NACCO Industries, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. NACCO operates in coal mining, small appliances (Hamilton Beach Brands, or HBB) and specialty retail (The Kitchen Collection, or KC). Results are unaudited; HBB and KC are seasonal, with a significant share of sales and operating profit typically occurring in the second half.
Financial performance
Amounts below are in millions of dollars except per-share data. Margin percentages are calculated from reported figures.
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $221.7 | $228.6 | $599.5 | $620.7 |
| Gross profit / margin | $46.5 / 21.0% | $49.2 / 21.5% | $119.2 / 19.9% | $143.1 / 23.1% |
| Operating profit / margin | $11.3 / 5.1% | $16.7 / 7.3% | $6.8 / 1.1% | $32.5 / 5.2% |
| Net income | $7.7 | $12.3 | $2.6 | $21.9 |
| Diluted EPS | $1.02 | $1.54 | $0.33 | $2.67 |
- Revenue declined 3.0% in Q3 and 3.4% for the first nine months year over year. Net income fell 37.5% in Q3 and 88.4% year to date.
- For the nine months, operating cash flow was $2.2 million, investing cash outflow was $47.3 million, and financing provided $0.3 million. Cash fell $44.8 million to $50.6 million. Capital expenditures were $47.7 million, compared with $24.9 million in the prior-year period.
- At September 30, cash was $50.6 million, current assets $450.4 million and current liabilities $287.5 million. Total debt was $216.6 million, up from $183.8 million at December 31, 2013; total stockholders’ equity was $269.2 million. Debt is at subsidiaries and is not guaranteed by the parent.
- The company repurchased $26.4 million of Class A shares and paid $5.9 million in dividends in the first nine months. Quarterly dividend per share was $0.2575 versus $0.2500 a year earlier.
Material changes and segment results
- NACoal: Nine-month revenue declined to $139.5 million from $147.6 million and operating profit to $11.2 million from $32.7 million. Lower royalty and other income, weaker Reed Minerals results, lower MLMC deliveries, higher expenses and a $1.2 million customer-equipment damage charge weighed on results. Reed Minerals experienced production shortfalls after a delayed dragline startup and faced lower metallurgical coal prices. Q3 operating profit was $4.4 million versus $9.7 million.
- HBB: Nine-month revenue was essentially flat at $354.9 million, but operating profit fell to $12.7 million from $18.5 million. Higher SG&A, environmental expense, professional fees, advertising and adverse currency movements more than offset improved product mix and gross profit. Q3 operating profit was $9.5 million versus $11.8 million.
- KC: Nine-month revenue fell to $107.2 million from $120.7 million, while operating loss narrowed to $12.2 million from $14.0 million. Store closures and lower costs helped, but comparable-store sales weakened. At quarter-end, KC operated 239 stores and Le Gourmet Chef 14, down from 258 and 36, respectively, a year earlier.
Outlook, risks and unusual items
- Outlook: NACoal expected Q4 2014 net income to rise significantly year over year, aided by Reed Minerals improvements and a $3.5 million gain on an October asset sale; fewer MLMC deliveries and lower royalty income were expected offsets. It forecast significantly higher 2015 net income versus 2014 and positive 2014 cash flow before financing activities.
- HBB expected moderately higher Q4 net income than in Q4 2013, but lower full-year 2014 net income than 2013. It anticipated revenue and net income growth in 2015, subject to consumer demand, strategic initiative costs, product and transport costs, and currency effects.
- KC expected substantially higher Q4 net income year over year but a full-year 2014 loss. It anticipated substantially lower revenue in Q4 and 2015, and results near break-even in 2015, relying on cost reductions, store closures and improved margins.
- Notable items included a $1.1 million after-tax allowance against a receivable from NACC India after its customer defaulted and the contract was terminated; a $1.1 million charge for correction of a prior-period deferred compensation estimate, which management said was not material to prior periods; and a $3.3 million increase in HBB’s Picton environmental remediation liability. HBB’s total environmental accrual was $10.0 million, with up to $4.2 million of additional costs considered reasonably possible.
- Key risks include potential coal-demand effects from proposed and existing emissions regulation, coal prices and customer power-plant outages; continued weak consumer and mall traffic; foreign exchange and sourcing costs at HBB; and store performance and lease obligations at KC. Management said material legal costs beyond existing accruals were considered remote. NACoal, HBB and KC reported compliance with their credit-facility covenants.
Important facts for investors to verify
- Whether Reed Minerals’ productivity recovery and planned operating improvements materialize, and how coal prices affect its economics.
- Actual customer outage schedules and delivery ramp-ups at MLMC and newer unconsolidated mines, including Kemper facility timing.
- HBB’s holiday-season demand, margins, inventory levels and working-capital needs; KC’s sales trends and planned store closures.
- Cash generation and borrowing needs following the $47.7 million of nine-month capital expenditures and the increase in debt.
- Developments in the NACC India receivable recovery, HBB environmental remediation estimates and coal-emissions regulation.