NACCO Industries
Annual Report 2006

Plain-text annual report

NACCO I N D U S T R I E S , I N C . Managing for long-term profit growth 2006 Annual Report NACCO Industries, Inc. at a Glance 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 and rental companies, which sell, lease and service 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 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 kitchenware and gourmet foods operating under the Kitchen Collection® and Le Gourmet Chef® store names in outlet and traditional malls throughout the United States. 2006 Financial Results NMHG Wholesale: Revenues: $2.3 billion Operating profit: $76.5 million Net income: $43.7 million NMHG Retail: Revenues: $170.6 million Operating loss: $9.0 million Net loss: $9.1 million HB/PS: Revenues: $546.7 million Operating profit: $42.5 million Net income: $22.2 million Kitchen Collection: Revenues: $170.7 million Operating profit: $6.8 million Net income: $3.7 million 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: $149.0 million Operating profit: $61.5 million Net income: $39.7 million NACCO Industries, Inc. is an operating holding company with three principal businesses: lift trucks, housewares and mining. In 2006, total revenues were $3.3 billion and net income was $106.2 million. Market Positions Competitive Advantages Financial Objectives Key Business Programs NACCO Materials Handling Group is a world leader in the lift truck industry with an estimated 12 percent market share worldwide, including a 26 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. HB/PS 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. • 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 790,000 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 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 Minimum operating profit margin target of 9 percent • Manufacturing restructuring • Quality initiative • Global supply chain • New product development • New product introductions • SPED (Customization) strategy • Strategic pricing optimization • Industry marketing strategy • National and global accounts • Anchor Dealer program • Dealer excellence enhancement • Aftermarket parts • NMHG Retail improvements HB/PS: Minimum operating profit margin target of 10 percent HB/PS: • Manufacturing cost reduction • Continuous quality improvement • Supply chain optimization • Product development process • New product introductions • Retailer and channel focus • Strategic brand application Kitchen Collection is the nation’s leading specialty retailer of kitchen and related products in factory outlet malls with 280 stores throughout the United States in 2006. Kitchen Collection: • Highly analytical merchandising skills and disciplined operating controls • Two well-established, complementary retail formats –Kitchen Collection® and Le Gourmet Chef® Kitchen Collection: Minimum operating profit margin target of 5 percent North American Coal is the nation’s largest miner of lignite coal and among the ten largest coal producers. Lignite coal is delivered from mines in Texas, North Dakota, Louisiana and Mississippi to adjacent or nearby power plants. • 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 • 2.2 billion tons of lignite coal reserves, of which 1.1 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 total capital employed of 13 percent and attain positive Economic Value Income from all existing consolidated mining operations and any new projects, and maintain or increase profitability of all existing unconsolidated project mining operations 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 • Traditional mall format initiatives • Vanity Fair initiative • Internet format initiative • Employee safety • Contract structure • Mississippi Lignite Mining Company improvement • Red River Mining Company improvement • Limerock dragline mining operations • Mining and management innovation • Environmental commitment • Leveraging NACoal’s lignite coal reserves • Mining NACoal reserves for direct coal-fired power generation • Mining NACoal reserves for coal gasification • Mining NACoal reserves for coal-based energy production • Utilizing lignite coal enhancement technologies • Contract mining of lignite coal • Contract mining of aggregates Managing for long-term profit growth NACCO Industries, Inc. Table of Contents Selected Financial and Operating Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Letter to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 NACCO Materials Handling Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Hamilton Beach/Proctor-Silex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Kitchen Collection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 The North American Coal Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Supplemental Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Officers and Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inside Back Cover Front Cover: Two draglines work through the night at The Sabine Mining Company in Texas. In 2006, NACCO had a number of significant achievements and realized substantially improved financial performance. N A C C O I n d u s t r i e s , I n c . In 2005, key performance improvement programs began to produce positive results at each subsidiary company, enhancing overall profit performance. As each subsidiary company moved further along in implementing programs, ground work was laid for additional progress in future years. In 2006, NACCO realized significantly improved performance as several key performance improvement programs matured. Net income increased at all subsidiary companies and overall results were strong, although enhanced by one-time events. Performance met or exceeded 2006 expectations at Hamilton Beach/Proctor-Silex, Kitchen Collection and North American Coal, while results fell short of 2006 expectations at NACCO Materials Handling Group due, in part, to external factors. In 2007, each subsidiary company, and more importantly NACCO Materials Handling Group, remains committed to its performance improve- ment programs. Meaningful actions are being taken to address key issues such as managing costs, driving innovation and improving sales and marketing professionalism with a goal of achieving NACCO’s performance and growth objectives. Returns on total capital employed are expected to remain strong as the subsidiary companies make progress toward their established financial goals. Total Revenues (In billions) $3.3 $3.2 $2.8 $2.5 $2.3 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 Net Income (In millions) $106.2 $62.5 $52.8 $47.9 $42.4 $120 $105 $90 $75 $60 $45 $30 $15 $0 Diluted Earnings Per Share $12.89 $7.60 $6.44 $5.83 $15 $10 $5.17 $5 $0 02 03 04 05 06 02 03 04 05 06 02 03 04 05 06 (cid:2) NMHG (cid:2) Housewares (cid:2) NACoal (cid:2) NACCO & Other [1] Managing for long-term profit growth Selected Financial and Operating Data NACCO Industries, Inc. and Subsidiaries Operating Statement Data : Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings of unconsolidated project mining subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted Earnings per Share: Income 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Per Share and Share Data: Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market value at December 31 . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity at December 31 . . . . . . . . . . . . . . Actual shares outstanding at December 31 . . . . . . . . . . Diluted weighted average shares outstanding . . . . . . Balance Sheet Data at December 31: Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ $ $ $ $ $ $ $ $ 2006 3,349.0 36.0 172.6 93.4 12.8 – 106.2 11.33 1.56 – 12.89 1.905 136.60 96.27 8.238 8.242 2,156.3 359.9 793.1 Year Ended December 31 2003 2004 2005 (In millions, except per share data) $ $ $ $ $ $ $ $ $ $ $ $ $ 3,157.4 33.8 108.0 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 $ $ $ $ $ $ $ $ $ $ $ $ $ 2,782.6 31.5 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 49.8 1.8 1.2 52.8 6.07 0.22 0.15 6.44 1.260 89.48 77.63 8.206 8.204 1,839.8 363.2 637.0 2002 2,285.0 30.3 115.5 49.6 (7.2) – 42.4 6.05 (0.88) – 5.17 0.970 43.77 68.21 8.201 8.198 1,780.8 416.1 559.4 $ $ $ $ $ $ $ $ $ $ $ $ $ [2] N A C C O I n d u s t r i e s , I n c . Year Ended December 31 Cash Flow Data: Operating Activities NACCO Materials Handling Group . . . . . . . . . . . . . . Hamilton Beach/Proctor-Silex . . . . . . . . . . . . . . . . . . Kitchen Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . North American Coal Corporation . . . . . . . . . . . . . . NACCO and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . Provided by operating activities . . . . . . . . . . . . . . . . . Investing Activities NACCO Materials Handling Group . . . . . . . . . . . . . Hamilton Beach/Proctor-Silex . . . . . . . . . . . . . . . . . . Kitchen Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . North American Coal Corporation . . . . . . . . . . . . . . NACCO and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . Used for investing activities . . . . . . . . . . . . . . . . . . . . Cash Flow before Financing Activities (1) NACCO Materials Handling Group . . . . . . . . . . . . . . Hamilton Beach/Proctor-Silex . . . . . . . . . . . . . . . . . . Kitchen Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . North American Coal Corporation . . . . . . . . . . . . . . . NACCO and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Cash Flow before Financing Activities . . . . Used for financing activities . . . . . . . . . . . . . . . . . . . . . Other Data: Adjusted EBITDA(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total employees at December 31(3) . . . . . . . . . . . . . . . . $ $ $ $ $ $ $ $ 2006 84.8 28.7 17.2 38.7 4.1 173.5 (30.6) 7.2 (16.1) 4.2 – (35.3) 54.2 35.9 1.1 42.9 4.1 138.2 (105.8) 217.5 11,300 2005 (In millions, except employee data) 2004 2003 $ $ $ $ $ $ $ $ 11.9 31.8 0.1 26.4 5.0 75.2 (30.1) (3.8) (1.0) (21.4) – (56.3) (18.2) 28.0 (0.9) 5.0 5.0 18.9 (1.8) 177.7 11,100 $ $ $ $ $ $ $ $ 80.0 17.7 (0.6) 41.1 (12.0) 126.2 (17.3) (5.5) (2.2) (15.3) – (40.3) 62.7 12.2 (2.8) 25.8 (12.0) 85.9 (4.1) 160.4 11,600 $ $ $ $ $ $ $ $ 50.1 34.7 6.5 36.1 (3.8) 123.6 (11.1) (4.5) (1.3) (26.3) 0.1 (43.1) 39.0 30.2 5.2 9.8 (3.7) 80.5 (71.9) 181.3 11,600 2002 72.1 45.3 6.7 36.6 (11.2) 149.5 (7.3) (1.9) (1.3) (7.2) (0.8) (18.5) 64.8 43.4 5.4 29.4 (12.0) 131.0 (146.8) 179.1 12,200 $ $ $ $ $ $ $ $ (1) Cash Flow before Financing Activities is equal to net cash provided by operating activities less net cash used for investing activities. (2) 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. 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. (3) Includes employees of the unconsolidated project mining subsidiaries. Reconciliation of Cash Flow From Operations to Adjusted EBITDA:(2) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted EBITDA (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Calculation of Adjusted EBITDA: (2) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative effect of accounting changes, net-of-tax . . . Extraordinary (gain) loss, net-of-tax . . . . . . . . . . . . . . . . . Minority interest income . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation, depletion and amortization expense Adjusted EBITDA (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 2006 Year Ended December 31 2004 2005 (In millions) 2003 2002 173.5 (22.4) 25.6 (0.8) 19.1 (11.8) 34.3 217.5 106.2 – (12.8) (0.7) 27.8 41.8 (7.5) 62.7 217.5 $ $ $ $ 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) 63.6 177.7 $ $ $ $ 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) 62.9 160.4 $ $ $ $ 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) 68.4 181.3 $ $ $ $ 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) 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 pages 44 and 45. [3] Managing for long-term profit growth To Our Stockholders A letter from Alfred M. Rankin, Jr., Chairman, President and Chief Executive Officer of NACCO Industries, Inc. Introduction While key profitability and growth programs in place at In 2006, NACCO Industries, Inc. had a number of North American Coal (“NACoal”), Hamilton Beach/Proctor- significant achievements and produced very strong financial Silex (“HB/PS”) and Kitchen Collection (“KCI”) delivered results, including substantial increases in net income, cash flow substantial benefits, progress toward financial goals was slower before financing activities and return on equity. Specifically, net than expected at NACCO Materials Handling Group income at NACCO increased by 70 percent in 2006 over 2005 (“NMHG”), the largest of NACCO’s subsidiary companies. as a result of improved performance at all of our subsidiary Strategic actions have been identified so that NMHG can adapt companies, although several events affecting 2006’s net income to changing conditions while continuing to work toward its are unlikely to reoccur. ambitious financial goals. However, we continue to believe that $2.0 $1.5 $1.0 $0.5 $0 Dividends Paid Per Share $1.848 $1.905 $1.675 $1.260 $.595 $.615 $.635 $.655 $.675 $.710 $.743 $.773 $.810 $.850 $.890 $.930 $.970 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 [4] N A C C O I n d u s t r i e s , I n c . Discussion of Results In 2006, NACCO’s net income and revenues increased compared with 2005. The Company reported significantly higher net income of $106.2 million in 2006, or $12.89 per diluted share, compared with net income of $62.5 million, or $7.60 per diluted share, in 2005. Revenues for 2006 were $3.3 billion compared with $3.2 billion for 2005. Net income in both 2006 and 2005 included after-tax extraordinary gains of $12.8 million and $4.7 million, respectively, recorded by Bellaire Corporation (“Bellaire”), a wholly owned non-operating subsidiary which manages ongoing liabilities related largely to closed Eastern U.S. coal mines. These extraordinary items relate to reductions in Bellaire’s payment obligation to the United Mine Workers of America Combined Benefit Fund (the “Combined Fund”). As a result of the Coal Industry Retiree Health Benefit Act of 2006 (the “2006 Act”), Bellaire’s obligation to the Combined Fund will be phased out over a three-year period beginning on October 1, 2007. After October 1, 2010, no further payments to the Combined Fund are expected. Income before extraordinary gain was $93.4 million, or $11.33 per diluted share, in 2006 compared with $57.8 million, or $7.03 per diluted share, in 2005. In 2006, NACoal recognized a gain of $21.5 million, $13.1 million after taxes of $8.4 million, from the sale of two electric draglines. Also in 2006, NMHG redeemed its 10% Senior Notes due in 2009. As a result, the Company recognized a charge to earnings for the early retire- ment of debt of approximately $17.6 million, or $10.7 million after a tax benefit of $6.9 million. In addition, NACCO was unsuccessful in its attempts to combine its HB/PS subsidiary with Applica Incorporated. As a result, NACCO received a $6 million termination fee from Applica and expensed $11.2 million in transaction costs for a net pre-tax expense of $5.2 million, which is included in the 2006 results. Excluding the effects of these unusual items, consolidated operations continued to improve in 2006 as a result of the continued implementation of key programs, which successfully increased selling prices and unit volumes at NMHG, increased deliveries and led to a favorably amended mining contract at NACoal, increased sales of higher-margin kitchen appliances at both HB/PS and KCI, and led to the acquisition of a complementary business by KCI. In addition, favorable product liability and tax adjustments at NMHG contributed to improved earnings. These improvements occurred despite relatively weak markets for housewares products, increases in material costs and a weak U.S. dollar. In 2006, NACCO generated $138.2 million in consolidated cash flow before financing activities, compared with $18.9 million in 2005. Cash flow before financing activities in 2006 improved significantly as a result of improved financial results at each of the subsidiary companies and from proceeds on the sale of two draglines at NACoal, net of cash paid of approximately $14 million for the acquisition of LGC. NMHG’s core profitability and growth programs, combined with positive market and economic factors, will, over time, deliver improved financial performance, particularly in 2008 and beyond. During 2006, two of NACCO’s subsidiaries pursued strategic combinations with other companies. KCI successfully purchased certain assets of Le Gourmet Chef, Inc. (“LGC”), a chain of 77 kitchen stores which had been in bankruptcy. HB/PS pursued a strategic combination with Applica Incorporated, which ended unsuccessfully in January 2007 when a rival bidder acquired all of Applica’s outstanding shares for cash. NACCO is currently pursuing litigation against Applica and its acquirer and has reserved all of its rights in relation to this matter. At each subsidiary, strategies and key programs have been established to address specific industry dynamics and trends, with the objective of achieving established financial targets and generating substantial cash flow before financing activities. Programs to enhance profitability are designed to achieve performance in line with minimum financial targets, and programs to generate growth are intended to drive long-term profit growth. The stakes involved in executing the Company’s profit enhancement and growth programs remain high, particularly at NMHG, where substantial improvement in operating profit margin is still required to meet financial targets. Assuming NACCO’s subsidiary companies had achieved at least their minimum financial targets in 2006, the Company would have generated additional net income of $99.5 million, or $12.07 in additional diluted earnings per share, approximately 90 percent of which would have been generated by improvement at NMHG. (See reconciliations of these non-GAAP amounts on page 44.) In order to realize this significant potential, an intense focus on profit improvement programs is expected at NMHG in the coming months and years. As HB/PS, KCI and NACoal approach all of their financial targets, a greater emphasis on programs to build profitable growth is planned. HB/PS will continue to drive innovation in current and new markets, KCI will work to realize synergies from its combination with LGC, as well as open new stores in outlet and traditional malls, and NACoal will work to improve [5] N A C C O I n d u s t r i e s , I n c . current operations, particularly at Mississippi Lignite Mining cost structure while maintaining and improving product and Company, while aggressively pursuing a variety of new business service quality. Programs aimed at achieving this objective opportunities. include new, more comprehensive manufacturing improvements As profit improvement and growth programs are pursued, and cost reduction activities, an extensive quality assurance NACCO maintains high expectations for returns on equity initiative and an aggressive global procurement program. and returns on total capital employed. These financial measures Market success requires the ability to provide lift trucks were strong in 2006 and are expected to remain healthy at all appropriate for a wide range of end-user needs at competitive NACCO subsidiaries, indicating that each subsidiary company prices. NMHG has, for the last few years, been developing what is performing well, even though they have yet to reach the it believes is the most flexible product line in the industry, specific financial targets established several years ago. enabling the company to configure lift trucks cost effectively for This letter provides a short summary of each subsidiary’s individual end-user requirements. The company’s new 1 to 8 market situation, strategies, key performance improvement ton internal combustion engine product line represents the programs and outlook, and concludes with an overall outlook core of this new approach. Several programs linked to this for NACCO Industries. The subsidiary letters found later in this strategy include a new product development process, a multi- Annual Report provide much greater detail on the objectives year plan for new product introductions, a strategic pricing and timing of key programs, which typically remain consistent optimization project and the development of specific industry from year to year, and on progress being made toward reaching marketing strategies. each company’s specific financial and growth objectives. Because the sales and service needs of lift truck customers are intensifying, NMHG is focusing on attaining a level of NACCO Materials Handling Group account management excellence unmatched in the industry. NMHG is a leader in the global lift truck industry and is Several projects related to this strategy involve enhancing committed to building on that success in coming years. national and global account capabilities, expanding and Companies in the global lift truck industry are faced with improving the anchor dealer network, adding new aftermarket increased material costs and unpredictable currency exchange services and enhancing the parts offerings for Hyster®, Yale® rates. As a result, NMHG believes it is highly beneficial to more and other brands of lift trucks. Programs are also being put in fully execute its core manufacturing strategy of assembling lift place to improve the performance of NMHG’s owned retail trucks in the market of sale and to consider a variety of low-cost operations, particularly in Australia. component sourcing options, particularly as new opportunities The Company is hopeful that its traditionally cyclical lift arise in lower-cost regions. NMHG is also focused on increasing truck markets will remain strong globally and grow in most manufacturing efficiency and reducing its fixed-cost and overall geographic regions and that NMHG’s market share will increase 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. In support of these guiding principles and to enhance stockholder value, NACCO provides oversight to its subsidiary companies with respect to processes, controls, key improvement 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. [6] N A C C O I n d u s t r i e s , I n c . further, driving an increase in NMHG’s lift truck volumes. process, HB/PS regularly investigates promising concepts both However, the Americas market is expected to contract in 2007 inside and outside its traditional product scope that have the and NMHG shipments of certain products will remain at potential to substantially improve results in the longer term. controlled levels in 2007 as factories ramp up production of Strong relationships with leading retailers are vital for new products. success. Shelf placement, brand positioning and promotions Overall, NMHG’s profitability is expected to improve, with all retailers and channels also are important to sustain and though more slowly than previously anticipated. Outperforming improve sales volumes. HB/PS believes that it has one of the 2006 in 2007 is expected to be challenging. The ongoing launch most professional sales and marketing organizations in the of newly designed lift trucks is expected to drive performance industry. The company views this sales and marketing strength improvements, though the company expects continued phase-in as critical to optimizing channel performance and maintaining costs as a result of the product launches and continued material cost increases. In addition, without the benefit in 2007 of currency hedges that NMHG had in place in 2006, the company is expecting a negative impact on 2007 results if certain unfavorable currency exchange rates persist. Further, the company is unlikely to have additional favorable product liability and tax adjustments in 2007. On the other hand, expenses related to NMHG’s early redemption of its 10% Senior Notes will not reoccur, effective interest Consolidated Cash Flow before Financing Activities (In millions) strong retailer relationships. Efforts supporting this strategy include specific retailer and channel focus programs as well as a number of strategic $131.0 $138.2 brand application initiatives. $85.9 $80.5 To help manage ongoing margin pressure in the industry, HB/PS places significant emphasis on continuous cost reduction. Several key profitability programs address manufacturing cost reductions, continuous quality improvement $18.9 and supply chain optimization. NACCO is moderately optimistic that $150 $125 $100 $75 $50 $25 $0 rate costs are expected to be lower and other 02 03 04 05 06 housewares markets will improve in 2007 as programs are expected to enhance 2007 profit prospects. HB/PS continues to concentrate on further improving margins Following 2007, the implementation of focused profitability and efficiencies as part of its effort to meet its 10 percent enhancement programs is anticipated to lead to substantial minimum operating profit margin target. The operating profit progress toward minimum financial targets from 2008 through margin was 7.8 percent in 2006. As programs to improve 2011. In addition, strong cash flow before financing activities profitability fully mature in 2007 and 2008, more focus will be is anticipated to continue. Hamilton Beach/Proctor-Silex placed on programs to generate growth. Driving even more innovation and introducing even stronger assortments of new products will become more important to realize sustainable HB/PS remains an industry leader with excellent market profit growth and drive the economies of scale that are also and financial performance and potential in an industry in which critical to attaining the 10 percent minimum operating profit many other companies struggle financially. margin target in 2009 or sooner. Significant generation of cash Because new products drive growth and help sustain flow before financing activities is expected in future years. margins, successful housewares companies must repeatedly capture consumers’ attention, as well as their dollars. HB/PS is Kitchen Collection aggressively focused on innovation through a unique product KCI’s position as the leading kitchenware retailer in the development process designed to create new products that meet outlet mall channel was advanced further in 2006 through its consumers’ current needs, as well as to improve profitability. acquisition of LGC, which complements the Kitchen Collection® Utilizing a relatively low-risk, staged assessment and development store format by offering a more upscale product assortment. [7] N A C C O I n d u s t r i e s , I n c . This acquisition provides an additional successful format for focused on its growth initiatives. These programs, in combination outlet malls, as well as a promising platform for expansion into with further improved outlet mall traffic, are intended to return other channels. KCI to its 5 percent minimum operating profit margin target Though consumer visits to outlet malls improved in 2006, by 2008. Cash flow before financing activities is expected to store rent and labor expenses continue to increase, making continue to be strong particularly after 2007, when LGC will disciplined cost control essential to maintaining and improving be mostly integrated into the KCI business. profitability. KCI has established programs aimed at achieving cost control through continuous product cost management, North American Coal highly focused store expense management and an ongoing NACoal is well positioned at its current mining operations logistics efficiency program. KCI will also apply these programs to maintain, and to a degree improve, its financial and growth to the newly acquired Le Gourmet Chef® stores and operations. performance through continuous operational enhancements, KCI believes there is still significant growth potential in the potential for additional volume at its Red River Mining kitchenware retailing, particularly in the niche between the Company and increased maturity of Mississippi Lignite Mining lowest-priced discounters and the higher-end chains. One Company operations and its Florida limerock dragline mining of the keys to capturing that potential is the ability to offer operations. In addition, NACoal, as the nation’s largest lignite customers unique, high-quality products at affordable prices. coal miner, is encouraged by prospects for new coal mining To help accomplish that goal, KCI has established innovative projects, particularly in the context of the domestic energy product selection and merchandising programs, a highly challenges and opportunities facing the United States. successful Hamilton Beach® private label product program and NACoal is pursuing a number of potential projects, which an Economic Value Income program designed to help select reflect lignite coal’s heightened recognition as an attractive SKU assortments by store type to optimize profit performance. domestic source of energy as a result of its abundance in the With limited construction of new malls expected in the United States and the availability of new, environmentally outlet mall channel, KCI has focused on optimizing Kitchen responsible technologies. New business opportunities, which Collection® store performance and Le Gourmet Chef® store leverage NACoal’s extensive lignite coal reserves, include mining presence at existing outlet malls while expanding into new, these reserves for direct coal-fired power generation, coal high-potential formats and distribution channels. The company gasification and coal-based energy production, utilizing and plans to substantially expand LGC’s national presence in outlet commercializing lignite coal enhancement technologies, and malls over time and has a number of other initiatives under contract mining of lignite coal and aggregates for others. way related to enhancing Kitchen Collection® stores’ outlet Central to NACoal’s historical success and future strategy mall format, including a large store format and a segmentation is preservation of its unique approach to structuring mining effort designed to enhance performance based on different types contracts to minimize risk – not only from the changing market of outlet malls. The LGC format will also enable KCI to expand price of coal – but also from the changing costs of equipment more effectively in traditional malls, a largely untapped channel and supplies required to mine the coal. Efficiency is crucial in for the mid-range kitchenware category. KCI also has plans to mining operations, particularly at this time of increasing costs improve the Internet sales programs for both KCI and LGC. for mining supplies and equipment. NACoal has repeatedly The company will focus on integrating the Le Gourmet demonstrated its ability to leverage its low-cost mining expertise Chef® stores and operations in 2007 with the expectation that to deliver operational improvements at mining operations realization of planned synergies will significantly boost economies facing specific challenges, such as the Mississippi Lignite of scale and result in improved operating profit performance Mining Company. beginning in 2008. In 2007 and beyond, the company will be [8] N A C C O I n d u s t r i e s , I n c . NACoal and its customers strongly believe in continuously NACCO is optimistic about its prospects to generate improving mining operations and having superior reclamation strong net income and anticipates generating significant cash programs in place at each of the mines. Just as innovation is flow before financing activities, excluding any acquisitions and important in other NACCO businesses, it is also important new coal projects. NACCO’s intention is to use this cash flow for NACoal in the mining industry. NACoal strives to meet its to reduce debt levels unless other strategic opportunities of customers’ expectations through mining and management greater long-term benefit to the Company and its stockholders innovation and award-winning safety and environmental arise, such as the Le Gourmet Chef acquisition in 2006. achievements. NACCO’s share price was $143.22 at the close of the NACoal’s performance was significantly enhanced in financial markets on March 1, 2007. We believe the increased 2006 as the result of pre-tax gains of $21.5 million from selling share price performance over the last few years recognizes the two electric draglines. Underlying performance of all NACoal’s work that has been done to improve and strengthen each mines was strong and largely at target levels. However, over time, subsidiary. By clearly articulating our understanding of the further profitability improvements are expected at Mississippi industries in which we compete and by successfully executing Lignite Mining Company, Red River Mining Company and the our profit improvement and growth programs, we are Florida limerock dragline mining operations. More importantly, hopeful that the Company will receive further enhanced the company hopes to undertake several new mining projects valuation in the future. over the next few years, which could add significantly to In closing, I would like to take this opportunity to express NACoal’s profitability in the longer term. Cash flow before my sincere thanks to Bob Gates and Bill Hendrix, who left financing activities is expected to continue to be very strong. NACCO’s Board of Directors in 2006. Bill decided not to stand NACCO Outlook for re-election in 2006 after serving on NACCO’s Board for 11 years, from 1995 through 2006. Bob served on the Board for In summary, the Company has well-thought-out profit 13 years, from 1993 through 2006. He left the Board in early enhancement and growth programs at each of its subsidiary December 2006 following his confirmation as United States companies. These programs are expected to continue to deliver Secretary of Defense. Bill and Bob added extremely valuable enhanced sales and income over time. NACCO is encouraged perspectives and insight to the NACCO Board, and their by the progress achieved to date. However, external factors, such contributions will be missed. as material cost increases and the effects of adverse movements Finally, I would like to thank all NACCO employees for in currency exchange rates, have required adjustments to our their continued support, hard work and commitment in meeting programs and the anticipated timing of achieving target the challenges of 2006. I look forward to a successful 2007. profitability. Each of NACCO’s subsidiaries will be placing extra effort on actions designed to manage these program areas in 2007. Results of improvement programs are expected to help sustain profitability in 2007 after extraordinarily strong results in 2006, with greater effects becoming increasingly visible in 2008 and beyond. NACCO is committed to achieving its long-term financial goals at each subsidiary company. These goals are being pursued with the utmost determination. As each subsidiary company moves toward its goals, we expect improving profitability and strong returns on total capital employed. Alfred M. Rankin, Jr. Chairman, President and Chief Executive Officer NACCO Industries, Inc. [9] Managing for long-term profit growth NACCO Materials Handling Group Hyster® Container Handling Lift Trucks serve the most demanding port operations around the world. N A C C O I n d u s t r i e s , I n c . 2006 Results NMHG Retail’s operations (net of eliminations) reported In 2006, NACCO Materials Handling Group (“NMHG”) a net loss of $9.1 million on revenues of $170.6 million in 2006 made strides toward achieving its long-term financial objectives compared with a net loss of $7.9 million on revenues of $185.8 and improving operations. Consolidated net income increased million in 2005. 91 percent to $34.6 million in 2006 despite a pre-tax charge of In 2006, Consolidated NMHG generated cash flow before $17.6 million, or $10.7 million after a tax benefit of $6.9 million, financing activities of $54.2 million, a significant improvement that was incurred as a result of the company’s early retirement from the negative cash flow before financing activities of $18.2 of its 10% Senior Notes due 2009. However, the year was not million in 2005. In addition, in 2006, Consolidated NMHG without some disappointment as NMHG’s results were reduced delivered an improved return on equity(1) (“ROE”) of 7.7 percent, by underperforming retail operations and higher-than-expected up from 4.2 percent in 2005, and an improved return on total initial costs on newly introduced products, both of which capital employed (“ROTCE”) of 6.9 percent in 2006, up from reduced consolidated net income. 5.3 percent in 2005 – levels still well below NMHG’s longer-term NMHG Wholesale generated net income of $43.7 million objectives. (See reconciliations of non-GAAP ROTCE on page 45.) in 2006 compared with $26.0 million in 2005, a 68 percent increase on revenue growth of five percent. Revenues increased Vision and Goals to $2.3 billion in 2006 as a result of increased unit and parts NMHG’s vision is to be the leading globally integrated volumes and price increases implemented in 2006 and prior designer, manufacturer and marketer of a complete range years. In addition, an increased worldwide lift truck market of high-quality, application-tailored lift trucks, offering the led to increased shipments of 87,789 units in 2006 compared lowest cost of ownership, outstanding parts and service with shipments of 83,361 units in 2005. Backlog increased to support and the best overall value. To accomplish this vision, approximately 27,200 units at December 31, 2006 compared NMHG has rededicated itself to becoming a more unified, with approximately 23,500 units at December 31, 2005. Net global organization. NMHG Wholesale’s established financial income improved as a result of increases in price and volumes, objectives are to achieve a minimum operating profit margin favorable product liability adjustments, a reduction in interest of 9 percent and to generate substantial cash flow before expense and favorable tax adjustments. These improvements were financing activities. NMHG also remains focused on reaching partially offset by an unfavorable shift in mix to lower-margin break-even results in its owned retail operations while lift trucks and increased material and manufacturing costs. developing strengthened market positions. Revenues by Geographic Region (In millions) $2,400 $2,488 $2,057 $1,780 $1,588 $2,500 $2,000 $1,500 $1,000 $500 $0 02 03 04 05 06 (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 05 (cid:2) Bookings (cid:2) Shipments (cid:2) Backlog 04 06 Net Income (In millions) $34.6 $16.4 $18.1 $12.3 $10.7 02 03 04 05 06 $35 $30 $25 $20 $15 $10 $5 $0 (1) ROE = The respective year’s net income divided by that year’s average equity (a five-point average of equity at December 31 of the previous year and each of the respective year’s quarter ends). Left: The newest Hyster® Container Handling lift truck operating at a container terminal in New York. [11] N A C C O I n d u s t r i e s , I n c . Industry Trends To reach its goals, NMHG has established strategies and Lift truck customers increasingly require more dependable key improvement programs aimed at addressing current lift trucks and greater levels of service and expect manufacturers industry trends. NMHG’s strategies and dealers to deliver both at competitive prices. Therefore, and key programs can be grouped maintaining low costs as well as maintaining outstanding in three main areas: quality and quality, timeliness and reliability are critical for competitiveness. efficiency; flexible and modular Because greater economies of scale produce lower product products; and sales and service costs, the industry is led by large, global manufacturers with an excellence. Each key program is increasingly global supply base. While China and other low-cost designed to enhance profitability countries are emerging as more reliable sources for low-cost or generate growth, both of which components, costs for commodities, such as steel, oil, lead, are critical for achieving NMHG’s rubber and copper, continue to rise globally and place pressure goals in this mature on profit margins for all competitors. In this environment, industry. Profitability programs at NMHG focus mainly on continual improvements in manufacturing and supply chain manufacturing and supply chain efficiency, while growth efficiencies are vital to success. programs focus on increasing country and industry share While costs and dependability are positions by addressing customer needs with customized important, customers increasingly packages of products and services. desire specialized solutions for their materials handling needs, and the market is Key Programs for Quality and Efficiency demanding a more rapid product NMHG continually strives to reduce manufacturing and development cycle. Manufacturers supply chain costs and improve operational effectiveness while must strike the right balance between delivering quality products. NMHG’s proven abilities to the number of models and options re-engineer processes and assemble products efficiently within offered and the volume required to an increasingly complex global operating environment support maintain efficiencies and economies this strategy. Several key programs aimed at achieving this of scale. In addition, newer lift trucks high-quality/low-cost strategy include: must address evolving end-user needs, Manufacturing restructuring. NMHG’s manufacturing which have led, for example, to more environmentally friendly strategy is guided by a commitment to high quality and products, such as lift trucks using fuel cell technology, and efficiency. To accomplish these goals, NMHG has been increased demand for electric-powered lift trucks, especially restructuring its global manufacturing facilities and processes. those for use in warehousing operations. The company has placed an intense focus on further Successful lift truck companies and dealers foster strong, implementation of a lean manufacturing strategy lasting customer relationships by utilizing highly professional based on Demand Flow Technology, personnel and business processes. As logistics efficiency grows which helps reduce inventory and in importance to end users, the overall product and service manufacturing floor space needs of these customers have become more sophisticated. requirements while improving Manufacturers face increasing demand for enhanced service productivity, lead times and quality. offerings, including national and global sales coordination, a The company continues to work to full range of financing options, maintenance programs and optimize production activities parts management services. among several Top to bottom: The new Hyster® FortisTM S120FT internal combustion cushion tire lift truck series has lifting capacities up to 12,000 pounds and can be configured to satisfy multiple customer applications. The new Yale® AC-Powered Reach truck provides unparalleled design, versatility and operator comfort in a narrow aisle lift truck. The new Hyster® B60ZAC Walkie/Rider Motorized Hand Pallet Truck, with a carrying capacity of 6,000 pounds, excels in warehousing applications where space utilization is a consideration. [12] key final assembly plants, including Greenville, North Carolina and Berea, Kentucky in the United States, and Irvine, Scotland and Craigavon, Northern Ireland in Europe. The sustained weakness of the U.S. dollar compared with the British pound sterling and euro has negatively affected NMHG’s net income for the last few years. Unfavorable foreign currency rates since 2002 have effectively lowered current annualized pre-tax profitability, excluding the effects of hedges, by approximately $70 million more than if the currency rates in early 2007 had been the same as early 2002, which is when NMHG’s operating profit margin target was established. NMHG is currently evaluating actions more consistent with its stated long-term strategy to manufacture products in the market of sale, which has the added benefit of minimizing unfavorable currency exposures. For example, several lift truck models serving the United States market are currently manufactured in the United Kingdom and Europe, and NMHG also purchases many components in British pound sterling and euro currencies. Several scenarios being considered, including the possibility of changing the sourcing and assembly locations to more favorable regions, would significantly lessen NMHG’s exposure to fluctuating currency exchange rates. Decisions will not be made or announced until thorough analyses and discussions are completed. The impact of any actions, which would primarily affect gross profit, is expected to occur in 2008 and beyond. Quality initiative. A number of programs within NMHG are part of a corporate-wide emphasis on quality and an initiative to further reduce overall defect rates. These programs focus on reducing warranty costs per truck and lowering product liability claims. NMHG also continues to deliver cost reductions and product quality improvements through its Value Improvement Program. Further benefits of these initiatives are expected to be realized in the 2007 to 2008 time frame. N A C C O I n d u s t r i e s , I n c . Global supply chain. Demands on NMHG’s global procurement group were high in 2006 as a result of continued raw materials shortages, material cost increases and continued high energy costs. From 2004 to 2006, NMHG faced cumulative material cost increases totaling approximately $108 million, primarily as a result of increased steel, lead, copper and energy costs. In response, NMHG has worked closely with suppliers to control costs and has implemented selective price increases, which produced cumulative benefits from 2004 to 2006 totaling approximately $98 million. In 2007 and beyond, NMHG plans to continue to actively monitor material costs and make corresponding price adjustments to offset higher costs when appropriate. In addition to the short-term actions established to manage these challenges, a program that is designed to completely transform the supply chain process made significant progress at NMHG in 2006. The program includes the implementation of a new software system that is expected to enable greater regional and worldwide coordination of purchasing and provide greater efficiencies. Included in this program is the implementation of a new, centralized global procurement organization structure with local capabilities designed to deliver quality parts to plants on time for production. This new structure will permit plant management to spend less time planning parts deliveries and to focus more on manufacturing operations. This program is scheduled to be implemented during the first half of 2007, and the benefits from the program are expected to be realized, to some extent, in the second half of 2007, with the full impact in 2008 and beyond. Concurrently, NMHG is continuing its ongoing efforts to optimize its supplier base and lower costs by making that group Top to bottom: The Hyster® YardMaster® II ReachStacker lift truck, for high productivity applications at ports and railroad terminals, is used for loading and stacking containers and has a lifting capacity up to 115,000 pounds. The new Yale® VeracitorTM 50VX counterbalanced internal combustion engine cushion tire lift truck with lifting capacity up to 12,000 pounds. [13] N A C C O I n d u s t r i e s , I n c . smaller, more reliable and more responsive. Non-core efficiencies are expected to increase individual lift truck components continue to be outsourced to low-cost suppliers profitability as well as overall company profitability. This around the world, with increased focus on China, Mexico and program will primarily affect gross profit, and the most Eastern Europe. These programs to enhance profitability are significant benefits are expected to be realized increasingly in intended to improve gross profits and decrease selling, general the 2007 to 2009 period. and administrative expenses (“SG&A”) and working capital New product introductions. Over the next two to three requirements and should be realized with the introduction of years, NMHG expects to deliver a continuous stream of new newly designed products in 2007 to 2008. product introductions and product improvements covering the ICE, electric, warehouse and big truck product lines. Key Programs for Flexible, Modular Products In 2006, NMHG introduced the 4 to 5.5 ton ICE lift truck A key NMHG strategy is to develop modular products series, the next series in the continued rollout of the 1 to 8 ton that can be flexibly configured to provide unique, tailored ICE lift truck line, which includes the Hyster® Fortis™ and solutions that deliver superior value to end users. Supporting Fortens™ and the Yale® Veracitor™ series of lift trucks. In 2007, this strategy is NMHG’s well-developed and recognized ability the company plans to introduce the 6 to 7 ton ICE lift truck to translate end-user needs into global, adaptable and highly series and in early 2009, the final series in the ICE line, a new reliable products. The following programs are focused on 8 to 9 ton lift truck series, is scheduled for introduction. achieving these results: A completely new line of electric counterbalanced lift trucks, New product development process. In 2006, NMHG which will benefit from the same design and manufacturing continued to implement this program to improve profitability approach as the 1 to 8 ton ICE line, is scheduled to roll out in through its unique approach to developing new products. 2008 and 2009. Complete ranges of products are developed simultaneously NMHG’s warehouse product line offering was significantly rather than on a traditional series-by-series approach, including strengthened in 2006 with the introduction of a new Reach truck the new 1 to 8 ton internal combustion engine (“ICE”) lift truck and End-Rider Pallet truck in the Americas, a new Low Level line. Platforms, components and modules have been designed Order Picker in Europe and a new Very Narrow Aisle truck in to be used across a wide array of lift trucks. This approach both the Americas and Europe. Additional new warehouse decreases the overall number of components required and products are scheduled for introduction in 2007, including a new permits easier and more frequent upgrades. In addition, design, Retail Reach truck in the Americas. A number of feature improve- prototyping and testing are guided by a rigorous, staged ments are also planned in 2007 to allow the warehouse lift trucks approval process that delivers higher levels of reliability while to perform better in targeted applications at key customers. increasing speed to market. NMHG’s Big Truck line improved in 2006 with the Increased component commonality, combined with introduction of a new Reach Stacker, a new Container Handler engineering techniques designed to deliver a more efficient and new forklift trucks in the 16 to 22 and 40 to 48 ton capacities. assembly process, are expected to continue to increase labor In addition, three new engines were introduced in 2006 to meet efficiency and improve product quality. Lift trucks utilizing new emissions requirements. Additional capacity models and interchangeable components and systems assembled on upgrades to the Big Truck line are scheduled for introduction computer-aided assembly lines are increasing NMHG’s ability in 2007 and 2008. to configure and manufacture lift trucks to individual customer The introductions of these newly designed products are application requirements. expected to enhance revenue and margins as well as absorb For newly designed product lines that have already been unused manufacturing capacity, primarily in the 2007 to 2008 introduced, these product development efforts are improving time frame as these new product introductions are completed. the quality of NMHG’s products, as well as more cost-effectively SPED Strategy. The company has the ability to create meeting end-user requirements. In the long term, improved truly customized features or configurations when customer Right: The Yale® AC-Powered Narrow Aisle Reach truck with lifting capacities from 3,000 to 4,500 pounds. [14] The new Yale® AC-Powered Reach Trucks deliver great advances in ergonomics and productivity within a warehouse environment. Hyster® prototype Hydrogen-Powered Fuel Cell lift trucks are successfully being tested at a number of high-profile customer sites. N A C C O I n d u s t r i e s , I n c . applications require highly specific solutions. This process, through a strong global relationship with GE Capital, should known internally as SPED, or Special Product Engineering help the company accomplish this strategy. Several programs Design, allows NMHG to respond to the unique needs of supporting this service strategy include: customers, particularly national account customers with large National and global accounts. NMHG has industry- lift truck fleets and specialized needs. In 2006, the company leading fleet management and national account organizations in implemented procedures to make the SPED process more North America and is developing a national account program effective for customers, yet more efficient for NMHG to in Europe, while enhancing its global account capabilities. administer. As a result, this profitability program is now viewed NMHG’s goal is to offer superior value and services to large as a continuous improvement process and is expected to provide customers that have centralized purchasing but geographically benefits to improve gross profit and reduce SG&A gradually over the next few years. Strategic pricing optimization. With the new modular product design concept, dealers can more accurately configure and price lift trucks to customer applications. Linking prices more closely to product features and performance delivers value and lower cost of ownership to customers and enhanced margins to NMHG. In conjunction with the program, the company may also make selected dispersed operations. This program to generate growth is expected to increase revenues and margins. The benefits from this program will be gradual, but increasing over the long term. Anchor Dealer program. The company’s Anchor Dealer strategy continues to strengthen a worldwide network of strong, professionally managed, well-capitalized independent dealers. NMHG’s experience is that these exclusive Hyster® and Yale® Anchor Dealers attain higher market shares, attract higher-quality employees adjustments to the mix of performance and feature offerings and offer higher-value services to their customers. This growth on its lift trucks. The benefits of this program are expected to program is expected to continue to enhance revenues and occur increasingly during the 2007 to 2008 time frame. margins and improve utilization of manufacturing capacity. Industry Marketing Strategy. In another effort to serve Benefits are expected to gradually increase over the long term. customer needs more specifically and effectively, NMHG has Dealer excellence enhancement program. This program, embarked on an effort to tailor products, services and sales designed to drive improvement at all Hyster® and Yale® approaches to targeted industry segments. This growth program dealers, provides dealers with best practices and performance is expected to enhance revenue, in combination with other assessment tools in the areas of operational and financial programs, over the next several years. management, lift truck and parts sales, service, rental and fleet management. NMHG also offers customized consulting Key Programs for Sales and Service Excellence assistance to help dealers implement these programs to improve NMHG is focused on maintaining and strengthening sales and profitability. In addition, a number of special its already highly professional direct and independent dealer initiatives are under way at NMHG to improve the company’s distribution networks to provide superior value-added support ability to communicate with and provide services to the dealer to its customers and market segments. NMHG’s experience distribution network. These initiatives include order and and success in building strong, lasting customer and dealer contact management systems, a training knowledge center and partnerships, as well as providing competitive financing customer and dealer satisfaction programs. As NMHG helps Left: A Hyster® Fuel Cell lift truck refuels at a hydrogen dispenser. This innovative lift truck was developed in partnership with Hydrogenics®, a leading Canadian company in the fuel cell industry. Above: The new Yale® VeracitorTM 50VX internal combustion lift truck series has been designed with a high degree of component commonality for simplified maintenance and easy configurability. [17] dealers enhance their capabilities, dealers can be more responsive to end users. These programs to generate growth are expected to enhance dealer and NMHG revenues over the long term. Aftermarket parts. In 2006, NMHG continued to leverage an important strategic alliance with a leading aftermarket parts provider in the Americas, Europe and Asia-Pacific. This alliance has enhanced Hyster® and Yale® dealers’ offerings of competitive lift truck parts as part of an effort to increase NMHG’s share of its customers’ parts and service business. NMHG has also made significant investments in training dealer technicians in lift truck diagnostics, maintenance and repair procedures to assure highest-quality customer service. Revenue and margin improvements are being realized and are expected to continue to increase gradually as a result of this growth program. NMHG Retail improvements. NMHG Retail consists of three dealer operations: Yale® in the United Kingdom, Hyster® in part of France and Hyster® and Yale® in Australia. Other operations have been sold in 2006 and prior years. NMHG Retail has streamlined activities in its French and U.K. operations to reduce costs, improve operational effectiveness and enhance customer service to these markets, ultimately improving the long-term financial performance of these operations. Efforts to improve long-term financial performance are expected to be implemented in Australia in 2007. These programs are expected to have an impact in 2008. Outlook for 2007 and Beyond Global lift truck markets expanded again in 2006. The company expects continued growth in many lift truck markets in 2007, particularly in Eastern Europe, Asia and China. The Americas market, which is NMHG’s largest market and which has been growing for the last several years, is projected to be slightly lower in 2007, a contraction that has been expected due to the cyclical nature of the industry. As a result, NMHG Wholesale expects to have only slightly higher volumes in 2007 in comparison with 2006 levels, with unit shipments of certain newly designed products increasing at controlled rates to accommodate the phase-in of these products at manufacturing facilities throughout 2007. The Yale® man-up turret lift trucks are designed for high-density warehouse applications in aisles as narrow as five feet and provide capacity ranges up to 3,000 pounds. Yale® Very Narrow Aisle Warehouse Trucks are designed for maneuverability and ease of use for greater productivity. N A C C O I n d u s t r i e s , I n c . Costs associated with the phase-in of the 6 to 8 ton series NMHG Retail’s objective continues to be to reach at least of the new 1 to 8 ton ICE lift truck line are expected to temper break-even financial performance while building market position. that product line’s profitability in the near term with profitability Improved results are expected in 2007 and 2008, particularly in improving as the phase-in is completed and the company’s Australia, where a number of restructuring actions are being manufacturing locations move into full production. Improved considered for implementation in 2007, with benefits from price realization is expected to offset continued material cost those actions anticipated for 2008 and beyond. increases in 2007. NMHG continues to believe it will be increasingly well The company is committed to addressing the critical issue positioned to offer superior products, efficiently manufactured of unfavorable currency exchange rates. NMHG believes it must and distributed by outstanding dealers. Key profitability and respond to the continued weakening of the U.S. dollar and the growth programs, particularly in the areas of quality and effect of currency movements, which could have a further efficiency, product flexibility and sales professionalism, are negative impact on results in 2007 compared with 2006. In 2006, expected to improve prospects for long-term growth in market unfavorable currency fluctuations were mitigated as a result of share and increased profitability. favorable currency hedging positions established in early 2006. In closing, I would like to give a special acknowledgment Although the company continues to hedge its foreign currency to Reg Eklund, who retired in June 2006 as President and Chief exposures, more recent currency movements have prevented Executive Officer of NMHG. During Reg’s 40-year career with the the company from sustaining its previously favorable hedging company, he set an outstanding example in both his responsible position, leaving NMHG more exposed in 2007. NMHG leadership and his personable style. This style was most evident Wholesale’s operating profit margin was 3.3 percent in 2006. during the last 14 years when Reg led NMHG. We all thank Reg Assuming 2006 exchange rates for the euro and British pound for his efforts and wish him the very best in his retirement. sterling had been at early 2002 levels, the year when the timing As I complete the first months in my new role, I want to for NMHG’s profit improvement goal was established, NMHG thank all NMHG employees and our dealers and suppliers would have been significantly closer to attaining its operating worldwide for their continued commitment to implementing profit margin target. vital programs and helping to improve profitability levels NMHG Wholesale’s financial objective has been to achieve while executing many simultaneous product launches. We are an operating profit margin of 9 percent by 2007-2008. Over committed both to successful execution of our stated plans as the past several years, NMHG has successfully implemented well as addressing the difficult challenges presented by operating a number of performance improvement projects aimed at in a complex, global economy. I would also like to thank achieving this goal. Overall, NMHG Wholesale’s investment in NMHG’s customers, whose needs we are dedicated to serving long-term programs, particularly its significant new product with our most intense energy. I look forward to working development and manufacturing programs, are expected to together with all of NMHG’s partners to meet the challenges continue to affect results positively in 2007 and 2008, but adverse and opportunities of 2007. currency exchange rates are expected to extend the period of time necessary to achieve the 9 percent operating profit margin goal by roughly two years to 2010 or 2011. The company is disappointed that it will not reach its goal in the time frame previously announced, but rather than lower expectations for profitability, NMHG remains committed to its goal and will adapt its operational programs to the current business environment. New, aggressive programs will be aimed at improving profitability and, ultimately, reaching the operating profit goal. Michael P. Brogan President and Chief Executive Officer NACCO Materials Handling Group, Inc. [19] Managing for long-term profit growth Hamilton Beach/Proctor-Silex HB/PS continues to bring to market successful new products, such as the innovative Toastation® combination toaster and toaster oven. N A C C O I n d u s t r i e s , I n c . 2006 Results Net income increased to $22.2 million in 2006 from The past year was a significant one for Hamilton Beach/ $20.3 million in 2005. Net income benefited from several factors, Proctor-Silex (“HB/PS”). The company maintained its solid including increased sales of higher-margin products and the revenue and earnings growth with a four percent increase in recognition of lower restructuring charges in 2006 compared revenues and a nine percent improvement in net income in with 2005 associated with the Mexican facility restructuring. 2006 compared with 2005, despite activities associated with These benefits were partially offset by increases in environmental an unsuccessful attempt to acquire Applica Incorporated. reserves of $2.2 million pre-tax and employee-related costs. HB/PS’ performance was particularly strong taking into In 2005, HB/PS recognized a pre-tax charge of $3.8 million account relatively low-growth retail markets for housewares associated with a restructuring program at the Saltillo, Mexico products and in the context of continued pricing pressures from manufacturing facility for the transfer of production of blenders retailers, rising material costs and significant competition for and coffeemakers for the U.S. and Canadian markets to third- consumers’ discretionary income. In addition, the company party Chinese manufacturers. In the fourth quarter of 2006, delivered a favorable return on equity(1) (“ROE”) in 2006 of the company recognized an additional charge of $1.5 million 18.0 percent up from 15.3 percent in 2005, and a solid return pre-tax associated with the transfer of production of blenders on total capital employed (“ROTCE”) of 14.2 percent in and coffeemakers for the Mexican and Latin American markets 2006, up from 12.5 percent in 2005. (See reconciliations of to third-party manufacturers. HB/PS will not have any non-GAAP ROTCE on page 45.) manufacturing operations following the closure of the Saltillo HB/PS’ revenue, which increased to $546.7 million in facility in mid-2007. 2006 from $527.7 million in 2005, benefited from additional In 2006, HB/PS generated cash flow before financing shelf placements and promotions by retailers in support of activities of $35.9 million compared with $28.0 million in 2005. direct-response television advertising, from increased sales of Included in 2006 were cash proceeds of $11.4 million from the higher-priced products and from newly introduced products. sale of the Saltillo facility. Excluding this sale, cash flows were Revenues (In millions) $546.7 $527.7 $503.9 $492.8 $507.3 $600 $500 $400 $300 $200 still very strong in 2006. Net Income (In millions) $22.2 $20.3 $25 $20 $16.1 $15.2 $15 $13.4 $10 $5 $0 02 03 04 05 06 02 03 04 05 06 (1) ROE = The respective year’s net income divided by that year’s average equity (a five-point average of equity at December 31 of the previous year and each of the respective year’s quarter ends). Left clockwise from top: Hamilton Beach/Proctor-Silex’s newest products include: Hamilton Beach® Brewstation® Plus 12 cup coffeemaker (shown in black), Proctor Silex® 12 cup coffeemaker (shown in white), eclectrics® all-metal kettle, Hamilton Beach® Custom GrindTM Deluxe 15 Cup Coffee Grinder, Hamilton Beach® Toastation® combination toaster and toaster oven, TrueAir® Allergen Reducer. [21] N A C C O I n d u s t r i e s , I n c . Applica Transaction New, innovative products tend to drive growth and higher Based on an evaluation of brand fit margins in the marketplace. Against a backdrop of continued and expected high synergy value, NACCO interest in home cooking, many new products aimed at this and HB/PS pursued an acquisition of market, particularly those promoted on television, have been Applica Incorporated in 2006. The proposed well received by consumers. Brand names continue to be transaction ended unsuccessfully in January important in small kitchen appliances, with the importance of 2007 when a rival bidder acquired all of Applica’s these names varying across consumer segments and markets. outstanding shares for cash. NACCO believes However, the overall market growth rate in the original merger agreement was breached small kitchen appliances by Applica. NACCO is currently pursuing is relatively low, with litigation against Applica and its acquirer and products facing increasing has reserved all of its rights in relation to this matter. In 2006, competition for consumers’ HB/PS incurred transaction expenses of $0.7 million, net of its disposable income from portion of the merger termination fee. consumer electronics and other gift items. Vision and Goals Strong relationships with the leading retailers, which HB/PS’ vision is to be the leading North American continue to grow in size, are critical for success. Shelf placement designer, marketer and distributor of small electric household is highly competitive and sales are increasingly driven by and commercial appliances sold under strong brand names and promotional activity in the fourth-quarter holiday season, to achieve profitable growth from innovative solutions that which delivers a significant portion of annual sales. In addition, improve everyday living. HB/PS’ financial objective is to achieve the impact of winning or losing a single product placement or a minimum operating profit margin of 10 percent and to multi-product placement program at specific retailers is being generate substantial cash flow before financing activities. magnified as certain retailers’ shares of the overall market grow. Industry Trends To achieve its stated goals, HB/PS has established strategies and key programs aimed at responding to these industry trends. Competition in the housewares industry continues to be These strategies and programs focus on three fundamental areas: intense as costs for freight and raw materials such as plastic, continuous cost reduction; innovation; and professional sales copper, aluminum and steel continue to place further and marketing. Each key program is designed to enhance pressure on margins. Competitors continue to consolidate, which can provide them with greater scale and efficiencies. To further lower costs and provide greater value, HB/PS and other housewares suppliers have transferred a significant portion of their manufacturing to third-party manufacturers located in lower-cost profitability or generate growth. Profit enhancement programs focus on efficiencies in product development, manufacturing and the supply chain, while growth programs focus on new innovative products, branding and distribution channel optimization. Key Programs for Continuous Cost Reduction regions, primarily Asia. As a result, further dramatic cost HB/PS is focused on driving continuous cost reductions may be difficult to achieve in the near future and, reduction throughout the entire company and at all of its in fact, supplier costs are expected to increase in 2007 in order suppliers. Achieving the 10 percent operating profit margin to cover higher material costs and transportation expenses. target has become part of the company’s culture. The company’s Above top to bottom: Hamilton Beach® EnsembleTM red 14 speed blender, Hamilton Beach® Stay or GoTM 6 quart slow cooker, Hamilton Beach® classic stainless extra-wide slot toaster. Right top to bottom: Hamilton Beach® 3-piece Party CrockTM cookset, Hamilton Beach® Big Mouth® Juice Extractor, Hamilton Beach® stainless steel kettle, Proctor Silex® auto shutoff iron. [22] N A C C O I n d u s t r i e s , I n c . exceptional ability to identify and eliminate unnecessary costs 2006 as evidenced by lower product return rates, and further across the value chain is a key competitive advantage. Three key improvements are anticipated in 2007 and beyond. programs directed at accomplishing improvements and cost Supply chain optimization. HB/PS’ continued focus on reductions include: supply chain management in 2006 resulted in Manufacturing cost reduction. A shift to outsourcing, as performance improvements for the well as a number of manufacturing efficiency programs, are company and for HB/PS’ helping HB/PS reduce product costs. HB/PS retail customers. HB/PS essentially completed these programs in 2006 continues to implement and expects by mid-2007 to be using third- improvement projects at party manufacturers to produce all of its its Memphis, Tennessee products. The company expects continued distribution facility, and the company is margin improvements in 2007 as a result increasingly offering customers additional of the manufacturing restructuring efficiencies through direct-ship programs, which route products programs implemented in 2006 and directly to retailers’ warehouses from third-party suppliers. prior years, with the full impact realized HB/PS is expected to improve its capabilities in 2007 through in 2008. implementation of a new supply chain software system, which The company also expects improved margins on is designed to enhance collaborative planning, forecasting and commercial products and consumer blenders for the U.S. and replenishment processes with several key retailers. Benefits from Canadian markets that were transferred from owned factories this program are expected to be realized in 2007 and 2008. in the United States and Mexico to third-party suppliers in China during 2006. The full impact of these programs is Key Programs to Leverage Innovation expected in 2008 and beyond. Furthermore, HB/PS is implementing its HB/PS relentlessly pursues innovation in its product categories through its superior ability to ongoing Value Improvement Program, which seeks to research, design and test new product concepts. reduce costs of processes, components and products, Two programs supporting this strategy include: at its suppliers’ plants. The company’s objective is to Product development process. HB/PS’ product maintain a significant competitive advantage by development process is designed to create a steady combining low-cost, third-party manufacturing stream of innovative products that exceed current market capabilities with HB/PS’ extensive manufacturing offerings in features, performance, style and value. HB/PS’ experience. This program provided significant benefits in 2005 goal is to deliver the most innovative products at the most and 2006, and additional incremental gross margin benefits are competitive costs possible and to bring to market products that expected in 2007 and beyond. represent best-in-class performance. HB/PS utilizes in-depth Continuous quality improvement. HB/PS is committed consumer research that enables the company to develop to continuous quality improvement throughout all areas of the products with consumer-preferred features and high rates of company. HB/PS has made quality a significant focus at key market acceptance. HB/PS’ engineers in both the United suppliers in China by providing guidance on specific processes States and China, as well as engineers at the company’s and techniques to ensure high quality, consistency and efficiency. key partners in China, all contribute to the These programs should pay off increasingly as expenses for process for designing successful new implementing this program have already been incurred. Further products. This program to enhance improvements in already high levels of quality were realized in profitability is designed to improve [23] The Hamilton Beach® eclectrics® new Sterling line combines the best of performance and styling for a higher-end consumer market. N A C C O I n d u s t r i e s , I n c . gross margin and decrease selling, general and administrative Key Programs for Professional Sales and Marketing expenses, and is an ongoing investment that is expected to HB/PS also has an ongoing strategy to develop and sustain bring both near-term and long-term benefits. the most professional sales, marketing and branding programs New product introductions. Backed by its consumer- in the industry. The company has a proven ability to match oriented product development process, HB/PS has demonstrated products, services and brands to specific retailer assortment a strong track record in new product introductions. Additionally, needs. Programs supporting this strategy include: patent protection is vigorously pursued and enforced, when Retailer and channel focus. HB/PS works closely with appropriate, for new products, product features or designs. retailers to develop product assortment strategies to optimize In 2006, more than 40 percent of the company’s U.S. category profits. In-depth data analyses are used to recommend consumer sales were from products introduced in the previous the most profitable combination of products, features and price three years. The revolutionary Hamilton Beach® BrewStation® points in each product category. In turn, these analyses drive coffeemaker, featuring carafe-less cup-activated dispensing, the HB/PS product development process, improve speed to continued to be the number-one-selling coffeemaker product market and increase the success rate of new products. HB/PS’ family in the United States. Other examples of innovative new category management approach is applied across all types of products include the Toastation® toaster, which can be used as retail channels, from mass merchants to smaller regional both a front-load toaster oven and a top-load traditional toaster retailers, and is being applied in the United States, Mexico, and the Stay or GoTM Slow Cooker, which features full-grip Canada and other selected international markets. This growth handles and a secured lid with lid locks for spill-resistant program has helped enhance revenues and margins and is transportation. In addition, in 2006, HB/PS continued to roll expected to continue to do so. out new colors in the Hamilton Beach® eclectrics® line, a Strategic brand application. HB/PS has a broad higher-end, color-coordinated line of die-cast kitchen appliances. complement of key brand names targeted at distinct consumer The company introduced several new commercial blenders segments. The Hamilton Beach® eclectrics® brand targets in 2006, which were well received by the market, and plans to high-end consumers who demand the best in performance introduce a number of other new commercial products in 2007 and style and are willing to pay more for those benefits. The and 2008. HB/PS is optimistic that these new products will Hamilton Beach® brand targets mid- to higher-end consumers have a significant impact on the revenues and profitability of desiring a strong brand name, innovative features, great its commercial business. This growth program is expected to performance and attractive styling. The Proctor Silex® brand provide revenue and margin improvements for the commercial targets middle-market consumers who prefer a strong heritage as well as consumer markets. More than 40% of U.S. Consumer Sales were from Products Introduced in the Last Three Years 2006 6.2% 22.6% 56.7% 14.5% (cid:2) 2006 Products (cid:2) 2005 Products (cid:2) 2004 Products (cid:2) Established Products brand name and good performance with good features and appearance at a reasonable price. The Traditions by Proctor Silex® brand targets entry-level consumers with basic, lower- priced products. The TrueAir® brand, used for home health products, continues to demonstrate strong appeal in its market segment. HB/PS may also use its brand names in conjunction with other companies’ brand names. For example, an agreement with Procter & Gamble (“P&G”) created a co-branded odor eliminator with P&G’s well-known Febreze® brand. Overall, strategically applying this range of targeted brands is expected to continue to benefit HB/PS on an ongoing basis. Left: The Hamilton Beach® eclectrics® all-metal product line in the new sterling color. Clockwise from the top: eclectrics® all-metal blender, eclectrics® all-metal coffeemaker, eclectrics® all-metal toaster, eclectrics® all-metal stand mixer, eclectrics® all-metal drink mixer. [25] Hamilton Beach® Commercial remains a leading brand name in blenders and drink mixers for restaurants and bars. N A C C O I n d u s t r i e s , I n c . The Hamilton Beach® Commercial brand targets and achieving a high ROE(1) of 18.0 percent. However, increases restaurants, bars and the hotel amenities markets. The strong in raw material and supplier costs, continued moderate industry heritage of the Hamilton Beach® Commercial brand name growth and the timing of completing specific improvement results from many successful years of producing blenders and projects are likely to delay target timing for reaching this the classic soda fountain-style milkshake mixers that could be operating profit goal. HB/PS expects to continue to approach seen on the back counter of almost every soda fountain across this goal during 2007 and 2008, with the objective of attainment America. Today, the Hamilton Beach® Commercial brand in 2009. HB/PS generated cash flow before financing of $35.9 name is associated with a wide variety of products found in million in 2006 and expects to continue to generate significant commercial kitchens, restaurants, bars and hotels. It remains a cash flow before financing in future years. leading brand in commercial blenders and spindle mixers in the United States. Outlook for 2007 and Beyond As a result of its ongoing focus on innovative new products, HB/PS has a strong assortment of new products planned for 2007 and 2008. HB/PS is moderately optimistic that raw material costs will stabilize. However, the company will closely monitor material costs and work to mitigate any increased costs In summary, the company is optimistic about the successful implementation of its strategic programs and about its prospects for continued performance improvement. In 2006, everyone at HB/PS worked as a team to accomplish our objectives while putting forth extraordinary effort related to the Applica transaction. HB/PS achieved significant success as we worked together to control costs, bolster brands and further enhance professionalism. HB/PS is becoming increasingly agile and innovative, through continued implementation of programs initiated in yet remains highly analytical and fiscally responsible. Most prior years, as well as through price increases when appropriate. importantly, HB/PS is a company that listens, with the utmost HB/PS is also hopeful that consumer markets will improve in consideration, to our end users and retail customers. My thanks 2007 and beyond and that it will continue to see performance go out to every one of the company’s employees for sustained improvements from its profitability and growth programs over excellence in this competitive yet exciting environment. I look the next several years. Specifically, efforts in corporate cost forward to our continued success in 2007. reduction, quality improvement, product innovation, promotions and branding are all expected to help sustain or improve profitability in 2007 and 2008. Overall, HB/PS is proud of its record of profit improvement and intends to make further strides. As noted earlier, HB/PS’ goals have been to achieve a 10 percent minimum operating profit margin, as well as to generate significant cash flow before financing activities. The company made significant progress toward its operating profit margin goal by reaching 7.8 percent in 2006, up from 7.0 percent in 2005 and 5.6 percent in 2004, Dr. Michael J. Morecroft President and Chief Executive Officer Hamilton Beach/Proctor-Silex, Inc. (1) ROE = 2006 net income divided by 2006 average equity (a five-point average of equity at December 31, 2005 and each of 2006’s quarter ends). Left: New Hamilton Beach® Commercial bar blenders for use in bars and restaurants include from left to right: Hamilton Beach® Commercial Rio® bar blender, Hamilton Beach® Commercial single spindle drink mixer, Hamilton Beach® Commercial 908® bar blender. Top: The new Hamilton Beach® Commercial triple spindle drink mixer. [27] Managing for long-term profit growth Kitchen Collection In 2006, Kitchen Collection acquired the assets of Le Gourmet Chef, which provides an exciting growth platform in outlet and traditional malls. N A C C O I n d u s t r i e s , I n c . 2006 Results 2005, and a solid return on total capital employed (“ROTCE”) Kitchen Collection (“KCI”) had an excellent year in 2006. of 18.3 percent in 2006, up from 6.9 percent in 2005. (See The 2006 results include the operations of Le Gourmet Chef reconciliations of non-GAAP ROTCE on page 45.) (“LGC”), a chain of 77 kitchenware stores, which were acquired KCI generated cash flow before financing activities of in August 2006. Sales increased 46 percent in 2006 due to the $1.1 million in 2006, a significant achievement considering the addition of four months’ revenue from the Le Gourmet Chef® relative size of the LGC acquisition. In 2005, KCI had negative stores (“LGC stores”) and as a result of a significant turn- cash flow before financing activities of $0.9 million. around in the outlet mall business driven by a stabilization of gasoline prices during the last half of 2006 and favorable weather Le Gourmet Chef Transaction patterns. A corresponding rise in customer visits and an increase On August 28, 2006, KCI acquired certain assets of in the number of transactions produced improvements at Le Gourmet Chef, Inc., after LGC had entered bankruptcy. Kitchen Collection® stores (“KCI stores”). Improvements to The assets acquired included 77 retail kitchenware stores product offerings and the merchandising approach at KCI across the United States, including 53 stores located in factory stores also helped produce higher average sales transactions. outlet malls and 24 stores in traditional malls. KCI currently Overall, KCI store sales increased 9.4 percent in 2006 from anticipates keeping open all but approximately eight LGC 2005. Excluding the acquisition of LGC, the number of KCI stores. KCI will continue to operate the stores under the stores increased to 203 in 2006 from 195 in 2005. The company Le Gourmet Chef® name, utilizing its successful format also operated 23 seasonal stores in traditional malls during the and product offerings, which feature gourmet foods, home fourth-quarter holiday season compared with 21 in 2005. entertainment products and electric and non-electric kitchen Net income increased substantially to $3.7 million in items. KCI is in the process of closing LGC’s headquarters in 2006 from $1.0 million in 2005. In addition, as a result of Shrewsbury, New Jersey, and integrating those operations into improvements at KCI stores and inclusion of the operations of the KCI headquarters in Chillicothe, Ohio. KCI believes that the LGC stores late in the third quarter of 2006, which allowed LGC’s formats are complementary to the KCI stores’ format KCI to benefit from those stores’ operations during the most and that the LGC acquisition will provide significant synergy profitable part of the year, KCI achieved a very strong return and growth opportunities for the company in both the short on equity(1) of 28.2 percent in 2006, up from 8.7 percent in and long term. Number of Stores 280* 188 195 180 173 300 250 200 150 100 50 0 Revenues (In millions) $170.7* $116.9 $111.1 $110.2 $112.3 $180 $160 $140 $120 $100 $80 02 03 04 05 06 *Includes acquisition of 77 Le Gourmet Chef® stores. 02 03 04 05 06 *Includes the sales of Le Gourmet Chef® stores beginning on August 28, 2006. Average Sales Transaction $21 $20 $19 $18.04 $18 $20.46 $19.10 $18.58 $18.29 $17 $16 02 03 04 05 06 (1) Return on equity = The respective year’s net income divided by that year’s average equity (a five-point average of equity at December 31 of the previous year and each of the respective year’s quarter ends). Left: The Le Gourmet Chef® store in Paramus, New Jersey, features higher-margin, brand-name kitchenware and gourmet foods. [29] Kitchen Collection’s highly efficient warehousing operations are an important competitive advantage for the company. Vision and Goals KCI believes there is excellent growth potential in KCI’s vision is to be the leading specialty retailer of kitchen, kitchenware retailing, but only through offering unique, home entertaining and gourmet food products in outlet malls high-quality products at prices affordable to most consumers. and other retail channels for consumers seeking a large selection Despite a challenging economy and high interest in consumer of unique, high-quality products at an exceptional value. electronics items, the continued popularity of cooking shows KCI’s goals are to earn a minimum operating profit margin of is evidence of consumers’ heightened interest in home 5 percent and to generate substantial cash flow before financing cooking. While a number of very low-end and very high-end activities. The advances made in 2006, as well as the addition kitchenware retailers participate in the marketplace, there is of the LGC format, are expected to significantly improve KCI’s still an excellent opportunity for stores offering mid-priced, progress toward those goals over the next few years. high-quality kitchenware. Industry Trends While the outlet mall industry expanded rapidly during the 1990s, its growth has now slowed as consumers find great The retail environment has become increasingly values in many channels, including mass retailers and the competitive over the past several years. Widespread Chinese Internet. Consumer traffic at many outlet malls improved in sourcing has increasingly leveled the playing field, allowing 2006 due, in part, to stabilization of gasoline prices. For store many retailers to offer value-priced kitchen products. To succeed formats with a widespread presence in existing outlet malls, in kitchenware retailing, costs must be kept to a minimum. such as KCI, overall success will require optimizing performance Above and right: To replenish inventory, items within Kitchen Collection’s warehouse are selected, bar coded in real time and placed on conveyors. The conveyor system moves items to the shipping area where they are automatically sorted by store location and loaded onto trucks for regional distribution. [30] N A C C O I n d u s t r i e s , I n c . in each existing store rather than expansion to new outlet initial integration of LGC’s logistics and warehousing malls. For store formats that have not fully expanded into the operations will continue in 2007, complete integration and existing outlet mall market, such as the LGC format, there is further enhancement of the combined LGC-KCI supply chain still opportunity for growth. Beyond outlet malls, the company operations will take place in 2008. believes that significant growth opportunities exist in other channels, such as traditional malls and lifestyle centers. Key Programs to Ensure Unique, Affordable Products To help KCI attain its stated goals, the company has Another KCI strategy is to provide customers with a established strategies and key programs geared to these continuous stream of innovative, quality products offered at current industry trends. KCI’s strategies and key programs affordable prices. The company’s strong competency in are focused on three main program areas: disciplined cost control; unique, affordable products; and store improvement and expansion. Programs designed to enhance profitability are especially important in periods of reduced traffic in outlet malls. In addition, programs to expand store formats outside of outlet malls are increasingly important for generating growth. providing both analytical rigor and creativity to the product selection process supports this strategy – for both KCI and LGC stores – through the following programs: Innovative products and merchandising. This growth program is designed to ensure that the latest products with the highest potential are found on the shelves of KCI and LGC stores, and that products are displayed in ways that attract Key Programs for Disciplined Cost Control consumer attention. The company continually tests and KCI’s proven ability to aggressively manage both vendor implements new approaches to increase traffic in its stores, to and store costs is accomplished through three established increase the percentage of individuals who make purchases programs. after they enter a store, to encourage customers to purchase Continuous product cost management. This ongoing higher-margin items and to increase the average purchase program to enhance profitability draws upon KCI’s significant amount of those who buy items in the stores. At KCI stores, experience in sourcing and managing vendors. This expertise special brand programs, “as-seen-on-TV” items and special will also be applied to the products sold in LGC stores, some value close-outs are all part of this program to increase revenue of which are supplied by companies with whom KCI already on an ongoing basis. At the LGC stores, product demonstrations does business, but most of which are unique to LGC. KCI and sampling of gourmet food items are particularly effective management views this as an area of opportunity. in driving consumer interest and increasing sales. In addition, Store expense management. This ongoing program to the LGC stores have in place a well-developed customer loyalty enhance profitability relies upon KCI’s ability to manage store program, called Le Club, which is expected to contribute rental and labor costs, which are key drivers of profitability. positively to performance at those stores. This program is of particular importance as KCI works to Hamilton Beach/Proctor-Silex brand leverage. KCI optimize the profitability of the newly acquired LGC stores. continues to leverage its lines of sourced private label Logistics efficiency. In 2006, KCI continued to improve its merchandise featuring the Hamilton Beach® and Proctor Silex® warehouse operations in Chillicothe, Ohio, to increase capacity brand names, which are unique to KCI and among KCI’s most and throughput and decrease overall operating costs. While successful and profitable product lines. These private label [31] Food sampling and appealing tabletop décor are key elements for creating an engaging Le Gourmet Chef ® store experience. N A C C O I n d u s t r i e s , I n c . non-electric product lines, offered at KCI stores, feature nearly The company has selectively introduced a larger store 400 items, including gadgets, cutlery, cutting boards, barbecue format for KCI stores in the outlet mall channel. These stores tools, bakeware and cookware. offer an expanded assortment in several key areas, including Economic Value Income. KCI utilizes disciplined operating tabletop, dinnerware and glassware items. LGC stores are controls to improve margins. The company continues to use its already generally larger than typical KCI stores. Larger KCI or proprietary Economic Value Income (“EVI”) business tool to LGC stores will be used where the additional cost of space can maximize return per cubic foot of retail space. When combined be justified. with other revenue and margin enhancement programs, Traditional mall format initiatives. For some time, EVI assists in optimizing profit from the mix of products, the the company has stated its belief that the development and amount of space allocated to each product and the most appropriate store size. As the LGC stores become integrated into the company’s operations, EVI analysis will be utilized in those stores as well. Key Programs for Store Improvement and Expansion KCI’s primary strategy for growth focuses on strengthening its leadership position in outlet malls, while working expansion of a traditional mall store format represents the most promising driver of future growth. This belief was a key driver in KCI’s interest in the LGC acquisition, and the company sees high-growth potential for the LGC format in traditional malls. While KCI developed and tested several formats of its own for use in this segment, the LGC store format – with its higher-end offerings, gourmet foods, home entertaining products and to reach customers through other channels. KCI has developed gifts – is excellently suited for traditional malls and represents a a particular strength in analyzing store data and creating quicker way for the company to enter this channel. With the specialized programs for different types of channels. KCI has addition of LGC, the company has 39 permanent, traditional four programs aimed at making this strategy successful. mall stores in a potential market of more than 500 traditional Outlet mall format initiatives. With nearly 250 outlet malls nationwide. The company continues to gain important mall locations, KCI and LGC stores can be found in a variety insight from its KCI stores and the newly acquired LGC stores of outlet mall types. The company utilizes mall profiling located in traditional malls. However, KCI will remain prudent information and segmentation analysis to assess new outlet regarding the pace at which it opens additional stores to ensure mall locations as well as improve profitability at existing outlet that store profits meet the company’s objectives. malls. As a result, the company manages its outlet stores The company operated 23 seasonal KCI stores in traditional differently depending on whether an outlet mall has high-end malls in November and December 2006. These profitable stores retail tenants, is located near a tourist destination or is located utilize short-term leases and a quick-to-set-up temporary store in an urban or rural area. With the acquisition of the LGC format to take advantage of the holiday gift-giving season. This stores, the company now has a solid complementary retail program, which can be expanded, is expected to continue to platform on which to expand. Initial analysis indicates add revenues and profitability in coming years. significant potential for additional LGC stores, particularly in Vanity Fair initiative. KCI is currently taking part in a test higher-end outlet malls, even when there is a KCI store present program in which Vanity Fair Corporation rents large retail in the same outlet mall. spaces, formerly occupied by large big-box retailers such as Left and above: Le Gourmet Chef® stores are separated into sections featuring Spices, Barbeque, Cookware, Snacks, Tex-Mex, Baking, Breakfast and Seafood. Featured at left is a product sampling and food-tasting station and above is the Barbeque section of the Paramus, New Jersey store. [33] KCI stores create effective regional assortments, such as Ohio State Buckeyes merchandise offered in KCI’s flagship store in Chillicothe, Ohio. N A C C O I n d u s t r i e s , I n c . K-Mart, and converts them into “mini-malls” with a substantial KCI’s operating profit margin, including LGC, was number of discount retailers inside. These stores previously 4 percent in 2006, which was below the company’s objective operated under the Outlet MarketPlace name, but will operate of earning a minimum operating profit margin of 5 percent. under the Vanity Fair name going forward. Vanity Fair provides For reasons explained previously, this operating profit margin all labor related to store operations, with KCI responsible only could be challenging to reach again in the next few years. for stocking its assigned space. To date, the test stores have However, with sustained strong consumer traffic at outlet operated below KCI’s expectations. KCI will continue to evaluate malls, the full realization of planned synergies from the LGC this novel approach and work to improve profitability. Any acquisition and an increase in the number of stores, particularly future growth of this concept will be considered judiciously LGC stores, KCI hopes to reach the operating profit margin by KCI based on profit prospects. target by 2008. KCI generated positive cash flow before Internet format initiative. Sales from the company’s financing activities in 2006, even after the cash outlay for the website, www.kitchencollection.com, decreased slightly in LGC acquisition. This is an outstanding result given the relative 2006 compared with 2005; however, this channel remains size of the acquisition. However, at the end of 2006, KCI was profitable for the company. Current sales on the LGC website, still in the process of restoring LGC’s depleted inventory to www.legourmetchef.com, are minimal. Efforts are under way normal levels to ensure product availability. to improve the LGC website and drive increased traffic and In summary, KCI will continue to pursue its objectives by sales based on KCI’s experience and knowledge. As marketing maintaining disciplined cost control, offering unique products activities increase, such as direct e-mail campaigns and Web at great values and balancing its outlet mall stores with stores partner programs, sales and profits from both the KCI and in traditional malls. KCI’s acquisition of LGC represents a key LGC websites are expected to increase. element of pursuing these objectives. The integration and Outlook for 2007 and Beyond optimization of the LGC stores and operations will be a main focus of the company’s efforts in the coming months and years. Overall, KCI believes it has managed costs well through In closing, I want to thank all of our employees – both our challenging times in the marketplace and these efforts are existing KCI employees as well as our new employees from LGC delivering higher profits as sales have begun to rebound. Under – for their hard work and dedication, particularly those that these conditions, and with the beneficial timing of the LGC dedicated a substantial amount of extra time and energy to the acquisition, KCI’s 2006 net income increased significantly over acquisition and initial integration of LGC. I look forward to the prior year to $3.7 million. The company expects modest working with everyone on our newly expanded team in 2007. increases in sales in 2007 from new store openings, particularly new LGC stores in outlet malls, new product offerings and continued success of other key growth programs. In addition, with a majority of the integration programs of the LGC operations scheduled to occur in 2007, KCI expects to realize many of the projected synergies in 2007. However, sustaining 2006 results in 2007 will be challenging because, in 2006, KCI only owned LGC from September through December, the most profitable four months of the year. Accordingly, KCI did not recognize the eight months of pre-acquisition normal operating results for LGC. Randolph J. Gawelek President and Chief Executive Officer The Kitchen Collection, Inc. [35] Managing for long-term profit growth The North American Coal Corporation North American Coal conducts highly coordinated operations 24 hours a day, 365 days a year at most of its mines. N A C C O I n d u s t r i e s , I n c . 2006 Results 18.1 percent without the impact of the dragline sales, compared North American Coal (“NACoal”) had an excellent year with 10.6 percent in 2005. (See reconciliations of non-GAAP in 2006 with significant increases in both revenues and net ROTCE on page 45.) income. NACoal’s six lignite coal mining operations delivered NACoal also generated very strong cash flow before 35.4 million tons of lignite coal in 2006 compared with 34.7 financing activities of $42.9 million, which includes proceeds of million tons in 2005, maintaining NACoal’s position as the approximately $30 million from the sale of two draglines. This nation’s largest lignite coal producer and one of the top ten compares with cash flow before financing activities of $5.0 million coal producers nationwide. The company’s lignite coal reserve in 2005. position remains strong with a total of 2.2 billion tons, of which 1.1 billion tons are committed to current customers. Vision and Goals NACoal’s limerock dragline mining operations had strong NACoal’s vision is to be the leading low-cost miner of growth with limerock deliveries 56 percent higher than in 2005. lignite coal used in power generation, coal gasification and Limerock deliveries totaled 39.2 million cubic yards during coal-to-liquids plants and to provide selected value-added 2006 compared with 25.2 million cubic yards during 2005. mining services for companies in the aggregates business. NACoal’s net income in 2006 increased to $39.7 million NACoal’s goals are to earn a minimum ROTCE of 13 percent, compared with $16.2 million in 2005. A significant portion of deliver positive Economic Value Income (“EVI”) from all existing this increase resulted from a gain of $21.5 million pre-tax, or consolidated mining operations and any new projects, maintain $13.1 million after taxes of $8.4 million, from the sale of two or increase the profitability of all existing unconsolidated project electric draglines. Excluding the dragline sales, net income still mining operations, generate substantial consolidated cash flow improved more than 60 percent compared with 2005, mainly before financing activities from existing operations, and achieve from improved results at all operations. substantial income growth by developing new mining ventures. As a result of this excellent year, NACoal produced a strong NACoal is making good progress toward achieving all of its return on equity(1) of 60.9 percent and an improved return on goals and expects further improvement in 2007. total capital employed (“ROTCE”) of 25.6 percent in 2006, or Lignite Coal Tons and Limerock Cubic Yards Delivered (In millions) 39.2 34.2 35.5 34.4 34.7 35.4 25.2 18.9 10.6 11.0 40 30 20 10 0 Revenues (In millions) $149.0 $118.4 $110.8 $94.1 $86.2 $160 $120 $80 $40 $0 02 04 03 (cid:2) Lignite Coal Tons (cid:2) Limerock Cubic Yards 05 06 02 03 04 05 06 Net Income (In millions) $39.7* $45 $30 $19.6 $15 $14.3 $18.6 $16.2 $0 02 03 04 05 06 *Includes gain on sale of $21.5 million, or $13.1 million after taxes of $8.4 million, from the sale of two electric draglines. (1) Return on equity = 2006 net income divided by 2006 average equity (a five-point average of equity at December 31, 2005 and each of 2006’s quarter ends). Left: The Red River Mining Company in Louisiana uses a variety of heavy-duty equipment to mine lignite coal, including, from the background forward, a Marion 7820 dragline, a hydraulic backhoe loading shovel and Caterpillar haul trucks. [37] Once coal seams are exposed, lignite is collected efficiently, loaded directly into haul trucks and delivered immediately to the nearby power plant. Industry Trends New opportunities and growth in the mining industry Safety and efficiency continue to be critical to success in exist in traditional coal and aggregates mining as well as in new the mining industry. Operating costs are highly sensitive to areas, such as coal-based alternative fuel production. In certain changes in mining routines. Recently, increases in diesel fuel regions of the United States, the demand for power has increased cost and the availability and cost of large off-road tires for significantly over the past few years. Significant advances in mining equipment have created additional challenges. Long traditional power generation technology, along with natural gas lead times and significantly higher prices for new mining prices that are still relatively high, have increased the probability equipment, such as draglines, present more challenges. Difficult that a substantial number of new coal-fired power plants will mining situations also put pressure on profitability. Successful be built over the next several years. In addition, many energy companies must remain vigilant about containing costs. companies are now considering completely new energy Lignite coal customers, primarily electric power plants, technologies, such as coal gasification and coal-to-liquids are under constant pressure from their end users to provide production. NACoal expects to continue to play a leadership affordable power in an environmentally sensitive manner. Since role in the evolving energy, environmental and national energy mining is a relatively mature industry, mining companies must policy landscape with the objective of capitalizing on the develop innovative processes to remain competitive. growing need for low-cost, coal-based domestic energy sources. Above: An Easi-Miner mines lignite coal from the ground into a Kress haul truck at the Sabine Mining Company in Texas. [38] N A C C O I n d u s t r i e s , I n c . To reach its goals, NACoal has established several strategies from, nor is unfairly burdened by, changes in these operational and key programs to respond to current industry trends. The expenses. In the event a situation arises in which a contract is programs, designed to enhance profitability or generate growth, not properly capturing cost changes, NACoal works closely with can be classified in three main areas: low-cost mining expertise; the customer to resolve the issue. Several such circumstances mining and reclamation innovation; and new business arose in 2006 and the company is working diligently to address opportunities. these issues. Key Programs to Leverage Low-Cost Mining Expertise Mining efficiency, productivity rates and profitability all NACoal leverages its highly disciplined management improved in 2006 at Mississippi Lignite Mining Company teams in place at existing mines to maximize efficiencies and (“MLMC”). Improvements also resulted from deliveries of Mississippi Lignite Mining Company Improvement. ensure safety. The key projects supporting this mining strategy are: Employee Safety. Ensuring employee safety is the number-one priority at NACoal. All of the company’s twelve locations worked the entire 2006 calendar year without incurring a single lost-time accident. NACoal’s incident rate has consistently been well below the national average for surface coal mines. NACoal 0 firmly believes that its commitment to safety and strong employee relations Safety Record (Lost-Time Accident “LTA” Rate) 3.0 2.0 2.33 2.29 2.07 2.11 1.99 1.75 0.94 1.0 0.79 0.67 0.39 0.33 0.39 0.16 99 00 01 02 03 04 05 (cid:3) LTA North American Coal Average (cid:2) LTA National Average for Surface Coal Mines higher quality lignite coal and automatic contractual adjustments related to coal quality. NACoal is applying creative approaches to manage higher costs for supplies, such as off-road tires. While the 1.52 1.47 company expects further challenges from certain cost reimbursement issues in 2007 and anticipates slightly lower volumes in 2008 due to a planned power plant outage, 0.00 06 significantly improved performance is expected in 2009 and beyond. MLMC has not yet achieved positive EVI, but improves productivity and employee retention, thereby reducing substantial improvements are anticipated in 2007 and 2008 costs and enhancing profitability. to help attain that goal by 2009-2010. Contract Structure. Central to NACoal’s strategy are Red River Mining Company Improvement. 2006 was mining contracts which minimize exposure to the market price a solid year for Red River Mining Company, with the mine of coal. These mining contracts are carefully structured coal achieving positive EVI. However, 2007 performance is not supply agreements that establish the specific mining services expected to be as strong due to a planned power plant outage that NACoal will perform for its customers and the mechanisms and planned capital expenditures by NACoal necessary to by which NACoal will be compensated for performing those prepare the mine for possible higher mining volumes in the activities. Through these mining agreements, NACoal and its future. The mine should return to normal mining volumes in customers share a common goal of minimizing costs. By 2008, with the potential for substantial volume increases and eliminating speculation on the future price of coal, these continued positive EVI in 2009 and beyond as a result of contracts are designed to provide the customer with low-cost promising new business opportunities. fuel and allow the company to consistently earn sound margins Limerock Dragline Mining Operations. At NACoal’s for its services. limerock dragline mining operations in southeast Florida, These mining contracts also include various cost escalation future operating results could potentially be reduced as a result mechanisms and may include performance incentives. As of a pending federal court decision, which may affect the inevitable changes occur in mining costs, such as the costs of customers’ limerock mining permits in Miami-Dade County. diesel fuel, equipment spare parts or tires, contracts are designed NACoal’s customers are making every effort to ensure mining to adjust to those changes so NACoal neither profits excessively continues in these specific areas, though such a continuation [39] N A C C O I n d u s t r i e s , I n c . is not guaranteed. NACoal has a relatively low capital investment Red Hills Mine received a National Award for Excellence in in the operations affected by the litigation, and the contracts in Surface Coal Mining & Reclamation from the U.S. Department place help protect the company from the financial impact of of Interior’s Office of Surface Mining. lower-than-projected delivery quantities. NACoal believes that the long-term prospects for limerock mining in those areas, Key Programs for New Business Opportunities and in Florida in general, remain quite good. NACoal’s strategy for growth is focused on understanding Key Programs for Mining and Reclamation Innovation the company operates. NACoal sustains long-term partnerships A second key NACoal strategy is to research, develop and in these regions. The company’s intense focus on opportunity deploy new mining and reclamation techniques. The company’s analysis, networking and new business development activities and satisfying the mining and energy needs of each region where 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 methods have improved mining efficiencies and coal recovery, reduced costs, enhanced safety and lessened the environ- mental impact of mining. For example, NACoal is utilizing a computerized tracking guide this strategy. Elements of the company’s business development opportunities include: Leveraging NACoal’s Lignite Coal Reserves. NACoal either mines, controls or owns data on many lignite reserves in North Dakota, Texas, Mississippi and Louisiana. NACoal has what it believes is the most extensive bank of geological data on lignite coal reserves in the country. This wealth of data provides a strategic advantage to NACoal as it works to identify, prioritize and pursue system at certain mines, which allows supervisors to view the opportunities to develop new mining operations. Based on locations of a mine’s haul trucks and, based on the locations results of these ongoing analyses, NACoal adjusts its ownership from which the coal was mined, the quality of coal being hauled plans for its existing lignite coal reserves as well as its strategies in each truck can be estimated as it approaches the power for securing ownership or leases for additional reserves, which plant. At other mines, NACoal employs on-line coal analyzers, offer potential for future development. Potential projects in which quickly determine a more precise measurement of coal each of these regions include new facilities for traditional quality as coal is delivered to the power plants. Both of these power generation, coal gasification, coal-to-liquids conversion systems provide power plant operators early knowledge of coal and coal beneficiation. NACoal’s potential involvement in these quality, allowing more effective coal blending for optimal plant projects ranges from mining the coal that fuels these facilities performance. These systems improve plant efficiency and, to being a partner in the operation or business venture. The ultimately, result in low cost electricity to end users. company believes its reserves are well positioned for these Environmental Commitment. NACoal is committed to ventures and NACoal is optimistic about the near-term protecting the environment by restoring mined land to its original prospects for opportunities in each of the regions. or an improved condition. To ensure reclamation accuracy and Mining NACoal Reserves for Direct Coal-fired Power effectiveness, the company utilizes innovations such as global Generation. The foundation for identifying new lignite coal positioning devices in the earthmoving equipment which link mining projects continues to be the ongoing analysis of power to electronic maps. The company has been a prominent recipient generation supply and demand in each of the regions where of environmental awards over the years, and in 2006, MLMC’s NACoal owns or controls reserves. As opportunities arise, Above: MLMC’s Red Hills Mine received a National Award for Excellence in Surface Coal Mining & Reclamation from the U.S. Department of Interior’s Office of Surface Mining for establishing reforested areas in a difficult Southern climate. Right: Three phases of land reclamation at MLMC’s Red Hills Mine from foreground back: reclamation preparation using innovative materials to prevent soil erosion, pine tree seedlings and new grassy areas and successfully reforested pine trees. [40] NACoal applies award-winning approaches to manage soil erosion during early land reclamation so new trees can take hold faster. NACoal returns mined land to its original or an improved condition, often leaving behind beautiful wildlife preserves. the company actively promotes the use of lignite coal owned it is injected into mature oil wells for enhanced oil recovery. or controlled by NACoal as the primary fuel for potential new NACoal is participating in several research projects and is in power plants. discussions with potential customers or partners involving Mining NACoal Reserves for Coal Gasification. NACoal development of other full-scale coal gasification plants. believes that, in the long term, the future development of Mining NACoal Reserves for Coal-based Energy coal reserves in the United States will depend greatly upon the Production. The company continues to invest significant adoption of new technologies that substantially lower emissions. resources in understanding and promoting new clean coal One of the most promising new technologies involves gasifying energy technologies. NACoal has developed its own vision, coal, which can significantly reduce key emissions such as SO2 called FlexGen, which, in addition to generating electricity, (sulfur dioxide), NOx (nitrogen oxide), particulates and mercury. could produce a variety of marketable by-products, including The highly efficient process of coal gasification also produces an synthetic natural gas, synthetic diesel or jet fuel, and petro- emission stream that allows for CO2 (carbon dioxide) capture chemical feedstocks. This process also could extract hydrogen and sequestration. For example, since 1984, NACoal’s Coteau that can be used in fuel cells to generate emission-free power. In Mine has supplied lignite to Dakota Gasification, the only full- addition, the company is studying a number of enhanced coal scale and fully operational coal-to-synfuel plant in the United and coal-to-liquids technologies and opportunities, which are States. The plant captures CO2 during the gasification process increasingly financially attractive in light of higher sustained and pipes it from North Dakota to a customer in Canada, where prices for natural petroleum products. Above: At The Sabine Mining Company in Texas, land once used for surface mining now hosts migrating waterfowl in the fall and spring. Right: North American Coal’s limerock dragline mining operation at White Rock Quarry in South Florida. [42] N A C C O I n d u s t r i e s , I n c . Utilizing Lignite Coal Enhancement Technologies. NACoal expenditures for the acquisition and development of additional and one of its customers have developed a process to use waste uncommitted coal reserves in 2007. heat from power plants to dry lignite coal to enhance its value, Key programs at NACoal are anticipated to help the a process known as coal beneficiation. NACoal and its customer company reach or exceed each of its objectives. ROTCE was expect to apply the technology not only to the customer’s 25.6 percent in 2006, exceeding NACoal’s goal of 13 percent, facilities, but also to offer the technology to other facilities, both and prospects for sustaining ROTCE at current levels are good domestic and international, that utilize lignite coal. NACoal for 2007 and 2008. (See reconciliations of non-GAAP ROTCE believes that this innovative coal beneficiation process will add on page 45.) The company achieved positive EVI in 2006 at value to its own and others’ operations and contribute to the Red River Mining Company, the San Miguel Lignite Mining company’s profitability over time. Contract Mining of Lignite Coal. NACoal, the nation’s largest miner of lignite coal, is widely regarded as an efficient and effective mining partner, and as a result, periodically is presented with opportunities to act as a contract miner for reserves owned by others. NACoal is optimistic that at least one of several projects currently under evaluation, some with current power generation customers, will come to fruition and contribute to profit growth in the future. Operations and the limerock dragline mining operations, and EVI at MLMC is expected to be improving consistently over the next few years. The company’s unconsolidated mining operations are consistently performing well. Cash flow before financing activities at existing operations was very good in 2006 and prospects are very strong for future years. Finally, growth opportunities from new ventures are promising. In closing, I would like to take this opportunity to extend our special thanks Contract Mining of Aggregates. The company is to Cliff Miercort, who retired as President and Chief Executive optimistic that niche growth opportunities for providing high Officer of NACoal in March 2006. Cliff worked for NACoal for value-added services for aggregates, such as limerock dragline 30 years and led the company for the past 17 years. Under Cliff’s mining services, will continue to emerge. Discussions are leadership, NACoal expanded its lignite coal mining operations ongoing with NACoal’s existing limerock customers, as well as in Texas, Louisiana and Mississippi and expanded its mining other limerock producers, about NACoal providing additional services to include the dragline mining of limerock in Florida. mining services to meet limerock production requirements Cliff’s guidance and inspiration will be missed, and we wish not now served by the company. him all the best in his retirement. Outlook for 2007 and Beyond Finally, in reflecting on my first year as President and Chief Executive Officer, I want to thank all NACoal employees for their Overall, NACoal expects increasingly enhanced hard work and dedication in making 2006 another safe and performance from its current operations, including MLMC, successful year. I look forward to our continued success in 2007. over the next few years. In addition, NACoal is encouraged that more new project opportunities may become available and expects to continue its efforts to develop new coal projects. The company is pursuing a number of potential opportunities which could add significantly to the company’s long-term profitability. Accordingly, the company expects to incur Robert L. Benson President and Chief Executive Officer The North American Coal Corporation [43] Managing for long-term profit growth Supplemental Data RECONCILIATION OF FINANCIAL TARGETS TO NET INCOME: Minimum Operating Profit Target, Break-Even Net Income Target and Minimum Return on Capital Employed Target as of December 31, 2006 (U.S. dollars in millions, except per share amounts) Subsidiaries with Minimum Operating Profit Targets 2006 revenues, as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x Operating profit target percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . = Operating profit at target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: 2006 operating profit, as reported for NMHG Wholesale, HB/PS and KCI . . . . . . . . . Difference between 2006 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 NMHG Wholesale $ $ $ 2,317.9 9.0% 208.6 (76.5) 132.1 (50.2) for NMHG Wholesale, HB/PS and KCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 81.9 Subsidiaries with Break-Even Net Income Targets NMHG Retail HB/PS KCI Total $ $ $ $ 546.7 10.0% 54.7 (42.5) 12.2 (4.6) 7.6 $ $ $ $ 164.8 5.0% 8.2 (6.8) 1.4 (0.5) 0.9 $ $ $ $ 3,029.4 N/A 271.5 (125.8) 145.7 (55.3) 90.4 Net income at target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 Net income, as reported - NMHG Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income difference between reported and target for NMHG Retail . . . . . . . . . . . . . . . . $ - (9.1) $ 9.1 $ 9.1 Net income difference between reported and target for Consolidated NMHG, HB/PS and KCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 91.0 $ 7.6 $ 0.9 $ 99.5 Subsidiaries with Minimum Return on Total Capital Employed Targets NACoal $ 2006 average equity (12/31/2005 and at each of 2006's quarter ends) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 average debt (12/31/2005 and at each of 2006's quarter ends) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total 2006 average capital employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on total capital employed target percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Return on total capital employed target = target net income before interest expense, after tax . . . . . . . . . . . $ 2006 net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: 2006 interest expense, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Income taxes on 2006 interest expense at 38%* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Actual 2006 return on total capital employed = actual net income before interest expense, after tax . . . . . . 65.2 107.6 172.8 13.0% 22.5 39.7 7.4 (2.8) 44.3 Actual 2006 return on total capital employed percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.6% $ Return on total capital employed target = target net income before interest expense, after tax . . . . . . . . . . . Actual return on total capital employed = actual net income before interest expense, after tax . . . . . . . . . . . $ Return on total capital employed difference between actual and target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Return on total capital employed target = target net income before interest expense, after tax . . . . . . . . . . . Less: 2006 interest expense, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Income taxes on 2006 interest expense at 38%* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Target net income at target return on total capital employed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Less: Target Net income at target return on total capital employed since actual exceeds target . . . . . . . . . . . Net income difference between reported net income and target net income at target return on 22.5 (44.3) (21.8) 22.5 (7.4) 2.8 17.9 (17.9) $ total capital employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - Total of net income differences between reported and targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per share impact at 8.234 million basic shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per share impact at 8.242 million diluted shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ - 99.5 12.08 12.07 Return on total 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. * Tax rate of 38% represents the Company's marginal tax rate compared with 2006's effective tax rate of 23.1%. [44] N A C C O I n d u s t r i e s , I n c . RECONCILIATION OF RETURN ON TOTAL CAPITAL EMPLOYED: NMHG (U.S. dollars in millions) HB/PS KCI NACoal 2006 2006 average equity (12/31/2005 and each of 2006's quarter ends) . . . . . . . . . . . . . . . . 2006 average debt (12/31/2005 and at each of 2006's quarter ends) . . . . . . . . . . . . . . . Total 2006 average total capital employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: 2006 interest expense, as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Income taxes on 2006 interest expense at 38%* . . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on total capital employed = actual net income before $ $ $ $ $ $ 452.0 332.2 784.2 34.6 31.8 (12.1) $ $ $ 123.2 54.0 177.2 22.2 4.8 (1.8) $ $ $ 13.1 9.3 22.4 3.7 0.7 (0.3) interest expense, after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54.3 $ 25.2 $ 4.1 $ 65.2 107.6 172.8 39.7 7.4 (2.8) 44.3 Actual return on total capital employed percentage. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9% 14.2% 18.3% 25.6% Less: After-tax gain on the sale of draglines at NACoal . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted return on total capital employed = adjusted net income before interest expense, after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted return on total capital employed percentage. . . . . . . . . . . . . . . . . . . . . . . . (13.1) $ 31.2 18.1% 2005 2005 average equity (12/31/2004 and each of 2005's quarter ends) . . . . . . . . . . . . . . . . 2005 average debt (12/31/2004 and at each of 2005's quarter ends) . . . . . . . . . . . . . . . Total 2005 average total capital employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: 2005 interest expense, as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Income taxes on 2005 interest expense at 38%** . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on total capital employed = actual net income before $ $ $ $ $ $ 436.1 315.9 752.0 18.1 34.9 (13.3) $ $ $ 132.6 55.6 188.2 20.3 5.3 (2.0) $ $ $ 11.5 8.8 20.3 1.0 0.6 (0.2) interest expense, after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39.7 $ 23.6 $ 1.4 $ 84.9 117.4 202.3 16.2 8.5 (3.2) 21.5 NMHG HB/PS KCI NACoal Actual return on total capital employed percentage. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3% 12.5% 6.9% 10.6% Return on total 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. * Tax rate of 38% represents the Company's marginal tax rate as compared with 2006’s effective income tax rate of 23.1%. ** Tax rate of 38% represents the Company's marginal tax rate as compared with 2005's effective income tax rate of 18.5%. [45] Managing for long-term profit growth 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 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: Michael P. Brogan President and Chief Executive Officer Colin Wilson Vice President and Chief Operating Officer Victoria L. Rickey Vice President, Chief Marketing Officer Michael K. Smith Vice President, Finance and Information Systems, and Chief Financial Officer James M. Phillips Vice President, Human Resources Michael E. Rosberg Vice President, Global Supply Chain Gopi Somayajula Vice President, Counterbalanced Engineering Carolyn M. Vogt Vice President, General Counsel and Secretary Daniel P. Gerrone Controller Jeffrey C. Mattern Treasurer Americas: James W. Donoghue Vice President, Marketing and Distribution, Americas Gregory J. Dawe Vice President, Manufacturing, Americas Donald L. Chance, Jr. Vice President; President, Yale Materials Handling Corporation D. Paul Laroia Vice President; President, Hyster Company Raymond C. Ulmer Vice President, Finance and Information Systems, Americas Europe, Africa and Middle East: Ralf A. Mock Managing Director, Europe, Africa and Middle East Stephen R. West Vice President, Finance and Information Systems, Europe, Africa and Middle East Asia-Pacific: Nobuo Kimura President, Sumitomo NACCO Materials Handling Co., Ltd. [46] 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 New Product Development Kathleen L. Diller Vice President, General Counsel and Human Resources, and Secretary Gregory E. Salyers Vice President-Operations and Information Systems James H. Taylor Vice President, Chief Financial Officer 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 Senior Vice President Merchandising Emil S. Wepprich Vice President Supply Chain L.J. Kennedy Secretary and Treasurer Mark A. Kleparek Vice President General Merchandise Manager-Le Gourmet Chef Charles J. LaPlaca Vice President Supply Chain- Le Gourmet Chef Christopher Green Vice President Product Development- Le Gourmet Chef Officers of The North American Coal Corporation Robert L. Benson President and Chief Executive Officer Bob D. Carlton Vice President-Financial Services Douglas L. Darby Vice President-Engineering and Eastern Operations Michael J. Gregory Vice President-Southern Operations and Human Resources Thomas A. Koza Vice President-Law and Administration, and Secretary Dan W. Swetich Vice President-Northern Operations and President of Falkirk Mining Company Lee A. Burton Controller K. Donald Grischow Treasurer 

Continue reading text version or see original annual report in PDF format above