NACCO Industries, Inc. — Q3 2015 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2015. NACCO operates in coal mining and mining services (NACoal), small appliances (Hamilton Beach Brands, or HBB), and specialty retail (The Kitchen Collection, or KC). HBB and KC are seasonal, with a majority of their revenue and operating profit typically earned in the second half.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $239.1 million | $221.7 million | $629.3 million | $599.5 million |
| Gross profit | $42.2 million | $46.5 million | $115.8 million | $119.2 million |
| Operating profit | $5.8 million | $11.3 million | $10.3 million | $6.8 million |
| Net income | $3.1 million | $7.7 million | $3.9 million | $2.6 million |
| Diluted EPS | $0.45 | $1.02 | $0.55 | $0.33 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $59.8 million | $2.2 million |
Q3 revenue rose about 7.8%, while net income declined about 59%. For the first nine months, revenue increased about 5.0% and net income about 52.6%. Gross margin was approximately 17.7% in Q3 and 18.4% year to date, compared with 21.0% and 19.9%, respectively, in the prior-year periods. The year-to-date effective tax rate was 10.5%; Q3’s was 4.1%, reflecting discrete tax benefits and a changed mix of taxable income.
Cash, debt and liquidity
- At September 30, cash was $11.8 million, versus $61.1 million at December 31, 2014. Current assets were $411.3 million and current liabilities $256.0 million, for a current ratio of approximately 1.61.
- Consolidated cash provided by operating activities was $59.8 million for nine months; investing activities used $6.3 million and financing activities used $102.7 million. Financing outflows included $74.1 million of net revolver reductions and $23.2 million of treasury-share purchases. Capital expenditures were $7.5 million, down from $47.7 million a year earlier.
- Revolving borrowings, current maturities and long-term debt totaled approximately $174.0 million, compared with $247.9 million at year-end 2014. The filing reports no parent-company guarantee of subsidiary borrowings. NACoal, HBB and KC reported facility availability of $123.8 million, $50.1 million and $19.8 million, respectively; each was in compliance with its stated financial covenants.
- Dividends paid were $5.5 million for the nine months; declared dividends were $0.2625 per share for Q3. The company completed its $60 million stock repurchase program on October 6, 2015.
Segments and material changes
- NACoal: Q3 revenue fell to $42.7 million from $49.8 million, and operating results moved from $4.4 million profit to a $4.0 million loss. The main unusual item was a $7.5 million increase in Centennial’s asset-retirement obligation; a $0.5 million severance charge also followed the decision to end mining there by year-end 2015. NACoal reported a $5.3 million Q3 net loss. Nine-month operating profit fell to $3.6 million from $11.2 million.
- HBB: Q3 revenue increased 20.8% to $163.3 million, including Weston Brands, acquired in December 2014; excluding Weston, revenue rose 13.8%. Operating profit increased to $11.6 million from $9.5 million. Higher volumes and Weston contributed, partly offset by lower-margin mix, product costs, higher SG&A and adverse currency effects. Nine-month operating profit rose to $16.7 million from $12.7 million.
- KC: Q3 revenue declined to $34.7 million from $37.6 million, while operating loss narrowed to $0.8 million from $1.4 million. Nine-month revenue fell to $94.5 million from $107.2 million, but operating loss improved to $6.9 million from $12.2 million. Store closures and improved comparable-store margins supported the improvement. KC had 224 stores at September 30, versus 253 a year earlier.
Outlook, risks and contingencies
- NACoal: Management expected improved Q4 operating performance, excluding comparison effects from 2014’s impairment charge and asset-sale gains. It expected higher pretax income in 2016 than in 2015, but lower cash flow before financing activities, with 2016 capital expenditures estimated at approximately $25 million versus $7.6 million in 2015. Centennial was expected to incur a Q4 loss during its wind-down and a moderate loss in 2016. Risks include reclamation costs, coal-market conditions, customer demand, regulation and power-plant closures.
- HBB: Management expected Q4 revenue to increase but operating profit to be comparable with Q4 2014; 2016 sales, revenue and net income were expected to increase. These expectations depend on consumer demand, product placements and successful Weston integration, and could be affected by foreign exchange, advertising, distribution and transportation costs.
- KC: Management expected lower Q4 revenue but significantly improved operating profit, roughly break-even operating profit for full-year 2015, and a possible return to profitability in 2016. Mall traffic, consumer spending and competition, including online retailers, remain risks.
- HBB had accrued $8.5 million for environmental investigation and remediation at September 30, 2015; it estimated reasonably possible additional costs of zero to $4.7 million. Management said it believed material legal losses beyond recorded accruals were remote. The filing lists no legal proceedings under Part II, Item 1.
- The filing discusses exposure to interest rates, foreign exchange and diesel fuel. It also identifies Clean Air Act and Clean Power Plan requirements as potential risks to coal demand. Management stated disclosure controls were effective and reported no material Q3 change in internal control over financial reporting; Weston’s integration work was ongoing.
Important facts for investors to verify
- Track Centennial’s closure, final reclamation costs and any further revisions to its asset-retirement obligations.
- Assess the assumptions behind NACoal’s coal-demand outlook, including Clean Power Plan implementation, customer requirements and new-mine delivery schedules.
- Monitor HBB’s sales and margins excluding Weston, working-capital needs, foreign-exchange exposure and integration progress.
- Check KC’s holiday-season performance, store-opening and closure plans, and progress toward its projected 2016 profitability.
- Reconcile the sharp decline in cash with operating cash generation, debt repayments, seasonal working capital and the completed share-repurchase program; review available subsidiary credit-facility capacity and covenant headroom.
- Follow environmental remediation estimates and the potential additional cost range, as well as any developments in Coyote Creek guarantees or other contingencies.