NACCO Industries, Inc. — 2013 Form 10-K
Business context and period. Annual report for the fiscal year ended December 31, 2013, filed March 4, 2014. NACCO is a holding company operating in coal mining and mining services (North American Coal, or NACoal), small appliances (Hamilton Beach Brands, or HBB), and specialty retail (Kitchen Collection, or KC). Hyster-Yale was spun off in September 2012; its results are reported as discontinued operations through the spin-off date, making headline net-income comparisons with 2012 less comparable.
Key financial metrics
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Revenue | $932.7 million | $873.4 million | Up 6.8% |
| Gross profit | $221.3 million | $225.9 million | Down 2.1%; gross margin 23.7%, versus 25.9% |
| Operating profit | $61.3 million | $67.6 million | Down 9.3%; operating margin 6.6%, versus 7.7% |
| Income from continuing operations | $44.5 million | $42.2 million | Up 5.4%; 2013 diluted EPS $5.47 |
| Net income | $44.5 million | $108.7 million | 2012 included $66.5 million from discontinued operations |
| Operating cash flow | $53.1 million | $74.3 million | Continuing operations; lower mainly due to deferred taxes and other operating items |
| Capital expenditures | $57.4 million | $44.7 million | Investing cash flow was $(60.7) million, including $5.0 million placed in escrow |
| Cash and cash equivalents | $95.4 million | $139.9 million | Down $44.5 million |
| Total debt | $183.8 million | $177.7 million | Debt to capitalization 38% for continuing operations |
| Stockholders’ equity | $297.8 million | $281.3 million | Up $16.4 million |
The company reported $238.1 million of current liabilities and $461.3 million of current assets at year-end. Subsidiary revolving facilities had $202.6 million of unused availability, subject to borrowing-base limits and covenants. The parent does not guarantee subsidiary debt; some subsidiary assets and investment value are restricted from transfer.
Q4 context: Fourth-quarter revenue was $312.0 million and net income was $22.6 million (diluted EPS $2.85). The quarter’s stronger results primarily reflected seasonal appliance and holiday retail sales.
Material changes and segment performance
- NACoal: Revenue increased to $193.7 million from $132.4 million, substantially reflecting the Reed Minerals acquisition and higher other mining and royalty revenue. Operating profit fell to $37.5 million from $43.2 million; Reed Minerals incurred an operating loss amid lower metallurgical-coal demand and prices, higher costs, and mining constraints. NACoal recorded a $4.0 million non-cash impairment, fully writing off Reed Minerals goodwill. Coal sold rose to 29.9 million tons from 28.4 million.
- HBB: Revenue rose 5.0% to $547.8 million and operating profit increased to $41.0 million from $35.8 million, driven by new products and commercial sales. Results included a $2.3 million environmental accrual for its Picton, Ontario site, partly offset by a $1.6 million receivable tied to a third party’s commitment to share certain environmental liabilities.
- KC: Revenue declined 12.8% to $196.0 million; operating loss widened to $10.9 million from $4.5 million. Store closures, lower comparable sales and weaker product mix contributed. KC recorded $1.1 million in store-asset impairment charges and a $0.3 million inventory write-down.
- Capital allocation and benefits: The board authorized a new share repurchase program of up to $60 million through 2015; $0.9 million was repurchased under it by year-end. The company repurchased $31.3 million of shares in 2013 overall. Pension benefits were frozen effective December 31, 2013, producing a $1.7 million pre-tax curtailment gain.
Outlook, risks and contingencies
- 2014 outlook: NACoal expected net income to decrease significantly, principally due to lower royalty and other income, first-half Reed Minerals losses, and fewer MLMC deliveries during planned customer power-plant outages. Management expected positive cash flow before financing activities, improved Reed Minerals performance later in the year, and overall improved mining performance. These are expectations, not guarantees.
- HBB: Management expected 2014 revenue growth above its market’s forecast but full-year net income broadly comparable with 2013. Higher initiative, advertising and promotional costs, modestly higher product and transportation costs, and currency effects were expected to offset much of the volume benefit.
- KC: Management expected revenue to decline in 2014 as it planned to close more than 50 stores, while targeting operating results near break-even through closures and cost reductions. The retail outlook was described as uncertain.
- Debt and liquidity: NACoal had $140.0 million drawn on a $225.0 million revolver and $83.9 million excess availability; $6.4 million of private-placement notes were due in 2014. HBB had $18.4 million drawn and $93.1 million excess availability on its facility. KC had $1.5 million drawn and $25.5 million excess availability. Each segment reported covenant compliance at year-end.
- Material exposures: Coal operations face demand and pricing risks from power-plant utilization, natural gas competition, environmental rules, permitting, weather, mining conditions and customer concentration. Reed Minerals’ customer concentration and uncertain metallurgical-coal economics are notable. HBB depends on large retailers—Wal-Mart represented 31% of HBB revenue—and China-based suppliers. KC faces mall traffic, consumer spending, store-lease and inventory risks.
- Environmental and other contingencies: HBB accrued $6.9 million for environmental investigation and remediation and disclosed reasonably possible additional costs of up to $4.6 million. NACCO’s non-operating subsidiary Bellaire had a $16.9 million mine-water treatment liability. Litigation was described as routine; management did not expect material costs beyond recorded accruals, though outcomes remain uncertain. The filing also discusses a challenge to certain Reed Minerals Clean Water Act permits in Alabama.
- Unusual items: In addition to the goodwill impairment and pension curtailment gain, 2013 cash flow reflected increased inventories and capital spending. The company had $7.8 million of gross unrecognized tax benefits; it expected a significant change within 12 months, including items anticipated to be resolved in the 2011–2012 federal tax examination.
Most important facts for investors to verify
- Whether Reed Minerals achieves the planned productivity gains and whether coal prices, demand and mining costs support recovery; monitor possible further impairment.
- Whether 2014 NACoal earnings and cash flow meet management’s outlook, especially given lower royalty income and planned MLMC outages.
- Whether KC’s store closures and cost reductions improve profitability without creating significant lease-exit or restructuring costs.
- HBB’s retailer concentration, product demand, supplier reliability, and environmental remediation exposure at Picton and other sites.
- Subsidiary borrowing-base availability, covenant headroom, 2014 debt maturities and the parent’s ability to access subsidiary cash, including restrictions on transfers.
- Cash conversion and capital spending: 2013 operating cash flow was below net income and capital expenditures exceeded operating cash flow.