NACCO Industries, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2012, compared with the same 2011 periods. On September 28, 2012, NACCO spun off Hyster-Yale; its results are reported as discontinued operations for all periods presented. Continuing businesses are NACoal, Hamilton Beach Brands (HBB) and The Kitchen Collection (KC). Amounts below are in millions except per-share data.
Key financial results
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $210.1 | $194.6 | $555.2 | $516.5 |
| Gross profit | $52.3 | $48.5 | $141.1 | $129.3 |
| Operating profit | $14.8 | $13.3 | $30.5 | $21.8 |
| Income from continuing operations | $10.2 | $8.2 | $18.5 | $49.6 |
| Income from discontinued operations | $27.8 | $17.5 | $66.5 | $58.1 |
| Net income | $38.0 | $25.7 | $85.0 | $107.7 |
| Diluted EPS | $4.52 | $3.05 | $10.12 | $12.81 |
Q3 gross and operating margins were approximately 24.9% and 7.0%, respectively; nine-month margins were approximately 25.4% and 5.5%. Nine-month 2011 continuing income included the $60 million Applica settlement, which substantially affects comparability; the settlement was received in 2011.
- Cash flow: Nine-month cash provided by continuing-operations operating activities was $10.7, down from $62.3 in 2011. Discontinued operations provided $68.7 in 2012 and used $11.0 in 2011. Continuing-operations investing cash use was $55.5, including the Reed acquisition; continuing-operations financing provided $46.8. Cash and equivalents were $155.7 at September 30, 2012, versus $153.7 at year-end 2011.
- Debt and liquidity: Consolidated debt was approximately $207.4, compared with $148.2 at December 31, 2011; consolidated debt-to-capitalization rose to 42% from 20%. NACoal, HBB and KC reported facility availability of $36.8, $58.5 and $12.3, respectively. Subsidiary borrowings are not guaranteed by the parent. Each subsidiary was reported in compliance with its facility covenants.
- Other: Nine-month dividends were $1.6275 per share. Total equity declined to $291.1 from $577.0, largely reflecting the $369.7 stock dividend associated with the Hyster-Yale spin-off.
Material changes and operating performance
- NACoal: Q3 revenue increased to $38.0 from $21.0 and operating profit to $8.6 from $7.0. Nine-month revenue was $81.5 versus $58.3 and operating profit $29.7 versus $21.8. Higher deliveries, the Reed acquisition and asset-sale gains contributed; higher SG&A and acquisition costs partly offset gains. The $64.8 Reed Minerals acquisition closed August 31; preliminary purchase accounting included $7.5 goodwill. NACoal debt increased to $140.4 from $94.0.
- HBB: Q3 revenue edged down to $124.8 from $126.7, while operating profit rose to $8.7 from $7.9. Nine-month revenue increased to $340.4 from $331.6 and operating profit to $15.9 from $14.8. Improved product mix and pricing supported profit, partly offset by currency effects, costs and lower volume.
- KC: Q3 revenue was $48.2 versus $48.9; operating loss widened to $1.9 from $0.6. Nine-month revenue rose to $135.8 from $129.8, but operating loss widened to $11.6 from $10.3. Store expansion, weaker comparable-store results, lower-margin sales and remodeling costs weighed on profitability.
Outlook, risks and unusual items
- Management expected NACoal Q4 2012 net income below Q4 2011, but 2013 net income moderately above 2012, subject to customer power-plant operating levels. Reed integration, coal prices, permits, regulation, costs and customer requirements are important risks.
- HBB expected Q4 2012 and full-year 2013 net income to increase, supported by product launches, promotions and placements, while acknowledging continued pressure on middle-market consumer demand and retailer caution.
- KC expected Q4 revenue and net income to increase year over year, with 2013 revenue expected to be comparable to 2012. Management cited consumer traffic and spending weakness, store-format execution and store costs as risks.
- After quarter-end, NACoal agreed to develop a North Dakota lignite mine supplying the Coyote Station, with expected deliveries of approximately 2.5 million tons annually beginning in 2016 under a long-term agreement. The agreement includes a NACoal payment and performance guaranty.
- HBB had accrued $4.8 for environmental investigation and remediation and estimated reasonably possible additional costs of $0 to $3.5. The filing says management considered material costs beyond recorded accruals from other legal and regulatory matters unlikely.
- Management identified seasonality at HBB and KC; their results for the first nine months are not necessarily indicative of full-year performance. The filing lists operational, market, regulatory, environmental, foreign-exchange and integration risks. Disclosure controls were concluded to be effective.
Important facts for investors to verify
- Separate continuing-business performance from Hyster-Yale discontinued operations and account for the 2011 Applica settlement when comparing earnings.
- Track Reed integration, acquisition-related debt, capital spending and the effect of coal deliveries, prices and customer plant utilization on NACoal.
- Monitor liquidity and covenant headroom at each subsidiary, including borrowing-base availability and restrictions on dividends to NACCO.
- Assess whether HBB’s new products and promotions improve volume and margins, and whether KC’s store remodels and seasonal selling deliver the projected recovery.
- Review the environmental cost range, Coyote project obligations and guaranty, and other permitting, litigation and regulatory exposures.