NACCO Industries, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. NACCO operates in mining, small appliances and specialty retail through NACoal, Hamilton Beach Brands (HBB) and The Kitchen Collection (KC). HBB and KC are seasonal, with most sales and operating profit typically in the second half of the year.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $168.6 million | $173.4 million |
| Gross profit / gross margin | $39.1 million / 23.2% | $40.0 million / 23.1% |
| Operating profit / operating margin | $7.4 million / 4.4% | $5.4 million / 3.1% |
| Net income | $5.0 million | $2.8 million |
| Diluted EPS | $0.73 | $0.41 |
| Operating cash flow | $(42.2) million | $(3.8) million |
| Capital expenditures | $4.7 million | $4.4 million |
Revenue declined 2.8%, while net income rose 78%. Operating profit improved despite lower gross profit, principally because earnings from unconsolidated mines increased. Cash used in operations rose substantially, reflecting working-capital movements, including reductions in accounts payable and other current liabilities. Cash fell $24.2 million from year-end to $56.4 million.
At March 31, total debt was $158.0 million, consisting of subsidiary borrowings that are not guaranteed by the parent; the company-reported debt-to-total-capitalization ratio was 41%, up from 38% at December 31, 2016. Current assets were $330.9 million and current liabilities $167.2 million. Subsidiaries reported available borrowing capacity of $140.9 million at NACoal, $45.0 million at HBB and $12.3 million at KC; each reported compliance with its financial covenants. The company said available cash, credit facilities and expected operating cash flow should cover operating needs and commitments for the next 12 months.
The quarterly dividend was $0.2675 per share, versus $0.2625 a year earlier. NACCO did not repurchase shares under its $50 million authorization during the quarter.
Segments and changes versus prior period
- NACoal: Revenue was $28.3 million versus $30.3 million; operating profit increased to $11.3 million from $9.7 million. Higher earnings from unconsolidated mines and lower Centennial costs outweighed weaker consolidated-mine results, including lower MLMC customer requirements. Coal tons sold increased to 9.9 million from 7.8 million, with new or increased production at unconsolidated mines.
- HBB: Revenue declined 1.4% to $114.2 million, while operating profit improved to $0.8 million from $0.1 million and net income was $0.7 million versus a $0.3 million loss. Higher-margin product mix and lower costs helped, partly offset by lower volume, transportation and warehousing costs.
- KC: Revenue declined to $26.7 million from $28.4 million; operating loss widened to $3.3 million from $2.9 million. Store closures and weaker comparable-store sales contributed; lower-margin sales mix also pressured operating results. KC had 208 stores at quarter-end, compared with 222 a year earlier.
Outlook, risks and unusual items
- NACoal: Management expected a significant increase in 2017 tons sold and pretax income versus 2016, including and excluding the effect of Centennial’s 2016 charges. New Bisti production and a full year at Coyote Creek were expected to support earnings; lower MLMC results and lower consolidated limerock activity were expected to offset part of the improvement. Full-year capital expenditures were estimated at about $17 million. The longer-term goal of increasing unconsolidated-mine earnings 50% from the 2012 level was pushed to 2020 or 2021, from prior expectations, reflecting slower inflation escalation and customer demand.
- HBB: Management expected modest 2017 revenue and net-income growth, conditional on consumer spending meeting expectations; strategic product, advertising and distribution costs were expected to offset much of the revenue benefit. Full-year capital expenditures were estimated at about $8 million. Consumer spending, retail-channel shifts, input costs and foreign exchange remain risks.
- KC: Management expected modestly lower 2017 revenue and full-year operating results comparable to 2016, conditional on customer visits meeting expectations. It closed 17 stores early in Q1 and planned limited openings, focusing on a smaller core of profitable stores. Continued weakness in store traffic and online competition are risks.
- Contingencies: HBB had $9.0 million accrued for environmental investigation and remediation, and estimated reasonably possible additional costs of $0–$5.0 million. NACoal’s Coyote Creek guarantees could require a make-whole payment or later asset purchase under specified circumstances; management considered future performance remote and recorded no amount. The filing describes ordinary-course legal and regulatory claims but reports no specific material outcome.
- Other items: Q1 comprehensive income was $6.2 million, including $1.2 million of other comprehensive income. NACCO planned to adopt the new revenue-recognition standard in 2018 and was assessing its impact. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether unconsolidated-mine production and customer power-plant demand develop as forecast, particularly at Bisti, Coyote Creek and Liberty.
- How working-capital requirements, seasonal cash flows and subsidiary borrowing levels affect liquidity through the rest of 2017.
- Whether HBB’s expected modest growth is realized amid consumer and channel uncertainty, and whether KC’s store rationalization can stabilize results.
- Potential changes to environmental remediation estimates, mine reclamation costs, and the exposure under Coyote Creek guarantees.
- The company’s progress assessing the financial and reporting effects of adopting the revenue-recognition standard in 2018.