Business context and reporting period
NACCO Industries, Inc. is a holding company whose principal businesses are lift trucks (NMHG), small appliances (Hamilton Beach Brands, or HBB), specialty retail (Kitchen Collection, or KC), and coal mining and mining services (North American Coal, or NACoal). This Form 10-K covers the fiscal year ended December 31, 2011; it also presents unaudited fourth-quarter results. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $3,331.2 | $2,687.5 |
| Gross profit | $593.1 | $526.2 |
| Operating profit | $174.1 | $140.3 |
| Income from continuing operations attributable to stockholders | $162.1 | $79.5 |
| Diluted earnings per share | $19.28 | $9.53 |
| Cash from operating activities | $155.2 | $63.1 |
| Cash from (used for) investing activities | $(32.7) | $(5.8) |
| Cash from (used for) financing activities | $(42.0) | $(43.3) |
| Cash and cash equivalents at year-end | $338.6 | $261.9 |
| Total debt at year-end | $374.2 | $391.5 |
| Stockholders’ equity | $576.2 | $447.4 |
Operating profit margin was approximately 5.2% in both years; gross margin decreased to approximately 17.8% from 19.6%. These percentages are calculated from reported figures. Year-end current assets were $1,375.1 versus current liabilities of $891.2. The company reported $348.4 of unused revolving-credit capacity across its subsidiaries, net of applicable limitations.
Business-unit results
| Business | 2011 revenue | 2011 operating profit | Change versus 2010 |
|---|---|---|---|
| NMHG | $2,540.8 | $110.0 | Revenue rose 41.0%; operating profit increased from $46.1. |
| HBB | $493.0 | $33.8 | Revenue fell from $515.7; operating profit declined from $45.9. |
| KC | $221.2 | $2.5 | Revenue edged up from $219.6; operating profit fell from $5.9. |
| NACoal | $81.8 | $35.2 | Revenue fell from $156.8; operating profit declined from $53.3. |
NMHG shipped 79,671 new lift trucks, compared with 60,014 in 2010; year-end backlog rose to approximately 24,700 units, valued at about $629 million. NACoal delivered 27.9 million tons of lignite, down from 33.5 million, principally following expiration of the San Miguel contract and lower MLMC deliveries. The filing reports fourth-quarter 2011 consolidated revenue of $951.3 and net income of $54.5; HBB and KC’s seasonal holiday sales contributed to the stronger quarter.
Material changes and unusual items
- Consolidated revenue increased 24.0%, principally on NMHG’s higher volume, product mix, pricing and favorable currency effects. NMHG operating profit more than doubled as higher volume and pricing offset material costs, partly countered by higher employee-related and other selling expenses.
- Net income included a $60 million cash settlement of the Applica litigation, received in February 2011. The income statement reflects a net $57.2 million benefit after $2.8 million of related 2011 litigation costs. This materially boosts the year-over-year earnings comparison; related costs were $18.8 million in 2010.
- HBB’s lower sales and operating profit reflected weaker U.S. consumer retail volumes, higher product and transportation costs, and $1.3 million to write off a capital-lease asset plus $0.9 million of distribution-center relocation costs.
- KC’s operating profit fell despite slightly higher revenue, reflecting lower comparable-store results, a shift toward lower-margin products and $0.7 million in distribution-center relocation costs. KC operated 337 stores at year-end, versus 340 a year earlier.
- NACoal’s decline reflected the San Miguel contract’s expiration at the end of 2010, lower MLMC deliveries and the absence of certain 2010 pre-development reimbursements. Agreements to sell assets, primarily two draglines, for $31.4 million were expected to close in 2012.
- The company repurchased $2.1 million of Class A shares under a $50 million authorization; the authorization expires December 31, 2012. Cash dividends were $2.12 per share for 2011.
Outlook, risks and contingencies
- NMHG: Management expected 2012 net income to decline materially, despite a slight increase in unit bookings and shipments, due to absent one-time benefits, adverse currency movements, lower-margin sales mix and higher marketing and employee costs. Cash flow before financing was expected to exceed 2011. A $212.6 million term loan balance included $171.4 million classified as current; management anticipated refinancing the term loan by September 30, 2012. Its revolving facility had no borrowings at year-end and expires in June 2014.
- HBB: Management expected modest 2012 revenue and net-income increases, supported by international and commercial markets and new products, while warning that the U.S. middle-market consumer remained weak. Its $54.2 million term loan matures in May 2013; its $115 million revolving facility expires July 2012. HBB reported no revolving borrowings at year-end and stated it expected adequate liquidity for the next twelve months.
- KC: Management anticipated higher 2012 revenue, net income and cash flow, based on store additions, store improvements and closure of underperforming locations, while citing a challenging consumer environment. KC reported no revolving borrowings at year-end; its facility expires April 2013, subject to a possible extension with lender consent.
- NACoal: Management expected 2012 net income and cash flow before financing to increase, assuming planned customer power-plant operating levels and improved MLMC deliveries. Limerock demand was expected to soften. Development and permitting of new mines—including the Otter Creek reserve—remain important execution risks.
- Material risks include economic cyclicality; commodity, currency and transportation costs; concentration among HBB customers (Wal-Mart represented approximately 30% of HBB revenue in 2011); dependence on mining contracts and customer power-plant demand; and environmental, emissions, reclamation and permitting requirements that could reduce coal demand or increase costs. NACoal’s reserves are management estimates and, according to the filing, were not reviewed by independent experts.
- NMHG’s customer financing recourse and repurchase obligations totaled $179.1 million, with estimated collateral value of approximately $201.2 million. Separately, its 20% guarantee of NFS debt had a stated incremental obligation of $114.4 million after specified receivables guarantees were excluded. Bellaire’s long-term closed-mine water-treatment liability was $13.6 million; the consolidated asset-retirement-obligation balance was $19.1 million.
Management reported effective disclosure controls and internal control over financial reporting at December 31, 2011. Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control.
Most important facts for investors to verify
- Normalize earnings for the Applica settlement and assess the sustainability of underlying operating results, particularly NMHG’s expected 2012 decline.
- Track refinancing of NMHG’s term loan and the July 2012 HBB revolving-facility expiry, including covenant compliance and available liquidity.
- Monitor HBB’s largest-customer exposure, U.S. consumer demand, product costs and the success of new product placements.
- Verify NACoal mine-delivery assumptions, customer power-plant utilization, new-mine permits and the timing and proceeds of the planned asset sales.
- Assess potential exposure from lift-truck financing guarantees, mine reclamation and water-treatment obligations, and evolving emissions and environmental rules.