NACCO Industries, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing; fourth-quarter figures are presented within the annual results. Following the September 28, 2012 spin-off of Hyster-Yale, its results are reported as discontinued operations, so continuing-operations comparisons are the more relevant measure of NACCO’s ongoing businesses.
Business context and key financial metrics
NACCO’s continuing businesses are North American Coal (NACoal), Hamilton Beach Brands (HBB) and Kitchen Collection (KC). Unless otherwise noted, amounts below are in millions of dollars.
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $873.4 | $790.4 |
| Gross profit | $225.9 | $209.6 |
| Operating profit | $67.5 | $64.1 |
| Income from continuing operations | $42.2 | $79.5 |
| Discontinued-operations income, net of tax | $66.5 | $82.6 |
| Net income | $108.7 | $162.1 |
| Diluted EPS | $12.92 | $19.28 |
| Cash and cash equivalents at year-end | $139.9 | $153.7 |
| Total debt | $177.7 | $148.2 |
- Gross margin was approximately 25.9% and operating margin approximately 7.7% in 2012, calculated from reported figures.
- Continuing-operations operating cash flow was $74.4; continuing investing cash flow was negative $63.7 and continuing financing cash flow was negative $24.5. Including discontinued operations, operating cash flow was $143.1, investing cash flow negative $74.2 and financing cash flow negative $123.4.
- Year-end current assets were $486.8 and current liabilities $227.2 (current ratio approximately 2.1). Subsidiary debt is not guaranteed by NACCO’s parent company. Total debt rose mainly to fund NACoal’s Reed Minerals acquisition; continuing-operations debt-to-capitalization was 39%, versus 35% in 2011.
- Available unused revolving credit totaled $138.1 at year-end: NACoal $38.8, HBB $72.3 and KC $27.0. All three businesses reported covenant compliance. Parent cash was $120.7, but subsidiary credit agreements restricted approximately $149.0 of NACCO’s investment in subsidiaries; unrestricted cash available through subsidiary investments was $4.9.
Material changes versus the prior comparable period
- Continuing revenue increased 10.5%, and operating profit increased 5.3%. Continuing income fell to $42.2 from $79.5, partly reflecting the absence of the $60.0 million Applica litigation settlement recognized in 2011.
- Reported net income includes Hyster-Yale discontinued-operations income through the spin-off date. Hyster-Yale contributed $65.6 of 2012 net income before spin-off-related expenses; the 2012 discontinued-operations figure was $66.5 after tax. Accordingly, total net income is not directly indicative of ongoing NACCO earnings.
- NACoal revenue rose to $132.4 from $81.8, mainly due to the Reed Minerals acquisition, higher deliveries at consolidated operations and increased royalty and other income. Operating profit rose to $43.2 from $35.2, including $5.8 of gains on asset sales. Coal tons sold were 28.4 million versus 27.9 million.
- HBB revenue rose 5.8% to $521.6 and operating profit increased to $35.8 from $33.8, driven mainly by stronger volume and product mix. Wal-Mart represented approximately 31% of HBB revenue.
- KC revenue increased to $224.7 from $221.2, but the business moved from $2.5 of operating profit to a $4.6 operating loss and from $1.1 of net income to a $3.1 net loss. Lower-margin sales mix, higher employee and other expenses, closed-store liquidation margins and a $0.7 leasehold impairment contributed.
- Capital expenditures were $44.7, up from $20.2, while cash declined $13.8. NACCO acquired Reed Minerals on August 31 for a preliminary purchase price of $73.3, including $69.3 cash and estimated contingent consideration of up to $4.0; the purchase-price allocation remained preliminary.
Outlook, commentary and risks
- NACoal: Management expected 2013 net income to decrease slightly from 2012, mainly because 2012 included approximately $7.0 of pre-tax asset-sale gains. Excluding those gains, operating results were expected to improve on higher deliveries and lower operating expenses. Coal deliveries were expected to increase if customers achieved planned power-plant operating levels; metallurgical coal sales and limerock deliveries faced weaker demand. Planned 2013 capital expenditures were $40.5.
- NACoal’s development pipeline includes expected initial deliveries from Liberty and Caddo Creek in 2014, Camino Real in the third quarter of 2014, and Coyote Creek in 2016. These projects require successful permitting, development and customer execution; several are years from full production.
- HBB: Management expected 2013 revenue and volume growth above the market forecast, supported by new products and commercial and international markets, but expected net income to be comparable to 2012 as growth-related expenses offset much of the benefit. Cash flow before financing was expected to be moderately lower due to working capital needs.
- KC: Management expected 2013 revenue comparable to 2012, modest net income and positive cash flow before financing, versus a 2012 net loss. Consumer traffic, store closures and the success of store-format and merchandise changes remained uncertain.
- Key risks include coal demand and power-plant utilization, customer concentration and contract performance, mining permits and reclamation costs, environmental and emissions regulation, weather and operating disruptions, and steel-market demand affecting Reed Minerals. HBB faces retail-customer concentration, sourcing and transportation exposure, foreign currency and commodity costs; KC is exposed to seasonal consumer spending, store traffic, competition and lease obligations.
- Environmental and closure exposures include $29.0 of consolidated mine-closing reserves, including $16.4 for Bellaire’s long-term mine-water treatment and related obligations. HBB accrued $4.7 for environmental investigation and remediation and estimated reasonably possible additional costs of up to $3.2. The filing states no material legal proceedings beyond routine business litigation.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded Reed Minerals from the internal-control assessment because it was acquired in August 2012; it represented 13% of year-end assets and 3% of annual revenue.
Most important facts for investors to verify
- Separate ongoing continuing-business earnings from Hyster-Yale discontinued operations and the 2011 Applica settlement when assessing year-over-year performance.
- Review NACoal’s Reed Minerals integration, contingent consideration, metallurgical coal demand and the assumptions underlying future mine-development timelines and returns.
- Track KC’s comparable-store sales, margins, store closures and whether management’s expected 2013 recovery materialized.
- Assess debt maturities, revolving-credit availability, covenant restrictions and the amount of subsidiary cash that can be distributed to the parent.
- Monitor coal-policy and environmental developments, customer concentration, mine-reclamation estimates, and the continuing costs and timing of legacy water treatment.