Unearthing Value At NACCO Industries

February 21, 2011

ryan@theknowledgepile.com
Company History and Overview

m
NACCO Industries is a diversified industrial holding company with operations in four

o
main business segments: lift trucks, mining, small appliances, and specialty retailing.

.c
le
pi
Originally founded in 1913, NACCO is named after its original business line, North

e
American Coal.

dg
le
Beginning in the mid 1980’s, NACCO began to diversify away from its core

w
business by acquiring disparate companies including Eaton’s Yale Materials

no
Handling Unit, WearEver-Proctor Silex, The Kitchen Collection and The Hyster

ek
company . NACCO eventually merged with Hamilton–Beach Brands in 1990.
th
n@
While NACCO has since divested a few non-core assets, today it remains an
a

conglomerate comprised of four unrelated businesses. Consequently, the market

ry

has a difficult time properly valuing the company and its shares trade a steep
discount to estimated intrinsic value.

2
 NACCO Industries Investment Thesis

m
ƒ Odd collection of good businesses

o
with market leading positions but

.c
le
few if any synergies

pi
Ticker: “NC” 9 Coal

e
dg
Stock Price: $125.57 9 Fork Lifts

le
9 Housewares and specialty retailing

w
¾Recent Valuation

no
Multiples:
ƒ Minimal sell-side research coverage

ek
ƒ7.76x ‘11E Earnings (ex-cash)*
ƒ5.82x EV / 2011E EBITDA
9 Only one analyst covering the stock
th
n@
¾Capitalization:
ƒEquity Market ƒ Cheap valuation on a consolidated
a
ry

Value: $1,046mm
ƒEnterprise
basis
Value: $1,230 mm
ƒ Significantly undervalued on a sum-
of-the-parts basis
9 Spin-off or sale of non-core businesses
a potential catalyst for share price
*Note: cash adjusted to include $60mm appreciation 3
payout from Harbinger lawsuit settlement
announced 2/17/11
 om
.c
le
pi
e
dg
le
w
no
More About NACCO’s Four Businesses

ek
th
n@
a
ry

4
NACCO’s Four Businesses

om
NC operates in four business segments

.c
le
pi
Materials North American Hamilton Beach Kitchen

e
Handling Group Coal Brands Collection

dg
ƒManufactures, sells, ƒMines and markets ƒDesigns, distributes ƒSpecialty retailer of

le
services and leases coal primarily for

w
and markets small kitchenware and
fuel for power

no
fork lift trucks under electric household gourmet foods
the Hyster and Yale generation appliances under the under the Kitchen

ek
brands Hamilton Beach and Collection and Le

th
Proctor Silex brands Gourmet Chef store
n@
names
a
ry

~56% of Revenues ~20% of Revenues ~17% of Revenues ~7% of Revenues

~2.5% Operating ~7.5% Operating ~10% Operating ~3% Operating

Margins Margins Margins Margins

5
Materials Handling Group Overview (“MHG”)

m
NMHG designs, engineers, manufactures, sells, services and leases a comprehensive

o
line of lift trucks and aftermarket parts marketed globally under the Hyster and Yale

.c
brands

le
pi
ƒ #3 manufacturer of fork lifts behind Toyota and Linde

e
dg
ƒ 20% market share in US, 8% globally

le
w
ƒ Very cyclical business which should benefit from economic

no
upswing

ek
th
ƒ Strong backlog indicates positive growth and demand
n@
ƒ Excellent distribution channels and seller network
a
ry

ƒ Potential acquisition target for financial buyer or competitor

6
Materials Handling Group Financial Snapshot

m
MHG Income Statement MHG Balance Sheet MHG Cash Flow

o
(in $mm's) (in $mm's) (in $mm's)

.c
TTM 2009 2009

le
Revenue 1475.2 Assets 290.8 Operating Cash Flow 115.9
Operating Loss (EBIT) -31.2 Cash 163.2 Free Cash Flow 110.1

pi
Net Income -43.1 LT Debt 246.4

e
dg
Margin Analysis

le
EBIT Margin -2.11%

w
Net Income Margin -2.92%

no
ek
th
Despite generating an operating loss in 2009, NACCO’s Materials Handling Group
n@
generated positive free cash flow during the same period. Given its high operating
a

leveraged and uptick in reported revenues which are tracking +14% and +35% YoY for Q3
ry

and Q4 2010, the business is on pace to earn an operating profit and return to profitability
for FY 2010.

7
Source: NC company presentation and 10-K
North American Coal Overview (“NAC”)

m
NAC mines and markets coal primarily as fuel for power generation and provides

o
selected value-added mining services for other natural resources companies. The

.c
company operates five surface coal mining operations and has three additional coal

le
pi
mines under development

e
dg
ƒ #1 coal Lignite coal producer in the United States with operations

le
mainly in North Dakota, Texas and Mississippi; amongst top 10 coal

w
no
producers overall

ek
ƒ Lignite coal is a low ranking coal type used as fuel in steam-electric

th
power generation
n@
ƒ Not subject to price fluctuations
a

ƒ The company mines under “cost-plus” contracts with local power

ry

plant customers under which they are essentially guaranteed a fee for
service regardless of the direction of coal prices
ƒ 2.2MM tons of proven reserves, of which 1.2MM are committed to
customers through long-term contracts expiring as far out as 2045
ƒ Original business line of company 8
North American Coal Financial Snapshot

m
NAC Income Statement NAC Balance Sheet NAC Cash Flow

o
(in $mm's) (in $mm's) (in $mm's)

.c
TTM 2009 2009
Revenue 213.9 Assets 172.1 Operating Cash Flow 42

le
Operating Loss (EBIT) 6.7 Cash 1.6 Free Cash Flow 31.5

pi
Net Income 3.9 LT Debt 46.8

e
dg
Margin Analysis

le
EBIT Margin 3.13%

w
Net Income Margin 1.82%

no
ek
th
NACCO’s North American Coal segment earns predictable, stable and recurring free cash
n@
flow without the exposure to commodity price fluctuations typical of coal and other
a

commodity producers, resulting in a high-quality, annuity-like business

ry

9
Source: NC company presentation and 10-K
Hamilton Beach Brands Overview (“HBB”)

m
Hamilton Beach is a leading designer, marketer and distributor of small electric

o
household appliances, as well as commercial products for restaurants, bars and

.c
hotels

le
ƒ Manufactures blenders, can openers, coffeemakers, food

e pi
dg
processors, indoor grills, irons, mixers, slow cookers, toasters,

le
etc.

w
no
ƒ Operates under well known Proctor Silex and Hamilton Beach

ek
brands
th
ƒ Has excellent relationships with leading retailers including
n@
Wal-Mart, Target, K-Mart and Sears
a
ry

ƒ Potential acquisition target for a number of strategic and

financial buyers

10
Hamilton Beach Brands Financial Snapshot

m
HBB Income Statement HBB Balance Sheet HBB Cash Flow
(in $mm's) (in $mm's) (in $mm's)

o
TTM 2009 2009

.c
Revenue 497 Assets 217.8 Operating Cash Flow 35.5

le
Operating Profit (EBIT) 50.4 Cash 34.1 Free Cash Flow 33.4

pi
Net Income 26.1 LT Debt 116.3

e
dg
Margin Analysis

le
EBIT Margin 10.14%

w
Net Income Margin 5.25%

no
ek
th
NACCO’s Hamilton Beach Brands segment earns attractive EBIT and net income margins
n@
while generating free cash flow well in excess of its reported GAAP earnings
a
ry

11
Source: NC company presentation and 10-K
Kitchen Collection Overview (“KC”)

m
Kitchen Collection is a national specialty retailer of kitchenware and gourmet foods

o
operating under the Kitchen Collection and Le Gourmet Chef store names in outlet

.c
and traditional malls throughout the United States

le
pi
ƒ Leading specialty retailer of kitchen products

e
dg
ƒ Very low margin business that requires scale and retailing

le
w
expertise in order to succeed

no
ƒ Low to no earnings over last few years

ek
th
ƒ Could be run more profitability in by a full-fledged retailer
n@
such as Bed, Bath & Beyond or Macy’s
a
ry

ƒ Sale to well-capitalized strategic buyer would generate cash

that could be better deployed elsewhere as well as a tax asset
as purchase price would likely be below cost basis for the
business

12
Kitchen Collection Financial Snapshot

m
KC Income Statement KC Balance Sheet KC Cash Flow
(in $mm's) (in $mm's) (in $mm's)

o
TTM 2009 2009

.c
Revenue 213.9 Assets 81.9 Operating Cash Flow 5.4

le
Operating Profit (EBIT) 6.7 Cash 8.5 Free Cash Flow 4.4

pi
Net Income 3.9 LT Debt -

e
dg
Margin Analysis

le
EBIT Margin 3.13%

w
Net Income Margin 1.82%

no
ek
th
NACCO’s Kitchen Collection carries a net cash position but earns fairly low EBIT and net
n@
income margins. A strategic acquirer could likely expand margins and would also gain a
a

new outlet channel through which it could offload excess inventory without tarnishing the
ry

parent company brand.

13
Source: NC company presentation and 10-K
 o m
.c
le
epi
dg
le
w
no
A Closer Look At NACCO’s Structure

ek
th
n@
a
ry

14
Why Are These Businesses Together?

m
NACCO’s legacy conglomerate structure is the byproduct of an earlier time during

o
which arrangements of this nature were in vogue and quite popular. Today, however,

.c
le
the merits of such structures are in question.

e pi
In recent years, many conglomerate business have simplified their operations by

dg
spinning off or selling their non-core businesses and have been rewarded favorably

le
by shareholders for doing so.

w
no
ek
9 NACCO’s four businesses have no apparent synergies
th
n@
9 NACCO is one of the last types of these businesses remaining
a
ry

15
Why A Breakup Of NACCO Makes Sense

m
In early April 2007, NACCO Industries announced it would spin-off its Hamilton Beach

o
Brands segment citing the transaction as an “opportunity for significant value

.c
enhancement for ours shareholders” and its stock soon reached all time highs. By the

le
pi
summer of 2007, however, the plan was shelved due to the uncertainty and volatility

e
in the capital markets.

dg
le
Recent announcements by Fortune Brands, ITT Corp., Marathon Oil, and Williams

w
Companies amongst others to breakup their business and the subsequent share price

no
appreciation achieved as a result are likely to cause NC management to revisit their

ek
own spin-off plans.

th
n@
ƒ Illogical structure and complicated consolidated financials statements creates difficulty
for investors to determine the fair value of the business
a
ry

ƒ Breaking up into four distinct units with alleviate this difficulty by allowing the market
to value each segment more easily thereby highlighting the intrinsic value of the
business and unlocking significant value for shareholders
ƒ Create four standalone, pure-play businesses that would make attractive acquisition
targets for strategic or financial buyers, further driving share price appreciation
ƒ Give shareholders a choice of whether to own the fork lift business, the coal business,
the housewares businesses, the specialty retail business or all four
16
Shareholder Friendly Management, Corporate Governance and Financial Reporting

m
NACCO Industries has a unique and open corporate structure which is somewhat

o
atypical for holding company/conglomerate businesses

.c
le
pi
ƒ NACCO provides very transparent financial statements and

e
dg
thorough historical supplemental data

le
ƒ Each segment reports full financial statements allowing for detailed

w
no
analysis

ek
ƒ Supplemental segment data allows for even deeper fundamental work
th
ƒ Each business segment has its own board of directors
n@

ƒ Each business is treated as a stand alone entity with no

a
ry

interference from the parent company, much like the way

operating businesses are treated at Berkshire Hathaway

Each of these attributes make a separation of NACCO’s four businesses even easier

17
 ry
a n@
th
ek
no
w
le
dg
e pi
le
So, What Is It Worth?

.c
o m
18
 Materials Handling Group Peer Analysis

o m
.c
le
e pi
dg
Toyota Linde AG Cascade Corp Median

le
$161,188 $26,127 $544 $26,127

w
Market Cap (mm)
Enterprise Value $270,647 $35,005 $574 $35,005

no
ek
EV / 2011E EBITDA 14.00 8.26 7.78 8.26

th
a n@
ry

19
Note: Data based on 2/18/11 closing prices and fx rates
Source: Bloomberg
 North American Coal Peer Analysis

mo
.c
le
e pi
dg
Peabody Energy Massey Energy Co. Arch Coal, Inc. Median

le
$17,532 $6,565 $5,368 $6,565

w
Market Cap (mm)
Enterprise Value $19,295 $7,207 $7,124 $7,207

no
ek
EV / 2011E EBITDA 10.90 7.40 6.85 7.40

th
a n@
ry

20
Note: Data based on 2/18/11 closing prices
Source: Bloomberg
 Hamilton Beach Brands Peer Analysis

o m
.c
le
e pi
dg
Newell Rubbermaid Tupperware Jarden Median

le
Market Cap (mm) $5,866 $3,485 $3,321 $3,485

w
Enterprise Value $8,099 $3,665 $5,866 $5,866

no
ek
EV / 2011E EBITDA 8.29 8.21 7.28 8.21

th
a n@
ry

21
Note: Data based on 2/18/11 closing prices
Source: Bloomberg
Kitchen Collection Peer Analysis

m
o
.c
le
pi
e
dg
Bed Bath & Beyond Macy's Median

le
Market Cap (mm) $1,295 $1,006 $1,151

w
Enterprise Value $1,151 $1,693 $1,422

no
EV / 2011E EBITDA 7.80 5.46 6.63

ek
th
n@
a
ry

22
Note: Data based on 2/18/11 closing prices
Source: Bloomberg
Sum-Of-The-Parts Analysis

m
(data in $mm's)

o
Low High

.c
Segment 2011E EBITDA(1) Multiple EV Multiple EV

le
NMHG 98 7x 686 8x 784
Housewares (2) 64 7x 448 8x 512

pi
Coal 49 6x 294 7x 343

e
dg
Plus: Net Debt(3) - -

le
Equity Value 1428 1639

w
Shares outstanding 8.3 8.3

no
Implied price 172.0 197.5

ek
Current Price: $125.57

th
% Upside n@ 37% 57%
a
ry

Analysis suggests that at NACCO shares are currently undervalued by 37-57%.

Another way to look at it is at current levels you are essentially buying NACCO’s fork lift and
coal business at a reasonable price and getting its Hamilton Beach and Kitchen Collection
businesses for free.

(1) Source: BB&T estimates

(2) Housewares includes Hamilton Beach and Kitchen Collection segments 23
(3) NC currently has ~$180mm of net debt but based on its cash flow generating ability should
have no net debt by year end 2011
The Potential For Shareholder Activism

om
.c
NACCO Industries is majority controlled by the founding Taplin/Rankin families via a

le
dual class share structure, making (on the surface) a potential activist campaign to

pi
effectuate a breakup unlikely to yield much success.

e
dg
However, company management has run the businesses in a shareholder friendly

le
way for many years, making it more likely that a large shareholder with a well

w
no
reasoned plan may be able to convince controlling interests of the merits of a

ek
breakup.

th
As the discrepancy between intrinsic value and market price grows and transactions
n@
of this nature become more frequent, it seems logical that a management team
a

oriented towards maximizing shareholder value would dust off its spin-off plans and
ry

reconsider breaking up the business into its four respective parts.

24
 om
.c
le
epi
dg
le
w
no
Recent Transactions Support Breakup Thesis

ek
th
n@
a
ry

25
Corporate Breakups Are Becoming Increasingly Common

om
.c
le
e pi
dg
In a “new normal”, low-growth environment where top-line growth is hard to come
by, company managements are looking for new and creative ways to maximize and

le
w
unlock shareholder value.

no
ek
Over the past few months, several companies have announced plans split-up their
businesses - separating units with different margin profiles, growth trajectories and
th
n@
earnings drivers.
a
ry

26
Case Study: Fortune Brands

om
On December 8th, 2010 Fortune Brands announced a plan for the separation of its

.c
three core businesses : distilled spirits, home and security, and golf products.

le
e pi
dg
le
10/8:

w
Pershing

no
Square
discloses

ek
11% stake 12/8: Fortune Brands
announces separation

th
of the company’s
n@
12/8:
threeFortune Brands
businesses
announces separation
a

of the company’s
ry

three businesses

27
Case Study: ITT Corporation

m
On January 12th, 2011 ITT Corp. announced a plan for the separation of its three core

o
.c
businesses: water, industrial, and defense.

le
e pi
dg
12/8: ITT announces

le
separation of the

w
company’s three

no
businesses

ek
th
an@
ry

28
Case Study: Marathon Oil

m
On January 13th, 2011 Marathon Oil. announced its intent to separate its high-

o
.c
multiple E&P business from its low multiple refinery business.

le
e pi
dg
1/13: Marathon

le
Oil announces

w
plans to separate

no
E&P and refinery
businesses

ek
th
an@
ry

29
Case Study: Williams Companies

m
On February 17th, 2011 Williams Companies announced plans to separate its E&P

o
business from its more steady cash-flow generating pipeline business.

.c
le
epi
dg
le
w
no
ek
2/17: Williams

th
announces
2/17: separation
Williams
n@
of E&P business from
announces separation
pipeline
of businessfrom
E&P business
a

pipeline business
ry

30
 ry
a n@
th
ek
no
w
Conclusion

le
dg
e pi
le
.c
o m
31
Conclusion

m
ƒ Underfollowed conglomerate with four good but

o
.c
unrelated business lines

le
pi
ƒ Attractive valuation on a consolidated basis

e
dg
ƒ Trading at a significant discount to fair value on a

le
w
no
sum-of-the-parts basis

ek
ƒ Breakup opportunity presents catalyst to unlock
th
n@
value
a

9 Recent voluntary breakups at FO, ITT, MRO, and WMB

ry

serve as models for a potential transaction

Upside potential: 37-57%

32