Total coal reserves approximate 2.0 billion tons with 1.2 billion
tons committed to electric utility customers pursuant to long-term contracts.
NACoal operates five lignite mines, including three project mining subsidiaries
(Coteau, Falkirk and Sabine), a NACoal division (San Miguel) and a joint venture
(Red River). NACoal also provides dragline mining services ("Florida dragline
operations") for a limerock quarry near Miami, Florida. The operating results
for the Florida dragline operations are included in other mining operations.
FINANCIAL REVIEW
NACoal's three project mining subsidiaries (Coteau, Falkirk and Sabine), which
represent a significant portion of NACoal's operations, mine lignite for utility
customers pursuant to long-term contracts at a price based on actual cost plus
an agreed pretax profit per ton. Due to the cost-plus nature of these contracts,
revenues and operating profits are affected by increases and decreases in
operating costs, as well as by tons sold. Net income of these project mines,
however, is not significantly affected by changes in such operating costs, which
include costs of operations, interest expense and certain other items. Because
of the nature and significance of the contracts at these mines, operating
results are best analyzed in terms of lignite tons sold, income before taxes and
net income.
Lignite tons sold by NACoal's five operating mines were as follows for the three
months ended March 31:
1998 1997
---- ----
Coteau Properties 4.2 3.9
Falkirk Mining 2.0 1.5
Sabine Mining .5 1.0
San Miguel .8 --
Red River Mining .2 .2
--- ---
Total Lignite 7.7 6.6
=== ===
The Florida dragline mined 1.9 million cubic yards of limerock in the first
quarter of 1998 versus 1.8 million cubic yards in the first quarter of 1997.
THE NORTH AMERICAN COAL CORPORATION - continued
FINANCIAL REVIEW - continued
Revenues, income before taxes, provision for taxes and net income were as
follows for the three months ended March 31:
1998 1997
---- ----
Revenues
Project mines $ 57.0 $ 52.8
Other mining operations 9.4 4.6
-------- --------
66.4 57.4
Royalties and other 2.0 1.0
-------- --------
$ 68.4 $ 58.4
======== ========
Income before taxes
Project mines $ 6.4 $ 5.7
Other mining operations 1.4 .7
-------- --------
Total from operating mines 7.8 6.4
Royalty and other income, net 1.8 .8
Other operating expenses (1.9) (1.3)
-------- --------
7.7 5.9
Provision for taxes 2.2 2.0
-------- --------
Net income $ 5.5 $ 3.9
======== ========
First Quarter of 1998 Compared with First Quarter of 1997
The following schedule identifies the components of the changes in revenues,
income before taxes and net income for the three months ended March 31:
Income
Before Net
Revenues Taxes Income
---------- --------- ---------
1997 $ 58.4 $ 5.9 $ 3.9
Increase (decrease) in 1998 from:
Project mines
Tonnage volume 1.6 .5 .3
Agreed profit per ton .3 .2 .1
Pass-through costs 2.3 --- ---
Other mining operations
Tonnage volume 4.8 4.6 3.0
Operating costs --- (3.9) (2.5)
-------- ------- -------
Changes from operating mines 9.0 1.4 .9
Royalties and other income, net 1.0 1.0 .7
Other operating expenses --- (.6) (.4)
Differences between effective and
statutory tax rates --- --- .4
-------- ------- -------
1998 $ 68.4 $ 7.7 $ 5.5
======== ======= ======
Operating results from project mines improved due to increased tonnage volume at
Coteau and Falkirk, slightly offset by decreased tonnage volume at Sabine due to
a customer's planned power plant outage. Year over year comparability is
affected by reduced tonnage volume in the first quarter of 1997 due to adverse
winter weather conditions and a customer's unplanned power plant outage.
THE NORTH AMERICAN COAL CORPORATION - continued
FINANCIAL REVIEW - continued
Operating results from other mining operations benefited from the results of the
San Miguel lignite mining operation. NACoal began providing mining services at
San Miguel Electric Cooperative, Inc.'s lignite mine in July 1997. Increased
royalty income also contributed to operating results, whereas increased
operating costs due to ongoing growth initiatives negatively affected first
quarter 1998 net income slightly, as compared with the first quarter of 1997.
Other Income and Expense and Income Taxes
Items of other income (expense) and the effective tax rate for the three months
ended March 31:
1998 1997
---- ----
Interest expense
Project mining subsidiaries $ (3.1) $ (3.2)
Other mining operations (.2) (.5)
-------- --------
$ (3.3) $ (3.7)
======== ========
Other-net
Project mining subsidiaries $ .1 $ .4
Other mining operations -- .2
-------- --------
$ .1 $ .6
======== ========
Effective tax rate 28.6% 34.6%
The decrease in the effective tax rate results from additional percentage
depletion eligible to reduce NACoal's effective tax.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $2.3 million during the
first quarter of 1998. It is estimated that NACoal's capital expenditures for
the remainder of 1998 will be $26.8 million, of which $23.3 million relates to
the development, establishment and improvement of the project mining
subsidiaries' mines and are financed or guaranteed by the utility customers.
Also during the remainder of 1998, NACoal anticipates investing approximately
$11.0 million in a joint venture with Phillips Coal Company to develop a new
lignite mine in Mississippi.
NACoal has in place a $50.0 million revolving credit facility. The expiration
date of this facility, which currently is September 2002, can be extended one
additional year, on an annual basis, upon the mutual consent of NACoal and the
bank group. NACoal had $36.0 million of its revolving credit facility available
at March 31, 1998. A portion of the outstanding balance is attributable to funds
loaned to NACCO to partially finance NACCO's Class A common stock repurchase
program.
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 NACCO in amounts equal to
their retained earnings.
THE NORTH AMERICAN COAL CORPORATION - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
NACoal's capital structure, excluding the project mining subsidiaries, is
presented below:
MARCH 31 DECEMBER 31
1998 1997
-------- -----------
Investment in project mining subsidiaries $ 2.4 $ 4.3
Other net tangible assets 6.7 3.4
-------- --------
Total tangible assets 9.1 7.7
Advances to parent company 20.0 21.9
Debt related to parent advances (14.0) (14.4)
Other debt -- (.1)
-------- --------
Total debt (14.0) (14.5)
-------- --------
Stockholder's equity $ 15.1 $ 15.1
======== ========
Debt to total capitalization 48% 49%
THE KITCHEN COLLECTION, INC.
============================
KCI is a national specialty retailer of kitchenware, tableware, small electric
appliances and related accessories. The specialty retail business is seasonal,
with the majority of its revenues and operating profit generated in the fourth
quarter during the fall holiday selling season.
FINANCIAL REVIEW
First Quarter of 1998 Compared With First Quarter of 1997
The following schedule identifies the components of the changes in revenues,
operating loss and net loss for the first quarter of 1998 compared with 1997:
Operating Net
Revenues Loss Loss
------------- --------- --------
1997 $ 14.6 $ (1.0) $ (.7)
Increase (decrease) in 1998 from:
Stores opened in 1997 .1 .2 .1
Comparable stores (.1) (.2) (.1)
Other --- .2 .2
--------- --------- -------
1998 $ 14.6 $ (.8) $ (.5)
========= ========= =======
KCI operated 142 stores on March 31, 1998 compared with 144 stores on March 31,
1997. Since March 31, 1997, KCI has closed 12 stores operated mainly under the
Hearthstone(TM) store format and opened 10 Kitchen Collection(R) stores.
Operating results in the first quarter of 1998 improved over the first quarter
of 1997 when margins were negatively affected by store closing costs and
clearance actions taken on discontinued product lines. Although the average
dollar value of each sales transaction rose 9.5 percent in the first quarter of
1998, the number of customer sales transactions decreased 9.9 percent, compared
with the first quarter of 1997, because of reduced customer traffic at factory
outlet malls. Consequently, the net loss for the first quarter of 1998 was $0.5
million compared with $0.7 million for the comparable period of the prior year.
Provision for Income Taxes
KCI's effective tax rate for the three months ended March 31, 1998 and 1997 was
42.0 percent.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for property, plant and equipment were $0.3 million during the
first three months of 1998. Estimated capital expenditures for the remainder of
1998 are $0.6 million. These expenditures are funded primarily from internally
generated funds and short-term borrowings. At March 31, 1998, KCI had available
$1.9 million of its $5.0 million line of credit. This line of credit has
performance-based pricing which provides for reduced interest rates based on the
achievement of certain financial performance measures. The expiration date of
KCI's revolving credit facility is May 2000 and may be extended, on an annual
basis, for one additional year upon the mutual consent of KCI and the bank.
THE KITCHEN COLLECTION, INC. - continued
LIQUIDITY AND CAPITAL RESOURCES - continued
KCI's capital structure is presented below:
MARCH 31 DECEMBER 31
1998 1997
-------- --------
Total net tangible assets $ 14.9 $ 12.3
Goodwill at cost 4.6 4.6
-------- --------
Total assets before goodwill amortization 19.5 16.9
Accumulated goodwill amortization (1.1) (1.1)
Total debt (8.1) (5.0)
-------- --------
Stockholder's equity $ 10.3 $ 10.8
======== ========
Debt to total capitalization 44% 32%
NACCO AND OTHER
===============
FINANCIAL REVIEW
NACCO and Other includes the parent company operations and Bellaire Corporation
("Bellaire"), a non-operating subsidiary of NACCO. While Bellaire's operations
are immaterial, it has significant long-term liabilities related to closed
mines, primarily from former eastern U.S. underground coal-mining activities.
Cash payments related to Bellaire's obligations, net of internally generated
cash, are funded by NACCO and are anticipated to be $2.7 million for the
remainder of 1998.
The results of operations at NACCO and Other were as follows for the three
months ended March 31:
1998 1997
-------- -------
Revenues $ -- $ .1
Operating loss $ (2.4) $ (2.1)
Other income-net $ .6 $ .1
Net loss $ (1.9) $ (1.8)
LIQUIDITY AND CAPITAL RESOURCES
Although the subsidiaries have entered into substantial borrowing agreements,
NACCO has not guaranteed the long-term debt or any borrowings of its
subsidiaries.
The borrowing agreements at NMHG, HB/PS and KCI allow for the payment to NACCO
of dividends and advances under certain circumstances. There are no restrictions
on the transfer of assets from NACoal. Dividends and advances from its
subsidiaries are the primary sources of cash for NACCO.
NACCO's consolidated capital structure is presented below:
MARCH 31, DECEMBER 31
1998 1997
--------- -----------
Total net tangible assets $ 367.2 $ 328.4
Goodwill at cost 571.2 571.3
-------- --------
Total assets before goodwill amortization 938.4 899.7
Accumulated goodwill amortization (125.8) (122.0)
Total debt, excluding current and long-term
portion of obligations
of project mining subsidiaries (270.5) (257.0)
Closed mine obligations, (Bellaire), including the
United Mine Worker retirees' medical fund, net-of-tax (77.9) (79.0)
Minority interest (17.4) (16.6)
-------- --------
Stockholders' equity $ 446.8 $ 425.1
======== ========
Debt to total capitalization 37% 37%
NACCO AND OTHER - continued
The Company believes it can adequately meet all of its current and long-term
commitments and operating needs. This outlook stems from amounts available under
revolving credit facilities and the utility customers' funding of the project
mining subsidiaries.
INTEREST RATE PROTECTION
NMHG, HB/PS, NACoal and KCI have entered into interest rate swap agreements for
portions of their floating rate debt. These interest rate swaps provide
protection against significant increases in interest rates and have terms
ranging from one to six years, with the counterparty's option to extend certain
contracts to eight years.
The Company evaluates its exposure to floating rate debt on an ongoing basis.
EFFECTS OF FOREIGN CURRENCY
NMHG and HB/PS operate internationally and enter into transactions denominated
in foreign currencies. As a result, the Company is subject to the transaction
exposures that arise from exchange rate movements between the dates foreign
currency transactions are committed and the dates they are consummated. The
effects of foreign currency on revenues, operating income and net income at NMHG
are disclosed above. At HB/PS, foreign currency effects had an immaterial impact
on operating results between comparable periods of 1998 and 1997.
NMHG and HB/PS use forward foreign currency exchange contracts to partially
reduce risks related to transactions denominated in foreign currencies. These
contracts usually have maturities of one to twelve months and generally require
the companies to buy or sell Japanese yen, Australian dollars, Canadian dollars
or various European currencies for the functional currency in which the
applicable subsidiary operates at rates agreed to at the inception of the
contracts.
YEAR 2000
The Company has developed an action plan and identified the resources needed to
convert the majority of its computer systems and software applications to
achieve a year 2000 date conversion with no effect on customers or disruption to
business operations. Implementation of the plan has begun, and the Company
anticipates completion of testing of mission critical systems by the end of
1998. The Company estimates that the cost to complete these efforts, which
primarily includes the purchase of software upgrades under normal maintenance
agreements with third party vendors, will not be material and will be expended
primarily in 1998. The Company is currently evaluating its computer-controlled
machinery and equipment for year 2000 compliance. Although the Company does not
anticipate the cost to convert, or failure to convert, this machinery and
equipment to be material to the Company's operating results, the ultimate impact
is unknown.
In addition, the Company has discussed with its vendors and customers the need
to be year 2000 compliant. Although the Company has no reason to believe that
its vendors and customers will not be compliant by the year 2000, the Company is
unable to determine the extent to which year 2000 issues will effect its vendors
and customers. The Company continues to discuss with its vendors and customers
the need for implementing procedures to address this issue.
OUTLOOK
NMHG: Given NMHG's current worldwide backlog of 22,700 units, NMHG expects lift
truck shipments in North America and Europe to remain strong in 1998. Shipments
in the Asia-Pacific region, which represents less than 5 percent of NMHG's
worldwide sales, are expected to decline because of weaker economies. NMHG's
cost reduction programs, including Value Improvement, Demand Flow Technology and
infrastructure reorganization, are expected to have an increasing positive
impact on NMHG's operating results throughout 1998.
HB/PS: HB/PS's transition to the Saltillo manufacturing facility will continue
through 1998. HBoPS expects increasing cost-savings from Saltillo to benefit
operations in 1998 as production capacity increases. The full cost-savings
impact of Saltillo is expected to be realized in 1999 and 2000.
NACoal: NACoal's mining operations are expected to continue to provide a steady
volume of lignite deliveries in 1998. NACoal will have a full year of lignite
deliveries from its San Miguel mine in 1998, compared with six months of
operations in 1997.
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 those forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Such risks and uncertainties with respect to each subsidiary's
operations include without limitation:
NMHG: (1) changes in demand for forklift trucks and related service parts on a
worldwide basis, (2) changes in sales prices, (3) delays in delivery or
increased costs of raw materials or sourced products and labor, (4) delays in
manufacturing and delivery schedules, (5) exchange rate fluctuations, changes in
foreign import tariffs and monetary policies and other changes in the regulatory
climate in the foreign countries in which NMHG operates and/or sells products,
(6) product liability or other litigation, warranty claims or other returns of
products and (7) delays or increased costs of employee relocations and/or in the
execution of the restructuring program.
HB/PS: (1) delays or increased costs in the start-up of the operations in
Saltillo, (2) bankruptcy of or loss of major retail customers, (3) changes in
the sales price, product mix or levels of consumer purchasing of small electric
appliances, (4) exchange rate fluctuations, changes in foreign import tariffs
and monetary policies and other changes in the regulatory climate in the foreign
countries in which HB/PS operates and/or sells products and (5) product
liability or other litigation, warranty claims or other returns of products.
NACoal: (1) weather conditions and other events that would reduce the level of
customers' fuel requirements and (2) weather or equipment problems that could
affect lignite deliveries to customers.
KCI: (1) weather conditions which would affect the number of customers visiting
the stores, (2) changes in the sales price, product mix or level of consumer
purchasing of kitchenware and small electric appliances and (3) delays in the
opening of proposed new stores.
Part II
Item 1 - Legal Proceedings
None
Item 2 - Change in Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits. See Exhibit Index on page 29 of this quarterly report
on Form 10-Q.
(b) Reports on Form 8-K. The Company did not file any reports
on Form 8-K during the first quarter of 1998.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NACCO Industries, Inc.
(Registrant)
Date May 13, 1998 /s/ Kenneth C. Schilling
----------------------------- --------------------------
Kenneth C. Schilling
Vice President and Controller
(Principal Financial and
Accounting Officer)
Exhibit Index
Exhibit
Number* Description of Exhibit
(10) Material Contracts
(cxxi) Amendment No. 4 dated as of April 22, 1998 to the
Second Amended and Restated Credit Agreement dated as of
October 11, 1990, amended and restated as of April 18, 1995,
among Hamilton Beach/Proctor Silex, Inc., Proctor-Silex Canada
Inc., Proctor-Silex S.A. de C.V., as Obligors, the Banks
signatory thereto and the Chase Manhattan Bank NA, as U.S.
Agent, and The Chase Manhattan Bank of Canada, as Canadian
agent, is attached hereto as Exhibit 10(cxxi).
(27) Financial Data Schedule
(99) Other Exhibits Not Required To Otherwise Be Filed
(I) Comments of Alfred M. Rankin, Jr., Chairman, President and
Chief Executive Officer, At the NACCO Industries, Inc. Annual
Meeting of Stockholders May 13, 1998, is attached hereto as
Exhibit 99.1.
*Numbered in accordance with Item 601 of Regulation S-K.