NACCO Industries, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited results cover NACoal (mining), Hamilton Beach Brands (HBB; small appliances), and The Kitchen Collection (KC; specialty retail). Hyster-Yale was spun off on September 28, 2012; its results are reported as discontinued operations through the spin-off date, making prior-year total net income and cash flows less comparable.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $228.6m | $210.1m | $620.7m | $555.2m |
| Gross profit | $49.2m | $52.2m | $143.1m | $141.0m |
| Operating profit | $16.7m | $14.8m | $32.5m | $30.5m |
| Continuing-operations income, net | $12.3m | $10.4m | $21.9m | $18.5m |
| Diluted EPS from continuing operations | $1.54 | $1.23 | $2.67 | $2.21 |
| Operating cash flow from continuing operations | Not provided by quarter | Not provided by quarter | $7.0m | $10.7m |
Calculated gross margin was approximately 21.5% for Q3 and 23.1% for the first nine months, down from approximately 24.9% and 25.4%, respectively, in 2012. Operating margin for the first nine months was approximately 5.2%, versus 5.5%.
Cash and cash equivalents were $79.4m at September 30, down from $139.9m at December 31, 2012. For the first nine months, continuing operations used $28.9m in investing activities and $38.6m in financing activities; cash declined $60.5m. Consolidated debt was approximately $174.8m, compared with $177.7m at year-end. The company paid $6.1m in dividends and spent $27.4m repurchasing shares during the period.
Material changes and segment results
- NACoal: Nine-month revenue increased to $147.6m from $81.5m, principally reflecting Reed Minerals, acquired in August 2012, and higher consolidated mining and royalty revenues. Operating profit rose to $32.7m from $29.7m, but Reed Minerals incurred operating losses amid weaker-than-expected metallurgical coal demand, higher costs, weather and mining restrictions. The prior period included asset-sale gains that did not recur.
- HBB: Nine-month revenue grew to $354.9m from $340.4m and operating profit to $18.5m from $15.9m. Growth in new and higher-priced products and commercial sales helped; higher SG&A and a $2.3m Picton environmental charge partly offset gains. HBB generated $16.6m of operating cash flow and reduced debt.
- KC: Nine-month revenue fell to $120.7m from $135.8m; operating loss widened to $14.0m from $11.6m. Store closures and lower comparable sales contributed to the decline. KC operated 258 Kitchen Collection and 36 Le Gourmet Chef stores at quarter-end, down from 264 and 55, respectively, a year earlier.
Liquidity, outlook and risks
- Management stated that available cash, credit facilities and expected operating cash flows should fund subsidiary operating needs and commitments for the next 12 months. At September 30, NACoal had $42.9m of revolver availability, HBB $88.4m and KC $12.3m. Each subsidiary was reported in compliance with its financial covenants.
- NACoal expected Q4 2013 net income to be comparable with Q4 2012 and 2014 net income to decline moderately versus 2013. Reed was expected to remain loss-making in Q4; management expected improvement toward break-even in 2014, subject to resolving mining restrictions and productivity improvements. NACoal was evaluating potential Reed impairment; any charge was expected to be non-cash.
- HBB expected Q4 2013 net income comparable with the prior year and 2014 net income slightly higher than 2013, dependent on consumer spending, product placements and execution of initiatives. KC expected a full-year 2013 loss, lower revenue in Q4 and 2014, and results around break-even in 2014; these expectations depended partly on mall traffic, store actions and merchandise mix. HBB and KC are seasonal, with most revenue and operating profit typically in the second half.
- Unusual items included a pension-plan freeze effective January 1, 2014, reducing the pension liability by $7.3m and producing a $1.7m pre-tax curtailment gain. HBB had $7.2m accrued for environmental remediation and estimated reasonably possible additional costs of up to $4.7m. Reed contingent consideration was valued at $1.6m at quarter-end and depends on coal prices and deliveries.
- Key risks include Reed operating performance and coal prices, mine permits and customer demand; HBB consumer demand, product costs, suppliers and foreign exchange; and KC store traffic, comparable sales and store closures. Management also noted potential effects from environmental obligations and power-plant operating levels. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Reed Minerals’ mining restrictions, costs, demand and productivity improve as management assumes, and the outcome of its impairment evaluation.
- Whether NACoal’s and HBB’s forecasted earnings and cash-flow trends materialize, and whether KC can approach break-even amid store closures and weak comparable sales.
- The scale and timing of HBB environmental remediation costs, including the possible additional $0–$4.7m exposure.
- Credit-facility availability, covenant compliance and cash needs, particularly KC’s more limited $12.3m excess availability.
- How second-half seasonality, consumer spending, commodity and transportation costs, and the Kemper County power-plant delay affect results against segment outlooks.