NACCO Industries
Annual Report 2005

Plain-text annual report

NACCO I N D U S T R I E S , I N C . Annual Report 2005 Managing for long-term profit growth NACCO INDUSTRIES, INC. AT A GLANCE NACCO Industries, Inc. is an operating holding company with three principal businesses: lift trucks, housewares and mining. In 2005, total revenues were $3.2 billion and net income was $62.5 million. Market Positions Competitive Advantages Financial Objectives Key Business Programs Principal Businesses NACCO Materials Handling Group (“NMHG”) Headquarters: Portland, Oregon NMHG Wholesale designs, engineers, manufactures and sells a comprehensive 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, leasing and servicing Hyster and Yale lift trucks, including sales of related service parts. NACCO Housewares Group Hamilton Beach/Proctor-Silex (“HB/PS”) Headquarters: Richmond, Virginia HB/PS is a leading designer, marketer and distributor 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 throughout the United States under the Kitchen Collection® name in outlet malls and under the Kitchen Collection® and Gadgets & More® names in enclosed malls. 2005 Financial Results NMHG Wholesale: Revenues: $2.2 billion Operating profit: $54.1 million Net income: $26.0 million NMHG Retail: Revenues: $185.8 million Operating loss: $6.6 million Net loss: $7.9 million NACCO Housewares Group: Revenues: $639.1 million Operating profit: $39.3 million Net income: $21.3 million Minimum operating profit margin target of 9 percent by 2007-2008 NACCO Materials Handling Group is a world leader in the lift truck industry with an estimated 12 percent market share worldwide, including a 25 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 in the Americas and worldwide • Highly recognized Hyster and Yale brand names • Large installed population base of lift trucks; an estimated 765,000 Hyster and Yale lift trucks in operation worldwide • Highly diverse customer base with more than 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 Hamilton Beach/Proctor-Silex is one of the leading companies in small appliances, with strong share positions in many of the categories in which it competes. HB/PS products are primarily 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 195 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 margin target of 10 percent by 2007 Kitchen Collection: Minimum operating profit margin target of 5 percent The North American Coal Corporation (”NACoal“) 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 in the United States. North American Coal operates six surface lignite mines. The company also provides dragline mining services operating under the name “North American Mining Company” for independently owned limerock quarries in Florida. North American Coal: Revenues: $118.4 million Operating profit: $23.8 million Net income: $16.2 million North American Coal is the nation’s largest miner of lignite coal and among the ten largest coal producers. Lignite coal is delivered to power plants adjacent to mines in Texas, North Dakota, Louisiana and Mississippi. • Lignite coal 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 • 2.3 billion tons of lignite coal reserves, of which 1.2 billion tons are committed to current customers • Outstanding operational and technological mining skills • Highly efficient heavy equipment utilization • Excellent record of environmental responsibility and employee safety Minimum return on capital employed of 13 percent and attain positive Economic Value Income from all existing consolidated mining operations as well as any new projects, and maintain or increase profitability of all existing unconsolidated project mining operations • Manufacturing restructuring • Quality initiative • Global supply chain • Material cost recovery • Aftermarket efficiency • Administrative efficiencies • New product development • SPED (Customization) • Strategic pricing optimization • New product introductions • Industry marketing strategy • National and global accounts • Anchor Dealer program • Dealer excellence enhancement • Aftermarket parts • NMHG retail improvements HB/PS: • Administrative cost reduction • Manufacturing cost reduction • Continuous quality improvement • Supply chain optimization • Product development process • New product introductions • Retailer and channel focus • Strategic brand application Kitchen Collection: • Continuous product cost management • Store expense management • Logistics efficiency • Innovative products and merchandising • Hamilton Beach/Proctor-Silex brand leverage • Economic Value Income • Outlet mall format initiatives • Enclosed mall format initiatives • Outlet MarketPlace initiative • Internet format initiative • Employee safety • Mississippi Lignite Mining Company improvement • San Miguel Lignite Mining Operations improvement • Contract structure • Mining and management innovation • Environmental commitment • Mining NACoal reserves for direct coal-fired power generation • Mining NACoal reserves for coal gasification • Mining NACoal reserves for coal-based energy production • Contract mining of lignite coal • Contract mining of aggregates NACCO INDUSTRIES, INC. AT A GLANCE NACCO Industries, Inc. is an operating holding company with three principal businesses: lift trucks, housewares and mining. In 2005, total revenues were $3.2 billion and net income was $62.5 million. Market Positions Competitive Advantages Financial Objectives Key Business Programs Principal Businesses NACCO Materials Handling Group (“NMHG”) Headquarters: Portland, Oregon NMHG Wholesale designs, engineers, manufactures and sells a comprehensive 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, leasing and servicing Hyster and Yale lift trucks, including sales of related service parts. NACCO Housewares Group Hamilton Beach/Proctor-Silex (“HB/PS”) Headquarters: Richmond, Virginia HB/PS is a leading designer, marketer and distributor 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 throughout the United States under the Kitchen Collection® name in outlet malls and under the Kitchen Collection® and Gadgets & More® names in enclosed malls. 2005 Financial Results NMHG Wholesale: Revenues: $2.2 billion Operating profit: $54.1 million Net income: $26.0 million NMHG Retail: Revenues: $185.8 million Operating loss: $6.6 million Net loss: $7.9 million NACCO Housewares Group: Revenues: $639.1 million Operating profit: $39.3 million Net income: $21.3 million Minimum operating profit margin target of 9 percent by 2007-2008 NACCO Materials Handling Group is a world leader in the lift truck industry with an estimated 12 percent market share worldwide, including a 25 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 in the Americas and worldwide • Highly recognized Hyster and Yale brand names • Large installed population base of lift trucks; an estimated 765,000 Hyster and Yale lift trucks in operation worldwide • Highly diverse customer base with more than 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 Hamilton Beach/Proctor-Silex is one of the leading companies in small appliances, with strong share positions in many of the categories in which it competes. HB/PS products are primarily 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 195 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 margin target of 10 percent by 2007 Kitchen Collection: Minimum operating profit margin target of 5 percent The North American Coal Corporation (”NACoal“) 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 in the United States. North American Coal operates six surface lignite mines. The company also provides dragline mining services operating under the name “North American Mining Company” for independently owned limerock quarries in Florida. North American Coal: Revenues: $118.4 million Operating profit: $23.8 million Net income: $16.2 million North American Coal is the nation’s largest miner of lignite coal and among the ten largest coal producers. Lignite coal is delivered to power plants adjacent to mines in Texas, North Dakota, Louisiana and Mississippi. • Lignite coal 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 • 2.3 billion tons of lignite coal reserves, of which 1.2 billion tons are committed to current customers • Outstanding operational and technological mining skills • Highly efficient heavy equipment utilization • Excellent record of environmental responsibility and employee safety Minimum return on capital employed of 13 percent and attain positive Economic Value Income from all existing consolidated mining operations as well as any new projects, and maintain or increase profitability of all existing unconsolidated project mining operations • Manufacturing restructuring • Quality initiative • Global supply chain • Material cost recovery • Aftermarket efficiency • Administrative efficiencies • New product development • SPED (Customization) • Strategic pricing optimization • New product introductions • Industry marketing strategy • National and global accounts • Anchor Dealer program • Dealer excellence enhancement • Aftermarket parts • NMHG retail improvements HB/PS: • Administrative cost reduction • Manufacturing cost reduction • Continuous quality improvement • Supply chain optimization • Product development process • New product introductions • Retailer and channel focus • Strategic brand application Kitchen Collection: • Continuous product cost management • Store expense management • Logistics efficiency • Innovative products and merchandising • Hamilton Beach/Proctor-Silex brand leverage • Economic Value Income • Outlet mall format initiatives • Enclosed mall format initiatives • Outlet MarketPlace initiative • Internet format initiative • Employee safety • Mississippi Lignite Mining Company improvement • San Miguel Lignite Mining Operations improvement • Contract structure • Mining and management innovation • Environmental commitment • Mining NACoal reserves for direct coal-fired power generation • Mining NACoal reserves for coal gasification • Mining NACoal reserves for coal-based energy production • Contract mining of lignite coal • Contract mining of aggregates NACCO INDUSTRIES, INC. Table of Contents Selected Financial and Operating Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Letter to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 NACCO Materials Handling Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Hamilton Beach/Proctor-Silex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Kitchen Collection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 The North American Coal Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Supplemental Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Officers and Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 MANAGING FOR LONG-TERM PROFIT GROWTH In 2004, NACCO strengthened its profit improvement and growth programs. These programs were designed to help each subsidiary company achieve challenging long-term financial goals. In 2005, these key performance improvement programs began to produce positive results as NACCO enhanced its overall profit performance. Each subsidiary company moved further along in implementing programs. As a result, more ground work was laid for progress in future years. In 2006, NACCO expects several key programs to mature, which are designed to significantly improve performance. In addition, growth programs will continue to be pursued with vigor. As each subsidiary company works with determination toward its financial goals, the Company expects progress toward its minimum profitability targets at Total Revenues (In billions) $3.2 $2.8 $2.6* $2.5 $2.3 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 01 02 03 04 05 * Effective January 1, 2002, NACCO adopted FIN No. 46. Revenues for 2001 were not restated for this adoption. Further discussion of FIN No. 46 is in Note 2 of the Consolidated Financial Statements. each subsidiary and increasingly strong returns on its capital employed. Earnings Per Share $7.60 $6.44 $5.83 $5.17 $10 $5 $0 $(4.40)† ($5) 01 02 03 04 05 † 2001 includes goodwill amortization expense. Amortization of goodwill was discontinued in 2002 with the adoption of SFAS No. 142. •1• 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2005 3,157.4 33.8 – 108.0 108.0 57.8 4.7 – 62.5 7.03 0.57 – 7.60 1.848 117.15 85.50 8.226 8.223 2,094.0 406.2 703.3 Year Ended December 31 2004 2003 (In millions, except per share data) 2002(1) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2,782.6 31.5 – 88.0 88.0 47.4 0.5 – 47.9 5.77 0.06 – 5.83 1.675 105.40 83.76 8.214 8.212 2,038.6 407.4 688.0 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 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 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 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 2001(2) 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 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ (1) 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. (2) Selected Financial and Operating Data for 2001 has not been restated to reflect the adoption of Financial Accounting Standards Board Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities,” which was adopted in 2003, retroactive to January 1, 2002. •2• 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 (3) NACCO Materials Handling Group . . . . . . . . . . . . . NACCO Housewares Group . . . . . . . . . . . . . . . . . . . North American Coal Corporation . . . . . . . . . . . . . . NACCO and Other . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Cash Flow before Financing Activities . . . Used for financing activities . . . . . . . . . . . . . . . . . . . . Other Data: Adjusted EBITDA (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ $ $ $ 2005 Year Ended December 31 2004 (In millions, except employee data) 2003 2002(1) 11.9 31.9 26.4 5.0 75.2 (30.1) (4.8) (21.4) – (56.3) (18.2) 27.1 5.0 5.0 18.9 (1.8) 177.7 $ $ $ $ $ $ $ $ 80.0 17.1 41.1 (12.0) 126.2 (17.3) (7.7) (15.3) – (40.3) 62.7 9.4 25.8 (12.0) 85.9 (4.1) 160.4 $ $ $ $ $ $ $ $ 50.1 41.2 36.1 (3.8) 123.6 (11.1) (5.8) (26.3) 0.1 (43.1) 39.0 35.4 9.8 (3.7) 80.5 (71.9) 181.3 $ $ $ $ $ $ $ $ 72.1 52.0 36.6 (11.2) 149.5 (7.3) (3.2) (7.2) (0.8) (18.5) 64.8 48.8 29.4 (12.0) 131.0 (146.8) 179.1 2001(2) 31.0 28.5 69.5 7.0 136.0 (47.2) (13.4) (33.8) (0.7) (95.1) (16.2) 15.1 35.7 6.3 40.9 (1.6) 78.3 $ $ $ $ $ $ $ $ Total employees at December 31(5) . . . . . . . . . . . . . . . 11,100 11,600 11,600 12,200 13,500 (3) Cash Flow before Financing Activities is equal to net cash provided by operating activities less net cash used for investing activities. (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 U.S. generally accepted accounting principles. 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. NACCO defines 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 U.S. generally accepted accounting principles and is not necessarily comparable with similarly titled measures of other companies. Net cash flows from operating, investing and financing activities as determined using U.S. generally accepted accounting principles are presented above. A reconciliation of cash flow from operations to Adjusted EBITDA is presented below. (5) Includes employees of the unconsolidated project mining subsidiaries. 2005 Year Ended December 31 2003 2004 (In millions) 2002(1) 2001(2) Reconciliation of Cash Flow From Operations to Adjusted EBITDA:(4) Cash flow from operations . . . . . . . . . . . . . . . . . . . . . . . . Change in working capital items . . . . . . . . . . . . . . . . . . . Gain (loss) on sale of assets . . . . . . . . . . . . . . . . . . . . . . Restructuring (charges) reversals . . . . . . . . . . . . . . . . . . Difference between deferred income taxes and total tax provision (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 . . . . . . . . . . . . . . . . . . . . . . . . . Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . Interest expense (excluding project mining subsidiaries) . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation, depletion and amortization expense $ $ $ $ $ $ 75.2 45.5 0.6 (2.7) 20.7 (4.9) 43.3 – 177.7 62.5 – (4.7) (0.1) 13.1 47.5 (4.2) $ $ $ 126.2 0.6 (0.6) (7.6) 7.2 (10.6) 45.2 – 160.4 47.9 – (0.5) (0.4) 5.3 47.4 (2.2) $ $ $ 123.6 14.1 (1.5) 1.2 4.9 (8.9) 47.9 – 181.3 52.8 (1.2) (1.8) (0.6) 15.8 51.0 (3.1) $ $ $ 149.5 (10.3) 0.4 (12.3) (6.5) 9.1 49.2 – 179.1 42.4 – 7.2 (1.2) 11.3 52.9 (3.7) 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 (excluding project mining subsidiaries) . . . . . . . . . . . Adjusted EBITDA(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63.6 177.7 62.9 160.4 $ 68.4 181.3 $ 70.2 179.1 $ $ 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 40. •3• TO OUR STOCKHOLDERS A letter from Alfred M. Rankin, Jr., Chairman, President and Chief Executive Officer of NACCO Industries, Inc. Introduction Net income at NACCO Industries increased by 30 percent in 2005 over 2004, but our goals for performance improvement are much more ambitious for the years ahead. Key profitability and growth programs in place at each of the subsidiaries are beginning to deliver substantial benefits. We believe that these programs, combined with positive market and economic factors, have the potential to deliver significantly improved performance in 2006 and further enhanced profitability in 2007 and beyond. Strategies and key programs have been established at each subsidiary to address specific industry dynamics and trends, with the objective of achieving specific financial targets and generating substantial cash flow before financing activities. Programs to enhance profitabil- ity are designed to achieve performance in line with minimum financial targets and programs to generate growth are intended to boost performance beyond these goals. In general, key programs tend to address issues such as managing costs, driving innovation and improving sales and marketing professionalism. NACCO Industries reported net income of $62.5 million, or $7.60 per share, and cash flow before financing activities of $18.9 million in 2005. Had each of NACCO’s subsidiary companies achieved its financial targets in 2005, the Company would have generated additional net income of $121.0 million, or $14.71 in additional earnings per share. Further, assuming increased cash flow could eliminate debt, and thereby interest costs, the Company could have produced additional net income of $29.4 million, or $3.57 in additional diluted earnings per share. (These non-GAAP calculations are explained in more detail on page 40 of this Annual Report.) Significant profit improvement and enhanced rates of return on NACCO’s capital employed are expected as the subsidiary companies improve their operating profits and approach their financial targets. Clearly, the stakes involved in executing the Company’s profit enhancement and growth programs remain very high and have NACCO’s full commitment. This letter provides a short summary of each subsidiary’s market situation, strategies, key programs and outlook, and concludes with an overall outlook for NACCO Industries. The subsidiary letters Dividends Paid Per Share $1.848 $1.675 $1.260 $.467 $.515 $.550 $.575 $.595 $.615 $.635 $.655 $.675 $.710 $.743 $.773 $.810 $.850 $.890 $.930 $.970 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 $2.0 $1.5 $1.0 $0.5 $0 •4• found later in this Annual Report provide much greater detail on the objectives and timing of key programs and on progress being made toward reaching each company’s specific financial objectives. NACCO Materials Handling Group NMHG is a leader in the global lift truck industry and is intensely focused on building on that success in the coming years. To remain competitive in the marketplace, it is vital to reduce operating and manufacturing costs continuously. One of NMHG’s primary strategies is to pursue increased efficiency while maintaining and improving product and service quality. Programs aimed at achieving this objective include comprehensive manufacturing restruc- turing activities, an extensive quality assurance initiative, an aggressive global procurement program, material cost recovery efforts and both aftermarket and administrative efficiency projects. Market success requires the ability to provide lift trucks appropriate for a wide range of end-user needs at competitive prices. NMHG has, for the last few years, been developing what it believes is the most flexible, modular product line in the industry, enabling the company to configure lift trucks cost effectively for individual end-user requirements. The company’s new 1 to 8 ton internal combustion engine product line represents the core of this new approach. Several programs linked to this strategy include a complete new product development process, new product introductions, programs to enhance product customization, a pricing optimization project and the development of specific industry marketing strategies. The sales and service needs of lift truck customers are intensifying, leading NMHG to focus on attaining a level of account management excellence unmatched in the industry. Several projects related to this strategy involve enhancing national and global accounts, expanding and improving the anchor dealer network, adding new aftermarket services and enhancing the parts offerings for Hyster, Yale and other brands of lift trucks. Programs are also in place to improve the performance of NMHG’s owned retail operations. The Company is hopeful that lift truck markets will remain strong and grow in all geographic regions and that NMHG’s lift truck volumes will increase. In 2006, NMHG shipments of certain products will, however, remain at controlled levels as factories ramp up production of new products. Overall, NMHG’s profitability is expected to continue to improve. The ongoing launch of newly designed lift trucks at NMHG, and an improved cost position for those products, is expected to drive performance improvements, particularly in the second half of 2006, despite continued phase-in costs as a result of the product launches. Further significant improvements are expected in 2007. Progress toward minimum profitability targets is anticipated throughout 2006, 2007 and 2008. DISCUSSION OF RESULTS In 2005, NACCO Industries’ net income and revenues both increased significantly compared with 2004. The Company reported net income of $62.5 million, or $7.60 per share, compared with net income of $47.9 million, or $5.83 per share, in 2004. Revenues for 2005 were $3.2 billion compared with $2.8 billion in 2004, primarily as a result of increased sales at NMHG and HB/PS. Net income in both 2005 and 2004 included after-tax extraordinary gains of $4.7 million and $0.5 million, respectively, recorded by Bellaire Corporation (“Bellaire”), a wholly owned non-operating subsidiary which manages ongoing liabilities related primarily to closed Eastern U.S. coal mines. These extraordinary items relate to adjustments to Bellaire’s estimated obligation to the United Mine Workers of America Combined Benefit Fund. Income before extraordinary gain was $57.8 million, or $7.03 per share, in 2005 compared with $47.4 million, or $5.77 per share, in 2004. Income before extraordinary gain in 2004 included a $9.4 million pre-tax charge ($6.1 million after a tax benefit of $3.3 million) related to a restructuring program being implemented at HB/PS’ manufacturing and distribution facilities. In the fourth quarter of 2005, the Company recognized an additional $3.8 million pre-tax charge ($2.5 million after a tax benefit of $1.3 million) associated with a manufacturing facility restructuring at HB/PS which will complete the transfer of blender production for the U.S. and Canadian markets to third-party Chinese manufacturers, and a charge of $2.5 million for repatriation of foreign earnings at NMHG, as permitted by the American Jobs Creation Act of 2004. Excluding the effects of these charges, current year consolidated operations continued to improve as a result of increased sales volumes in the U.S., sales of higher-margin lift trucks and kitchen appliances, increases in selling prices, and restructuring programs previously implemented by both NMHG and HB/PS. These improvements occurred despite weak markets for housewares products, reduced customer visits to outlet malls, significant product development and marketing costs at NMHG, a relatively weak U.S. dollar and the business and economic effects of hurricanes in the Southern Florida and Gulf Coast regions of the United States. In 2005, NACCO generated $18.9 million in consolidated cash flow before financing activities, compared with $85.9 million and $80.5 million in 2004 and 2003, respectively. Cash flow before financing in 2005 included significant investments made both in working capital in support of higher sales volumes and in new mining operations. •5• Hamilton Beach/Proctor-Silex HB/PS remains an industry leader with admirable performance and strong potential as some housewares companies consolidate or struggle financially. To help manage ongoing margin pressure in the industry, HB/PS continues to place significant emphasis on continuous cost reduction. Several key profitability programs address administrative and manufacturing cost reductions, continuous quality improve- ment, and supply chain optimization. Since new products drive growth and help sustain margins, successful housewares companies must repeatedly capture consumers’ attention. HB/PS is aggressively focused on innovation through a unique product development process and a high-impact new product introduction program designed to create new products consumers desire, as well as to improve profitability. Strong relationships with the leading housewares retailers are vital for success. Shelf placement, branding and promotions with all retailers and channels also are important to sustaining and improving sales volumes. HB/PS believes that it has the most professional sales and marketing organization in the industry. The company views this as critical to optimizing channel performance and maintaining strong retailer relationships. Programs supporting this strategy include specific retailer and channel position enhancement efforts as well as a number of strategic brand application initiatives. NACCO is moderately optimistic that housewares markets will improve in 2006 as HB/PS concentrates on further improving efficiencies, driving even more innovation and introducing a strong assortment of new products. As programs to improve profitability mature, more focus will be placed on programs to generate growth. HB/PS is expected to continue its progress toward its minimum target financial returns over the next two years, while pursuing profitable growth. “mini-mall” concept and an ongoing, successful Internet sales program. Kitchen Collection KCI continues to be the leader in kitchenware retailing in the outlet mall channel and is successfully expanding into other channels with existing and new store formats. With consumer visits to outlet malls down and store rent and labor expenses constant or increasing, disciplined cost control is essential to maintaining and improving profitability. KCI has estab- lished programs aimed at achieving cost control through continuous product cost management, highly focused store expense management and an ongoing logistics efficiency program. KCI believes there is still significant growth potential in kitchenware retailing, particularly in the niche between the lowest priced discounters and the higher- end chains. One of the keys to capturing that potential is the ability to provide unique, quality products at affordable prices. To help accomplish that goal, KCI has established innovative product selection and merchandising programs, a highly successful Hamilton Beach® private label product program and an Economic Value Income program designed to help select SKU assortments which optimize profit performance. With limited expansion expected in the outlet mall channel, KCI is focusing on optimizing performance at existing outlet mall stores while expanding into new, high-potential formats and distri- bution channels. KCI has a number of initiatives under way related to enhancing the Kitchen Collection outlet mall format, including a large store format and a seg- mentation program designed to enhance performance based on different types of outlet malls. Programs targeting new channels or formats include an enclosed mall store project, an Outlet MarketPlace KCI is hopeful that consumer traffic to outlet malls will improve and that modest performance improvement will occur in 2006. In 2006 and beyond, the company expects to implement its key profitability programs and increase its focus on growth initiatives. These, in combination with strengthened outlet mall traffic, are designed to return KCI to its minimum financial target levels. North American Coal NACoal, as the nation’s largest lignite coal miner, is encouraged by prospects for new coal mining projects, particularly in the context of the recent domestic energy challenges facing the U.S. In addition, NACoal has established a successful and growing aggregates mining business and is poised for significant improvement and growth through operational enhancements, maturity of its new mining projects, and the potential for growth from additional new mining projects. Efficiency is crucial in mining operations, particularly at this time of increasing costs for mining supplies and equipment. Central to achieving NACoal’s objectives is its ability to leverage its low-cost mining expertise while assuring the highest levels of safety. Programs to support this approach focus specifically on employee safety, operational improvements at mines facing specific geological or operational challenges, such as the Mississippi Lignite Mining Company (“MLMC”) and the San Miguel Lignite Mining Operations (“San Miguel”), and adhering to a contract structure that minimizes risk from the changing market price of coal. NACoal and its customers believe strongly in continuously improving mining operations and having superior •6• NACCO CONTINUES TO MAINTAIN A LONG-TERM PERSPECTIVE NACCO has consistently maintained a long-term perspective with respect to its subsidiary companies, which is reflected in four guiding principles: • Ensure highly professional management teams; • Attain industry-leading operational effectiveness and efficiencies; • Build industry-leading market positions; and • Create sustainable competitive advantage positions To help achieve these guiding principles and enhance stockholder value, the NACCO parent company plays a significant role by providing oversight to subsidiary processes, controls, programs and finances, as well as consulting services in areas such as strategy and tax. Further information on these oversight and consulting roles, as well as on NACCO’s strong corporate governance program, is outlined in a publication entitled CEO Perspectives, which is available on the NACCO website, www.nacco.com. reclamation programs in place at each of its mines. Just as innovation is important in other NACCO businesses, it is also important for NACoal in the mining industry. NACoal strives to meet its customers’ expectations through mining and management innovation and award- winning environmental achievements. NACoal is pursuing a greater number of potential projects as coal is increasingly recognized as not only abundant in the U.S. but also environ- mentally responsible as a domestic source of energy as a result of new technology now available or on the horizon. New business opportunities include mining NACoal reserves for direct coal-fired power generation, coal gasification and coal-based energy production, as well as contract mining of lignite coal and aggregates for others. NACoal is optimistic that it will show significant performance improvement in the future, particularly at the San Miguel and MLMC operations, and the company hopes to undertake one or two new projects over the next several years, which could add significantly to company prof- itability in the longer term. Specifically, NACoal expects to meet its targets in 2006 and beyond with substantially improved returns on capital employed, as well as increased cash flow before financing activities. NACCO Outlook In summary, the Company has well-thought-out profit enhancement and growth programs at each of its subsidiary companies that are expected to continue to deliver improving results. The Company is pleased with the progress achieved to date and is optimistic as it enters 2006. In particular, improvements in products and product costs at NMHG are anticipated to provide a significant benefit to perform- ance, as are operational improvements at NACoal’s San Miguel and MLMC operations. Results of NACCO improve- ment programs are expected to become increasingly visible in 2006, especially in the second half, and to an even greater extent in 2007. While prospects for the next few years appear excellent, a word of caution is nevertheless in order. Other events could intervene, such as changes in markets, competitive conditions, material costs and currency exchange rates. However, NACCO is committed to achieving its long-term minimum financial goals at each subsidiary company. While each subsidiary company moves toward its goals, we expect strong and improving profitability and returns on capital employed. These goals are being pursued with the utmost determination. Throughout this period, NACCO also anticipates generating significant cash flow before financing activities. NACCO’s intention is to use this cash flow to reduce debt levels unless other strategic opportunities of greater long- term benefit to the Company and its stockholders arise. NACCO’s share price was $138.00 at the close of the financial markets on February 24, 2006. We believe the share price increase during the year recognized the work that has been done to improve and strengthen each subsidiary. By clearly articulating our understanding of the industries in which we compete, by successfully executing the programs in place, and by achieving our long-term objectives, we are hopeful that the Company will receive further improved valuation in the future. Finally, I would like to thank all NACCO employees for their continued support, hard work and commitment in meeting the challenges of 2005. I look forward to a successful 2006. Alfred M. Rankin, Jr. Chairman, President and Chief Executive Officer NACCO Industries, Inc. •7• 2005 Results in 2004 and early 2005, and unit and NACCO Materials Handling Group parts volume increases. However, higher (“NMHG”) Wholesale generated net material costs and additional costs and income of $26.0 million on revenues of manufacturing inefficiencies associated $2.2 billion in 2005 compared with net with the rollout of new internal NACCO MATERIALS HANDLING GROUP An improved worldwide lift truck market led to increased shipments of 83,361 units in 2005 compared with shipments of 77,493 units in 2004 income of $17.9 million, as revised(1), combustion engine (“ICE”) lift trucks NMHG Retail’s operations (net of on revenues of $1.9 billion in 2004. An with lifting capacity ranges from 1 to eliminations) reported a net loss of $7.9 improved worldwide lift truck market led 8 tons continued to reduce operating million on revenues of $185.8 million in to increased shipments of 83,361 units in results. Additionally, in 2005, NMHG 2005 compared with a net loss of $7.2 2005 compared with shipments of 77,493 repatriated $56 million of earnings from million on revenues of $195.2 million units in 2004. Backlog decreased to 23,500 foreign subsidiaries under the Homeland in 2004. The decrease in revenues was units at December 31, 2005 compared Investment Act, which resulted in an primarily associated with two European with 25,700 units at December 31, 2004. additional $2.5 million tax expense. retail dealerships that were sold in 2005. Revenue and net income benefited Further, 2005 net income did not benefit NMHG Consolidated, which from a favorable shift in mix toward from a recurrence of the $6.7 million includes NMHG Wholesale and NMHG higher-priced lift trucks in the Americas pre-tax 2004 anti-dumping settlement Retail, generated negative consolidated and Europe, price increases implemented award from U.S. Customs. cash flow before financing activities of Revenues by Geographic Region (In millions) $2,399.9 $2,056.9 $1,779.6 $1,672.4 $1,588.4 $2,500 $2,000 $1,500 $1,000 $500 $0 01 02 03 04 05 (cid:2) Asia-Pacific (cid:2) Europe (cid:2) Americas 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 Unit Bookings, Shipments and Backlog Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 04 (cid:2) Bookings (cid:2) Shipments (cid:2) Backlog 03 05 Net Income (Loss) (In millions) $18.1 $16.4 $12.3 $10.7 $(49.4) 01 02 03 04 05 $20 $10 $0 ($10) ($20) ($30) ($40) ($50) Left: Workers assemble new Yale 2 to 3 ton internal combustion engine cushion tire lift trucks. The trucks are moved through key assembly stages on NMHG’s new automated assembly line at the Berea, Kentucky plant using automated guided vehicles (AGVs). (1) For a portion of 2004, NACCO did not charge management fees to NMHG Wholesale. Subsequently, the NACCO management fees that were not charged during 2004 were reclassified between NACCO and NMHG Wholesale’s selling, general and administrative expenses and a capital contribution was made by NACCO to NMHG. As a result of the reclassification, the 2004 operating profit and net income results for NMHG Wholesale were revised. •9• $18.2 million in 2005, well below the projects aimed at achieving this goal. The $62.7 million generated in 2004. NMHG company has made significant progress to net debt (consolidated debt less cash and date and expects more progress in 2006 cash equivalents) decreased to $181.3 and 2007, with a sustained high level million at December 31, 2005 from of performance expected in 2008 and $193.1 million at December 31, 2004. beyond. In addition, NMHG is focused In 2005, consolidated cash flow before on reaching break-even results in its financing activities declined primarily due owned retail operations while developing to increased working capital to support strengthened market positions. number of models and options offered higher volumes, plant restructuring and the rollout of the new 1 to 8 ton ICE lift Industry Trends and the volume required to maintain efficiencies and economies of scale. truck line, which commenced in 2005. Lift truck customers increasingly As logistics efficiency grows in require more dependable lift trucks importance to end-users, the overall Vision & Goals and greater levels of service and expect product and service needs of these NMHG’s vision is to be the leading manufacturers and dealers to deliver customers become more sophisticated. globally integrated designer, manufacturer both at competitive prices. Therefore, Manufacturers face increasing demand and marketer of a complete range of maintaining low costs as well as providing for enhanced services, including national outstanding quality and reliability are and global sales, financing options, and critical for competitiveness. Because maintenance and parts coordination. As a economies of scale are directly related result, successful lift truck companies and to maintaining low costs, the industry dealers have highly professional personnel is led by large, global manufacturers with and business processes and foster strong, an increasingly global supply base. lasting customer relationships. Regardless of scale, increases in material To reach its goals, NMHG has costs and fluctuations in currency established strategies and key programs exchange rates have made net cost aimed at addressing current industry reductions challenging in the last several trends. These strategies and key programs high-quality, application-tailored lift years. In this environment, continual can be grouped in three main areas: trucks, offering the lowest cost of improvements in manufacturing and quality and efficiency, flexible and ownership, outstanding parts and supply chain efficiencies are critical modular products, and sales and service service support and the best overall value. to success. excellence. Each key program is designed NMHG Wholesale’s objectives have While cost and dependability are to enhance profitability or generate been to achieve a minimum operating important, customers also increasingly growth, both of which are critical for profit of 9 percent by 2007-2008 and to desire specialized solutions for their achieving NMHG’s goals in this mature generate substantial cash flow before materials handling needs, and the market industry. Profitability programs at financing activities. Over the past several is demanding a more rapid product NMHG focus mainly on manufacturing years, NMHG has implemented a development cycle. Manufacturers must and supply chain efficiency, while growth number of performance improvement strike the right balance between the programs focus on increasing country Top to bottom left: The new Hyster V30-35ZMU series is a very narrow aisle turret lift truck designed for high-density warehouse application in aisles as narrow as five feet and provides capacity ranges up to 3,000 pounds. The new Yale Veracitor™ 30VX counterbalanced internal combustion engine cushion tire lift truck provides capacity ranges up to 3,000 pounds. Top to bottom right: The new Yale AC Technology ATF lift truck has a reliable design and provides versatility and operator comfort in capacity ranges up to 4,000 pounds. The Hyster container handler lift truck is a solid performer for use at ports and railroad terminals for loading and stacking containers and provides capacity ranges from 105,000 to 115,000 pounds. The new Yale MSW-E motorized hand straddle stacker lift truck, which excels in warehousing applications where space utilization is a consideration, provides capacity ranges from 3,000 to 4,000 pounds. •10• and industry market share positions by among several key final assembly plants, addressing customer needs with optimal including Greenville, North Carolina and packages of products and services. Berea, Kentucky in the United States, and Key Programs for Quality and Efficiency NMHG continually strives to improve manufacturing and supply chain costs and improve operational effectiveness while delivering improved quality. NMHG’s proven ability to re-engineer processes and systems within an increasingly complex global operating environment supports this strategy. Several key programs aimed at achieving this high-quality/low-cost strategy include: Manufacturing restructuring. NMHG’s manufacturing strategy is guided by a commitment to high quality and efficiency. To accomplish these goals, NMHG has been restructuring its global manufacturing facilities and processes. The continued implementation of a lean manufacturing strategy based on Demand Flow Technology is reducing inventory and manufacturing floor space require- ments while improving productivity, lead times and quality. The company is working to optimize production activities Irvine, Scotland and Craigavon, Northern Ireland in Europe. The final phases of this restructuring are well under way and are expected to be completed in 2006. NMHG is also employing advanced assembly line technology in its Berea, Kentucky plant, to produce the new of a corporate-wide emphasis on quality 1 to 8 ton ICE lift truck line. On this new and an initiative to further reduce overall assembly line, automated guided vehicles defect rates. While these programs have move trucks through key assembly stages contributed to a significant reduction only after quality is assured using the in warranty costs on a per-truck basis in latest computer-aided testing and control 2005, the most significant benefits are equipment. In Craigavon, Northern expected to occur in the 2006 to 2008 Ireland, NMHG has implemented a time frame. newly retooled plant layout, which Global supply chain. Demands on includes computer-assisted quality NMHG’s global procurement group were testing equipment. The company high in 2005 as a result of continued raw plans to expand the use of these materials shortages and material cost advanced assembly lines in the future. increases, as well as skyrocketing energy This program to enhance profitability costs. In addition to the short-term will primarily affect gross margin, and programs established to manage these the most significant benefits are expected challenges, a complete transformation to occur in the 2006 to 2008 time frame. of the supply chain process is under Quality initiative. A number of way at NMHG. The program includes quality programs within NMHG are part the implementation of a new software system to enable greater regional and worldwide coordination and provide greater efficiencies. Concurrently, NMHG is continuing its efforts to optimize its supplier base, making that group smaller, more reliable, more responsive and lower cost. Non-core components continue to be outsourced to low-cost suppliers around the world, with increased focus on China and Eastern Europe. These programs to enhance profitability are intended to improve gross margins, and decrease SG&A and working capital, •11• and are expected to be realized with Administrative efficiencies. During truck line. Platforms, components and the introduction of newly designed 2005, NMHG utilized a new web-based modules are being designed to be used products, particularly in 2006 to 2007. Contact Management System designed across a wide array of lift trucks. This Material cost recovery. NMHG’s to improve customer support and yield approach decreases the overall number of material costs in 2005 were approximately a more cost-effective customer response components required and permits easier $54 million higher than in 2004, primarily system. Also, NMHG expanded its and more frequent upgrades. In addition, as a result of increased steel and energy Transaction Processing Center activities design, prototyping and testing are guided NMHG has a well developed ability to translate end-user needs into global, adaptable product designs costs. In response, NMHG has imple- in both the U.S. and Europe. NMHG by a rigorous, staged approval process mented selective price increases, which will continue to expand its use of web- that delivers higher levels of reliability produced benefits totaling approximately based technology to include marketing while increasing speed to market. $65 million in 2005. During 2006, and logistics activities. This profitability Increased component commonality, NMHG’s price increases are expected program affects SG&A and operating combined with engineering techniques to progressively offset the cumulative margin, with benefits expected to be designed to deliver a more efficient effect of material cost increases that maximized by 2007. assembly process, are expected to have occured since 2003. The company continues to monitor material cost increases on a regular basis and to Key Programs for Flexible, Modular Products continue to increase labor efficiency, resulting in improved product quality. Lift trucks utilizing interchangeable evaluate the need and potential for future A key NMHG strategy is to develop components and systems assembled price increases. This program to enhance modular products that can be flexibly on highly automated assembly lines profitability primarily affects gross margin configured to provide unique, tailored are increasing NMHG’s ability to and has resulted in benefits in 2004 end-user solutions at competitive costs. configure and manufacture lift trucks and 2005, though full recovery of the Supporting this strategy is NMHG’s well to individual customer application accumulated increases in material costs developed ability to translate end-user requirements. NMHG also continues incurred is not anticipated until 2007. Aftermarket efficiency. Several needs into global, adaptable product designs. The following programs are to deliver cost reductions and product quality improvements through its projects are under way to increase after- focused on achieving these results: Value Improvement Program. market service efficiencies, including New Product Development Process. For newly designed product lines programs to improve the ability of In 2005, NMHG continued to implement that have already been introduced, NMHG and its dealers to capture parts sales, manage parts inventories and enhance the training and electronic connectivity of service technicians. This this program to improve profitability through its completely re-engineered approach to developing new products. Complete ranges of products are being these product development efforts are improving the quality of NMHG’s products, as well as more cost-effectively meeting end-user requirements. In the program primarily affects SG&A and developed simultaneously rather than on long term, improved efficiencies are operating margin with benefits realized a traditional series-by-series approach, expected to increase individual lift truck on an ongoing basis. including the new 1 to 8 ton ICE lift profitability as well as overall company Right: The new Hyster Fortis™ S60FT counterbalanced internal combustion engine cushion tire lift truck, which can be configured to provide the appropriate lift truck for each user’s application and has a capacity of 6,000 pounds. •12• profitability. This program will primarily selling,” an approach intended to help designed products are expected to affect gross margin, and the most signif- match product pricing with customer enhance revenue and margins as well as icant benefits are expected to be realized value in a competitive market environ- absorb unused manufacturing capacity, increasingly in the 2006 to 2008 period. ment. This program, introduced along primarily in the 2006 to 2008 time frame SPED Strategy. When customer with the newly designed line of ICE as these new products are introduced. applications require highly specific products, will primarily affect gross Industry Marketing Strategy. In solutions, the company has the ability margin, with benefits expected to occur another effort to serve customer needs to create truly customized features or increasingly during the 2006 to 2008 more specifically and effectively, NMHG configurations. This process, known time frame. has embarked on an effort to tailor The entire introduction of the new 1 to 8 ton ICE lift truck line, planned to take place in phases over three years, is now nearly 50% complete internally as SPED, or Special Engineering New product introductions. In early products, services and sales approaches Design, allows NMHG to respond to the 2005, NMHG began its rollout of the to targeted industry segments. This unique needs of customers, particularly 1 to 8 ton ICE lift truck line, which growth program is expected to enhance national account customers with large represents the most significant new revenue, in combination with other lift truck fleets and specialized needs. product launch in the history of the programs, over the next several years. In 2005, a project was undertaken to company and a significant growth make the SPED process more effective opportunity. This launch introduced for customers, yet more efficient for the new Hyster Fortis™ series, and NMHG to administer. This profitability Fortens™ series in Europe, and the Yale program will primarily affect SG&A and Veracitor™ series of lift trucks. The gross margin and is expected to provide entire introduction, planned to take benefits gradually over the next few years. place in phases over three years, is now Strategic pricing optimization. nearly 50 percent complete, with the Because the new modular product conclusion of the rollout expected in design concept will permit dealers to 2006 and 2007. NMHG’s Sumitomo/ more accurately configure lift trucks to NACCO joint venture also began the customer applications, lift trucks may introduction of its new 1.0 to 5.5 ton be more appropriately priced as well. ICE lift truck line in 2005, which is NMHG believes it will be able to deliver expected to help increase market share the lowest total cost of lift truck owner- in Japan. Development of additional ship to customers while delivering product lines using the same processes improved margins on new unit sales to employed for the 1 to 8 ton ICE line is both dealers and the company. NMHG under way, with introductions expected has made a considerable investment by 2008 for electric counterbalanced lift in training its own and independent trucks, warehouse lift trucks and big dealers’ sales forces in “value-based trucks. The introductions of these newly Key Programs for Sales & Service Excellence NMHG is focused on maintaining and strengthening its already highly professional direct and independent dealer distribution networks in order to provide superior value-added support to its customers and market segments. NMHG’s ability to build strong, lasting customer and dealer partnerships should help the company accomplish this. Several programs supporting this service strategy include: National and global accounts. As additional evidence of the company’s dedication to custom services and solutions, NMHG has established industry-leading fleet management and national account organizations in North America, a developing national Left: The new Yale Veracitor™ GC-VX 1 to 2 ton internal combustion engine lift truck series provides capacity ranges from 3,000 to 4,000 pounds and has been designed with component commonality for simplified maintenance and customizable productivity packages for specific application needs. •15• Key long-term programs are expected to drive improved margins and considerable profitability improvement in 2006 account program in Europe, and is Dealers attain higher market shares, implement these programs to improve enhancing its global account capabilities. attract higher-quality employees and sales and profitability. In addition, a NMHG’s goal is to offer superior value offer higher-value services to their number of special initiatives are under and services to large customers that have customers than other dealers. This way at NMHG to improve the company’s centralized purchasing but geographically growth program is expected to continue ability to communicate with and provide dispersed operations. This program to enhance revenues and margins and services to the dealer distribution net- to generate growth is expected to help improve utilization of manufacturing work. These initiatives include order and enhance revenues and margins and capacity. Benefits are expected to be contact management systems, a training absorb unused manufacturing capacity. gradual but increasing over the long term. knowledge center and customer and The benefits from this program are Dealer excellence enhancement dealer satisfaction programs. As NMHG expected to be gradual, but increasing program. This program, designed to drive helps dealers enhance their capabilities, over the long term. improvement at the company’s existing dealers can be more responsive to end Anchor Dealer program. The dealers, provides dealers with best users. These programs to generate growth company’s Anchor Dealer strategy practices and performance assessment are expected to ultimately enhance dealer continues to strengthen a worldwide tools in the areas of operational and and NMHG revenues over time. network of strong, professionally financial management, lift truck and parts Aftermarket parts. In 2005, NMHG managed, well-capitalized independent sales, service, rental and fleet manage- continued to leverage an important dealers. NMHG’s experience is that ment. NMHG also offers customized strategic alliance with a leading after- these exclusive Hyster and Yale Anchor consulting assistance to help dealers market parts provider in the Americas, Top: The new Hyster Fortis™ S40FT internal combustion engine lift truck series provides capacity ranges up to 4,000 pounds and can be configured to provide the appropriate lift truck for each user’s application. •16• Europe and Asia-Pacific. This alliance product line’s profitability in the near NMHG continues to believe it is has enhanced Hyster and Yale dealers’ term, with profitability improving as the offering the right products, manufac- offerings of competitive lift truck parts phase-in is completed and the company’s tured at the right costs and sold by the as part of an effort to increase NMHG’s manufacturing locations move into full right dealers. Key profitability and share of its customers’ parts and service production. Improved price realization growth projects, particularly in the business. NMHG has also made signifi- and a reduced rate of material cost areas of quality and efficiency, product cant investments in training dealer increases are expected in 2006 and flexibility and sales professionalism, technicians in lift truck diagnostics, 2007. All of these factors, as well as the are expected to improve prospects for maintenance and repair procedures to programs described, are expected to long-term growth in market share and assure highest-quality customer service. drive improved margins and considerable profitability in an improving global Revenue and margin improvements profitability improvement at NMHG economic environment. are being realized and are expected to in 2006, particularly in the second half In closing, I would like to thank continue to increase gradually as a result of the year, with further substantial all NMHG employees and our dealers of this growth program. improvements anticipated for 2007. worldwide for their continued commit- NMHG Retail improvements. NMHG Wholesale’s financial ment to implementing vital programs NMHG Retail continues to implement objective has been to achieve an and helping to sustain profitability levels cost reduction and revenue enhancement operating profit margin of 9 percent while executing many complex, simulta- programs to improve the performance by 2007-2008. While the company’s neous global product launches. The of its wholly owned retail dealerships. operating profit margin was only company is in the midst of the busiest NMHG Retail’s objectives include the 2.4 percent in 2005, it should be noted and most challenging period in its goal of reaching at least breakeven results that 2005 was one of the peak years history, but it is also an era that should while building market position. for expenses related to the new 1 to lay the foundation for a bright outlook 8 ton lift truck program. As key profit for the company and for Hyster and Yale Outlook for 2006 and Beyond improvement and growth programs in the years ahead. I look forward to Global lift truck markets increased mature further, the company expects working together with all of NMHG’s in 2005. The company expects continued to move increasingly toward its target partners to meet the challenges of growth in all lift truck markets in 2006, operating profit in 2006, 2007 and 2008. 2006 successfully. including the Americas, Europe and These anticipated results will depend, Asia-Pacific, and orders are anticipated in part, on the levels of material and to remain strong. As a result, NMHG energy costs, fluctuations in foreign Wholesale expects to have higher currency exchange rates and continued volumes in 2006 in comparison with successful implementation of established 2005 levels, with unit shipments of certain product development and manufacturing newly designed products increasing at restructuring projects. controlled rates to accommodate the NMHG’s Retail objective continues phase-in of these products at manufac- to be that its wholly owned retail dealer- turing facilities throughout 2006. Costs ships reach at least break-even financial associated with the phase-in of the 4 to performance while building market 7 ton series of the new 1 to 8 ton ICE lift position. Improved results are expected truck line are expected to reduce that in 2006 and 2007. Reginald R. Eklund President and Chief Executive Officer NACCO Materials Handling Group, Inc. •17• HAMILTON BEACH/PROCTOR-SILEX HB/PS’ 2005 revenue benefited from increased sales volumes of U.S. consumer and commercial products 2005 Results Net income increased to $20.3 the Saltillo, Mexico manufacturing facility Hamilton Beach/Proctor-Silex million in 2005 from $15.2 million which will complete the transfer of the (“HB/PS”) had higher revenues and net in 2004. In 2004, HB/PS implemented remaining production for the U.S. and income in 2005 compared with 2004. a restructuring program at its various Canadian markets to third-party Chinese HB/PS’ performance was particularly manufacturing facilities. In the fourth manufacturers. Excluding the 2004 and strong in the context of overall weaker quarter of 2005, the company recognized 2005 restructuring charges, HB/PS real- retail markets for housewares products a charge of $3.8 million pre-tax, or ized an increase in net income in 2005 and taking into account continued price $2.5 million after a tax benefit of $1.3 compared with 2004. The improvement pressures, rising material costs and million, associated with an additional is primarily attributable to an increase in significant competition for consumers’ restructuring program implemented at HB/PS’ operating profit as a result of the discretionary incomes. HB/PS’ 2005 revenue, which increased to $527.7 million in 2005 from $507.3 million in 2004, benefited from increased sales volumes of U.S. consumer and commercial products, and more specifically from additional shelf place- ments and promotions by retailers in support of fourth quarter direct-response television advertising, specifically for newly introduced products. Revenues (In millions) $539.5 $503.9 $492.8 $507.3 $527.7 $600 $500 $400 $300 $200 Net Income (Loss) (In millions) $20.3 $16.1 $15.2 $13.4 $(14.4) $25 $20 $15 $10 $5 $0 ($5) ($10) ($15) 01 02 03 04 05 01 02 03 04 05 Left: Clockwise from top: Hamilton Beach/Proctor-Silex’s newest products include: Hamilton Beach® Wavestation™ 12 speed blender, Hamilton Beach® Big Mouth® Pro 14 cup food processor, Hamilton Beach® Change-a-Bowl™ multi-bowl slicer/shredder, Hamilton Beach® iron, Hamilton Beach® Stay or Go™ 6 quart slow cooker and the eclectrics® all-metal drink mixer (shown in Moroccan red). •19• housewares manufacturers have trans- while growth programs focus on new ferred a significant portion of their product innovations, branding and manufacturing to lower-cost regions, distribution channel optimization. primarily in Asia. New, innovative products tend to drive growth and higher margins in the marketplace. Against a backdrop of growing interest in home cooking, many new products aimed at this market, particularly those promoted on television, have been well received by consumers. Brand names continue to be important manufacturing restructuring program in small kitchen appliances, with the implemented in 2004, along with importance of these names varying Key Programs for Continuous Cost Reduction HB/PS is focused on driving continuous cost reduction throughout the entire company and at all of its suppliers. The company’s exceptional ability to identify and eliminate unnecessary costs across the value chain is a key competitive advantage. Four key programs directed at accomplishing improvements and increased sales volume and a continued across consumer segments and markets. cost reductions include: shift to sourcing products from China. However, the overall market growth rate Vision and Goals in small kitchen appliances is relatively low and products face increasing HB/PS’ vision is to be the leading competition for consumers’ disposable North American designer, marketer income from consumer electronics and distributor of small kitchen electric and other gift items. and household appliances sold under Strong relationships with the leading strong brand names and to achieve profitable growth from innovative small kitchen appliance retailers, which continue to grow in size, are critical for solutions that improve everyday living. success. Shelf placement is highly com- HB/PS’ objective is to achieve a minimum petitive and sales are increasingly driven operating profit margin of 10 percent by promotional activity in the fourth by 2007 and to generate substantial cash quarter holiday season, which delivers a flow before financing activities. The significant portion of annual sales. company has already made significant To achieve its stated goals, HB/PS has progress toward these goals. Industry Trends established strategies and key programs aimed at responding to these industry trends. These strategies and programs Administrative cost reduction program. As the result of a 2004 management reorganization, HB/PS is operating with a leaner organization. Achieving its target of a minimum of 10 percent operating profit margin has become part of HB/PS’ culture. All Margin pressure in the housewares focus on three fundamental areas: employees participate in identifying non- industry continues to be intense as continuous cost reduction, innovation, both competitors and retail customers and professional sales and marketing. consolidate. In addition, increased costs Each key program is designed to enhance of freight and raw materials such as profitability or generate growth. Profit plastic, copper, aluminum and steel enhancement programs focus on continue to add further pressure on efficiencies in product development, margins. In response, HB/PS and other manufacturing and the supply chain, value-added expenses and developing creative ways to improve processes. This program to enhance profitability primarily impacts SG&A. While the largest benefits were realized in 2005, some incremental benefits may be realized in 2006 and beyond. Top to bottom left: eclectrics® all-metal coffeemaker (shown in seabreeze) and the eclectrics® all-metal toaster (shown in the new sterling color). Top to bottom right: eclectrics® all-metal stand mixer (shown in Moroccan red), Proctor Silex® Easy Press™ Iron and the new eclectrics® all-metal double spindle drink mixer (shown in sugar). •20• The company’s objective is to maintain of quality performance are anticipated a significant competitive advantage in 2006 and 2007. by combining low-cost, third-party Supply chain optimization. manufacturing capabilities with HB/PS’ HB/PS’ continued intense focus on deep manufacturing experience. This supply chain management in 2005 program, which enhances gross profit resulted in performance improvements margins, provided significant benefits in for the company and for HB/PS’ 2005 with additional benefits expected retail customers. HB/PS continues to in 2006 and 2007. implement improvement projects at Continuous quality improvement. its Memphis, Tennessee HB/PS is committed to continuous distribution facility, quality improvement throughout all areas of the company. HB/PS’ commitment to quality was demonstrated again in 2005 by product return rates that remained at comparatively low levels. By actively transferring specific processes and techniques to assure high quality, consis- tency and efficiency, HB/PS has made and the company is increasingly offering quality a significant focus at key suppliers customers additional efficiencies in China. These programs should pay through direct-ship programs, which off increasingly as significant expenses route products directly to retailers’ for implementing this program have warehouses. Also, HB/PS is expected already been incurred, and further to improve its capabilities further improvements in already high levels through continued implementation of its supply chain software system in 2006, which is designed to enhance collaborative planning, forecasting and replenishment processes at several key retailers. Benefits from this program are expected to be realized increasingly in 2006 and 2007. Key Programs to Leverage Innovation HB/PS relentlessly pursues innova- tion in its product categories through its superior ability to research, design and test new product concepts. Two programs supporting this strategy include: •21• Manufacturing cost reduction. A number of manufacturing efficiency programs are helping HB/PS reduce product costs. With the anticipated completion of these restructuring programs by mid-2006, HB/PS will be using contract manufacturers to produce all of its products except for a few products manufactured in Mexico for the Mexican and Latin American markets. The company expects continued margin improvements as a result of the manufacturing restructuring programs implemented in 2004 and 2005. Improved margins are expected on commercial products that are being transferred from an owned factory in the United States to third-party manufacturers in China and on blenders for the U.S. and Canadian markets that are being transferred from an owned factory in Mexico to third- party Chinese manufacturers. Also, at the company’s Chinese suppliers’ plants, HB/PS is implement- ing its ongoing Value Improvement Program, which seeks to reduce costs of process, components and products. Product development process. New product introductions. Additionally, patent protection HB/PS’ product development process Backed by its consumer-oriented is always sought and enforced, when is designed to create a steady stream of product development process, HB/PS appropriate, for new products, product innovative products that exceed current has demonstrated a strong track record features or designs. Revenue and margin offerings in features, performance, style in new product introductions. In 2005, improvements are expected on an and value. HB/PS’ goal is to deliver the approximately half of the company’s ongoing basis from this growth program. Backed by its consumer-oriented product development process, HB/PS has demonstrated a strong track record in new product introductions Approximately Half of U.S. Consumer Sales were from Products Introduced in the Last Three Years 12% 16.2% 2005 21.7% 50.1% (cid:2) 2005 Products (cid:2) 2004 Products (cid:2) 2003 Products (cid:2) Established Products U.S. consumer sales were from products introduced in the last three years. The revolutionary Hamilton Beach® BrewStation® coffeemaker, featuring carafe-less, cup-activated dispensing, continued to be the number-one-selling coffeemaker product family in America. Other examples of innovative new products include the WaveStation™ Key Programs for Professional Sales & Marketing HB/PS also has an ongoing strategy to develop and sustain the most profes- sional sales, marketing and branding programs in the industry. The company has a proven ability to match products, services and brands to specific retailer assortment needs. Programs supporting blender, which features a specially shaped this strategy include: most innovative products at the most jar to improve blending performance as competitive costs possible and to bring well as a cup-activated serving feature, to market products that represent best- and the Change-A-Bowl™ slicer/shredder, in-class performance. HB/PS utilizes which fits on top of reusable GladWare in-depth consumer research that enables plastic containers. In addition in 2005, the company to develop products with HB/PS continued its rollout of a complete consumer-preferred features and high line of higher-end, color-coordinated, rates of market acceptance. HB/PS’ die-cast kitchen appliances under the engineers in both the U.S. and China, as Hamilton Beach® eclectrics® brand well as engineers at the company’s key name. All product categories within the partners in China, all contribute to the company have aggressive new product process for designing successful new introduction schedules. products. This program to enhance The company plans to introduce a profitability is designed to affect gross number of new commercial products margin and SG&A positively, and is an from 2006 to 2008. HB/PS is optimistic ongoing investment for the company that these new products will have a which is expected to bring both near- significant impact on the commercial term and long-term benefits to HB/PS. division’s revenue and profitability. Retailer and channel focus. HB/PS works closely with retailers to develop product assortment strategies to optimize category profits. In-depth data analyses are used to recommend the most profitable combination of products, features and price points in each product category. In turn, these analyses drive the HB/PS product development process, improve speed to market and increase the success rate of new products. HB/PS’ category management approach is applied across all types of retailers, from mass merchants to smaller regional retailers, and is being applied in the United States, Mexico, Canada and other selected international markets. This Left: Hamilton Beach/Proctor-Silex has introduced the next generations of its Brewstation™, the number-one-selling coffeemaker product family in America. Shown from left to right: Proctor Silex® Brewstation™ 10 cup dispensing coffeemaker, Hamilton Beach® Brewstation™ Deluxe 12 cup coffeemaker (shown in silver) and the Hamilton Beach® Brewstation™ Deluxe 12 cup coffeemaker (shown in black). •23• growth program has helped enhance blenders and the classic soda fountain- projects could delay reaching the revenues and margins and is expected style milkshake mixers that could operating profit goal by 2007. However, to do so on an ongoing basis. be seen on the back counter of almost with improved consumer markets and Strategic brand application. every soda fountain across America. continued success in planned product HB/PS has a broad complement of Today, the Hamilton Beach® Commercial introductions, HB/PS could attain this key brand names targeted at distinct brand name is associated with a wide goal by the end of 2007. HB/PS did, consumer segments. The Hamilton variety of products found in commercial however, meet its cash flow goal in Beach® eclectrics® brand targets a kitchens, restaurants and bars. It 2005, with cash flow before financing of high-end consumer who demands the remains the number-one brand name $27.9 million, and expects to continue best in performance and style and is in commercial bar blenders and spindle to do so in future years. In summary, willing to pay more for those benefits. mixers in the U.S. the company is optimistic about the The eclectrics® brand continues to successful implementation of its strategic receive high levels of media coverage. Outlook for 2006 and Beyond programs and about its prospects for Hamilton Beach®-branded products As a result of its ongoing focus on continued performance improvement. target a mid- to higher-end consumer innovative new products, HB/PS has a In 2005, everyone at HB/PS desiring a strong brand name, innova- strong assortment of new products worked hard as a team to accomplish tive features and attractive styling. planned for 2006 and 2007. HB/PS is our objectives. We saw significant Additionally, HB/PS produces selected moderately optimistic that consumer accomplishments as we worked together General Electric-branded products for markets will improve in 2006 and that to innovate, control costs, bolster brands Wal-Mart that also targets this consumer the company will continue to see and further increase professionalism. segment. Proctor Silex®-branded products performance improvements from its We continue to set the standard for our target the middle-market consumer who profitability and growth programs over industry in many ways, but can never be prefers a strong, heritage brand name the next several years. Specifically, efforts complacent. My thanks go out to every with good features and appearance at a in administrative cost reduction, manu- one of the company’s employees for reasonable price. The new Traditions by facturing efficiency, product innovation, sustained excellence in a challenging Proctor Silex™ brand targets the entry- promotions and branding are expected retail environment. I look forward to level consumer with basic, lower-priced to help sustain or improve profitability continued success in 2006. products. The TrueAir® brand, used for in 2006 and 2007. home health products, continues to Overall, HB/PS is proud of its record demonstrate strong appeal in its market of profit improvement, and intends to segment. Strategically applying this make further strides in the future. The range of targeted brands is expected company improved its operating profit to continue to benefit HB/PS on an margin in 2005 to 7.0 percent, up from ongoing basis. 5.6 percent in 2004. As noted earlier, The Hamilton Beach® Commercial HB/PS’ goals are to achieve a 10 percent brand targets restaurants, bars and minimum operating profit margin by the hotel amenities markets. The 2007, as well as to generate significant strong heritage of the Hamilton Beach® cash flow before financing activities. Commercial brand name results from Recent more tempered industry growth many successful years of producing and the timing of specific improvement Dr. Michael J. Morecroft President and Chief Executive Officer Hamilton Beach/Proctor-Silex, Inc. Right: The new Hamilton Beach® Commercial Revolution™ Ice Shaver Blender for use in bars and restaurants. •24• 2005 Results $2.0 million in 2004. Nevertheless, KCI Kitchen Collection (“KCI”) had a remains relatively strong compared very challenging year in 2005. While sales with its competitors in the outlet mall increased 4 percent to $116.9 million in channel and produced a return on 2005 from $112.3 million in 2004 as a equity(1) (“ROE”) of just under 9 percent. KITCHEN COLLECTION The number of Kitchen Collection’s outlet and enclosed mall stores increased to 195 in 2005 from 188 in 2004 result of an increase in permanent and The number of KCI’s outlet and temporary store locations, as well as an enclosed mall stores increased to 195 in increase in the amount of the average 2005 from 188 in 2004. In addition, the sales transaction, the number of sales company operated 21 temporary stores transactions per store declined 3 percent in traditional enclosed malls during the as a result of a decrease in outlet mall fourth quarter holiday season compared traffic attributable primarily to higher with 17 in 2004. gasoline prices. Additional profits from the modest sales increase were not Vision and Goals exceptional value. KCI’s goals are to earn a minimum operating profit margin of 5 percent and to generate substantial cash flow before financing activities. While the company continues to work diligently toward these objectives, attainment of these goals will be challenging in the near term, given the external marketplace challenges the company faced in 2005 adequate to offset increased store KCI’s vision is to be the leading and continues to face. operating costs, primarily due to more specialty retailer of housewares in outlet stores and higher utility and employee- malls and other retail channels for Industry Trends related costs. As a result, net income consumers seeking a large selection of declined in 2005 to $1.0 million from unique, high-quality products at an The retail environment for housewares has become increasingly Number of Stores 195 188 180 173 168 200 180 160 140 120 100 Revenues (In millions) $116.9 $111.1 $110.2 $112.3 $120 $110 $100 $97.9 $90 $80 01 02 03 04 05 01 02 03 04 05 Average Sales Transaction $20 $19 $18 $17 $16 $19.10 $18.58 $18.29 $18.04 $17.52 01 02 03 04 05 Left: Kitchen Collection’s store in Chillicothe, Ohio features higher-margin, brand-name kitchen gadgets, small electric appliances and a variety of other kitchen- and housewares-related products. (1) ROE = 2005 net income divided by 2005 average equity (a five-point average of equity at December 31, 2004 and each of 2005’s quarter ends). •27• KCI’s strategies are focused on three areas: disciplined cost control, unique affordable products, and format improvement and expansion competitive over the last several years. very low-end and very high-end to optimizing performance in each Sourcing from China is widespread and retailers participate in the marketplace, existing store than expansion to new the playing field is beginning to level there is still an excellent opportunity outlet malls. However, there remain out, with many retailers offering value- for stores offering mid-priced, good- significant growth opportunities for priced kitchen products. To succeed in quality kitchenware. KCI, particularly in the mid-price niche, kitchenware retailing, costs must be The outlet mall industry expanded and in other channels, such as traditional kept to a minimum. rapidly during the 1990s and has now enclosed malls. KCI believes there is excellent slowed as consumers find comparable To help KCI attain its stated goals, growth potential in kitchenware retailing, values in many channels, including mass the company has established strategies but only through offering unique, quality retailers and the Internet. In addition, and key programs geared to these current products at prices affordable to most consumer traffic at many outlet malls has industry trends. KCI’s strategies and key consumers. Despite a challenging declined recently due primarily to the programs are focused on three main economy and high interest in consumer cost of reaching their “out-of-the-way” program areas: disciplined cost control, electronics items, the increased popularity locations given higher gasoline prices. unique affordable products, and format of cooking television shows is evidence Certain outlet malls have retained their improvement and expansion. Programs of heightened interest by consumers strength while some have struggled. designed to enhance profitability are in home cooking. While a number of Success in outlet malls has shifted more especially important in this period of Top: Kitchen Collection’s store in Chillicothe, Ohio. •28• reduced outlet mall traffic. In addition, providing both analytic rigor and assist in determining how to maximize programs to identify and offer unique creativity to the product selection process its return per cubic foot of retail space. affordable products and to improve supports this strategy. The company is When combined with other revenue upon and expand its store formats working to achieve this strategy though and margin enhancement programs, outside of outlet malls are increasingly the following programs. EVI assists in optimizing profit from the important for generating growth. Innovative Products and mix of products, the amount of space Key Programs for Disciplined Cost Control KCI’s proven ability to manage both vendor and store costs assertively is accomplished through three established programs aimed at achieving disciplined cost control. Continuous Product Cost Management. This ongoing program Merchandising. This growth program is allocated to each product and the most designed to assure that the latest products appropriate store size. with the highest potential are found on the shelves of KCI stores, and that its products are displayed in ways designed to attract optimal consumer attention. KCI continually tests and implements new approaches to increase traffic in its stores, to increase the percentage of individuals who make purchases Key Programs for Store Improvement and Expansion KCI’s primary strategy for growth focuses on strengthening its leadership position in outlet malls, while working to reach customers through other channels utilizing creative approaches. One of the to enhance profitability draws upon after they enter a store, to encourage strengths that supports this strategy is KCI’s significant experience in sourcing customers to purchase higher-margin KCI’s ability to analyze store data and and managing vendors. items and to increase the average create specialized programs for different Store Expense Management. purchase amount of those who buy. types of channel situations. KCI has This ongoing program to enhance Special brand programs, “As-seen-on four programs aimed at making this profitability relies upon KCI’s ability to TV” items, and special-value close-outs strategy successful. manage store rental and labor costs, key are all part of this program to help Outlet Mall Format Initiatives. drivers of profitability, particularly in increase revenue on an ongoing basis. With nearly 200 locations, KCI stores times of reduced consumer traffic. Hamilton Beach/Proctor-Silex can be found in a variety of mall types, Logistics Efficiency. In 2005, Brand Leverage. KCI continues to from those located in tourist locations to Kitchen Collection continued to leverage its lines of sourced private label higher-end premium outlet malls. KCI improve its warehouse operations in merchandise featuring the Hamilton utilizes mall profiling information and Chillicothe, Ohio in order to increase Beach® and Proctor Silex® brand names, segmentation analysis to assess new mall capacity and throughput and decrease which are unique to KCI and among locations as well as improve profitability overall operating costs. The benefits KCI’s most successful and profitable at existing malls. Important profiling from this investment are expected to product lines. These private label non- criteria include whether an outlet mall be ongoing. electric product lines now feature nearly has high-end retail tenants, is located Key Programs to Assure Unique, Affordable Products Another KCI strategy is to provide customers with a continuous stream of innovative, quality, unique products offered at affordable prices. The company’s strong competency in 400 items, including gadgets, cutlery, near a tourist destination or is located cutting boards, barbecue tools, bakeware in an urban or rural area. This growth and cookware. program is expected to increase revenue Economic Value Income. KCI and margins on an ongoing basis. utilizes disciplined operating controls Kitchen Collection has also selec- to improve margins. The company tively introduced a larger store format continues to use its proprietary Economic in the outlet mall channel. These stores Value Income (“EVI”) business tool to offer an expanded assortment in several •29• key areas, including tabletop, dinnerware large big-box retailers such as K-Mart, KCI’s operating profit margin and glassware items. Larger stores will and converts them into “mini-malls” was 2 percent in 2005, well below be used where the additional cost of with a substantial number of discount the company’s objective of earning a space can be justified. retailers inside. These stores operate minimum operating profit margin of Enclosed Mall Format Initiatives. under the Outlet MarketPlace name. 5 percent as it did in 2003. KCI may The enclosed mall store format, which Vanity Fair provides all labor related to not reach its operating profit goal in continues to operate in test mode, store operations, with KCI responsible the 2006 to 2008 period unless factory represents the company’s most promising only for stocking its assigned space. To outlet mall traffic improves. Given its driver of future growth. KCI is planning date, the test stores have been successful constrained profitability in 2005 and to introduce a completely new store but growth will be at a pace set by its need to enhance inventory levels to format for enclosed malls in 2006 based Vanity Fair. Expansion of this program ensure product availability, KCI also on experience with Gadgets & More® would be expected to add profitable had a modestly negative cash flow and Kitchen Collection® stores located revenue to KCI. before financing activities in 2005. In in enclosed malls, which currently sell a Internet Format Initiative. summary, KCI will continue to pursue broad range of higher-margin kitchen Sales from the company’s web site, its objectives by maintaining disciplined gadgets and other selected housewares www.kitchencollection.com, increased cost control, offering unique products products. The company currently has in 2005 compared with 2004, and this at great values, and fortifying its only 18 permanent, enclosed mall stores channel remains profitable for the traditional outlet mall stores while in a potential market of more than company. As marketing activities, such pursuing additional store formats. 500 traditional enclosed malls. The as direct e-mail campaigns and Web In closing, I want to thank all of company continues to gain important partner programs, increase, sales and our KCI employees for their hard work insight from its initial stores, and remains profits from this channel are expected and dedication during a very difficult prudent in the pace with which it opens to continue to increase. year for the outlet mall industry. I look additional stores in order to ensure forward to working with this outstand- that potential sales volumes and profit Outlook for 2006 and Beyond ing team of people as we work toward meet KCI’s objectives. Overall, KCI believes it has a more successful 2006. KCI operated 21 seasonal stores managed costs well through challenging in enclosed malls in November and times in the marketplace. Under these December 2005. These stores utilize a conditions, KCI achieved an acceptable quick-to-set-up temporary store format ROE(1) of just under 9 percent in 2005. to take advantage of the strong holiday The company expects modest increases gift giving season. This program, which in sales and improvements in operations can be expanded, is expected to continue in 2006 from new product offerings to add revenue in coming years. and continued success of key programs. Outlet MarketPlace Initiative. KCI KCI expects that more significant is currently taking part in a test program growth will come from the addition in which Vanity Fair Corporation rents of new stores in various formats in the large retail spaces, formerly occupied by coming years. Randolph J. Gawelek President and Chief Executive Officer The Kitchen Collection, Inc. Right: A wide selection of Hamilton Beach® -branded non-electric products, sold exclusively at Kitchen Collection® stores. (1) ROE = 2005 net income divided by 2005 average equity (a five-point average of equity at December 31, 2004 and each of 2005’s quarter ends). •30• Branding Strategy In late 2005, the North American Coal Corporation (”NACoal”) adopted a new logo for the company and its subsidiaries in recognition of the company’s position as a world-class coal producer and miner. The company’s lignite coal mines will operate under the name North American Coal, while the company’s non-coal mining operations will operate under the name North American Mining. Both new logos are shown above. The new logos reflect NACoal’s business focus and environmental commitment with black representing the company’s heritage in coal mining, a bright brown curve representing the earth’s surface and forest green and deep blue representing NACoal’s commitment to reclamation and environmental stewardship. THE NORTH AMERICAN COAL CORPORATION New limerock dragline mining operations at NACoal contributed to an increase in 2005 deliveries that were 33 percent higher than in 2004 2005 Results of limerock during 2005 compared with industrial minerals businesses. NACoal’s NACoal operates six lignite coal 18.9 million cubic yards during 2004. goals are to earn a minimum return on mines which delivered 34.7 million tons Despite the increases in deliveries, capital employed of 13 percent, deliver of lignite coal in 2005 compared with NACoal’s net income in 2005 decreased positive Economic Value Income from all 34.4 million tons in 2004, maintaining to $16.2 million compared with $18.6 existing consolidated mining operations NACoal’s position as the nation’s million in 2004. The decrease occurred as well as any new projects, maintain or largest lignite coal producer and one of primarily as a result of adverse geological the top ten coal producers nationwide. mining conditions at the Mississippi The company’s lignite coal reserve posi- Lignite Mining Company, continued tion, including reserves related to uncon- losses at the San Miguel Lignite Mining solidated project mining operations, Operations and increased start-up remains strong with a total of 2.3 billion costs related to new limerock dragline tons, of which 1.2 billion tons are com- mining operations. mitted to current customers. NACoal’s limerock dragline mining Vision and Goals operations had an excellent year with NACoal’s vision is to be the leading limerock deliveries 33 percent higher low-cost miner of lignite coal used in in 2005 compared with 2004, primarily power generation and coal gasification due to the start-up of two new limerock and liquefaction plants and to provide dragline mining operations in 2005. selected value-added mining services for Deliveries were 25.2 million cubic yards companies in the aggregates and other Lignite Coal Tons and Limerock Cubic Yards Delivered (In millions) 40 30 20 10 0 35.5 34.2 34.4 34.7 31.4 25.2 18.9 10.6 11.0 8.7 01 03 02 (cid:2) Lignite Coal Tons (cid:2) Limerock Cubic Yards 04 05 Left: The Falkirk Mining Company in North Dakota uses a variety of heavy-duty equipment to mine lignite coal, including, from the background forward, a Marion 8750 dragline, a Marion 195M dragline, an electric loading shovel, Kress haul trucks, a Caterpillar front-end loader and a Caterpillar bulldozer. •33• NACoal has key strategies focused on low-cost mining expertise, mining and reclamation innovation, and new business opportunities increase the profitability of all existing even when mining contracts are designed Significant advances in traditional power unconsolidated project mining operations, to cover cost increases. generation technology, along with sharp and generate substantial consolidated Lignite coal customers, primarily increases in the price of natural gas, cash flow before financing activities. electric power plants, are under have increased the probability that new NACoal is making good progress toward constant pressure from their end-users coal-fired power plants will be built achieving its goals and expects solid to provide affordable power in an over the next several years. In addition, performance improvement in 2006 and environmentally sensitive manner. Since many energy companies are now further improvement in 2007. mining is a relatively mature industry, considering completely new coal-based it is imperative for mining companies energy technologies, such as gasification, Industry Trends to develop new, innovative processes coal-to-liquids, and other coal enhance- Safety and efficiency are critical to to remain competitive. ment processes. NACoal expects to providing value in the mining industry. New opportunities and growth continue to play a leadership role in the Operational costs are highly sensitive to in the mining industry can arise in evolving energy, environmental and changes in mining routines. When diffi- traditional coal and aggregates mining national energy policy landscape in the cult mining situations emerge, pressure as well as in new areas, such as coal-based U.S. with the objective of capitalizing on is put on profitability. Recently, increases fuel production. In certain regions of a growing need for low-cost coal based in diesel fuel cost and the reduced avail- the U.S., the demand for local power domestic energy sources. ability and higher cost of tires for mining is increasing. In these as well as other To reach its goals, NACoal has equipment have created additional regions, power companies that have established several strategies and key challenges. Successful companies must traditionally mined their own lignite programs to respond to current industry remain vigilant about containing costs, are considering contract mining. trends. The programs, designed to Top: Wheat fields ready for harvesting bask in the evening sun on reclaimed land at The Coteau Properties Company’s Freedom Mine in North Dakota. •34• enhance profitability or generate growth, Mississippi Lignite Mining Contract Structure. Central to can be classified in three main areas: Company Improvement. This mine and NACoal’s strategy are contracts which low-cost mining expertise; mining the customer’s power plant were fully minimize exposure to the market price and reclamation innovation; and new operational in 2005. However, mining of coal. These contracts are carefully business opportunities. efficiency was negatively affected in 2005 structured coal supply agreements that Key Programs to Leverage Low-Cost Mining Expertise NACoal leverages highly disciplined management of its financial activities and its operations to minimize costs and ensure safety. Four key projects supporting this mining strategy include: Employee Safety. Ensuring employee safety is the number-one priority at NACoal. Each of NACoal’s mines emphasizes safety as part of its daily routine. Three of the company’s mining operations worked the entire 2005 calendar year without incurring a single lost-time accident, and NACoal’s lost-time accident rate has consistently been well below the national average. NACoal firmly believes that its commit- ment to safety and strong employee relations improves productivity and employee retention, thereby reducing costs and enhancing profitability. Safety Record (Lost-Time Accident “LTA” Rate) 3.0 2.0 2.36 2.33 2.29 2.07 2.11 1.99 by certain adverse geological conditions essentially establish the specific mining and by mining through a hill, which services that NACoal will perform for required the removal of an unusually its customers and the mechanisms large amount of overburden to reach by which it will be compensated for the lignite coal below. Mining efficiency performing those activities. These and profitability at this operation are agreements include various cost expected to improve in 2006 as NACoal escalation mechanisms and may include completes implementation of its solution performance incentives. Through these for handling the adverse geological mining agreements, NACoal and its conditions and completes mining in customers share a common goal of the hill area. minimizing costs. By eliminating San Miguel Lignite Mining speculation on the future price of coal, Operations Improvement. In 2005, these contracts are designed to permit NACoal provided a range of mining the company to consistently earn sound services at this mine, some of which were margins for its services and to earn, within the scope of the original mining on a regular basis, returns on capital contract and some of which were within employed that are in excess of the the scope of the 2004 amendment to company’s cost of capital. that original contract. Although more tons were mined in 2005 than in 2004, revenues and income were less than planned as NACoal provided more lower-fee and lower-margin services than anticipated by the original contract scope. NACoal expects significant improvements in revenues and income from this mine in 2006 as mining services are anticipated to be performed under 1.75 1.52 an amended contract that is anticipated to cover the period from 2006 to 2010. 1.05 0.94 1.0 0.79 0.67 0.39 0.33 0.39 0.16 0 98 99 00 01 02 03 04 05 (cid:3) LTA North American Coal Average (cid:2) LTA National Average If this amended contract is consummated, NACoal will be continuing its strong working relationship with this customer in the period after 2007, when its current amended contract expires. Key Programs for Mining and Reclamation Innovation A second key NACoal strategy is to research, develop and deploy new mining, reclamation and supply base management techniques. The company’s culture of inquiry, creativity and excellence along with the following programs support this strategy: Mining and Management Innovation. NACoal continues to be a leader in developing innovative mining and management methods. These processes have improved mining efficiencies and coal recovery, reduced costs, enhanced safety and lessened the environmental impact of mining. •35• NACoal has pioneered the use of certain and new business development activities Mining NACoal Reserves for Coal coal extraction equipment, designed guides this strategy. Projects directed at Gasification. NACoal believes that, in unique systems to mine in flood plains accomplishing this business development the long term, future development of and other challenging mining areas, strategy include: coal reserves in the United States will and developed special features for coal Mining NACoal Reserves for depend greatly upon the adoption of hauling trucks and utilized special Direct Coal-fired Power Generation. newer power plant technologies that equipment maintenance tracking soft- The foundation for new lignite coal substantially lower emissions. One ware. In addition, NACoal is utilizing mining projects continues to be the of the most promising technologies new supply chain management measures ongoing, in-depth analysis of power involves gasifying coal, which can As NACoal implements its programs, the company anticipates further improvement in return on capital employed, particularly in 2006 & 2007 to address the challenges of limited generation supply and demand in significantly reduce key emissions such availability and increased costs of some each of the regions where NACoal as SO2 (sulfur dioxide), NOx (nitrogen materials, supplies and equipment. has reserves. In areas where future oxide), particulates and mercury. This Environmental Commitment. power generation demand is expected highly efficient process of coal gasifica- NACoal is committed to protecting the to outpace supply, there is potential for tion also produces lower levels of CO2 environment by restoring mined land to the development of new power plants (carbon dioxide) and allows for CO2 its original or an improved condition. that could utilize lignite coal owned or separation and sequestration. NACoal is The company utilizes innovative methods controlled by NACoal. Based on results in discussions with potential customers to assure reclamation accuracy in this of these ongoing analyses, NACoal or partners involving development of process, including the use of global adjusts its ownership plans for its full scale coal gasification plants. positioning devices installed in the earth existing lignite coal reserves as well as Mining NACoal Reserves for Coal- moving equipment that are linked to its strategies for securing ownership based Energy Production. The company electronic maps. The company has or leases for additional reserves which continues to invest significant effort in been a prominent recipient of many offer potential for future development. understanding and promoting new environmental awards over the years. In addition, NACoal owns what it clean coal energy technologies. In fact, Key Programs for New Business Opportunities NACoal’s strategy for growth is focused on understanding and satisfying the mining and energy needs of each region in which the company operates. NACoal sustains long-term partnerships in these regions. The company’s intense focus on opportunity analysis, networking believes is the most extensive bank of NACoal has developed its own flexible geological data on lignite coal reserves power plant vision, called FlexGen, in the country, consisting of data on its which, in addition to generating power, company-owned reserves as well as could produce a variety of marketable lignite coal reserves owned or controlled byproducts, including synthetic natural by other land owners. This wealth gas, synthetic diesel or jet fuel, and of data provides a strategic advantage petrochemical feedstocks. This process to NACoal as it works to identify, also could extract hydrogen that can be prioritize and pursue opportunities used in fuel cells to produce emission- to develop new mining operations for free power generation. Additionally, the company’s reserves. Right: North American Coal’s attention to routine maintenance procedures contributes to the company’s highly efficient mining process. At The Coteau Properties Company’s Freedom Mine, a Kress coal haul truck obtains a new paint job and undergoes general maintenance. •36• the company is studying a number of Tarmac America LLC to start mining at anticipates that through implementation enhanced coal and coal-to-liquids its Pennsuco Quarry, both of which of its key programs, the company will be technologies and opportunities, which commenced operations in late 2005. well positioned to meet its target return are increasingly financially attractive All of these new operations are located on capital employed in 2006 and 2007, in light of higher sustained prices for in Florida. natural petroleum products. as well as to have increased cash flow before financing activities. Contract Mining of Lignite Coal. Outlook for 2006 and Beyond As you may know, I am retiring NACoal, the nation’s largest miner of Overall, NACoal expects improved from North American Coal in March lignite coal, is broadly regarded as an performance in 2006, primarily through 2006. Bob Benson will take over as efficient and effective mining partner, increased limerock deliveries, the President and Chief Executive Officer and as a result, is periodically presented anticipated new contract amendment of the company. After 30 years, I will with opportunities to act as a contract at the San Miguel Lignite Mine, and certainly miss NACoal, its people, and miner for reserves not owned by NACoal. enhanced profitability at the Mississippi the company’s extended family - our The company is hopeful that at least Lignite Mining Company resulting from customers, vendors and others in the one of several projects currently under improved geologic conditions. Further business community. I am truly grateful evaluation, some with current power improved performance from current for the opportunity to have served generation customers, will come to operations in 2007 also is expected. NACoal during my career. As I say fruition and contribute to NACoal’s In addition, NACoal is encouraged goodbye, I leave with confidence that profit growth. that more new project opportunities the company is on a sound footing and Contract Mining of Aggregates. may become available given current in the excellent hands of Bob Benson, The company is optimistic that niche high prices for natural gas, its main who has been with the company for 29 growth opportunities for providing high competition as power plant fuel, and successful years, with many of them at the value-added services for aggregates and NACoal expects to continue its efforts highest levels of operational responsibility. industrial minerals mining applications, to develop new domestic coal projects. Finally, I want to thank all North such as limerock dragline mining services, The company is pursuing a number of American Coal employees for their hard will continue to emerge. Discussions potential opportunities that could add work and dedication in making 2005 are ongoing with NACoal’s existing significantly to company profitability in another safe and successful year for the limerock customers, as well as other the longer term. company. I wish everyone great success limerock producers, about providing NACoal’s objectives are to earn a in 2006 and beyond. mining services to meet limerock minimum return on capital employed production requirements not currently of 13 percent, attain positive Economic served by NACoal. Value Income from all existing consoli- In 2004 and 2005, NACoal signed dated mining operations as well as any agreements with White Rock Quarries new project, maintain or increase the (“WRQ”) for expansion of mining at its profitability of all existing unconsolidated existing quarry, which began in 2005, project mining operations and deliver and for mining at WRQ’s new quarry, substantial consolidated cash flow before White Rock South, beginning in 2007. financing activities. Return on capital NACoal also signed agreements in 2005 employed was just below 11 percent in with Rinker Materials of Florida, Inc. to 2005. (This is a non-GAAP number. See start mining at its FEC Quarry and with reconciliation on page 40.) NACoal Clifford R. Miercort President and Chief Executive Officer The North American Coal Corporation Right: One of the draglines at The Falkirk Mining Company in North Dakota. •38• SUPPLEMENTAL DATA RECONCILIATION OF FINANCIAL TARGETS TO NET INCOME: Minimum Operating Profit Target, Minimum Return on Capital Employed Target and Interest Expense as of December 31, 2005 Subsidiaries with Minimum Operating Profit Targets (U.S. dollars in millions, except per share amounts) Housewares NMHG Total 2005 revenues, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x Operating profit target percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . = Operating profit at target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2,399.9 9% 216.0 Less: 2005 operating profit, as reported for NMHG and Housewares . . . . . . . . . . . . . . . . . . . . . . Difference between 2005 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 $ (47.5) 168.5 (64.0) for NMHG and Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 104.5 Subsidiaries with Minimum Return on Capital Employed Targets 2005 average equity (12/31/2004 and at each of 2005's quarter ends). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 average debt (12/31/2004 and at each of 2005's quarter ends) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total 2005 average capital employed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on capital employed target percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on capital employed target = target net income before interest expense, net-of-tax . . . . . . . . . . . . . . . . . . 2005 net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: 2005 interest expense, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Income taxes on 2005 interest expense at 38%** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual 2005 return on capital employed = actual net income before interest expense, net-of-tax . . . . . . . . . . . . . Actual 2005 return on capital employed percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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: 2005 interest expense, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Income taxes on 2005 interest expense at 38%** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Target net income at target return on capital employed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: 2005 net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income difference between reported net income and target net income at target return on $ $ $ $ $ $ $ $ $ $ $ $ $ 639.1 * 9.1% 58.2 (39.3) 18.9 (7.2) 11.7 $ $ $ $ 3,039.0 N/A 274.2 (86.8) 187.4 (71.2) 116.2 NACoal 84.9 117.4 202.3 13% 26.3 16.2 8.5 (3.2) 21.5 11% 26.3 (21.5) 4.8 26.3 (8.5) 3.2 21.0 (16.2) capital employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.8 4.8 Total of net income differences from subsidiaries with minimum operating profit targets and minimum return on capital employed targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per share impact at 8.223 million basic shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per share impact at 8.226 million diluted shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ 121.0 14.71 14.71 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 2005 interest expense, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Income tax expense at 38%** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 interest expense, net-of-tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per share impact at 8.223 million basic shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per share impact at 8.226 million diluted shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * The weighted average minimum operating profit target for the Housewares segment is 9.1% (HB/PS at 10% and Kitchen Collection at 5%). ** Tax rate of 38% represents the Company's marginal tax rate as compared with 2005's effective tax rate of 18.5%. $ $ $ $ 47.5 (18.1) 29.4 3.58 3.57 •40• OFFICERS AND DIRECTORS 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, 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. 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 Eugene Wong Emeritus Professor, University of California at Berkeley Director Emeritus Thomas E. Taplin Officers of Subsidiaries Officers of NACCO Materials Handling Group, Inc. Corporate: Reginald R. Eklund President and Chief Executive Officer Michael P. Brogan Executive Vice President Operations Colin Wilson Vice President and Chief Operating Officer James P. Gorzalski Vice President, Procurement and Supply James M. Phillips Vice President, Human Resources Victoria L. Rickey Vice President, Chief Marketing Officer Seppo O. Saarinen Vice President, Global Product Development Michael K. Smith Vice President, Finance and Information Systems, and Chief Financial Officer Gopi Somayajula Vice President, Counterbalanced Engineering Carolyn M. Vogt Vice President, General Counsel and Secretary Daniel P. Gerrone Controller Jeffrey C. Mattern Treasurer Americas: Gregory J. Dawe Vice President, Manufacturing, Americas Raymond C. Ulmer Vice President, Finance and Information Systems, Americas Donald L. Chance, Jr. Vice President; President, Yale Materials Handling Corporation D. Paul Laroia Vice President; President, Hyster Company Europe: 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 Wholesale Nobuo Kimura President, Sumitomo NACCO Materials Handling Co., Ltd. Officers of Hamilton Beach/ Proctor-Silex, Inc. Dr. Michael J. Morecroft President and Chief Executive 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 Human Resources Gregory E. Salyers Vice President, Operations and Information Systems James H. Taylor Vice President, Finance and Treasurer Gregory H. Trepp Vice President, Marketing Officers of The Kitchen Collection, Inc. Randolph J. Gawelek President and Chief Executive Officer Robert O. Strenski Vice President, General Merchandise Manager Emil S. Wepprich Vice President, Operations L.J. Kennedy Secretary and Treasurer Officers of The North American Coal Corporation Clifford R. Miercort President and Chief Executive Officer Robert L. Benson Executive Vice President and Chief Operating Officer Clark A. Moseley Senior Vice President-Business Development and Engineering Bob D. Carlton Vice President-Financial Services, and Controller Thomas A. Koza Vice President-Law and Administration, and Secretary K. Donald Grischow Treasurer •41• [This Page Intentionally Left Blank] •42• Annual Meeting The Annual Meeting of Stockholders of NACCO Industries, Inc. will be held on May 10, 2006, at 9 a.m. at the corporate office located at: 5875 Landerbrook Drive, Suite 300 Cleveland, Ohio 44124 Form 10-K Additional copies of the Company’s Form 10-K filed with the Securities and Exchange Commission are available through NACCO’s website (www.nacco.com) or by request to Investor Relations, NACCO Industries, Inc., 5875 Landerbrook Drive, Suite 300 Cleveland, 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 Stock Exchange Listing The New York Stock Exchange Symbol: NC Annual CEO Certification On June 17, 2005, in accordance with Section 303A.12(a) of the New York Stock Exchange Listed Company Manual, our Chief Executive Officer, Alfred M. Rankin, Jr., submitted his annual certification to the New York Stock Exchange following our annual stockholders’ meeting, stating that he is not aware of any violations by NACCO Industries, Inc. of the NYSE’s Corporate Governance listing standards as of that date. Investor Relations Contact Investor questions may be addressed to: Christina Kmetko, Manager-Finance NACCO Industries, Inc. 5875 Landerbrook Drive, Suite 300 Cleveland, Ohio 44124 (440) 449-9669 E-mail: ir@naccoind.com NACCO Industries Website Additional information on NACCO Industries may be found at the corporate website, www.nacco.com. The Company considers this website to be one of the primary sources of information for investors and other interested parties. Areas of interest on the website include: • Historical timeline charting NACCO’s evolution • In-depth background data on each subsidiary company • Investor Relations section with detailed financial data • Specific section on Corporate Governance • News room section with archived news releases • Calendar of events with e-mail alert sign-up Subsidiary Company Websites The websites of several subsidiary companies and their brands can be found at the following locations: 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/Proctor-Silex–U.S.: www.hamiltonbeach.com www.proctorsilex.com www.hbeclectrics.com www.buytraditions.com www.trueair.com http://commercial.hamiltonbeach.com Hamilton Beach/Proctor-Silex–Mexico: www.hamiltonbeach.com.mx www.proctorsilex.com.mx www.trueair.com.mx Kitchen Collection: www.kitchencollection.com North American Coal: www.nacoal.com NACCO Industries, Inc. 5875 Landerbrook Drive • Cleveland, Ohio 44124 An Equal Opportunity Employer Printed in U.S.A. 

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