NACCO Industries, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; filed August 3, 2011. NACCO operates lift-truck, small-appliance, specialty-retail and mining businesses.
Financial results and liquidity
- Revenue: Q2 revenue was $811.0 million, up 35.4% from $598.8 million. First-half revenue was $1.557 billion, up 34.6% from $1.156 billion.
- Profit: Q2 operating profit was $31.1 million versus $27.3 million; net income attributable to stockholders was $19.2 million versus $15.9 million. First-half operating profit was $66.4 million versus $51.5 million; attributable net income was $82.0 million versus $27.6 million. First-half diluted EPS was $9.76 versus $3.31.
- Margins: Q2 gross margin was approximately 17.0% versus 20.6% a year earlier; operating margin was approximately 3.8% versus 4.6%. First-half gross margin was approximately 17.6% versus 19.8%, and operating margin approximately 4.3% versus 4.5%.
- Cash flow: First-half operating cash flow was $55.9 million versus $39.4 million. Capital expenditures were $16.5 million; investing cash outflow was $15.8 million. Cash increased $39.6 million to $301.5 million, including a $4.3 million favorable exchange-rate effect.
- Debt and liquidity: Total debt was approximately $398.1 million, compared with $391.5 million at year-end 2010; cash was $301.5 million. Current maturities were $73.8 million and long-term debt $300.8 million. Consolidated equity was $541.2 million, up from $448.2 million. Subsidiary facilities were reported in compliance with covenants; NMHG reported $132.5 million excess availability, HBB had no revolver borrowings and a $72.4 million borrowing base, and NACoal reported $87.8 million excess availability.
- Dividends: First-half dividends were $1.055 per share; cash dividends paid were $8.9 million.
Material changes and drivers
- Lift-truck business NMHG drove consolidated growth: first-half revenue rose 56.5% and operating profit rose to $57.9 million from $20.1 million, reflecting higher unit and parts volumes, pricing and improved production levels. Its backlog was approximately 25,100 units at June 30, 2011, versus 21,700 a year earlier.
- HBB first-half revenue was nearly flat at $204.9 million, while operating profit fell to $6.9 million from $15.2 million. Margin pressure from product and transportation costs, distribution-center relocation expenses and higher bad-debt expense weighed on results.
- Kitchen Collection (KC) first-half revenue declined to $80.9 million from $83.7 million, and operating loss widened to $9.7 million from $5.8 million, reflecting weaker comparable-store results, store costs and distribution-center relocation expenses.
- NACoal first-half revenue declined to $37.3 million from $79.9 million and operating profit to $14.8 million from $26.7 million. The San Miguel contract ended in 2010, the prior-year period included a $7.6 million pre-development reimbursement, and customer outages and lower requirements reduced deliveries.
Outlook, commentary and risks
- Management expects consolidated 2011 net income to increase significantly, principally on NMHG volume recovery. It cautions that second-half earnings are expected to be substantially below first-half earnings because of scheduled plant shutdowns, higher materials and manufacturing costs, and higher employee-related expenses. Full-year cash flow before financing activities is expected to exceed 2010.
- NMHG expects stronger 2011 unit and parts markets, further product launches and higher material costs, particularly steel. It does not currently anticipate significant supply-chain disruptions.
- HBB expects 2011 revenue to increase but net income to be somewhat lower than 2010; price increases are not expected to fully offset cost increases. Its business is seasonal, with most revenue and operating profit typically in the second half.
- KC expects modest 2011 revenue growth and a slight improvement in full-year net income, while noting challenging consumer conditions and higher product and transportation costs. Its business is seasonal.
- NACoal expects full-year net income to decline significantly because of the San Miguel contract expiration, lower royalties, customer outages and the absence of the prior-year reimbursement. It expects lower coal and limerock deliveries than in 2010.
- Notable unusual item: NACCO received $60 million in February 2011 to settle Applica litigation. The income statement recorded a $57.2 million benefit in first-half other income/expense, after litigation costs; this materially boosted reported first-half pretax and net income and is not a recurring operating result.
- Other exposures include foreign-exchange and floating-rate risks, seasonal demand, commodity and transportation costs, customer and supplier credit, mine permitting and operating conditions, and product liability or warranty claims. Lift-truck financing guarantees and recourse obligations totaled $195.9 million; reserves for anticipated losses were $3.4 million. Management said material losses beyond recorded accruals on ordinary-course legal claims were remote. No material changes to market-risk exposure were reported.
Most important facts for investors to verify
- Separate recurring operating performance from the $57.2 million Applica settlement benefit when assessing first-half earnings and EPS.
- Track whether NMHG’s volume and backlog growth translate into sustained margins amid rising material costs and higher operating expenses.
- Assess cash conversion and working-capital demands: inventory increased, and first-half operating cash flow benefited from factors beyond net income.
- Monitor HBB’s margin recovery and KC’s comparable-store performance, seasonal results and borrowing needs.
- Confirm subsidiary facility availability, covenant compliance and refinancing plans, including HBB’s July 2012 revolver expiration and NACoal’s October 2012 facility expiration.
- Review the consequences of mine customer outages, the ended San Miguel contract, pending safety-citation contests and the contingent lift-truck financing guarantees.