NACCO Industries, Inc. Annual Report 2005

← All annual reports

FY2005 Annual Report · NACCO Industries, Inc.

Loading PDF…

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 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

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:
Revenues:

$118.4 million
Operating profit:
$23.8 million

Net income:

$16.2 million

• 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

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

* 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

$(4.40)†

($5)

† 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)

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

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

$2.0

$1.5

$1.0

$0.5

•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

(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

Net Income (Loss)
(In millions)

$18.1

$16.4

$12.3

$10.7

$(49.4)

$20

$10

($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)

($10)

($15)

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

Average Sales Transaction

$20

$19

$18

$17

$16

$19.10

$18.58

$18.29

$18.04

$17.52

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)

35.5

34.2

34.4

34.7

31.4

25.2

18.9

10.6

11.0

8.7

03
02
(cid:2) Lignite Coal Tons
(cid:2) Limerock Cubic Yards

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

(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

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

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.