NACCO Industries, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. NACCO operates in coal mining, small appliances (Hamilton Beach Brands, HBB) and specialty retail (The Kitchen Collection, KC). Results are seasonal, with HBB and KC typically generating most revenue and operating profit in the second half.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $177.4 million | $196.1 million |
| Gross profit | $36.2 million | $46.3 million |
| Gross margin | 20.4% | 23.6% |
| Operating income (loss) | $(0.6) million | $7.0 million |
| Net income (loss) | $(1.5) million | $4.4 million |
| Diluted earnings (loss) per share | $(0.19) | $0.53 |
| Cash from operating activities | $(26.0) million | $(25.0) million |
| Capital expenditures | $31.8 million | $7.5 million |
| Cash and cash equivalents, March 31 | $70.1 million | $96.9 million |
Q1 2014 investing cash outflow was $31.9 million and financing cash inflow was $32.6 million; cash declined $25.3 million from year-end 2013. At March 31, total debt was approximately $223.3 million, versus $183.8 million at December 31, 2013; debt is at operating subsidiaries and is not guaranteed by the parent. Current assets were $403.2 million and current liabilities $202.1 million. The quarterly dividend remained $0.25 per share.
Material changes and segment results
- NACoal: Revenue fell to $39.9 million from $51.1 million and operating profit to $6.7 million from $11.8 million. A longer-than-expected planned outage at an MLMC customer’s power plant reduced deliveries; limerock customer requirements and royalty and other income also declined. Net income was $5.7 million versus $9.6 million.
- HBB: Revenue declined to $101.3 million from $106.2 million and operating profit to $0.9 million from $2.7 million. Lower consumer sales, unfavorable foreign exchange, higher SG&A and lower gross profit weighed on results. Operating cash flow was $(16.1) million, principally reflecting working-capital needs, and revolving borrowings increased.
- KC: Revenue declined to $36.9 million from $39.7 million; operating loss widened to $6.5 million from $5.0 million and net loss to $4.0 million from $3.3 million. Store closures, weaker comparable-store sales, weather-related closures and inventory liquidation affected results. KC had 238 Kitchen Collection and 20 Le Gourmet Chef stores at quarter-end, down from 255 and 44, respectively, a year earlier.
Consolidated capital spending rose substantially, mainly for dragline refurbishment and Reed Minerals equipment. NACCO repurchased 90,978 Class A shares for $5.0 million during the quarter; the company had repurchased $5.9 million under its $60 million authorization by March 31.
Outlook, risks and unusual items
- NACoal: Management expected improved overall mine performance in 2014 but forecast a significant decline in annual net income versus 2013, owing to lower royalty and other income and weaker first-half results. A further planned MLMC customer outage was expected in Q4. The Reed Minerals area was to be temporarily idled during the last three quarters while a revised permit was pursued. Management expected positive 2014 cash flow before financing, compared with negative cash flow in 2013.
- HBB: Management expected 2014 revenue growth above the market forecast, but full-year net income comparable to or moderately below 2013. Initiative, advertising, product and transportation costs, and currency effects were expected to offset sales gains; cash flow before financing was expected to be substantially lower than in 2013.
- KC: Management expected lower 2014 revenue, a moderate net loss, and improved operating performance as store closures and cost reductions took effect; the objective was to approach break-even full-year operating profit. It closed 48 stores in Q1 and planned approximately ten additional closures in Q2. Mall traffic and consumer spending remained uncertain.
- Liquidity and debt: NACoal’s $225 million revolver had $74.0 million excess availability; HBB’s $115 million facility had $58.4 million; KC’s $30 million facility had $15.3 million. Each subsidiary was reported in covenant compliance. NACoal’s $6.4 million private-placement notes mature in October 2014. Management stated that available cash, facilities and anticipated operating cash flows were sufficient for near-term needs.
- Contingencies and other items: HBB recorded $6.8 million for environmental investigation and remediation and estimated an additional reasonably possible exposure of $0–$4.3 million. The Reed Minerals contingent consideration liability was $1.6 million, with no cap on potential earn-out payments. In April 2014, NACoal acquired NCOA coal reserves and prepaid royalties and assumed reclamation obligations; no cash payment was made. Management said ordinary-course legal proceedings were not expected to result in material costs beyond accruals.
- Key risks include power-plant outages and customer demand, coal prices and permits, mining costs and reclamation, HBB foreign exchange and sourced-product costs, and KC store traffic, consumer spending and execution of store closures. The filing reported no material change to previously disclosed risk factors and no material change in internal controls.
Investor verification priorities
- Track the duration and delivery impact of planned customer power-plant outages, and whether NACoal achieves its Reed Minerals productivity and permitting plans.
- Verify progress against each segment’s full-year outlook, especially NACoal’s expected earnings decline, HBB’s cost and currency pressures, and KC’s store-closure and break-even objectives.
- Monitor cash use, rising subsidiary borrowings, covenant headroom and the October 2014 NACoal note maturity alongside planned capital spending.
- Review the size and timing of HBB environmental remediation costs and potential Reed Minerals earn-out payments.
- Assess whether reduced KC store count and HBB/NACoal seasonal patterns translate into the expected second-half results; management cautioned that Q1 results are not necessarily indicative of the full year.