NACCO Industries, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2016, compared with the same 2015 periods. NACCO operates through North American Coal (NACoal), Hamilton Beach Brands (HBB), and The Kitchen Collection (KC). HBB and KC are seasonal, with a majority of their revenue and operating profit typically generated in the second half of the year.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $220.8 million | $239.1 million | $572.2 million | $629.3 million |
| Gross profit | $51.7 million | $42.2 million | $132.2 million | $115.8 million |
| Operating profit | $0.7 million | $5.8 million | $11.3 million | $10.3 million |
| Net income (loss) | $(0.4) million | $3.1 million | $5.5 million | $3.9 million |
| Diluted EPS | $(0.07) | $0.45 | $0.80 | $0.55 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $46.2 million | $59.8 million |
Q3 gross margin was approximately 23.4%, versus 17.7% a year earlier; nine-month gross margin was approximately 23.1%, versus 18.4%. Q3 operating margin was approximately 0.3%, versus 2.4%; nine-month operating margin was approximately 2.0%, versus 1.6%.
- At September 30, cash was $44.3 million, total assets $664.1 million, total liabilities $467.8 million and stockholders’ equity $196.3 million.
- Balance-sheet debt was approximately $137.3 million, comprising subsidiary revolving borrowings and current and long-term debt; cash less this debt was approximately $(93.0) million. Subsidiary borrowings are not guaranteed by the parent.
- Nine-month investing cash outflow was $9.9 million and financing cash outflow was $44.4 million. Financing included $29.6 million of long-term debt repayments, $3.1 million of net revolving-credit repayments, $5.5 million of dividends and $6.0 million of share repurchases.
- Cash declined $8.2 million from year-end 2015 to $44.3 million. The company reported total debt to capitalization of 41%, down from 46% at December 31, 2015.
Material changes versus prior periods
- Consolidated revenue fell 7.7% in Q3 and 9.1% over nine months. NACoal revenue declined substantially following Centennial’s cessation of coal production in late 2015; HBB and KC also had lower revenue.
- Q3 results included a $17.4 million Centennial impairment charge, reducing the carrying value of its coal land and real estate to zero and machinery and equipment held for sale to about $5.0 million. This contributed to NACoal’s $10.9 million Q3 operating loss and the company’s quarterly net loss.
- Nine-month net income increased to $5.5 million from $3.9 million despite revenue contraction. HBB improved operating profit and net income; KC remained loss-making. NACoal’s nine-month net loss of $1.1 million compared with prior-year net income of $3.4 million.
- Operating cash flow was lower year over year, mainly reflecting less favorable working-capital changes. Company-wide inventory increased to $201.3 million from $165.0 million at year-end 2015, including higher HBB sourced inventory ahead of the holiday season.
Outlook, commentary and risks
- NACoal: Management expected higher Q4 coal tons sold and income versus Q4 2015, but full-year 2016 operating profit excluding Centennial was expected to decline from 2015. For 2017, excluding the 2016 impairment, NACoal expected a significant increase in pretax income, driven by Bisti’s contract-mining transition and a full year of Coyote Creek production, partly offset by weaker MLMC and limerock results. Centennial was expected to incur a moderate Q4 loss while continuing reclamation and asset disposals.
- HBB: Management forecast Q4 sales and revenue growth, subject to expected consumer spending, and comparable full-year 2016 revenue with a significant increase in full-year net income. For 2017, revenue was expected to increase but net income to remain comparable to 2016 as growth initiatives, advertising, distribution and taxes offset revenue benefits. Consumer demand, foreign exchange, product costs and freight remain important uncertainties.
- KC: Management expected modest revenue declines in Q4 and for full-year 2016, with full-year results expected to be comparable to 2015. It forecast near-breakeven 2017 results on lower revenue, dependent on customer visits and store initiatives. The company operated 221 stores, down from 224 a year earlier, amid declining physical-store traffic and consumer spending pressure.
- Environmental remediation obligations at HBB were accrued at $9.0 million; reasonably possible additional costs were estimated at zero to $5.3 million. The filing describes ordinary-course legal and regulatory matters but gives no clear aggregate potential-loss value.
- NACoal’s Coyote Creek guarantees could require make-whole payments or, in specified circumstances after 2023, an asset purchase; management considered future performance remote and recorded no liability. The company also cited mine reclamation, permits, customer demand and power-plant outages, retail conditions, competition, foreign exchange, product claims and input costs as risks.
- Management stated that subsidiaries were in compliance with their credit-facility covenants and believed available cash, facilities and operating cash flows would meet needs for the next 12 months. The NACoal facility had $123.9 million excess availability; HBB had $89.2 million; KC had $15.4 million.
Important facts for investors to verify
- Whether the $17.4 million Centennial impairment and ongoing reclamation costs indicate further asset or cash-flow exposure.
- Whether forecast production and customer demand materialize at Bisti, Coyote Creek and Liberty, and how MLMC and limerock performance develops.
- Whether HBB achieves its seasonal sales and earnings outlook despite uncertain consumer demand, and whether inventory and working capital remain controlled.
- Whether KC’s store rationalization and operating initiatives can deliver the forecast near-breakeven 2017 result.
- Potential environmental, guarantee and reclamation obligations, including any developments that change recorded estimates or the stated likelihood of loss.
- That interim results are not necessarily indicative of full-year results; HBB and KC’s second-half seasonality is particularly significant.