NACCO Industries, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited consolidated results cover mining (NACoal), small appliances (Hamilton Beach Brands, or HBB) and specialty retail (The Kitchen Collection, or KC). Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $196.5 | $200.4 | $390.2 | $377.8 |
| Gross profit | $35.4 | $36.5 | $73.6 | $72.7 |
| Operating profit (loss) | $1.3 | $(3.9) | $4.5 | $(4.5) |
| Net income (loss) | $(0.3) | $(3.6) | $0.8 | $(5.1) |
| Diluted EPS | $(0.04) | $(0.47) | $0.11 | $(0.66) |
- Approximate consolidated gross margin was 18.0% in Q2 and 18.9% for the first half. Revenue fell 1.9% in Q2 but rose 3.3% for the half; operating results improved in both comparisons.
- First-half segment results: NACoal revenue $79.3, operating profit $7.6 and net income $8.7; HBB revenue $252.8, operating profit $5.1 and net income $2.2; KC revenue $59.7, operating loss $6.0 and net loss $3.7.
- HBB revenue growth reflected higher volumes and the Weston Brands acquisition, partly offset by unfavorable currency. KC revenue declined following store closures, while improved margins reduced its losses. NACoal’s operating profit benefited from the absence of a prior-year equipment-damage charge and an asset-sale gain, partly offset by lower royalty income and weaker consolidated mine results.
Cash flow, debt and liquidity
- Consolidated operating cash flow was $49.9 for the first half, versus cash used of $21.4 in 2014. Investing used $3.1, including $4.2 of capital expenditures; financing used $88.6, including $70.2 of net revolving-credit repayments, $16.0 of share repurchases and $3.7 of dividends.
- Cash declined $41.8 from year-end to $19.3. Current assets were $359.6 and current liabilities $192.8. Consolidated debt was approximately $179.1, versus $247.9 at year-end; debt to total capitalization declined to 48% from 54%.
- Management attributed much of the cash-flow and debt reduction to working-capital movements, including collection of Coyote Creek affiliate receivables and repayment of NACoal borrowings. These factors affect how sustainable the reported cash generation is.
- At June 30, NACoal had $107.0 outstanding and $116.8 of excess availability under its $225.0 facility; HBB had $56.2 outstanding and $55.2 available under its $115.0 facility; KC had $2.3 outstanding and $17.9 available under its $30.0 facility. Each subsidiary reported covenant compliance and management expected liquidity to meet needs over the next 12 months.
Outlook, risks and unusual items
- Centennial mine closure: After quarter-end, on July 31, management and NACoal’s board approved permanently discontinuing Centennial operations by year-end, citing deteriorating coal-market conditions and regulatory-driven customer coal-quality requirements. Coal production is expected to end in the second half of 2015. NACoal expects $0.5–$1.0 of severance and employee-benefit charges and up to $15.0 of additional reclamation-related charges, on top of the existing $16.0 reclamation liability. Most charges were expected in Q3, with future cash expenditures extending through reclamation; actual costs may differ and further charges may arise.
- NACoal expects stronger second-half results at operations other than Centennial, moderate improvement at unconsolidated mines, and lower royalty and other income. Excluding specified 2014 impairment and asset-sale effects and Centennial and closure costs, management expected second-half pretax income to increase substantially year over year and cash flow before financing to be significant. Full-year 2015 capital expenditures were projected at $8.1, down from the prior $24.1 projection.
- HBB expected second-half revenue growth and moderately higher net income than the prior-year half, with seasonality, new products and Weston contributing. Risks include soft consumer demand, Canadian weakness, foreign-exchange headwinds, product mix and costs. Weston integration was described as proceeding smoothly, with synergies ahead of schedule.
- KC expected continued market softness and lower second-half revenue after closing underperforming stores. It anticipated substantially higher second-half net income and roughly break-even full-year 2015 results, subject to consumer traffic, store performance and execution of its cost and store realignment plans.
- HBB had $9.3 of accrued environmental remediation obligations and estimated reasonably possible additional costs of up to $4.9. The filing says ordinary-course legal matters are not expected to cause material losses beyond accruals, though outcomes are not presently determinable. NACoal’s Coyote Creek guarantees were not recorded; management considered performance under them remote.
- Other comparison items include HBB’s $3.3 environmental charge in Q2 2014, partly offset by a $0.8 third-party recovery; a $1.1 parent-company charge in Q2 2014 to correct a prior-period deferred-compensation estimate; and NACoal’s $105.1 Centennial impairment recorded in December 2014. The 2014 tax comparisons also included favorable discrete tax benefits.
Most important facts for investors to verify
- Centennial closure timing, final reclamation estimates, cash-payment schedule and any additional shutdown charges.
- Whether first-half operating cash flow persists after the Coyote Creek collection and other working-capital movements.
- Availability and covenant headroom under subsidiary credit facilities, particularly as HBB and KC enter their seasonally important second half.
- HBB’s margin, currency and Weston integration performance, and KC’s ability to achieve its projected second-half recovery.
- Environmental remediation exposure and the terms and potential triggers of NACoal’s Coyote Creek guarantees.
- Capital allocation: the company had repurchased $52.0 of shares under its $60.0 program by June 30, with $8.0 remaining; confirm the effect of buybacks and dividends on liquidity and debt reduction.