NACCO Industries, Inc. — 2014 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2014. NACCO is a holding company with three principal businesses: North American Coal (NACoal), Hamilton Beach Brands (HBB), and Kitchen Collection (KC). The 2014 results include Weston Brands from its December 16 acquisition date. Hyster-Yale had been spun off in 2012 and is reported as discontinued operations only in 2012.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $896.8 million | $932.7 million |
| Gross profit | $185.1 million | $221.3 million |
| Operating profit (loss) | $(66.3) million | $61.3 million |
| Continuing operations net income (loss) | $(38.1) million | $44.5 million |
| Diluted EPS | $(5.02) | $5.47 |
| Operating cash flow | $19.8 million | $53.1 million |
| Capital expenditures | $57.5 million | $57.4 million |
| Cash and cash equivalents at year-end | $61.1 million | $95.4 million |
| Total debt | $247.9 million | $183.8 million |
| Stockholders’ equity | $211.5 million | $297.8 million |
Revenue declined 3.9%. The operating loss principally reflects a $105.1 million non-cash impairment charge on Reed Minerals’ long-lived assets. Gross margin was approximately 20.6%, versus 23.7% in 2013; the operating margin was approximately negative 7.4%, versus positive 6.6%. Net cash used for investing activities was $74.9 million, including the Weston acquisition; net cash provided by financing activities was $21.0 million. Cash decreased $34.3 million during the year.
- NACoal: Revenue was $172.7 million, down 10.8%; operating loss was $89.0 million versus $37.5 million operating profit. Net loss was $51.0 million versus $31.9 million net income. The impairment, weaker royalty income, higher Reed Minerals costs and fewer MLMC deliveries were key factors. Earnings from unconsolidated mines rose to $48.4 million from $46.4 million.
- HBB: Revenue increased 2.2% to $559.7 million, while operating profit fell to $35.8 million from $41.0 million and net income was $23.1 million versus $25.1 million. Revenue growth reflected product mix and volume, partly offset by currency and lower comparable-product pricing.
- KC: Revenue declined 14.0% to $168.5 million as stores closed and comparable sales weakened. Operating loss narrowed to $7.1 million from $10.9 million; net loss narrowed to $4.6 million from $6.9 million.
Material changes, outlook and risks
- Reed Minerals’ $105.1 million impairment followed weaker Alabama coal markets, lower metallurgical coal demand and prices, and customer coal-quality requirements expected to raise processing costs. Management said it was uncertain whether blending or washing could meet the requirements profitably. Reed Minerals was renamed Centennial Natural Resources effective January 1, 2015.
- HBB acquired Weston Brands for approximately $25.4 million, including $25.0 million paid at closing. Weston contributed $1.1 million of revenue and a $0.2 million operating loss in 2014. HBB’s outlook anticipated higher 2015 revenue and moderately higher net income, supported by new products and a full year of Weston, with cost, currency and execution risks.
- Management expected NACoal’s 2015 operating performance to improve overall and cash flow before financing activities to turn positive. Centennial was still expected to incur a substantial operating loss; management noted a marginally negative effect on NACoal’s 2015 cash flow. The forecast depended on coal demand and pricing, customer requirements, plant outages, and successful cost management.
- KC expected 2015 revenue to decline and net income to be near break-even, while planning to close another 28 stores, mostly in the first quarter. Consumer traffic and spending remained key uncertainties.
- Liquidity: NACoal had $180.0 million outstanding on its $225.0 million revolving facility and approximately $44.0 million available; HBB had $52.8 million outstanding and $59.3 million available under its facility; KC had no borrowings and $22.6 million available. Each business reported compliance with its credit covenants at year-end. NACCO noted that subsidiary debt is not guaranteed by the parent and that some subsidiary assets and cash flows are restricted.
- Other notable matters include HBB environmental remediation accruals of $9.7 million, with up to $3.9 million of additional reasonably possible costs; a $1.1 million charge to correct a prior-period deferred-compensation estimate, which management deemed immaterial to prior periods; and a $1.1 million after-tax allowance against a receivable from a defaulting Indian customer. No material legal proceedings were reported.
- Principal risks include coal regulation and reduced coal-fired generation, reliance on long-term mining customers, coal price and operating-cost volatility, HBB’s customer concentration and China-based sourcing, retail competition and seasonality, environmental obligations, and interest-rate and foreign-currency exposure.
Most important facts for investors to verify
- Review the assumptions and valuation inputs behind the Reed Minerals impairment and whether Centennial can meet customer coal-quality requirements at an economic cost.
- Track NACoal’s debt, covenant headroom, cash generation and expected Coyote Creek repayment of the $53.2 million payable to NACoal.
- Assess delivery, outage and development risks affecting NACoal mines, including Liberty, Camino Real and Coyote Creek.
- Check HBB’s Weston integration, new-product performance, customer concentration and environmental remediation exposure.
- Monitor KC store closures, comparable-store sales and progress toward break-even.
- Note that the auditors issued unqualified opinions on the financial statements and internal controls; management excluded recently acquired Weston Brands from its internal-control assessment.