NACCO Industries
Annual Report 2003

Plain-text annual report

Annual Report 2003 NACCO I N D U S T R I E S , I N C . Managing for long-term profit growth NACCO Industries, Inc. 5875 Landerbrook Drive • Mayfield Heights, Ohio 44124 An Equal Opportunity Employer Printed in U.S.A. NACCO Industries, Inc. Managing for Long-term Profit Growth NACCO Materials Handling Group (“NMHG”) NMHG Wholesale • NMHG Wholesale designs, engineers, manufac- tures, sells and services a comprehensive line of lift trucks and aftermarket parts marketed globally under the Hyster® and Yale® brand names NMHG Retail • NMHG Retail operates a small number of wholly owned dealers selling and leasing Hyster and Yale lift trucks and aftermarket parts NACCO Housewares Group Hamilton Beach(cid:2)Proctor-Silex (“HB/PS”) • HB/PS is a leading designer, manufacturer, importer and marketer of small electric kitchen and house- hold appliances, as well as commercial products for restaurants, bars and hotels Kitchen Collection • Kitchen Collection is a national specialty retailer of brand-name kitchenware, small electric appli- ances and related accessories, operating under the Kitchen Collection® name in outlet malls and under the Gadgets & More® name in traditional enclosed malls The North American Coal Corporation • North American Coal mines and markets lignite coal primarily as fuel for power generation and provides selected value-added mining services Table of Contents Selected Financial and Operating Data . . . . . . . 2 Letter to Stockholders . . . . . . . . . . . . . . . . . . . . 4 NACCO Materials Handling Group . . . . . . . . . 10 NACCO Housewares Group. . . . . . . . . . . . . . . 16 The North American Coal Corporation . . . . . . 24 Supplemental Data. . . . . . . . . . . . . . . . . . . . . . 30 Officers and Directors . . . . . . . . . . . . . . . . . . . 31 for other natural resources companies Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 In 2002, a year with a difficult market environment, improved net income and cash flow resulted directly from continuing successful implementation of long-term profitability and growth programs initiated in previous years. In 2003, challenging markets continued. Net income did not reach the level of our expectations. Importantly, however, the Company demon- strated its continued commitment to profit improvement and growth programs by increasing investments in these key change programs. The objective of these programs is to drive each subsidiary company to achieve its long-term financial goals by 2008, or sooner, as programs reach maturity. Further, the Board of Directors demonstrated its confidence in these programs by increasing the dividend by approximately 50 percent in 2003. NACCO’s long-term perspective is reflected in four guiding principles: • Ensure highly professional management teams • Attain industry-leading operational effectiveness and efficiencies • Build industry-leading market positions • Create sustainable competitive advantage positions Total Revenues Diluted Earnings Per Share in billions (In billions) $2.9 $2.6 $2.6 $2.3* $2.5 $3.0 $2.0 $1.0 $0.0 $8.29 † $6.51 † $5.17 $6.44 † ($4.40 ) $10 $5 $0 ($5) 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 * 2002 revenues were restated for the adoption of FIN No. 46 in 2003 retroactive to January 1, 2002. Prior years were not restated. Further discussion of FIN No. 46 is in the boxes on pages 2 and 25. † 1999, 2000 and 2001 include goodwill amortization expense. Amortization of goodwill was discontinued in 2002 with the adoption of SFAS No. 142. -1- NACCO Industries, Inc. at a Glance NACCO Industries, Inc. is an operating holding company with three principal businesses: lift trucks, housewares and lignite coal mining. In 2003, total revenues were $2.5 billion and net income was $52.8 million. Principal Businesses NACCO Materials Handling Group (“NMHG”) Headquarters: Portland, Oregon NMHG Wholesale designs, engineers, manufactures, sells and services a compre- hensive line of lift trucks and aftermarket parts marketed globally under the Hyster® and Yale® brand names. Lift trucks and component parts are manufactured in the United States, Northern Ireland, Scotland, the Netherlands, China, Italy, Japan, Mexico, the Philippines and Brazil. NMHG Retail operates a small number of wholly owned dealers selling and leasing Hyster and Yale lift trucks and aftermarket parts. NACCO Housewares Group Hamilton Beach(cid:2)Proctor-Silex (“HB/PS”) Headquarters: Richmond, Virginia HB/PS is a leading designer, manufacturer, importer and marketer of small electric kitchen and household appliances, as well as commercial products for restaurants, bars and hotels. Kitchen Collection Headquarters: Chillicothe, Ohio Kitchen Collection is a national specialty retailer of brand-name kitchenware, small electric appliances and related accessories. The company operates stores under the Kitchen Collection® name in outlet malls and under the Gadgets & More® name in traditional enclosed malls. ® 2003 Financial Results NMHG Wholesale: Revenues: $1.6 billion Operating profit: $55.5 million Net income: $22.4 million NMHG Retail: Revenues: $162.6 million Operating loss: $6.7 million Net loss: $6.0 million NACCO Housewares Group: Revenues: $598.7 million Operating profit: $42.0 million Net income: $19.5 million Market Positions Competitive Advantages Financial Targets Key Business Programs NACCO Materials Handling Group is a world leader in the lift truck industry with an estimated 13 percent market share worldwide, including a leading 27 percent market share in the Americas market. Lift trucks are distributed through a worldwide network of independent Hyster and Yale dealers and a limited number of wholly owned dealers. • Leading market share positions • #1 market position in North America, #3 worldwide • Highly recognized Hyster and Yale brand names • Large installed population base of lift trucks; an estimated 700,000 Hyster and Yale lift trucks in operation worldwide • Highly diverse customer base with over 600 different end-user applications in 900 industries • Comprehensive global product line • Strong dealer network • Industry-leading national account coverage in the Americas • Globally integrated operations with significant economies of scale Minimum operating profit target of 9 percent at average pre-recession market levels • New product development • Manufacturing restructuring and quality improvement • Global procurement • Pricing optimization • National and global accounts expansion • Dealer network enhancement • Aftermarket parts and efficiency • Wholly owned dealer improve- ments Hamilton Beach(cid:2)Proctor-Silex has the #1 or #2 market share positions in 20 of its 38 product categories in the United States and has the #1 market share of commercial blenders and spindle mixers. HB/PS is the market share leader in Canada. HB/PS products are distributed through mass merchants, national discount department stores, warehouse clubs and other retail sales outlets. Kitchen Collection is the nation’s leading specialty retailer of kitchen and related products in factory outlet malls with 180 stores throughout the United States. HB/PS: • Strong heritage brands with leading market shares • Strong relationships with leading retailers • Highly professional and experienced management team • Successful track record of product line expansion and new product innovation • Industry-leading working capital management Kitchen Collection: • Highly analytical merchandising skills and disciplined operating controls HB/PS: Minimum operating profit target of 10 percent Kitchen Collection: Minimum operating profit target of 5 percent The North American Coal Corporation Headquarters: Dallas, Texas North American Coal mines and markets lignite coal primarily as fuel for power generation and provides selected value-added mining services for other natural resources companies. North American Coal Corporation North American Coal operates six surface lignite coal mines and two dragline mining operations at limerock quarries. North American Coal: Revenues: $94.1 million Operating profit: $27.4 million Net income: $14.3 million North American Coal is the nation’s largest miner of lignite coal and among the 10 largest coal producers. Lignite coal is delivered to power plants adjacent to mines in North Dakota, Texas, Louisiana and Mississippi. Minimum return on capital employed of 13 percent and delivery of substan- tial cash flow before financing activities • Mines provide steady income and cash flow before financing activities and high return on equity • Contracts structured to minimize exposure to market fluctuations of coal prices • 2.4 billion tons of lignite coal reserves, of which 1.1 billion tons are uncommitted (including unconsolidated project mines in both cases) • Outstanding operational and technological mining skills • Highly efficient heavy equipment utilization • Excellent record of environmental protection and employee safety HB/PS: • Product development process • New product introductions • Manufacturing cost reduction • Continuous quality improvement • Supply chain optimization • Strategic brand application • Retailer and channel focus Kitchen Collection: • Economic Value Income • Margin enhancement and merchandising programs • Private label programs • Gadgets & More store expansions in traditional enclosed malls • Larger format store testing in outlet malls • Internet sales growth • Employee safety • Mississippi Lignite Mining Company efficiency improvements • San Miguel Lignite Mining Operations profitability improvements • Innovative mining methods • Environmental commitment • Value-added mining services for other natural resources companies • Lignite coal reserve development strategies • Clean coal power generation technologies • Limerock projects Selected Financial and Operating Data NACCO INDUSTRIES, INC. AND SUBSIDIARIES Operating Statement Data : Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings of unconsolidated project mining subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit excluding goodwill amortization . . . . . Income (loss) before extraordinary gain (loss) and cumulative effect of accounting changes . . . . . . Extraordinary gain (loss), net-of-tax . . . . . . . . . . . . . . . . Cumulative effect of accounting changes, net-of-tax . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted Earnings Per Share: Income (loss) before extraordinary gain (loss) and cumulative effect of accounting changes . . . . . . Extraordinary gain (loss), net-of-tax . . . . . . . . . . . . . . . . Cumulative effect of accounting changes, net-of-tax . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Per Share and Share Data: Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market value at December 31 . . . . . . . . . . . . . . . . . . . Stockholders’ equity at December 31 . . . . . . . . . . . . . Actual shares outstanding at December 31 . . . . . . . . Average shares outstanding . . . . . . . . . . . . . . . . . . . . Balance Sheet Data at December 31: Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt, excluding project mining subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2003 2,472.6 31.7 - 117.2 117.2 49.8 1.8 1.2 52.8 6.07 0.22 0.15 6.44 1.260 89.48 77.63 8.206 8.204 1,839.8 363.2 637.0 2002(1) (3) Year Ended December 31 2001(2) (In millions, except per share data) 2000(2) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2,285.0 30.3 - 115.5 115.5 49.6 (7.2) - 42.4 6.05 (0.88) - 5.17 0.970 43.77 68.21 8.201 8.198 1,780.8 416.1 559.4 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2,637.9 - 15.9 5.7 21.6 (34.7) - (1.3) (36.0) (4.24) - (0.16) (4.40) 0.930 56.79 64.58 8.196 8.190 2,161.9 248.1 529.3 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2,871.3 - 15.7 117.9 133.6 37.8 29.9 - 67.7 4.63 3.66 - 8.29 0.890 43.69 74.21 8.171 8.167 2,193.9 450.0 606.4 1999(2) 2,635.9 - 15.2 131.3 146.5 54.3 - (1.2) 53.1 6.66 - (0.15) 6.51 0.850 55.56 68.92 8.157 8.150 2,013.0 326.3 562.2 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ (1) During 2003, the Company adopted Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities,” retroactive to January 1, 2002. As a result, financial results for 2002 have been restated to reflect the adoption of this Interpretation. (The impact of the adoption of FIN No. 46 is further described in the box at the bottom of this page.) (2) Selected Financial and Operating Data for 2001, 2000 and 1999 have not been restated to reflect the adoption of FIN No. 46. (3) On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” The Company discontinued amortization of its goodwill in accordance with this Statement. Adoption of FIN No. 46 During the fourth quarter of 2003, NACCO Industries adopted Financial Accounting Standards Board Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest Entities," retroactive to January 1, 2002. The adoption of FIN No. 46 significantly changed the presentation of the Company’s financial statements. As a result of the adoption of FIN No. 46, the Company no longer consolidates the financial statements of three of North American Coal's wholly owned subsidiaries: The Coteau Properties Company, The Falkirk Mining Company and The Sabine Mining Company (collectively, the "project mines"). The Company still has a 100 percent equity investment in the project mines; however, the pre-tax earnings are now reported in the 2003 and 2002 Consolidated Statements of Operations and Comprehensive Income (Loss) as one line item entitled "Earnings of unconsolidated project mining subsidiaries." In addition, the assets and liabilities of the project mines are no longer consolidated within the Company’s Consolidated Balance Sheets, although the balance sheets now reflect an investment in the project mines and related income tax obligations. Since the adoption of FIN No. 46 was made retroactively to January 1, 2002, only the 2002 financial results shown above have been restated to reflect this new accounting Interpretation. The effect of adopting FIN No. 46 on the 2002 consolidated financial results was to reduce previously reported revenues by $263.1 million, reduce previously reported operating profit by $16.3 million and reduce previously reported total assets by $343.1 million. Cash flow data and EBITDA for 2002 were also affected and, thus, restated. Cash Flow Data: Operating Activities NACCO Materials Handling Group . . . . . . . . . . . . . NACCO Housewares Group . . . . . . . . . . . . . . . . . . . North American Coal Corporation . . . . . . . . . . . . . . NACCO and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . Provided by operating activities . . . . . . . . . . . . . . . . . Investing Activities NACCO Materials Handling Group . . . . . . . . . . . . . NACCO Housewares Group . . . . . . . . . . . . . . . . . . . North American Coal Corporation . . . . . . . . . . . . . . NACCO and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . Used for investing activities . . . . . . . . . . . . . . . . . . . . Cash Flow before Financing Activities NACCO Materials Handling Group . . . . . . . . . . . . . NACCO Housewares Group . . . . . . . . . . . . . . . . . . . North American Coal Corporation . . . . . . . . . . . . . . NACCO and Other . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Cash Flow before Financing Activities . . . Provided by (used for) financing activities . . . . . . . . . Other Data: Adjusted EBITDA (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ $ $ $ Year Ended December 31 2003 2002(1) (3) 2001(2) 2000(2) 1999(2) (In millions, except employee data) 50.1 41.2 37.3 (5.3) 123.3 (11.1) (5.8) (26.0) 0.1 (42.8) 39.0 35.4 11.3 (5.2) 80.5 (71.9) 181.3 $ $ $ $ $ $ $ $ 72.1 52.0 36.3 (11.2) 149.2 (7.3) (3.2) (6.9) (0.8) (18.2) 64.8 48.8 29.4 (12.0) 131.0 (146.8) 179.1 $ $ $ $ $ $ $ $ 31.0 28.5 69.5 7.0 136.0 (47.2) (13.4) (33.8) (.7) (95.1) (16.2) 15.1 35.7 6.3 40.9 (1.6) 78.3 $ $ $ $ $ $ $ $ 62.6 24.4 39.4 6.6 133.0 (59.7) (19.4) (156.8) 1.7 (234.2) 2.9 5.0 (117.4) 8.3 (101.2) 98.3 165.1 $ $ $ $ $ $ $ $ 79.4 9.3 49.6 (9.2) 129.1 (116.1) (16.5) (28.7) (.1) (161.4) (36.7) (7.2) 20.9 (9.3) (32.3) 35.3 182.6 Total employees at December 31 (5) . . . . . . . . . . . . . . . 11,600 12,200 13,500 17,200 16,000 (4) Adjusted EBITDA is provided solely as a supplemental disclosure with respect to liquidity because management believes it provides useful information regarding a company’s ability to service its indebtedness. Adjusted EBITDA does not represent cash flow from operations, as defined by accounting principles generally accepted in the United States. You should not consider Adjusted EBITDA as a substitute for net income or net loss, or as an indicator of our operating performance or whether cash flows will be sufficient to fund our cash needs. We define Adjusted EBITDA as income before income taxes, minority interest (income) expense, extraordinary gain (loss) and cumulative effect of accounting changes plus net interest expense and depreciation, depletion and amortization expense. However, interest expense, depreciation, depletion, and amortization attributable to the project mining subsidiaries are not included. Adjusted EBITDA is not a measurement under accounting principles generally accepted in the United States and is not necessarily comparable with similarly titled measures of other companies. Net cash flows from operating, investing and financing activities as determined using accounting principles generally accepted in the United States are presented above. A reconciliation of cash flow from operations to Adjusted EBITDA is presented below. (5) Includes employees of the project mines. 2003 2002(1) (3) 2001(2) 2000(2) 1999(2) Year Ended December 31 (In millions) Reconciliation of Cash Flow From Operations to Adjusted EBITDA (4) Cash flow from operations . . . . . . . . . . . . . . . . . . . . . . . . Change in working capital items . . . . . . . . . . . . . . . . . . . (Loss) gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . Difference between deferred tax expense and total tax expense/benefit . . . . . . . . . . . . . . . . . . . . . . . Other non-cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . Project mining subsidiaries’ depreciation, depletion and amortization . . . . . . . . . . . . . . . . . . . . . Adjusted EBITDA (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Calculation of Adjusted EBITDA (4) Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative effect of accounting changes, net-of-tax . . . Extraordinary (gain) loss, net-of-tax . . . . . . . . . . . . . . . . Minority interest (income) expense . . . . . . . . . . . . . . . . . Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . Interest expense (excluding project mining subsidiaries) . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation, depletion and amortization expense $ $ $ $ $ $ 123.3 14.1 (1.5) 1.2 4.9 (8.6) 47.9 - 181.3 52.8 (1.2) (1.8) (0.6) 15.8 51.0 (3.1) $ $ $ 149.2 (10.2) .4 (12.3) (6.5) 9.4 49.1 - 179.1 42.4 - 7.2 (1.2) 11.3 52.9 (3.7) (excluding project mining subsidiaries) . . . . . . . . . . . Adjusted EBITDA (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68.4 181.3 70.2 179.1 $ $ 136.0 (25.9) (10.5) (21.5) (4.9) (1.0) 36.7 (30.6) 78.3 (36.0) 1.3 - (0.8) (9.9) 40.5 (3.8) 87.0 78.3 $ $ $ $ $ $ 133.0 14.0 (1.4) (15.6) 34.8 1.3 27.7 (28.7) 165.1 67.7 - (29.9) (0.1) 22.3 30.2 (2.5) 129.1 31.4 (0.4) (1.2) 28.4 3.3 20.8 (28.8) 182.6 53.1 1.2 - 0.6 31.7 25.7 (4.9) 77.4 165.1 $ 75.2 182.6 $ This Annual Report contains references to non-GAAP financial measures. Presentations of, and quantitative reconciliations to, the most directly comparable financial measures calculated and presented in accordance with GAAP appear on this page and page 30. -2- -2- -3- To Our Stockholders fact, provides a clearer view of North American Coal’s and achieved slightly improved operating results despite a slower- NACCO’s operating and financial structure. The boxes on than-anticipated recovery in lift truck markets and weak pages 2 and 25 of this Annual Report further discuss FIN No. 46. housewares and factory outlet mall markets. Net income for 2003 and 2002 included a $1.8 million In 2003, each of NACCO’s subsidiary companies generated after-tax extraordinary gain and a $7.2 million after-tax extraor- significant cash flow before financing activities: $39.0 million Economic and Corporate Overview Reflecting increased confidence in the future potential of dinary loss, respectively, recorded by Bellaire Corporation, at NMHG; $35.4 million at NACCO Housewares Group; In 2003, NACCO Industries had a reasonable year despite NACCO’s businesses and in their prospects for generating a wholly owned non-operating subsidiary which manages and $11.3 million at North American Coal. In total, NACCO a more gradual economic recovery than expected and the cash flow before financing activities, as well as in the context ongoing liabilities related largely to closed Eastern U.S. generated $80.5 million in consolidated cash flow before impact of other unfavorable external factors, particularly of changed dividend taxation laws, the Board of Directors underground coal mines. These extraordinary items relate to financing activities in 2003 and $131.0 million in 2002. Both adverse currency movements. Major change programs put in approved two dividend increases in 2003 that raised the annual adjustments to Bellaire’s estimated obligation to the United 2003 and 2002 were significantly above 2001 levels when the place at each of the subsidiary companies over the last several dividend by more than 50 percent. The first increase, from Mine Workers of America Combined Benefit Fund. The 2003 company generated $40.9 million in consolidated cash flow years continue to affect our view of future prospects positively. $0.98 to $1.02 per share, was made in May 2003 as part of the extraordinary gain is due to lower-than-estimated premium before financing activities. Overall, we believe these programs will continue to help Board of Directors’ regular annual consideration of dividend drive NACCO’s subsidiary companies toward their long-term rates. The second dividend increase, of approximately 50 percent minimum financial goals over the next five years. from $1.02 to $1.52 per share, was approved in August 2003. The relatively slow pace of the economic recovery in 2003 The discussion that follows is organized in a manner payments and number of assignees, along with adjustments to actual mortality rates as compared with previous estimates, resulting in a decrease in expected future obligations. The 2002 extraordinary loss was primarily the result of an unfavorable NACCO Maintains a Long-term Perspective NACCO has consistently maintained a long-term per- spective with respect to its subsidiary companies, which is affected all of NACCO’s subsidiary companies. Lift truck similar to the letters included in last year’s Annual Report, and, U. S. Supreme Court ruling. In addition, net income for 2003 reflected in four guiding principles: markets continued to improve worldwide, but not to the levels in fact, some of the discussion itself is the same. This approach previously expected. Consumer spending in North America strengthened in some areas, but both Hamilton Beach(cid:2) reflects the fact that NACCO’s underlying strategies and key programs for each of its subsidiary companies are long-term Proctor-Silex (“HB/PS”) and Kitchen Collection experienced oriented and constant. We believe this strategic consistency is weak retail markets for their products. Further, lignite coal one of NACCO’s core strengths. demand at North American Coal was not as strong as had been expected. Likewise, relative currency values negatively affected several of NACCO’s subsidiary companies. For example, the extraordinary strength of the euro and British pound sterling compared with the U.S. dollar made European- and U.K.- produced lift trucks less competitive in the U.S. market. Nevertheless, in the face of these external forces, NACCO’s subsidiary companies responded commendably. Efforts to control costs were accelerated and revenue enhancement programs were pursued with even greater urgency. While financial results in 2003 were not at the level the Company had anticipated, each of NACCO’s subsidiary companies emerged from 2003 strong or stronger relative to its competition, and each is well positioned to take full advantage of the expected continued global economic recovery in 2004 and beyond. Discussion of Results In 2003, NACCO Industries reported net income of $52.8 million, or $6.44 per share, compared with net income of $42.4 million, or $5.17 per share, in 2002. Revenues for 2003 were $2.5 billion compared with $2.3 billion in 2002, an increase of approximately 9 percent primarily attributable to increased revenues at NACCO Materials Handling Group (“NMHG”). Additionally, 2003 and 2002 financial statements reflect the adoption of Financial Accounting Standards Board Interpretation No. 46 (“FIN No. 46”),“Consolidation of Variable Interest Entities,” which requires the deconsolidation of North American Coal’s three project mining subsidiaries. The effect of deconsolidation is to decrease reported revenues while leaving reported net income unchanged. Further, the assets and liabilities of these project mining subsidiaries are no longer consolidated. The Company believes this change, in included a net benefit of $1.2 million, or $0.15 per share, for the cumulative effect of a change in accounting for mine- • Ensure highly professional management teams; • Attain industry-leading operational effectiveness and closing obligations recognized as a result of the adoption of efficiencies; Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations.” This net benefit consisted of a $2.5 million after-tax gain at Bellaire and a $1.3 million after-tax charge at North American Coal to reflect this accounting change. On a year-over-year comparable basis, income before extraordinary gain (loss) and cumulative effect of accounting change for 2003 was $49.8 million, or $6.07 per share, compared with $49.6 million, or $6.05 per share, in 2002. The Company • Build industry-leading market positions; and • Create sustainable competitive advantage positions. To help achieve these guiding principles, the NACCO parent company, which consists of a small group of experienced specialists, plays a significant role through two key functions: oversight and consulting. As part of its oversight role, the parent company works closely with subsidiary company CEOs and senior managers to reinforce a process of con- structive change designed to enhance long-term, sustainable Dividends Paid Per Share $1.5 $1.0 $0.5 $.467 $.515 $.550 $.575 $.595 $.615 $.635 $.655 $.675 $.710 $.743 $.773 $.810 $.850 $.890 $.930 $.970 $1.26 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 -4- -5- competitive advantage, to ensure that programs are developed 2003. The main objective of these profitability enhancement At NMHG, specific programs to enhance profitability • A manufacturing cost reduction program which focuses to enable each subsidiary company to achieve mutually programs is to achieve minimum financial targets at each include the following: on the company’s evolution toward increased low-cost, agreed-upon financial targets, and to monitor the disciplined subsidiary company by 2007-2008 or before. • A new product development process which is designed to high-quality sourcing from China. This program will execution of key programs. Minimum operating profit targets defined in the 2002 improve product flexibility, increase speed to market, likely continue through 2005, with the potential for Through its consulting capabilities, the NACCO parent NACCO Annual Report remain the same at NMHG and at enhance quality and reduce costs. Significant investments implementation of an even more aggressive product company provides its subsidiary companies with highly HB/PS. Kitchen Collection’s minimum operating profit target in this program will continue in 2004, with most of the sourcing strategy to ensure cost leadership. analytical, disciplined and dedicated value-added consulting was adjusted to 5 percent from 5.5 percent to more accurately resulting new products to be introduced from 2005-2008. • A continuous quality improvement program encompassing services. These services include not only business operations reflect long-term trends in light of what now appears to have • A manufacturing restructuring and quality improve- design, engineering, manufacturing and distribution. and strategy consulting provided by the Company’s internal been extraordinary results in 2002. North American Coal’s ment program which is increasing quality, optimizing Significant expenditures in this program have been incurred consulting group, but also acquisition and divestiture services; target was changed, due to the deconsolidation of its project plant capacity and reducing complexity and costs. Though and the largest expected gains are currently being realized. financial, tax and accounting advisory services; and focused mines, from a target based on operating profit to a minimum elements of this program will continue for several years, • A supply chain optimization program which is lowering legal and compensation services. The parent company’s target based on return on capital employed. the most substantial expenditures should be completed costs while increasing customer service to retailers. This oversight and consulting roles are reinforced by a stringent corporate governance program, as outlined in the box below. NACCO Materials Handling Group NMHG Wholesale’s objective is to reach a minimum Key Long-term Programs operating profit target of 9 percent at the mid-point of the Consistent with NACCO’s long-term perspective, market cycle, although minimum operating profit target key long-term programs are designed both to increase the expectations will vary appropriately when markets are higher profitability of each subsidiary company to at least that or lower. In that regard, NMHG now believes that the subsidiary’s minimum financial target and to generate growth mid-point of the market cycle may be reached by 2007- in each subsidiary company. Following is a brief overview of 2008, rather than in 2006-2007 as stated in last year’s Annual the Key Programs to Enhance Profitability and the Key Programs Report, due to the slow pace of market recovery in 2003. to Generate Growth for each subsidiary company. Additional NMHG continued the successful implementation of detail is provided in each subsidiary company’s CEO’s letter in key programs in 2003, a process which will continue in 2004. this Annual Report. Key Programs to Enhance Profitability Key strategic cost reduction and operational improvement programs are designed to achieve each subsidiary company’s long-term minimum financial target. The Company continued NMHG will incur additional costs in 2004 related to product development programs as well as to some restructuring activities. Key programs in place are expected to improve results increasingly in 2005-2007 and to reach maturity in 2008 when major programs are expected to be largely complete and the worldwide lift truck market is expected to have to make progress in implementing these key programs in returned to average pre-recession levels. Corporate Governance Program Parent company oversight and consulting roles are reinforced by a corporate governance structure designed to ensure accountability, fiscal responsibility and the highest levels of ethical conduct. At NACCO, this corporate governance program has four key elements: • A strong, independent board of directors to ensure effective board oversight. This oversight is reinforced by our subsidiary company structures, in which each subsidiary company has its own CEO and its own strong, independent board of directors, each of which includes, as core board members, the parent company directors. • A strong nominating and governance committee to ensure continued board independence. • A strong compensation committee, which will be separated from the nominating and governance committee in the near future, to ensure responsible compensation levels and no management self-dealing. • A strong, independent audit review committee to ensure accounting integrity. NACCO further addresses the issue of corporate governance in a publication entitled CEO Perspectives, which is available on the NACCO Web site at www.nacco.com. by the end of 2004. program is being accomplished through staged, moderate • A global procurement program which will result in higher investments with resulting benefits on a continual basis. quality components procured at lower costs and sourced more efficiently from a smaller group of highly reliable Kitchen Collection suppliers. Many benefits of this program should be realized with the introduction of new products in 2005-2008. Kitchen Collection’s objective is to continue to achieve at least its minimum operating profit target of 5 percent. Specific • A pricing optimization program which seeks to deliver programs to enhance profitability include the following: sound value to customers and more attractive margins to NMHG and its dealers. This program is largely linked to the introduction of new products in 2005-2008. • An aftermarket efficiency program to assist independent dealers, on an ongoing basis, in optimizing service parts inventories. • A NMHG Retail improvement program with an objective of reaching at least breakeven results for wholly owned dealers as quickly as possible. • An Economic Value Income analysis process which is a highly analytical approach to achieving the greatest possible return per cubic foot of retail space. The primary investment in this proprietary tool has already been incurred and benefits are expected to continue from the ongoing application of this process. • Margin enhancement and merchandising programs which are designed to strengthen key drivers of store profitability. This is a continuous process which prudently tests and applies low-risk approaches to improving Hamilton Beach(cid:2)Proctor-Silex profitability. HB/PS’ objective is to achieve a minimum operating profit • A private label program which leverages use of the target of 10 percent by 2005-2006, when its key programs are Hamilton Beach® and Proctor-Silex® brand names on non- expected to mature. electric kitchen products. This program requires minimal At HB/PS, specific programs to enhance profitability incremental investment and has resulted in product lines include the following: that are among the company’s most profitable. • A new product development process which is resulting in new products brought to market faster with increased innovation and lower costs. This program, initiated several years ago, is an ongoing focus for the company with both near-term and long-term benefits expected. -6- -7- North American Coal $31.6 million, or $3.85 additional earnings per share. (These • Retailer and channel focus programs which employ Throughout this period, NACCO’s objective is to generate North American Coal’s financial objectives are to earn calculations are explained on page 30 of this Annual Report.) in-depth assortment analyses and flexible product significant cash flow before financing activities. NACCO’s a return on capital employed in excess of 13 percent and to Clearly, the stakes involved in executing the Company’s profit and service solutions in order to maximize retail shelf intention is to use these cash flows to reduce debt levels unless deliver substantial cash flow before financing activities. enhancement and growth generation programs remain very placements and consumer sales. HB/PS has developed other strategic opportunities of greater long-term benefit to Programs with the objective of significant performance high and continue to have NACCO’s full commitment. and improved this program over several years with the Company and its stockholders arise. improvements are anticipated to mature in 2006-2007. Specific programs to enhance profitability include the Key Programs to Generate Growth increasing effectiveness. following: Programs have also been designed to increase revenues Kitchen Collection • Aftermarket parts programs building upon important North American Coal • Employee safety programs, ongoing at North American and expand market share at each subsidiary company. These Coal, which improve productivity and employee retention, programs supplement profitability enhancement programs and enhance profitability. aimed at reaching minimum financial targets. While some of • A Mississippi Lignite Mining Company optimization these programs have specific timeframes for maturity, many program which focuses on attaining full operating are ongoing programs in which the subsidiary companies efficiency in the context of higher costs due to mining invest, and from which they gain benefits, on an ongoing basis. deeper coal seams until 2006. • A San Miguel Lignite Mining Operations improvement program which is intended to return this mine to profitability by 2006 through a revised mine plan and an anticipated new contract that is currently in negotiation. • Innovative mining methods which continue to drive increased efficiency and effectiveness on an ongoing basis. • Environmental commitment programs which utilize highly precise equipment to restore mined land to its original or improved condition in the most cost-effective manner. Summary of Programs to Enhance Profitability NACCO Materials Handling Group Specific programs to generate growth include the following: • New product introductions, including aggressive programs for all lift truck categories, most of which will be introduced in 2005-2008. alliances made in 2002 to increase parts and service revenues, with benefits realized in 2003 and expected to increase in the future. • National and global account programs, including fleet management, which will extend NMHG’s lead in these areas and contribute to longer-term market share growth. Overall, the programs outlined above are designed to • Dealer network programs to enhance further the improve performance at each subsidiary company over industry’s most professional distribution network and the next few years, with the objectives of achieving both contribute to long-term market share growth. minimum financial targets at each subsidiary company by 2007-2008 or earlier and generating substantial cash flow Hamilton Beach(cid:2)Proctor-Silex before financing activities. NACCO Industries reported net income of $52.8 million, or $6.44 per share, in 2003. Had each of NACCO’s subsidiary companies achieved its financial targets in 2003, the Company would have generated additional net income of $82.9 million, or $10.10 additional earnings per share. Further, assuming increased cash flow could eliminate debt and thereby interest costs, the Company could have had additional net income of Specific programs to generate growth include the following: • A new product introduction process which is an ongoing process that aims to increase innovation, improve speed to market and reduce costs. • Strategic brand application programs to leverage current brands and offer creative, new brand options to retailers. Two new brand concepts are being introduced for the 2004/2005 retail season. Specific programs to generate growth include the following: • The Gadgets & More® format, focused on the high-margin gadget business, is expected to continue in test mode in 2004 and, if successful, will lead to more significant growth in 2005 and beyond. • A large store format with increased product offerings, a new concept which is in testing and, which could, in future years, create another profitable format in the factory outlet mall market. • Internet sales programs to accelerate profitable growth in this channel in 2004 and beyond. NACCO’s share price ($82.77 at the close of the financial markets on March 1, 2004) has begun, we believe, to reflect better the improved results of 2002 and 2003 and the potential impact of the profit enhancement and growth programs underway. If each subsidiary company successfully executes its programs in place and achieves its long-term objectives, we are hopeful that the Company will receive a further improved valuation in the future. In closing, I would like to thank all NACCO employees for their continued support, hard work and commitment in meeting the challenges of 2003 and I look forward to working together toward a successful 2004. * * * * Specific programs to generate growth include the following: • Reserve development strategies which analyze reserve potential and help prioritize development efforts for future growth. • Clean coal power generation technologies, the adoption of which could significantly improve reserve develop- ment potential in future decades. On a final note, all of us at NACCO are deeply saddened by the death in 2003 of Frank E. Taplin, Jr., a director from January 1946 to February 1997, a director emeritus since then, and the eldest son of our Company’s founder. The contributions he made to the Company for over half a century are immeasurable. His wise guidance and sound counsel were instrumental in transforming a coal company • Limerock dragline services projects which continue to with $18 million of sales in 1946 into a diversified company provide niche contract mining opportunities, and with $2.5 billion of sales in 2003. We are very grateful for his could result in benefits in both the short and long term. extraordinary service. Outlook In summary, the Company has comprehensive profit enhancement and growth programs in place at each of its subsidiary companies. The results of these programs will be increasingly visible in 2005-2006 as the Company moves toward its ultimate objective of reaching minimum financial targets at each subsidiary company by 2007-2008 or earlier as programs mature. Financial performance could also benefit from improved markets as well as the successful implementation of additional growth programs. Alfred M. Rankin, Jr. Chairman, President and Chief Executive Officer NACCO Industries, Inc. -8- -9- NMHG’s vision is to be the leading globally integrated designer, manufacturer and marketer of a complete range of high-quality lift trucks. Delivering quality products and services, and increasing volume growth and market share, are the company’s top priorities. NACCO Materials Handling Group 2003 Results – NMHG Wholesale 2003 Results – NMHG Consolidated NMHG Wholesale reported net income of $22.4 million NACCO Materials Handling Group (“NMHG”), including on revenues of $1.6 billion in 2003 compared with net income NMHG Wholesale and NMHG Retail, generated consolidated of $21.5 million on revenues of $1.4 billion in 2002. A slightly cash flow before financing activities of $39.0 million in increased worldwide lift truck market in 2003 estimated at 2003 and $64.8 million in 2002. In addition, NMHG reduced 577,000 units led to an increase in shipments to 70,406 compared consolidated debt to $307.7 million at December 31, 2003 with a market of 544,000 and shipments of 64,437 in 2002. compared with $324.8 million at December 31, 2002. Net NMHG Wholesale’s 2003 shipments increased approximately income and consolidated cash flow before financing activities 9 percent over 2002 shipments, exceeding worldwide market in 2003 were negatively affected by adverse foreign currency growth of approximately 6 percent. Backlog increased to movements and, as anticipated, by continued costs for the 19,100 units at December 31, 2003 compared with 18,800 previously announced manufacturing restructuring programs units at December 31, 2002. 2003 Results – NMHG Retail and product development activities related to new Hyster® and Yale® products that will be introduced in 2005 through 2008. NMHG Retail’s operations (net of eliminations) reported Vision, Strategy and Core Competencies a net loss of $6.0 million on revenues of $162.6 million in NMHG’s vision is to be the leading globally integrated 2003 compared with a net loss of $9.2 million on revenues designer, manufacturer and marketer of a complete range of $172.2 million in 2002, demonstrating progress but still of high-quality lift trucks. Delivering quality products and a disappointment. Continued execution of NMHG Retail’s services, and increasing volume growth and market share, are global restructuring program, as well as an increased focus on the company’s top priorities. sales, rental, parts and service, resulted in further improvements The company’s strategies for achieving its vision include to financial performance on lower revenues in 2003. NMHG developing flexible, reliable, end-user-driven products; attaining Retail’s global restructuring program included the sale of the low-cost, high-quality manufacturing and procurement; only U.S. wholly owned dealer at the beginning of 2003, which providing value-added marketing support services; and contributed to the decline in revenues. maintaining and strengthening highly professional dealer Counter clockwise from top left: Hyster Challenger 25-40XM internal combustion lift truck designed to operate in the tightest of spaces, up to a capacity of 4,000 pounds. • Yale NTA narrow aisle lift truck offers exceptional performance, ergonomic design and operator comfort for increased productivity and reliability. • Hyster 36,000-45,000 pound lift truck designed for tough applications ranging from steel to logging yards, quarries and concrete works. • Yale MPE motorized hand truck provides capacity ranges from 6,000 to 8,000 pounds. • Hyster E70-120 XL3 series electric lift truck available for loads up to 12,000 pounds. Revenues by Geographic Region Unit Bookings, Shipments & Backlog (In millions) $1,932.1 $1,761.4 $1,672.4 $1,588.4 $1,779.6 1999 2000 2001 2002 2003 $2,000 $1,500 $1,000 $500 $0 25,000 20,000 15,000 10,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q 2 Q3 Q4 2002 2001 2003 (cid:3) Americas (cid:3) Europe, Africa and Middle East (cid:3) Asia-Pacific (cid:3) Bookings (cid:3) Shipments (cid:3) Backlog -11- Above left to right: Yale MPE motorized hand truck is ergonomically designed for reduced operator fatigue and improved productivity.• Yale MPC motorized pallet truck with capacity ranges from 6,000 to 8,000 pounds and features for enhanced order-picking productivity and improved operator comfort. distribution. These strategies, which are supplemented Manufacturing restructuring and quality improvement. by high relative economies of scale and reinforced by the NMHG’s manufacturing strategy is guided by a desire for company’s large global population of lift trucks in use, are high-quality, low-cost manufacturing with assembly generally designed to provide NMHG with sustainable competitive in the market of sale to meet customer needs quickly and advantage versus its competition. efficiently. To accomplish these goals, NMHG has been NMHG’s core competencies supporting these strategies restructuring its global manufacturing facilities and processes. include translating end-user needs into globally flexible product The company is working to optimize capacity among several designs; adapting operations to changing market conditions; key plants, including Greenville, North Carolina, and Berea, managing the growing complexity of customer needs; and Kentucky, in the United States, and Irvine, Scotland, and building and sustaining strong dealer partnerships. Craigavon, Northern Ireland, in Europe. The final phases of Key Programs to Enhance Profitability this restructuring are underway and include the closing of the company’s Lenoir, North Carolina, lift truck component NMHG is successfully implementing several key programs facility, which is anticipated to be completed in the second to enhance long-term profitability. quarter of 2004. The restructuring of the Irvine, Scotland, lift New product development process. NMHG has com- truck assembly plant is underway, with completion expected pletely re-engineered its process for developing new products. within the next 18 to 24 months. Complete ranges of products are being developed simultane- The continued implementation of a lean manufacturing ously rather than on a traditional series-by-series approach. strategy called Demand Flow Technology® (DFT) is reducing Platforms, modules and components have been designed to be inventory and manufacturing floor space requirements while used across a full array of lift trucks. This decreases the overall improving productivity, lead times and quality. NMHG also number of components required and permits easier and more continues to deliver cost reductions and product quality frequent future upgrades. Finally, design, prototyping and improvements through its Value Improvement Program (VIP). testing are guided by a rigorous, staged approval process that Global procurement. NMHG has a number of procure- incorporates increasingly reliable engineering while reducing ment efforts underway to make its supplier base smaller, more overall cycle time and increasing speed to market. This approach reliable, faster and lower cost. Non-core components continue is expected to increase the quality of NMHG’s products, as to be outsourced to low-cost suppliers around the world, well as meet end-user requirements more cost effectively. with increased focus on China and Eastern Europe. NMHG is implementing new supplier partnerships and quality programs and setting standards for just-in-time delivery. These programs, along with global economies of scale, provide At right: Hyster container handler truck, a solid performer for use at ports and railroad terminals for loading and stacking containers. -12- NMHG with leverage to obtain high-quality components at New product introductions. NMHG continues to move lower prices and are expected to be an important source of forward with a significant new product development program profit improvement in the years ahead. that is expected to mature in 2005-2008. One program, the Pricing optimization. The goal of NMHG’s pricing most comprehensive new product development project in the optimization program is to establish product pricing that company’s history, will result in a wide range of new internal delivers both good value to end users and attractive margins combustion engine lift trucks in 2005-2007. Extensive use of to dealers and the company. NMHG is pursuing this goal interchangeable components and systems will increase flexi- through implementation of the company’s new product design bility to tailor these lift trucks to individual customer application philosophy, which, by incorporating a modular approach requirements. Additional new product programs employing using fewer overall components, allows products to be more the same techniques are underway through 2008 for electric precisely configured and, therefore, priced to meet specific counterbalanced lift trucks. Big truck and warehouse lift truck customer application needs. Product options will be bundled product development programs are also underway. as appropriate to address additional application requirements. Aftermarket parts. In 2003, NMHG continued to leverage Aftermarket efficiency. NMHG has several projects an important strategic alliance made in 2002 with a leading underway to increase aftermarket service efficiencies, including aftermarket parts provider in the Americas, Europe and Asia- a program to help manage dealer parts inventories and a program Pacific. This alliance has enhanced the ability of NMHG’s Yale to improve the management of after-sale contacts with dealers and Hyster dealers to expand their parts offerings for com- and customers. petitor lift trucks and thereby receive an increasing market NMHG Retail improvements. NMHG continues to share of their customers’ parts and service business. implement cost reduction and revenue enhancement programs National and global accounts. NMHG has industry- to improve the performance of its wholly owned retail dealer- leading fleet management and national account organizations ships. NMHG Retail reduced its net loss by 35 percent from and is enhancing its global account capabilities. The goal of 2002 to 2003. The objective of the programs in place is to reach these programs is to offer superior value and services to large at least breakeven results as quickly as possible, while still customers that have centralized purchasing but geographically strengthening the distribution capability in each area. dispersed operations in multiple dealer territories around the world. Key Programs to Generate Growth Dealer network. The company’s Anchor Dealer strategy As discussed in last year’s Annual Report, NMHG’s continues to strengthen a worldwide network of strong, programs to enhance growth center on introducing newly professionally managed, well-capitalized independent dealers. developed products, increasing sales of aftermarket parts, NMHG’s experience is that these exclusive Yale and Hyster expanding fleet management and financial services, increasing Anchor Dealers gain higher market share, attract higher-quality national and global accounts, and strengthening the dealer employees and offer more specialized services to their customers. network. Left to right: Hyster 360-450 turbo-charged diesel-powered lift truck designed with a capacity up to 36,000 pounds. • Hyster order picker for fast and secure picking operations. • The S 80 Odyssey propane cushion tire lift truck handles loads ranging from 7,000 to 12,000 pounds. ® -14- Left to right: Yale order selector fills the needs for all mid-range warehouse applications. • Yale cushion tire lift truck has a 7,000 to 12,000 pound capacity. • Yale three wheel stand-up rider lift truck for 3,000 to 4,000 pound applications. To drive further improvement in the Hyster and Yale As a result of this delay in achieving efficiencies available at dealer networks, NMHG is implementing a Dealer Excellence higher market volumes, and in light of additional new product Enhancement program, which provides dealers with best- development programs, NMHG Wholesale’s objective is to practices manuals and performance assessment tools in the achieve its long-term operating profit target of 9 percent by areas of operational and financial management, lift truck sales, 2007-2008, rather than in 2006-2007, as stated last year. parts sales, service, rental and fleet management. NMHG also NMHG’s goal is to make increasing progress toward this offers customized consulting assistance to help dealers imple- objective in future years, especially in 2006, as programs ment these programs to drive improved sales and profitability. begin to mature. During periods of lower or higher industry Corporate Initiatives NMHG is improving quality by standardizing global processes and emphasizing continuous process improvement. In 2003, NMHG achieved ISO 9001-2000 certification. In addition, NMHG is implementing new tools and systems, which support parts sales, technicians and knowledge management, in order to become more responsive and improve service at all points of dealer and customer contact. As previously stated, the objective of NMHG’s overall strategy is to build sustainable competitive advantage versus its competition through strong market share, a large field population, which provides ongoing parts revenue, and significant economies of scale. Outlook for 2004 and Beyond In 2004, NMHG expects modest strengthening of lift truck markets in the Americas and Japan, strong growth in the China lift truck market and relatively flat lift truck markets in Europe and the rest of Asia-Pacific. Because U.S. and global market growth in 2003 was more tempered than widely anticipated a year ago, NMHG now expects global lift truck markets to gradu- ally return to average pre-recession levels by 2007-2008, rather than in 2006-2007 as indicated in last year’s Annual Report. volumes, minimum operating profit target expectations should be appropriately scaled. NMHG Retail’s objective for its wholly owned dealerships is to reach at least break-even financial performance while building market position and to attain that goal in the near term. We believe NMHG is increasingly offering the right products at the right costs through the right dealers. As a result, NMHG believes firmly in its prospects for long-term growth in market share and profitability in an improving market environment. Finally, I would like to take this opportunity to recognize the excellent work of all NMHG employees in helping the company realize improved financial performance in 2003 during a slow recovery period, while continuing to make progress on initiatives to enhance NMHG’s future prospects. Reginald R. Eklund President and Chief Executive Officer NACCO Materials Handling Group, Inc. -15- NACCO Housewares Group 2003 Results Hamilton Beach(cid:2)Proctor-Silex has a deep understanding NACCO Housewares Group, which includes Hamilton Beach(cid:2)Proctor-Silex and Kitchen Collection, reported net of consumer preferences and product trends within the small electric kitchen and household appliance marketplace. Kitchen income of $19.5 million on revenues of $598.7 million in 2003 Collection understands the logic and criteria used by retailers compared with net income of $17.8 million on revenues of in allocating limited shelf space among competing housewares $610.3 million in 2002. Revenues for 2003 decreased primarily products, brands and vendors. due to declines in consumer spending both for small electric In addition to carrying a broad range of Hamilton Beach kitchen and household appliances at key retail customers for Hamilton Beach(cid:2)Proctor-Silex, and in the factory outlet and Proctor-Silex® electric products, Kitchen Collection licenses these brand names for non-electric products. Products channel for Kitchen Collection. ranging from kitchen gadgets to cookware have benefited Net income increased in 2003 due to continued improve- substantially from the use of these strong heritage brand names, ment in manufacturing and sourcing efficiencies and profit improvement programs at Hamilton Beach(cid:2)Proctor-Silex, as well as increased sales of innovative products such as the Hamilton Beach® BrewStation™ coffeemaker. In 2003, the Housewares Group generated $35.4 million making these among Kitchen Collection’s most profitable product lines. Finally, Kitchen Collection purchases overstocked merchandise from Hamilton Beach(cid:2)Proctor-Silex. This arrange- ment helps Hamilton Beach(cid:2)Proctor-Silex manage inventory, in cash flow before financing activities compared with $48.8 contributing to reductions in inventory and debt levels, and million in 2002. helps Kitchen Collection offer a steady stream of higher- value products to its customers. Complementary Operations While the operations of Hamilton Beach(cid:2)Proctor-Silex and Kitchen Collection are separate, certain aspects of their businesses are complementary. NACCO Housewares Group consists of Hamilton Beach(cid:2)Proctor-Silex, one of North America’s leading providers of a full line of small electric kitchen and household appliances, and Kitchen Collection, America’s leading outlet mall retailer of specialty brand-name kitchenware. ® Net Income (Loss) Cash Flow before Financing Activities (In millions) (In millions) $21.2 $17.8 $19.5 $8.8 ($12.2) $30 $20 $10 $0 ($10) ($20) $48.8 $35.4 $50 $40 $30 $20 $10 0 ($10) $15.1 ($7.2) $5.0 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 -17- 2003 Results Vision, Strategy and Core Competencies Hamilton Beach(cid:2)Proctor-Silex (“HB/PS”) had a good HB/PS’ vision is to be the leading North American year in 2003, reporting improved net income despite lower provider of small electric kitchen and household appliances revenues compared with 2002. Net income benefited from that are sold under strong heritage brand names and provide manufacturing, sourcing and distribution efficiencies, increased consumers with innovative features and superior value. sales of higher-margin products and reduced expenses. The company’s strategies for achieving its vision include Revenues decreased in 2003, despite an increased number developing innovative, high-quality products; continuously of HB/PS product placements on major retailers’ shelves, reducing costs; aligning brands with key consumer segments; due to continued softness in the retail marketplace for small and sustaining highly professional sales and marketing programs. electric kitchen and household appliances and consumer Core competencies supporting these strategies include purchases below expectations. Decreased revenues in several researching, designing and testing new product concepts; categories were partially offset by increased sales of innovative driving improvement through detailed value chain analyses; new products, such as the Hamilton Beach® BrewStation™ understanding end-user buying behavior as a foundation for coffeemaker (shown at left), which eliminates the need for a building brands; and matching products and services to specific carafe by brewing coffee into a built-in thermal container, retailer assortment needs. allowing coffee with fresh-brewed flavor to be dispensed cup-by-cup. Clockwise from top left: Hamilton Beach(cid:2)Proctor-Silex‘s newest products include: Hamilton Beach BrewStation™ coffeemaker, Hamilton Beach Stay or Go™ blender, Proctor-Silex® 1.5 qt. slow cooker, TrueAir™ odor eliminator, Hamilton Beach 2-slice toaster. The Building of HB/PS – NACCO’s Long-term Perspective The history of the formation and development of HB/PS exemplifies NACCO’s long-term perspective. NACCO acquired WearEver/Proctor- Silex in 1988. In order to create more focused businesses, Kitchen Collection, which had been purchased along with WearEver/Proctor-Silex, was established as an independent subsidiary company with dedicated management, and the WearEver cookware business was sold to Newell Co. In 1990, Hamilton Beach, a company that produced primarily motor-driven small kitchen appliances, was acquired and merged with Proctor- Silex, a company that produced primarily heat-driven small kitchen and garment care appliances. In succeeding years, with consulting assistance from NACCO Industries, the company fully integrated the operations of its predecessors, repositioned the two heritage brands to serve different price-point segments with a broad array of both motor- and heat-driven products, began producing GE-branded products for Wal-Mart and successfully entered the home health category with the TrueAir™ brand. The company is currently introducing the Traditions™ by Proctor-Silex and the Hamilton Beach Eclectrics™ lines to serve additional price-point segments. HB/PS has entered 17 new product categories over the last 14 years, now participates in a total of 38 categories, and has captured a #1 or #2 market share in 20 categories. Today, HB/PS is recognized by retailers for superior products and services and industry-leading category management capabilities. Other new programs are in development as the company pursues additional product categories, increased market share and long-term profitable growth. -19- A few of the newest products from Hamilton Beach(cid:2)Proctor-Silex also include (from left to right): Hamilton Beach Stay or Go™ coffeemaker, General Electric® 2-slice toaster, Proctor-Silex 12 cup coffeemaker, Hamilton Beach Professional iron. Key Programs to Enhance Profitability implemented quality programs from design and engineering Product development process. HB/PS’ product develop- through manufacturing and distribution. As a result, HB/PS ment process, which has evolved over the last several years, has achieved significant quality improvements as evidenced by is designed to increase each product’s probability of market product return rates, which declined significantly again in 2003. success. Elements of this approach include a rigorous product Supply chain optimization. Intense focus on supply strategy process that includes detailed analysis of consumer chain management in 2003 resulted in significant performance preferences, highly efficient design techniques and collabora- improvements both within the company and for HB/PS’ tive engineering with multiple Chinese partners who often retailer customers. Process and software enhancements contribute meaningfully to product development. The goals helped reduce overall inventory while improving customer are to deliver high consumer satisfaction at competitive costs service. Further efficiencies should be gained in 2004 from on both current and innovative new products, and to enter implementation of a collaborative planning, forecasting and new product categories. Because of HB/PS’ up-front attention replenishment (CPFR) process with some key retailers. HB/PS to consumer preferences and retailer needs, the company’s continues to improve distribution performance at its Memphis, products sell well with lower promotional expenses than many Tennessee, facility as well as to offer further efficiencies competitors’ products require. through direct-ship programs to retailers’ warehouses. Manufacturing cost reduction. A number of manufac- turing efficiency programs are contributing to HB/PS’ successful record of continuous cost reduction. Programs include continued consolidation of Mexican manufacturing plants and increased low-cost, high-quality sourcing from China, where HB/PS has established a permanent office. HB/PS hopes to have these efforts completed by 2005. Also, at both company-owned and Chinese suppliers’ plants, HB/PS implements its ongoing Value Improvement Program (VIP), which seeks to reduce process and component costs while continuously maintaining high quality. Continuous quality improvement. Product and service quality is a top priority at HB/PS. The company is committed to continuous quality improvement and has successfully Key Programs to Generate Growth New product introductions. HB/PS continues to increase the pace of new product introductions sold under its various brand names. In-depth consumer research enables the company to develop products with innovative consumer-preferred features and high rates of market success. In the company’s consumer business, the Hamilton Beach BrewStation™ coffeemaker is an example of a breakthrough new product that has driven significant growth, with shelf placement in nearly every major housewares retailer. Sales of home health products continue to grow under the TrueAir™ brand name, and other new product areas remain under consideration. In the company’s commercial business, new blenders, coffeemakers and coffee urns were The objective of HB/PS’ overall strategy is to grow successfully introduced in 2003, and more new products are profitably through increased sales of high-margin, innovative planned for 2004. new products sold through a wide range of retailers and Strategic brand application. HB/PS has developed and distribution channels. utilizes a proprietary consumer “value proposition” segmen- tation analysis that helps the company and retailers apply Outlook for 2004 and Beyond brand names most effectively in the marketplace. Proctor- HB/PS is hopeful that consumer markets will improve in Silex‚ Hamilton Beach, TrueAir™, and the new Traditions™ by 2004. Since the small electric kitchen and household appliance Proctor-Silex and Hamilton Beach Eclectrics™ brands will be market declined more than expected in 2003, it is possible deployed across multiple retailers to reach specific target that the pace of recovery through 2004 will be slow. In this markets. Other brands produced by the company are sold uncertain and competitive environment, continued product exclusively at certain retailers, such as the well-known innovations, reduced costs, strong brands and heightened General Electric brand at Wal-Mart. Product and service channel efforts are expected to help HB/PS maintain leading costs associated with each brand are aligned with the needs market share positions. of its target segment through detailed value chain analysis. The longer-term objective for HB/PS is that the combi- New brand names and licensing opportunities are constantly nation of profit improvement programs and some growth evaluated to generate end-user excitement and fuel growth. programs move the company to achieve its minimum operating Retailer and channel focus. HB/PS helps each retailer profit target of 10 percent in the 2005-2006 time period, as well develop an optimal product assortment strategy, a process as to generate significant cash flow before financing activities. that lies at the heart of HB/PS’ marketing and sales approach. Additional growth programs are designed to help the company In-depth analyses are performed for each retailer to help go beyond its minimum operating profit target and to add determine the combination of products, features and prices profitable volume to this enhanced profit base. most likely to succeed. These detailed analyses drive the Last year, I extended my gratitude to all Hamilton Beach(cid:2) product development process, improve speed-to-market, Proctor-Silex employees for their contributions in making the increase retailer acceptance and have resulted in HB/PS being named category manager at a number of key North American company successful in a difficult 2002. The market challenges continued in 2003. Once again, Hamilton Beach(cid:2)Proctor- accounts. The company applies this approach to strengthen Silex employees demonstrated creativity, commitment and current retailer relationships and to pursue new distribution diligence in helping the company again achieve financial opportunities throughout North America and other selected improvement. I continue to be truly thankful for the quality international markets. Corporate Initiatives In addition to profitability and growth programs in specific areas, HB/PS has two general performance improvement programs that span all areas of the company. A focused expense management effort, which helped the company increase net income despite lower revenue in 2003, will continue in 2004. The company also utilizes Economic Value Income (EVI) analyses, a measure of return on invested capital, to identify and prioritize opportunities for growth and profit improvement. of our team in this demanding business environment. Dr. Michael J. Morecroft President and Chief Executive Officer Hamilton Beach(cid:4)Proctor-Silex, Inc. -20- -21- concept proves to be adequately profitable, additional larger a minimum operating profit of 5 percent and to generate stores could be added, which would contribute to Kitchen substantial cash flow before financing activities by focusing Collection’s growth. on its core programs: optimizing store selling space, enhancing Internet sales. Sales from the company’s Web site, store merchandise mix, expanding private label lines, developing www.kitchencollection.com, although modest, grew by new store formats and aggressively managing costs. 37.5 percent in 2003 compared with 2002, and this channel is Last year, the company communicated a long-term profitable for the company. As marketing activities increase, minimum operating profit objective of 5.5 percent, a goal that such as direct e-mail campaigns and Web partner programs, was set following what, in retrospect, was an extraordinarily Internet sales are expected to increase further. strong 2002 as outlined above. Accordingly, the objective has Corporate Initiatives now been reduced to a more appropriate level of 5 percent, which would still permit well-above-average returns on capital. Kitchen Collection constantly strives to control costs in Finally, I want to take this opportunity to thank all of our every area of the company in order to improve store prof- Kitchen Collection employees for helping the company itability. Significant store costs, such as rent and labor, are achieve solid results in 2003, a year in which the company rigorously analyzed and efforts to reduce further the costs of faced significant challenges in the retail marketplace. distributing products to the stores are underway. The objective of Kitchen Collection’s overall strategy is to maintain the profitability of the current Kitchen Collection stores while successfully achieving growth by rolling out profitable new store formats. Outlook for 2004 and Beyond Kitchen Collection expects moderate growth in 2004 from opening new stores and from the continued success of Internet sales. The company’s objective is to continue earning Randolph J. Gawelek President and Chief Executive Officer The Kitchen Collection, Inc. Kitchen Collection's Gadgets & More store in the Beachwood Place mall near Cleveland, Ohio, features higher-margin, brand-name kitchen gadgets, small electric appliances and a variety of other kitchen- and housewares-related products. 2003 Results company continues to utilize its proprietary Economic Value Kitchen Collection had a good year in 2003 taking into Income (EVI) business tool to assist in determining how to account lower traffic in outlet malls, which led to moderately achieve the greatest possible return per cubic foot of retail lower sales and lower net income than in 2002. Comparisons space. Combined with other revenue and margin enhancement of 2003 to 2002 require recognition that 2002 was an programs, EVI assists in optimizing the most profitable mix of extraordinary year for Kitchen Collection, with unusually products, the amount of space allocated to each product and high sales growth of 13.5 percent above 2001 and high levels the most appropriate store size. of profitability partly attributable to its major competitor, Margin enhancement and merchandising programs. Lechter’s, leaving the outlet mall business. Over the longer Kitchen Collection continually tests and implements new term, Kitchen Collection should continue to benefit from the approaches to increase traffic, to increase the percentage of closing of the Lechter’s stores in 2001. individuals who make purchases after they enter a store, to The modest sales decrease in 2003 was driven by a encourage customers to purchase higher-margin items and to reduced number of transactions in comparable stores, offset increase the average purchase amount of those who buy. slightly by a small increase in the amount of the average sales Private label. Kitchen Collection continues to expand its transaction and sales from new stores. In addition, sales were lines of sourced private label merchandise featuring the adversely affected by severe weather in the first and fourth Hamilton Beach® and Proctor-Silex® brand names, which are quarters. The number of Kitchen Collection® and Gadgets & among Kitchen Collection’s most successful and profitable More® stores increased from 173 in 2002 to 180 in 2003. product lines. These product lines now feature nearly 400 items, including gadgets, cutlery, cutting boards, barbecue Vision, Strategy and Core Competencies tools, bakeware and cookware. Kitchen Collection’s vision is to be a leading specialty retailer of housewares, including cookware, bakeware, kitchen Key Programs to Generate Growth gadgets and related items, in outlet and traditional malls for Gadgets & More. The Gadgets & More store format, consumers seeking outstanding value. which is still in test mode, continues to represent the company’s The company’s strategy is to maintain a strong position most promising driver of future growth. Located primarily in in the outlet mall channel and to develop complementary traditional enclosed malls, Gadgets & More stores sell a broad store formats that can be profitably expanded to large numbers range of higher-margin kitchen gadgets and other selected of stores in traditional malls. housewares products. The company currently has only eight Core competencies supporting this strategy include Gadgets & More stores in a potential market of more than 500 analyzing assortment performance to optimize store prof- traditional enclosed malls. However, Kitchen Collection will be itability and creating and refining store concepts to ensure prudent in the pace with which it opens additional stores in profitable expansion. order to ensure that sales volumes and profit structure meet Kitchen Collection’s objectives. Key Programs to Enhance Profitability Large store format. In the outlet channel, Kitchen Kitchen Collection has in place several key programs to Collection is currently testing a larger format store that grow profitably in a highly competitive retail environment: will offer an expanded assortment in several key areas, Economic Value Income. Kitchen Collection utilizes including tabletop, dinnerware and glassware items. If this disciplined operating controls to improve margins. The -22- North American Coal’s vision is to be the leading low-cost miner of lignite coal used in power generation and coal gasification plants and to provide selected value-added mining services for other natural resources companies. The North American Coal Corporation 2003 Results Also contributing to lower net income was the adoption of North American Coal operates mines, which, in total, SFAS No. 143, which requires that future mine closure costs be delivered 35.5 million tons of lignite coal in 2003 compared recognized sooner than under North American Coal’s previous with 34.2 million tons in 2002, maintaining North American accounting methodology. The effect of this methodology Coal’s position as the nation’s largest lignite coal producer and change was a charge of $1.3 million, net of tax, recognized as among the top 10 coal producers nationwide. The Florida a cumulative effect of an accounting change. Income before the dragline operations increased limerock deliveries by approxi- cumulative effect of an accounting change in 2003 was $15.6 mately 4 percent in 2003 over 2002. The Company’s lignite million, compared with $19.6 million in 2002. coal reserve position, including unconsolidated project The adoption of Financial Accounting Standards Board mines, remains strong with a total of 2.4 billion tons of Interpretation No. 46 (“FIN No. 46”) has dramatically changed which 1.3 billion tons are committed to current customers. the presentation of North American Coal’s financial statements. Unconsolidated project mines account for 1.1 billion tons For many years, the company has explained the unique financial of total reserves, all of which are committed to project mine characteristics of three subsidiaries: The Coteau Properties customers. Company, The Falkirk Mining Company and The Sabine Although North American Coal delivered more tons of Mining Company (collectively the “project mines”), in which lignite coal in 2003 than in 2002, net income declined to ownership of modest equity investments resulted in the con- $14.3 million in 2003 compared with $19.6 million in 2002. solidation of the debt obligations of the project mines which The decrease was primarily the result of losses at North were fully guaranteed by its customers, and in fact, non- American Coal’s San Miguel Lignite Mining Operations recourse to North American Coal. FIN No. 46 requires the attributable to high operating and maintenance costs of aged deconsolidation of the project mines from North American equipment, and receipt in 2002 of the last liquidated damage Coal’s financial statements. The company believes the resulting payments related to the delayed start up of the Mississippi financial statements better reflect the fundamental economics Lignite Mining Company’s customer’s power plant. of the project mines. (The adoption of FIN No. 46 is further described in the boxes at the bottom of this page and page 2.) Top left: The dragline at The Coteau Properties Company in North Dakota, North American Coal’s largest unconsolidated project mining operation. Middle: North American Coal’s limerock mining operation at White Rock Quarry in South Florida. During 2003, the contract for these mining services was extended to 2010. Bottom: North American Coal is committed to protecting the environment by restoring mined land to its original or better condition. At The Falkirk Mining Company in North Dakota, one of North American Coal’s unconsolidated project mines, land once used for surface mining now hosts migrating waterfowl in the fall and spring. Adoption of FIN No. 46 During the fourth quarter of 2003, North American Coal adopted Financial Accounting Standards Board Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities,” which the company chose to retroactively apply to January 1, 2002. As a result of the adoption of FIN No. 46, the company no longer consolidates the financial statements of three of its wholly owned subsidiaries: The Coteau Properties Company, The Falkirk Mining Company and The Sabine Mining Company (collectively, the “project mines”). These project mines sell lignite coal at a formula price based on actual costs plus an agreed pre-tax profit per ton. These entities are capitalized primarily with debt financing, which has been arranged and guaranteed by the project mines’ customers. Previously disclosed financial results for 2002 have been restated to reflect the adoption of FIN No. 46. The effect of deconsolidation was to decrease previously reported 2002 revenues by $263.1 million, but to leave reported net income unchanged. The company still has a 100 percent equity investment in the project mines; however, the pre-tax earnings are now included in one line on the statement of operations entitled "Earnings of unconsolidated project mining subsidiaries." In addition, the assets and liabilities of the project mines are no longer consolidated within the company’s balance sheet, although the balance sheet now reflects an investment in the project mines and related income tax obligations. The company’s invested capital in the project mines was $4.9 million at December 31, 2003 and 2002. -25- The adoption of FIN No. 46 did not change North calendar year without incurring a single lost-time accident. • Utilizing Easi-Miners, equipment resembling road Limerock projects. The company is increasingly optimistic American Coal’s reported net income. However, North American North American Coal continues to believe that its commitment Coal’s reported revenues from mining operations were reduced to safety and strong employee relations improves productivity significantly. In 2002, previously reported revenues were and employee retention and thereby enhances profitability. $349.3 million before the adoption of FIN No. 46. After Mississippi Lignite Mining Company. With this new the adoption of FIN No. 46, restated 2002 revenues were mine and its customer’s power plant now fully operational, $86.2 million. Revenues in 2003 were $94.1 million. North North American Coal is aggressively focused on achieving American Coal generated $11.3 million of cash flow before planned profitability through the application of its extensive financing activities in 2003 and $29.4 million in 2002. mining expertise. While mining of deeper coal seams will increase mining costs in the near term, lower costs are Vision, Strategy and Core Competencies expected by 2006, with more profitable mining beginning North American Coal’s vision is to be the leading low-cost in 2007. miner of lignite coal used in power generation and coal gasifi- San Miguel Lignite Mining Operations. Over the past cation plants and to provide selected value-added mining several years, North American Coal has mined more lignite coal services for other natural resources companies. at this mine than originally anticipated. While higher volume North American Coal’s strategy is to leverage low-cost would normally be desirable, this increased production has mining expertise at existing mines while pursuing new mining led to higher mining costs, increased equipment needs and opportunities. higher equipment maintenance costs. These cost increases, Core competencies supporting this strategy include which are generally not covered by contractual coal price operating mines in a safe, low-cost and environmentally increases, resulted in a significant loss at this operation for responsible manner through disciplined, efficient and respon- 2003. North American Coal is currently renegotiating the sible processes; fostering successful, long-term partnerships mining contract with the mine’s customer to take into account with power generating customers; and analyzing regional a revised mine plan. The current proposal for these contract opportunities, understanding new coal-based power generating revisions, if implemented, is expected to reduce near-term technologies and identifying potential partners for future losses in 2004 and 2005, lead to profitability in 2006 and development. 2007, and enhance the long-term working relationship with the customer. Key Programs to Enhance Profitability Innovative mining methods. North American Coal con- Employee safety. Employee safety is the number one tinues to be a leader in developing innovative mining methods, priority at North American Coal. Each of the mines emphasizes which have improved mining efficiency and coal recovery, safety as part of its daily routine and annually conducts extensive reduced costs, enhanced safety and lessened the environmental safety training courses. Red River Mining Company has not had impact of mining. These methods, also described in last year’s a lost-time accident since it was opened in 1989. In addition, Annual Report, include: five of the company’s seven operations worked the entire 2003 Income Before Taxes Lignite Coal Tons Delivered (In millions) $34.6 $22.2 $12.5 $21.8 $18.3 $40 $30 $20 $10 $0 40 30 20 10 0 (In millions) 31.3 31.6 31.4 34.2 35.5 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 (including project mines) resurfacers, to extract thinner seams of coal, thereby that niche growth opportunities to provide high value-added improving coal recovery and reducing costs. services for other natural resource mining applications, such • Designing a unique slurry wall dewatering system at Red as limerock dragline services, will continue to emerge. The River Mining Company in Louisiana. This system, derived contract with White Rock Quarries (“WRQ”), under which from drainage systems used to keep basements dry in North American Coal provides dragline mining services to wet areas, enables workers to mine lignite coal safely and WRQ at its limerock mining operation in South Florida, was efficiently in a flood plain. automatically extended at the end of December 2003 for a • Developing specialized non-stick linings applied to the term that ends in 2010. Discussions are currently ongoing with inside of truck beds and buckets on earth-moving equip- WRQ about further expansion of its limerock requirements. ment to improve efficiencies and lower costs. The company is optimistic these discussions will lead to a • Using special proprietary software to track equipment revised contract in 2004. utilization and optimize service intervals for lower overall North American Coal also began providing dragline maintenance costs. mining services to the Krome Avenue Quarry owned by Rinker Environmental commitment. North American Coal is Materials of Florida, Inc. (“Rinker”) in the fourth quarter of committed to protecting the environment by restoring mined 2003. The company expects to deliver approximately 4.0 land to its original or improved condition. North American million cubic yards of limerock per year based on the mining Coal utilizes the latest geological and technological approaches services agreement, which has a seven-year term ending in to mining as well as to reclaiming mined land. For instance, the 2010 and includes three one-year extensions. In January 2004, Company pioneered the use of Global Positioning Systems North American Coal and Rinker signed a new agreement for (GPS) on mining equipment to reduce the amount of dirt the company to provide dragline mining services to Rinker’s moved, improve efficiencies, lower costs, reduce the environ- Alico Road Quarry near Ft. Myers, Florida beginning in the mental impact of mining and improve the precision of land second quarter of 2004. The company expects to deliver an reclamation activities. Key Programs to Generate Growth additional 3.0 million cubic yards of limerock annually through 2011 based on this mining services agreement. Long-term positioning. North American Coal believes Reserve development strategies. North American Coal that, in the long term, development of additional coal owns what it believes is the most extensive bank of geological reserves in the United States will depend greatly upon the data on lignite coal reserves in the country, consisting of data on adoption of new power plant technologies that substantially its own company-owned lignite coal reserves as well as lignite lower emissions. One of the most promising new technologies coal reserves owned or controlled by others. This wealth of involves gasifying coal to produce synthetic natural gas data provides a strategic advantage to North American Coal as (syngas) for power generation. Lignite coal is among the it works to identify, prioritize and pursue opportunities to best types of coal to be used for gasification. This process can develop its own reserves or other new mining opportunities. reduce overall emissions, allow the complete capture of The foundation for new mining projects is the ongoing, mercury and carbon dioxide, and create an opportunity to in-depth analysis of power generation supply and demand in produce marketable by-products such as synthetic diesel each of the regions where North American Coal has reserves. fuel. This coal gasification process can also extract hydrogen, In areas where future power generation demand outpaces which could eventually be used in fuel cells for emission-free supply, there is potential for the development of new power power generation or for vehicles. The company continues to plants, which could utilize lignite coal mined by North invest significant effort in understanding and promoting these American Coal. Based on the results of these analyses, North new technologies and is a member of a national coalition of American Coal adjusts both its ownership plans for its own power and mining companies, called FutureGen, organized to lignite coal reserves as well as the direction of its efforts to help bring to fruition President Bush’s vision of the coal-fired develop new mining opportunities. -26- -27- power plant of the future. Concurrently, North American Coal The company has programs with the objective of sig- has developed its own vision for a clean, economical and flex- nificant improvements in return on capital employed by ible power plant, called FlexGen, which would allow power 2006-2007: companies to generate power from natural gas, coal-based • While mine development at Mississippi Lignite Mining synthetic gas or fuel cells, to produce a variety of by-products, Company is now complete, higher levels of operating including hydrogen, and to significantly reduce, or even elim- costs, including depreciation of higher mine development inate, many harmful emissions. The company’s hope is that costs attributable to the customer’s power plant startup adoption of these new technologies will create new opportu- delay and other depreciation and amortization, must nities for lignite coal mining in the long term. now be expensed. Mississippi Lignite Mining Company, Corporate Initiatives like many mining operations, will have lower returns on capital employed early in the project’s life. Also, reaching Central to North American Coal’s successes are its efforts long-term potential operating efficiency following to minimize exposure to the market price of coal. This goal is start-up will continue to take time, since some higher- accomplished through carefully structured long-term mining cost mining due to deeper coal seams is still required agreements, which essentially establish the specific mining until 2006. More profitable mining is expected beginning services that North American Coal will perform for its customers in 2007. and the mechanisms by which it will be compensated for • Cost pressures will continue at San Miguel Lignite performing those activities. Because North American Coal is Mining Operations, although contract provisions under selling its services in addition to its coal, these agreements negotiation, if successful, should improve the mine’s include various cost escalation procedures and often include operating results, with the greatest benefit occurring in performance incentives. Through these mining agreements, 2006 and 2007. North American Coal and its customers share a common goal • The customer at Red River Mining Company is expected of minimizing costs. By eliminating speculation on the future to continue, at least in the immediate future, to elect to price of coal, this approach allows the company to consistently take only the contractual minimum number of tons. The earn sound margins for its services and earn, on a regular company’s objective is to increase deliveries over the basis, returns on capital employed substantially in excess of the longer term, which would add significantly to profitability. company’s cost of capital. With implementation of these programs, the company The objective of North American Coal’s overall strategy is anticipates improvement in returns on capital employed as the profitable operation of all current mines coupled with the well as increased cash flow before financing activities. development of new mines that utilize the company’s lignite Finally, on a personal note, I would like to express my coal reserves or its mining expertise. gratitude to all North American Coal employees for their hard work and dedication in making 2003 another safe and Outlook for 2004 and Beyond successful year for the company. North American Coal’s financial objectives are to earn a minimum return on capital employed of 13 percent and to deliver substantial cash flow before financing activities. In light of the company’s deconsolidation of its project mines pursuant to FIN No. 46 in 2003, the company has moved from a financial goal based on operating profit to a financial goal based on return on capital employed. Clifford R. Miercort President and Chief Executive Officer The North American Coal Corporation Left: The Mississippi Lignite Mining Company uses a variety of heavy-duty equipment to mine lignite coal, including a Marion® 8200 dragline, Huron® 1224 Easi-Miner and Caterpillar® 785 haul trucks. -29- Supplemental Data Officers & Directors RECONCILIATION OF FINANCIAL TARGETS TO NET INCOME: Minimum Operating Profit Target, Minimum Return on Capital Employed Target and Interest Expense as of December 31, 2003 Subsidiaries with Minimum Operating Profit Targets (U.S. dollars in millions, except per share amounts) Housewares NMHG Total 2003 Revenues, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x Operating profit target percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . = Operating profit at target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 1,779.6 9% 160.2 Less: 2003 Operating profit, as reported for NMHG and Housewares . . . . . . . . . . . . . . . . . . . . . . Difference between 2003 operating profit, as reported, and operating profit target. . . . . . . . . . . Less: Income tax expense at 38%** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income difference between reported operating profit and operating profit target $ (48.8) 111.4 (42.3) for NMHG and Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69.1 Subsidiaries with Minimum Return on Capital Employed Targets 2003 Average Equity (12/31/2002 and at each of 2003's quarter ends) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 Average Debt (12/31/2002 and at each of 2003's quarter ends). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total 2003 average capital employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on capital employed target percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on capital employed target = target net income before interest expense, net-of-tax . . . . . . . . . . . . . . . . . . 2003 Net income, as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: 2003 Interest expense, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Income taxes on 2003 interest expense at 38%** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on capital employed = actual net income before interest expense, net-of-tax . . . . . . . . . . . . . . . . . . Return on capital employed target = target net income before interest expense, net-of-tax . . . . . . . . . . . . . . . . . . Actual return on capital employed = actual net income before interest expense, net-of-tax . . . . . . . . . . . . . . . . . . Return on capital employed difference between actual and target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on capital employed target = target net income before interest expense, net-of-tax . . . . . . . . . . . . . . . . . . Less: 2003 Interest expense, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Income taxes on 2003 interest expense at 38%** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Target net income at target return on capital employed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: 2003 Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income difference between reported net income and target net income at target return on $ $ $ $ $ $ $ $ $ $ $ $ $ 598.7 * 9.2% 55.1 (42.0) 13.1 (5.0) 8.1 $ $ $ $ 2,378.3 N/A 215.3 (90.8) 124.5 (47.3) 77.2 NACoal 65.5 131.1 196.6 13% 25.6 14.3 9.1 (3.5) 19.9 25.6 (19.9) 5.7 25.6 (9.1) 3.5 20.0 (14.3) capital employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.7 5.7 Total of net income differences from subsidiaries with minimum operating profit targets and minimum return on capital employed targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per share impact at 8.204 million average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 82.9 10.10 Return on capital employed is provided solely as a supplemental disclosure with respect to income generation because management believes it provides useful information with respect to earnings in a form that is comparable to the Company's cost of capital employed, which includes both equity and debt securities. Interest Expense 2003 Interest expense, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Income tax expense at 38%**. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 Interest expense, net-of-tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per share impact at 8.204 million average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ 51.0 (19.4) 31.6 3.85 * The weighted average minimum operating profit target for the Housewares segment is 9.2% (HB/PS at 10% and Kitchen Collection at 5%). ** Tax rate of 38% represents the Company's marginal tax rate as compared to 2003's effective tax rate of 24.3%. Officers and Directors of NACCO Industries, Inc. Officers: Alfred M. Rankin, Jr. Chairman, President and Chief Executive Officer Charles A. Bittenbender Vice President, General Counsel and Secretary J.C. Butler, Jr. Vice President-Corporate Development and Treasurer Lauren E. Miller Vice President-Consulting Services Kenneth C. Schilling Vice President and Controller Dean E. Tsipis Assistant General Counsel and Assistant Secretary Directors: Owsley Brown II Chairman and Chief Executive Officer, Brown-Forman Corporation Robert M. Gates President, Texas A&M University Former Director of Central Intelligence Leon J. Hendrix, Jr. Chairman, Remington Arms Company, Inc. David H. Hoag Retired Chairman and Chief Executive Officer, The LTV Corporation Dennis W. LaBarre Partner, Jones Day Richard de J. Osborne Retired Chairman and Chief Executive Officer, ASARCO Incorporated Alfred M. Rankin, Jr. Chairman, President and Chief Executive Officer, NACCO Industries, Inc. Ian M. Ross President Emeritus, AT&T Bell Laboratories Michael E. Shannon President, MEShannon & Associates, Inc. Retired Chairman, Chief Financial and Administrative Officer, Ecolab, Inc. Britton T. Taplin Principal, Western Skies Group, Inc. David F. Taplin Self employed (tree farming) John F. Turben Chairman of the Board Kirtland Capital Corporation Director Emeritus Thomas E. Taplin Officers of Subsidiaries Americas: Officers of The North American Coal Corporation Clifford R. Miercort President and Chief Executive Officer Charles B. Friley Senior Vice President and Chief Financial Officer Robert L. Benson Vice President-Eastern & Southern Operations Thomas A. Koza Vice President-Law and Administration, and Secretary Clark A. Moseley Vice President-Business Development and Engineering Bob D. Carlton Controller and Director of Tax K. Donald Grischow Treasurer Officers of NACCO Materials Handling Group, Inc. Corporate: Reginald R. Eklund President and Chief Executive Officer Frank G. Muller Executive Vice President, Chief Operating Officer Michael Brogan Senior Vice President, Product Development and Procurement Gregory J. Dawe Vice President, Manufacturing and Quality Strategy James P. Gorzalski Vice President, Procurement and Supply Ron J. Leptich Vice President, Engineering and Big Trucks Geoffrey D. Lewis Vice President, Corporate Development, General Counsel and Secretary James M. Phillips Vice President, Human Resources Victoria L. Rickey Vice President, Chief Strategy Officer Michael K. Smith Vice President, Finance and Information Systems, and Chief Financial Officer Gopi Somayajula Vice President, Counterbalanced Engineering Daniel P. Gerrone Controller Jeffrey C. Mattern Treasurer Colin Wilson Vice President, President, Americas David Clarke Vice President, Marketing, Americas Raymond C. Ulmer Vice President, Finance and Information Systems, Americas Donald L. Chance, Jr. Vice President, President, Yale Materials Handling Corporation David O’Dell Vice President, President, Hyster Company Europe: Richard H. Close Vice President, Managing Director, Europe, Africa and Middle East Stephen R. West Vice President, Finance and Information Systems, Europe, Africa and Middle East Asia-Pacific: Donna M. Baxter Vice President, Managing Director, Asia-Pacific Yoshinori Ohno Managing Director, Sumitomo NACCO Materials Handling Co., Ltd. Officers of Hamilton Beach(cid:2)Proctor- Silex, Inc. Dr. Michael J. Morecroft President and Chief Executive Officer Charles B. Hoyt Senior Vice President-Finance and Chief Financial Officer Paul C. Smith Senior Vice President-Sales Keith B. Burns Vice President-Engineering and Product Development Kathleen L. Diller Vice President, General Counsel and Secretary Gregory E. Salyers Vice President-Operations W. Lance Servais Vice President/General Manager-Global Commercial Products James H. Taylor Vice President and Treasurer Gregory H. Trepp Vice President-Marketing Officers of The Kitchen Collection, Inc. Randolph J. Gawelek President and Chief Executive Officer Darlene Denman-Jones Senior Vice President-General Merchandise Manager -30- -31- Annual Meeting Investor Relations Contact The Annual Meeting of Stockholders of NACCO Industries, Inc. will be held on May 12, 2004, at 9 a.m. at the corporate office located at: 5875 Landerbrook Drive Mayfield Heights, Ohio. Form 10-K Additional copies of the Company’s Form 10-K filed with the Securities and Exchange Commission are available through NACCO’s Web site (www.nacco.com) or by request to Investor Relations, NACCO Industries, Inc., 5875 Landerbrook Drive, Mayfield Heights, Ohio 44124. Stock Transfer Agent and Registrar National City Bank Corporate Trust Operations P.O. Box 92301, Dept. 5352 Cleveland, Ohio 44193-0900 1-800-622-6757 Legal Counsel Jones Day North Point 901 Lakeside Avenue Cleveland, Ohio 44114 Independent Auditors Ernst & Young LLP 1300 Huntington Building 925 Euclid Avenue Cleveland, Ohio 44115 Investor questions may be addressed to: Christina Kmetko, Manager-Finance NACCO Industries, Inc. 5875 Landerbrook Drive Mayfield Heights, Ohio 44124 (440) 449-9669 E-mail: ir@naccoind.com Stock Exchange Listing The New York Stock Exchange Symbol: NC Web Sites The Web sites of NACCO Industries and several Company subsidiaries and product brands can be found at the following locations: NACCO Industries: www.nacco.com North American Coal: www.nacoal.com NACCO Materials Handling Group: www.nmhg.com Hyster North America: www.hyster.com Hyster Europe: www.hyster.co.uk Hyster Asia-Pacific: www.hyster.com.au Yale North America: www.yale.com Yale Europe: www.yale-europe.com Yale Asia-Pacific: www.yale.com.au Hamilton Beach(cid:4)Proctor-Silex: www.hamiltonbeach.com www.proctorsilex.com www.trueair.com http://commercial.hamiltonbeach.com Kitchen Collection: www.kitchencollection.com [This Page Intentionally Left Blank] -32- Annual Report 2003 NACCO I N D U S T R I E S , I N C . Managing for long-term profit growth NACCO Industries, Inc. 5875 Landerbrook Drive • Mayfield Heights, Ohio 44124 An Equal Opportunity Employer Printed in U.S.A. 

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