NACCO Industries, Inc. (NC) - Description of business
NMHG’s lift truck business historically has been cyclical. Fluctuations in the rate of orders for
lift trucks reflect the capital investment decisions of NMHG’s customers, which depend to a certain
extent on the general level of economic activity in the various industries that the lift truck
customers serve. During economic downturns, customers tend to delay new lift truck purchases.Research and DevelopmentNMHG’s research and development capability is organized around four major engineering centers, all
coordinated on a global basis from NMHG’s Portland, Oregon headquarters. Comparable products are
designed for each brand concurrently and generally each center is focused on the global
requirements for a single product line. NMHG’s counterbalanced development center, which has
global design responsibility for several classes of lift trucks primarily used in industrial
applications, is located in Portland, Oregon. NMHG’s big truck development center is located in
Nijmegen, The Netherlands, adjacent to a dedicated global big truck assembly facility. Big trucks
are primarily used in handling shipping containers and in specialized heavy lifting applications.
Warehouse trucks, which are primarily used in distribution applications, are designed based on
regional differences in stacking and storage practices. NMHG designs warehouse equipment for sale
in the Americas market in Greenville, North Carolina, adjacent to the Americas assembly facility
for warehouse equipment. NMHG designs warehouse equipment for the European market in Masate, Italy
adjacent to its assembly facilities for warehouse equipment. In addition, during 2005, NMHG opened
an engineering office in India to support its global drafting and design activities.NMHG’s engineering centers utilize a three-dimensional CAD/CAM system and are electronically
connected with one another, with all of NMHG’s manufacturing and assembly facilities and with some
suppliers. This allows for collaboration in technical engineering designs and collaboration with
suppliers. Additionally, NMHG solicits customer feedback throughout the design phase to improve
product development efforts. NMHG invested $52.4 million, $50.0 million and $50.8 million on
product design and development activities in 2006, 2005 and 2004, respectively.Sumitomo-NACCO Joint VentureNMHG has a 50% ownership interest in Sumitomo-NACCO Materials Handling Group, Ltd. (“SN”), a
limited liability company that was formed in 1970 to manufacture and distribute lift trucks in
Japan. Sumitomo Heavy Industries, Inc. owns the remaining 50% interest in SN. Each shareholder of
SN is entitled to appoint directors representing 50% of the vote of SN’s board of directors. All
matters related to policies and programs of operation, manufacturing and sales activities require
mutual agreement between NMHG and Sumitomo Heavy Industries, Inc. prior to a vote of SN’s board of
directors. As a result, NMHG accounts for its ownership in SN using the equity method of
accounting. NMHG purchases Hyster ® and Yale ® branded lift trucks and related
components and aftermarket parts from SN under normal trade terms for sale outside of Japan. NMHG
also contracts with SN for engineering design services on a cost plus basis and charges SN for
technology used by SN but developed by NMHG.EmployeesAs of January 31, 2007, NMHG had approximately 7,000 employees, approximately 6,100 of whom were
employed by the wholesale operations and approximately 900 of whom were employed by the retail
operations. A majority of the employees in the Danville, Illinois parts depot operations
(approximately 130 employees) are unionized, as are tool room employees (approximately 15
employees) located in Portland, Oregon. NMHG’s contracts with the Danville and Portland unions
expire in June 2009 and November 2007, respectively. Employees at the facilities in Berea,
Kentucky; Sulligent, Alabama; and Greenville, North Carolina are not represented by unions. In
Mexico, shop employees are unionized.In Europe, some employees in the Craigavon, Northern Ireland; Irvine, Scotland; Masate, Italy; and
Modena, Italy facilities are unionized. Employees in the Nijmegen, The Netherlands facility are
not represented by unions, but the employees have organized a works council, as required by Dutch
law, which performs a consultative role on employment matters. All of the European employees are
part of a European Works Council that performs a consultative role on business and employment
matters.In Asia-Pacific, 13 locations have certified industrial agreements for hourly employees and five of
the 13 locations have unions for their employees.NMHG believes its current labor relations with both union and non-union employees are generally
satisfactory. However, there can be no assurances that NMHG will be able to successfully
renegotiate its union contracts without work stoppages or on acceptable terms. A prolonged work
stoppage at a unionized facility could have a material adverse effect on NMHG’s business and
results of operations.Environmental MattersNMHG’s manufacturing operations are subject to laws and regulations relating to the protection of
the environment, including those governing the management and disposal of hazardous substances.
NMHG Retail’s operations are particularly affected by laws and regulations relating to the disposal
of cleaning solvents and wastewater and the use of and disposal of petroleum products from
underground and above-ground storage tanks. NMHG’s policies stress compliance and NMHG believes it
is currently in substantial compliance with existing environmental laws. If NMHG fails to comply
with these laws or its environmental permits, then it could incur substantial costs, including
cleanup costs, fines and civil and criminal sanctions. In addition, future changes to
environmental laws could require NMHG to incur significant additional expense or restrict
operations. Based on current information, NMHG does not expect compliance with environmental
requirements to have a material adverse effect on NMHG’s financial condition or results of
operations.In addition, NMHG’s products may be subject to laws and regulations relating to the protection of
the environment, including those governing vehicle exhaust. Regulatory agencies in the United
States and Europe have issued or proposed various regulations and directives designed to reduce
emissions from spark ignited engines and diesel engines used in off-road vehicles, such as
industrial lift trucks. These regulations require NMHG and other lift truck manufacturers to incur
costs to modify designs and manufacturing processes and to perform additional testing and
reporting. While there can be no assurance, NMHG believes that the impact of the additional
expenditures to comply with these requirements will not have a material adverse effect on its
business.NMHG is investigating or remediating historical contamination at some current and former sites
caused by its operations or those of businesses it acquired. NMHG has also been named as a
potentially responsible party for cleanup costs under the so-called Superfund law at several
third-party sites where NMHG (or its predecessors) disposed of wastes in the past. Under the
Superfund law and often under similar state laws, the entire cost of cleanup can be imposed on any
one of the statutorily liable parties, without regard to fault. While NMHG is not currently aware
that any material outstanding claims or obligations exist with regard to these sites, the discovery
of additional contamination at these or other sites could result in significant cleanup costs that
could have a material adverse effect on NMHG’s financial conditions and results of operations.In connection with any acquisition made by NMHG, NMHG could, under some circumstances, be held
financially liable for or suffer other adverse effects due to environmental violations or
contamination caused by prior owners of businesses NMHG has acquired. In addition, under some of
the agreements through which NMHG has sold businesses or assets, NMHG has retained responsibility
for certain contingent environmental liabilities arising from pre-closing operations. These
liabilities may not arise, if at all, until years later.Government and Trade RegulationsAs a result of certain rulings by the World Trade Organization (“WTO”) with respect to tax benefits
granted to U.S. exporters under U.S. tax laws, a portion of NMHG’s products exported into European
Union countries during 2004 were subject to an additional duty. The additional duty was 5% ad
valorem in March 2004 and increased 1% each month thereafter up to a maximum of 17%. Effective
January 1, 2005, the council of the European Union suspended the additional customs duties on
imports of certain NMHG products originating in the United States, subject to a determination by
the WTO whether certain aspects of the American Jobs Creation Act of 2004 (the “Jobs Act”) are
consistent with the U.S.’s WTO obligation. In May 2006, the U.S. Congress voted to repeal certain
tax benefits for U.S. companies contained in the Jobs Act. As a result, the European Union
repealed the regulation which dealt with the additional customs duties and the additional duties to
be applied to lift trucks imported into Europe from the United States were eliminated.NMHG’s business in the past has been affected by trade disputes between the United States and
Europe. In the future, to the extent NMHG is affected by trade disputes and increased tariffs are
levied on its goods, its results of operations may be materially adversely affected.B. NACCO Housewares GroupGeneralHousewares consists of two reportable segments: HB/PS and KCI. HB/PS is a leading designer,
marketer and distributor of small electric household appliances, as well as commercial products for
restaurants, bars and hotels. HB/PS’ products are marketed primarily to retail merchants and
wholesale distributors.KCI is a national specialty retailer of kitchenware and gourmet foods operating under the Kitchen
Collection ® and Le Gourmet Chef ® store names in outlet and traditional malls
throughout the United States. KCI operated 280 retail stores as of December 31, 2006. KCI stores
are located primarily in factory outlet malls and feature merchandise of highly recognizable
name-brand manufacturers, including Hamilton Beach ® and Proctor Silex ® . Le
Gourmet Chef ® stores are located primarily in outlet and traditional malls throughout the United
States and feature gourmet foods and home entertainment products, as well as brand name electric
and non-electric kitchen items.Sales and MarketingHB/PS designs, markets and distributes a wide range of small electric household appliances,
including motor-driven appliances such as blenders, mixers, can openers and food processors and
heat-driven appliances such as coffeemakers, irons, toasters, slowcookers, indoor grills and
toaster ovens. HB/PS also markets a line of air purifiers and odor eliminators. In addition,
HB/PS
designs, markets and distributes commercial products for restaurants, bars and hotels. HB/PS
generally markets its “better” and “best” segments under the Hamilton Beach ® brand and
uses the Proctor Silex ® brand for the “good” and “better” segments. HB/PS markets
premium products under the Hamilton Beach ® eclectrics ® brand and its opening
price point products under the Traditions by Proctor Silex ® brand. HB/PS also markets
air purifiers, allergen reducers and home odor elimination products under the TrueAir ®
brand. In addition, HB/PS supplies Wal-Mart with GE-brand kitchen electric and garment-care
appliances under Wal-Mart’s license agreement with General Electric Company. In addition, HB/PS
supplies Target with certain Michael Graves-brand kitchen appliances under Target’s store-wide
Michael Graves line. HB/PS also licenses the Febreze ® brand from The Procter & Gamble
Company for use in HB/PS’ odor elimination line. HB/PS markets its products primarily in North
America, but also sells products in Latin America, Asia-Pacific and Europe. Sales are generated
predominantly by a network of inside sales employees to mass merchandisers, national department
stores, variety store chains, drug store chains, specialty home retailers and other retail outlets.
Sales to one of HB/PS’ customers, Wal-Mart, exceeded 10% of Housewares’ revenues in each of the
last three years and the loss of this customer would be material to Housewares. HB/PS’ five
largest customers accounted for approximately 57%, 58% and 59% of net sales for the years ended
December 31, 2006, 2005 and 2004, respectively. Sales promotion activities are primarily focused
on cooperative advertising. In 2006, HB/PS also promoted its most innovative products through the
use of direct response television advertising. In 2006, HB/PS licensed certain of its brands to
various licensees for water coolers, microwaves and water treatment products.Because of the seasonal nature of the markets for small electric appliances, HB/PS’ management
believes that backlog is not a meaningful indicator of performance and is not a significant
indicator of annual sales. As of December 31, 2006, backlog for HB/PS was approximately $9.0
million. This compares with the backlog as of December 31, 2005 of approximately $6.4 million.
This backlog represents customer orders, which may be canceled at any time prior to shipment.HB/PS’ warranty program to the consumer consists generally of a limited warranty lasting for
varying periods of up to three years for electric appliances, with the majority of products having
a warranty of one year or less. Under its warranty program, HB/PS may repair or replace, at its
option, those products found to contain manufacturing defects.Revenues and operating profit for Housewares are traditionally greater in the second half of the
year as sales of small electric appliances to retailers and consumers increase significantly with
the fall holiday selling season. Because of the seasonality of purchases of its products, HB/PS
incurs substantial short-term debt to finance inventories and accounts receivable in anticipation
of the fall holiday selling season.Product Design and DevelopmentHousewares spent $7.4 million in 2006, $6.9 million in 2005 and $7.2 million in 2004 on product
design and development activities. All of these expenditures were made by HB/PS.Key Suppliers and Raw MaterialThe principal raw materials used to manufacture and distribute HB/PS’ products are plastic, glass,
steel, copper, aluminum and packaging materials. HB/PS believes that adequate quantities of raw
materials are available from various suppliers.In 2006, HB/PS purchased approximately 90% of its finished products from suppliers in China. HB/PS
believes that there are adequate third-party supplier choices available that can meet HB/PS’
quality standards.CompetitionThe small electric appliance industry does not have onerous entry barriers. As a result,
Housewares competes with many small manufacturers and distributors of housewares products. Based
on publicly available information about the industry, HB/PS believes it is one of the largest
full-line distributors and marketers of small electric household appliances in North America based
on key product categories.As retailers generally purchase a limited selection of small electric appliances, HB/PS competes
with other suppliers for retail shelf space. Since 1996, HB/PS has also conducted consumer
advertising for the Hamilton Beach ® brand. Since 2002, this advertising has focused on
the Hamilton Beach ® and TrueAir ® brands. HB/PS believes that the principal
areas of competition with respect to its products are product design and innovation, quality,
price, product features, merchandising, promotion and warranty.Since the outlet channel of the retail industry is approaching maturity, the management of KCI
continues to explore alternate areas of growth and diversification. For the past several years,
KCI has been testing alternative store formats both within the outlet industry and in the more
traditional retail environments, including the enclosed mall store format and the large store
format. Because not all of these formats have met KCI’s rigorous financial performance standards,
KCI continues to explore alternate channels of distribution, including distribution through the
internet. In addition, KCI is exploring alternatives for Le Gourmet Chef ® stores in
outlet malls, traditional malls and distribution through the internet.Government RegulationHB/PS is subject to numerous federal and state health, safety and environmental regulations.
HB/PS’ management believes that the impact of expenditures to comply with such laws will not have a
material adverse effect on HB/PS.As a marketer and distributor of consumer products, HB/PS is subject to the Consumer Products
Safety Act and the Federal Hazardous Substances Act, which empower the U.S. Consumer Product Safety
Commission (“CPSC”) to seek to exclude from the market products that are found to be unsafe or
hazardous. Under certain circumstances, the CPSC could require HB/PS to repair, replace or refund
the purchase price of one or more of HB/PS’ products, or HB/PS may voluntarily do so.Throughout the world, electrical appliances are subject to various mandatory and voluntary
standards, including requirements in some jurisdictions that products be listed by Underwriters’
Laboratories, Inc. (“UL”) or other similar recognized laboratories. HB/PS also uses the ETL SEMKO
division of Intertek for certification and testing of compliance with UL standards, as well as
other nation- and industry-specific standards. HB/PS endeavors to have HB/PS’ products designed to
meet the certification requirements of, and to be certified in, each of the jurisdictions in which
they are sold.Patents, Trademarks, Copyrights and LicensesHB/PS holds patents and trademarks registered in the United States and foreign countries for
various products. HB/PS believes that its business is not dependent upon any individual patent,
trademark, copyright or license, but that the Hamilton Beach ® and Proctor
Silex ® trademarks are material to its business.EmployeesAs of January 31, 2007, Housewares’ work force consisted of approximately 2,300 employees, most of
whom are not represented by unions. In Canada, approximately 17 hourly employees at HB/PS’ Picton,
Ontario distribution facility are unionized. These employees are represented by an employee
association which performs a consultative role on employment matters. The February 2005 collective
bargaining agreement for HB/PS’ Saltillo, Mexico manufacturing facility has been extended through
April 30, 2007. Under this agreement, a new wage agreement with similar terms was effective in
January 2006. As of January 31, 2007, there were approximately 174 employees subject to the terms
of the Saltillo agreement. HB/PS and KCI believe their current labor relations with both union and
non-union employees are satisfactory. However, there can be no assurances that HB/PS will be able
to successfully renegotiate its union contracts without work stoppages or on acceptable terms. A
prolonged work stoppage at a unionized facility could have a material adverse effect on Housewares’
business and results of operations.C. North American CoalGeneralNACoal is engaged in the mining and marketing of lignite coal primarily as fuel for power
generation and provides selected value-added mining services for other natural resources companies.
NACoal mines lignite coal through both wholly owned unconsolidated project mining subsidiaries
pursuant to long-term, cost plus a profit per ton contracts with utility customers, as well as
consolidated coal mining operations. At the unconsolidated project mining subsidiaries, the
utility customers have provided, arranged and/or guaranteed the financing of the development and
operation of the mines. There is no recourse to NACCO or NACoal for the financing of these
unconsolidated project mining subsidiary mines. Conversely, NACoal has arranged and provided the
necessary financing for the consolidated coal mining operations, except for the San Miguel Lignite
Mining Operations. NACoal also provides dragline mining services for limerock quarries in Florida
and earns royalty income from the lease of various coal and other natural resources properties.At December 31, 2006, NACoal’s operating mines consisted both of mines where the reserves were
acquired and developed by NACoal, as well as mines where reserves were owned by the customers of
the mines. It is currently contemplated that the reported reserves will be mined within the term
of the leases for each of the mines that NACoal operates and controls the reserves. In the future,
if any of the leases are projected to expire before mining operations can commence, it is currently
expected that each such lease would be amended to extend the term or new leases would be
negotiated. Under these terms, NACoal expects that lignite coal mined pursuant to these leases
will be available to meet its production requirements.Because each coal mining operation has a contract to provide lignite coal to its customer, a
significant portion of NACoal’s revenue is derived from a single source, which exceeds 10% of
NACoal’s revenues. The loss of any lignite coal customer would be material to NACoal.Sales, Marketing and OperationsThe principal lignite coal customers of NACoal are electric utilities and an independent power
provider.The total production by mine for the last three years and the weighted average prices per ton
sold/delivered for the last three years are as follows: Total production by mine (in millions of tons) (1)
2006
2005
2004
Unconsolidated Project Mines
Freedom
15.2
15.1
15.2
Falkirk
8.2
7.7
7.6
Sabine
4.0
4.6
4.3
Consolidated Mines Operations
San Miguel
3.6
3.3
3.1
Red River
0.8
0.6
0.5
Red Hills
3.8
3.6
3.6
Total lignite tons produced
35.6
34.9
34.3
Lignite price per ton sold/delivered
$
12.14
$
11.42
$
10.93
(1)
No operating mines currently exist on the undeveloped reserves. Florida Dragline
Operations have contracts with Vecellio & Grogan, Inc., d/b/a White Rock Quarries (“WRQ”), Rinker
Materials of Florida, Inc. (“Rinker”) and Tarmac America LLC (“Tarmac”) to provide limerock dragline
mining services only.
The contracts under which the project mining subsidiaries were organized provide that, under
certain conditions of default, the customer(s) involved may elect to acquire the assets (subject to
the liabilities) or the capital stock of the subsidiary for an amount effectively equal to book
value. NACoal does not know of any conditions of default that currently exist. In one case, the
customer may elect to acquire the stock of the subsidiary upon a specified period of notice without
reference to default, in exchange for certain payments on coal thereafter mined. NACoal does not
know of any current intention of any customer to acquire the stock of a subsidiary or terminate a
contract for convenience.The location, mine type, reserve data, coal quality characteristics, customer, sales tonnage and
contract expiration date for the mines operated by NACoal in 2006 were as follows: LIGNITE
COAL MINING OPERATIONS ON AN “AS RECEIVED” BASIS
2006
Proven and Probable Reserves (1)(2)
2005
Committed Under
Total Committed
Contract
Uncommitted
Total
Sales Tonnage
and Uncommitted
Sales Tonnage
Contract
Mine/Reserve
Type of Mine
(Millions of Tons)
(Millions)
Owned (%)
Leased (%)
(Millions of Tons)
(Millions)
Expires
Unconsolidated Project Mining
Subsidiaries
Freedom Mine (3)
Surface Lignite
484.6
—
484.6
15.3
3
%
97
%
553.0
15.0
2012
(4)
Falkirk Mine (3)
Surface Lignite
470.9
—
470.9
8.2
1
%
99
%
473.1
7.7
2045
Sabine Mine (3)
Surface Lignite
(5)
(5)
—
3.9
(5)
(5)
—
4.5
2020
Consolidated Mining Operations
San Miguel Lignite Mining Operations
Surface Lignite
(5)
(5)
—
3.6
(5)
(5)
—
3.3
2010
Red River Mine
Surface Lignite
4.1
53.2
57.3
0.8
93
%
7
%
58.1
0.6
2011
Red Hills Mine
Surface Lignite
135.4
117.9
253.3
3.6
25
%
75
%
264.4
3.6
2032
Total Developed
1,095.0
171.1
1,266.1
35.4
1,348.6
34.7
Undeveloped Mining Operations
North Dakota
—
—
562.7
562.7
—
0
%
100
%
526.7
—
—
Texas
—
13.0
196.4
209.4
—
41
%
59
%
209.4
—
—
Eastern (6)
—
(6)
47.9
47.9
—
95
%
5
%
47.4
—
—
Mississippi
—
—
142.2
142.2
—
0
%
100
%
143.4
—
—
Total Undeveloped
13.0
949.2
962.2
926.9
Total Developed/Undeveloped
1,108.0
1,120.3
2,228.3
2,275.5
Coal Formation or
Average Seam
Average
Average Coal Quality (As received)
Mine/Reserve
Type of Mine
Coal Seam(s)
Thickness (feet)
Depth (feet)
BTUs/lb
Sulfur (%)
Ash (%)
Moisture (%)
Unconsolidated Project Mining
Subsidiaries
Freedom Mine (3)
Surface Lignite
Beulah-Zap Seams
18
130
6,767
0.8
%
9
%
36
%
Falkirk Mine (3)
Surface Lignite
Hagel A&B, Tavis Creek Seams
8
50
6,200
0.6
%
11
%
38
%
Sabine Mine (3)
Surface Lignite
(5)
(5)
(5)
(5)
(5)
(5)
(5)
Consolidated Mining Operations
San Miguel Lignite Mining Operations
Surface Lignite
(5)
(5)
(5)
(5)
(5)
(5)
(5)
Red River Mine
Surface Lignite
Chemard Lake Lignite Lentil Seams
7
70
6,722
0.7
%
14
%
33
%
Red Hills Mine
Surface Lignite
C, D, E, F, G, H Seams
4
150
5,200
0.6
%
14
%
43
%
Undeveloped Mining Operations
North Dakota
—
Fort Union Formation
13
130
6,500
0.8
%
8
%
38
%
Texas
—
Wilcox Formation
8
120
6,800
1.0
%
16
%
30
%
Eastern (6)
—
Freeport & Kittanning
4
400
12,070
3.3
%
12
%
3
%
Mississippi
—
Wilcox Formation
12
130
5,200
0.6
%
13
%
44
%
(1)
Committed and uncommitted tons represent in-place estimates. The projected extraction loss is approximately 10% of the proven and probable reserves, except with respect to the Eastern Undeveloped Mining Operations, in which case the extraction loss is approximately 30% of the proven and probable
reserves.
(2)
NACoal’s reserve estimates are based on the entire drill hole database, which was used to develop a geologic computer model using a 200 foot grid and inverse distance to the second power as an interpolator. None of NACoal’s coal reserves have been reviewed by independent experts. As such, all
reserves are considered proven (measured) within NACoal’s reserve estimate.
(3)
The contracts for these mines require the customer to cover the cost of the ongoing replacement and upkeep of the plant and equipment of the mine.
(4)
Although the term of the existing coal sales agreement terminates in 2012, the term may be extended for five additional periods of five years, or until 2037, at the option of The Coteau Properties Company.
(5)
The reserves are owned and controlled by the customer and, therefore, have not been listed in the table.
(6)
The proven and probable reserves included in the table do not include coal that is leased to others. NACoal had 57.6 million tons and 59.4 million tons in 2006 and 2005, respectively, of Eastern Undeveloped Mining Operations with leased coal committed under contract.
Unconsolidated Project Mining SubsidiariesFreedom Mine — The Coteau Properties CompanyThe Freedom Mine, operated by The Coteau Properties Company (“Coteau”), is located approximately 90
miles northwest of Bismarck, North Dakota. The main entrance to the Freedom Mine is accessed by
means of a paved road and is located on County Road 15. Coteau holds 395 leases granting the right
to mine approximately 35,498 acres of coal interests and the right to utilize approximately 30,771
acres of surface interests. In addition, Coteau owns in fee 30,796 acres of surface interests and
4,561 acres of coal interests. Substantially all of the leases held by Coteau were acquired in the
early 1970s with terms totaling 40 years. Many of these leases were amended or replaced with new
leases which extend the lease terms for a period sufficient to meet Coteau’s contractual production
requirements.The Freedom Mine generally produces over 15 million tons of lignite coal annually. The mine
started delivering coal in 1983. All production from the mine is sold to Dakota Coal Company, a
wholly owned subsidiary of Basin Electric Power Cooperative. Dakota Coal Company then sells the
coal to Great Plains Synfuels Plant, Antelope Valley Station and Leland Olds Station, all of which
are affiliates of Basin Electric Power Cooperative.The reserves are located in Mercer County, North Dakota, starting approximately two miles north of
Beulah, North Dakota. The center of the basin is located near the city of Williston, North Dakota,
approximately 100 miles northwest of the permit area. The economically mineable coal in the
reserve occurs in the Sentinel Butte Formation, and is overlain by the Coleharbor Formation. The
Coleharbor Format
