NACCO Industries, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. NACCO operates in coal mining and mining services (NACoal), small appliances (Hamilton Beach Brands, HBB), and specialty retail (The Kitchen Collection, KC). HBB and KC are seasonal, with most revenue and operating profit typically generated in the second half.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $178.0 million | $196.5 million | $351.4 million | $390.2 million |
| Gross profit | $40.5 million | $35.4 million | $80.5 million | $73.6 million |
| Operating profit | $5.2 million | $1.3 million | $10.6 million | $4.5 million |
| Net income (loss) | $3.1 million | $(0.3) million | $5.9 million | $0.8 million |
| Diluted EPS | $0.45 | $(0.04) | $0.86 | $0.11 |
- Revenue declined about 9% year over year in both periods. Gross margin improved to 22.8% in Q2 from 18.0%, and to 22.9% for the half-year from 18.9%. Operating margin rose to 2.9% in Q2 from 0.7%, and to 3.0% for the half-year from 1.2%.
- Six-month operating cash flow was $17.0 million, versus $49.9 million in 2015. Investing used $8.6 million, including $8.7 million of capital expenditures; financing used $26.5 million, including $16.6 million of long-term debt repayments, $3.6 million in dividends and $3.8 million in treasury share purchases. Cash fell by $18.2 million to $34.3 million.
- At June 30, current assets were $321.0 million and current liabilities $161.7 million (current ratio approximately 2.0). Reported debt was approximately $151.2 million, down from $170.0 million at year-end 2015; subsidiary borrowings are not guaranteed by the parent. The filing reports sufficient liquidity for anticipated needs over the next 12 months and states subsidiaries were in compliance with their credit-facility covenants.
- Dividends were $0.2675 per share in Q2 and $0.53 per share for the half-year. A new program authorizes up to $50 million of Class A share repurchases through December 31, 2017; $3.8 million had been repurchased by June 30.
Segment trends and material changes
- NACoal: Six-month revenue fell to $53.4 million from $79.3 million, largely because Centennial stopped coal production in Q4 2015. Operating profit increased to $14.6 million from $7.6 million, reflecting lower Centennial wind-down costs and higher unconsolidated-mine earnings. Limerock volumes increased; MLMC results faced customer power-plant outages and lower index-linked prices.
- HBB: Half-year revenue declined 4% to $242.8 million; operating profit was $4.8 million versus $5.1 million, while net income rose to $2.7 million from $2.2 million. Q2 operating profit improved on product mix and lower SG&A, despite currency-related revenue pressure. HBB’s revolving-facility maturity was extended to June 2021.
- KC: Half-year revenue declined to $57.0 million from $59.7 million; operating loss was $5.9 million versus $6.0 million. KC operated 220 stores at June 30, down from 225 a year earlier, and continued its shift toward a smaller core store base.
- The company recorded a $2.3 million tax benefit from reversing an uncertain tax position associated with the Centennial acquisition, offset in part by a $2.2 million reversal of a related indemnification receivable recorded as other expense.
Outlook, risks and contingencies
- NACoal: Expects higher coal tonnage in H2 2016 than H2 2015, but lower income before tax excluding Centennial, mainly due to expected weaker MLMC results and lower royalty and limerock income. The company expects newer unconsolidated mines to add earnings. Its long-term goal of increasing unconsolidated-mine earnings 50% from the 2012 level is expected in 2017 or 2018, subject to inflation and customer demand. Remaining 2016 capital expenditures were estimated at $9.7 million.
- HBB: Expects H2 revenue and net income to increase year over year, supported by new products, distribution and lower product costs, but notes uncertain consumer demand, a difficult Canadian market, currency exposure and potentially higher SG&A. H2 market volumes are expected comparable to or slightly below 2015; HBB expects its own volumes to increase moderately. Remaining 2016 capital expenditures were estimated at $4.8 million.
- KC: Expects H2 revenue and results to decline slightly year over year amid weak retail traffic and consumer spending. Management expects positive but substantially lower full-year 2016 cash flow before financing than in 2015. Remaining 2016 capital expenditures were estimated at $1.5 million.
- Centennial continues reclamation and asset-disposal work; further impairment charges are possible if circumstances indicate remaining assets are not recoverable. The company cites coal-market, customer-demand, regulatory, permit, operating-cost, foreign-exchange, consumer-spending and retail-traffic risks.
- Potential contingencies include up to $4.5 million of royalty repayment if a court rules against NACCO in Ohio Dormant Mineral Act litigation. HBB had accrued $9.2 million for environmental remediation and disclosed reasonably possible additional costs of up to $5.4 million. NACoal also has contingent guarantees related to Coyote Creek; management considered future performance remote and recorded no amount.
Investor facts to verify
- Whether second-half seasonal sales and the segment outlooks materialize, particularly HBB’s projected profit improvement and KC’s expected decline.
- The sustainability of NACoal’s improved operating profit, including the effects of Centennial’s wind-down, mine ramp-ups and MLMC cost and volume assumptions.
- Cash generation, working-capital movements, subsidiary debt, borrowing availability and covenant headroom; consolidated cash declined despite positive operating cash flow.
- Potential outcomes and financial exposure from the Ohio mineral-rights litigation, HBB environmental remediation and Coyote Creek guarantees.
- The use of the new share-repurchase authorization and any effects on liquidity and capital allocation.