NACCO Industries, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. NACCO operates in coal mining and mining services (NACoal), small appliances (Hamilton Beach Brands, or HBB), and specialty kitchenware retail (The Kitchen Collection, or KC). The financial statements are unaudited. HBB and KC are seasonal, with most revenue and operating profit typically generated in the second half.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $181.1 million | $178.0 million | $349.7 million | $351.4 million |
| Gross profit | $43.4 million | $40.5 million | $82.6 million | $80.5 million |
| Operating profit | $10.6 million | $5.2 million | $17.9 million | $10.6 million |
| Net income | $6.8 million | $3.1 million | $11.8 million | $5.9 million |
| Diluted EPS | $0.99 | $0.45 | $1.72 | $0.86 |
Q2 gross margin was approximately 24.0%, versus 22.8% a year earlier; operating margin was approximately 5.8%, versus 2.9%. For the first half, gross margin was approximately 23.6%, versus 22.9%, and operating margin approximately 5.1%, versus 3.0%.
For the six months, consolidated operating cash flow was negative $1.7 million, compared with positive $17.0 million in 2016. Capital expenditures were $8.1 million and investing cash outflow was $6.0 million. Financing cash outflow was $12.7 million, including $24.8 million of long-term debt repayments, partly offset by $9.6 million of net revolving-credit borrowings. Cash declined $20.4 million to $60.2 million.
At June 30, total debt was $123.4 million, down from $134.8 million at December 31, 2016; cash was $60.2 million. The current ratio was approximately 1.85. Consolidated debt-to-total-capitalization was 35%, compared with 38% at year-end. Subsidiary facilities had reported excess availability of $163.6 million at NACoal, $56.9 million at HBB, and $10.0 million at KC. Each subsidiary reported compliance with its financial covenants.
Changes and segment drivers
- Q2 revenue rose 1.7%, while first-half revenue declined 0.5%. First-half operating profit increased 69% and net income nearly doubled, though 2016 included a tax benefit from reversal of an uncertain tax position and a corresponding other expense.
- NACoal’s operating profit increased to $10.9 million in Q2 and $22.2 million for the half. Drivers included higher unconsolidated-mine earnings, royalty and other revenue, and a roughly $2.3 million gain on sale of a Centennial dragline. First-half consolidated-mine results were partly offset by weaker MLMC results.
- HBB Q2 revenue was nearly flat, while first-half revenue fell 0.4%; operating profit rose 24.8% for the half as lower costs and a richer product mix improved gross margin. Higher employee-related, transportation, and warehouse costs partly offset gains.
- KC revenue declined 9.7% in Q2 and 7.9% for the half. First-half operating loss widened to $6.3 million from $5.9 million, reflecting lower comparable-store sales and store closures. KC operated 209 stores at June 30, versus 220 a year earlier.
Outlook, risks, and contingencies
- NACoal: Management expected second-half tons sold to increase year over year and full-year pretax income to rise substantially, including and excluding specified 2016 Centennial charges. It also expected lower second-half MLMC results and lower NAM consolidated limerock results to offset some gains. 2017 capital expenditures were estimated at approximately $15 million.
- Liberty Mine uncertainty: Southern Company and Mississippi Power suspended start-up and operations activity for the Kemper County gasifier on June 28, 2017. Liberty is its sole coal supplier; the mine’s future was uncertain. Permanent suspension could reduce NACoal’s longer-term earnings. The contract assigns mine closure costs to Mississippi Power if closure is required.
- HBB: Management expected second-half revenue and full-year results to increase modestly, subject to consumer spending, with higher strategic, distribution, advertising, and employee costs tempering profit growth. Consumer buying shifts toward online sales, currency changes, and commodity/input costs remain risks.
- KC: Management expected revenue and results to decline in the second half and full-year operating results to decrease, while continuing to close underperforming stores and focus on a smaller core portfolio. The company cited declining mall traffic and competition from online channels.
- Environmental and other contingencies: HBB had accrued $8.9 million for environmental investigation and remediation at June 30; additional costs of up to $5.2 million were considered reasonably possible. The filing also describes ordinary-course legal, regulatory, product, patent, asbestos, and environmental claims, with outcomes uncertain.
- Other: NACCO stated that funds from cash, subsidiary facilities, and anticipated operating cash flows were expected to cover operating needs and commitments over the next twelve months. Results may be affected by seasonality, customer requirements, coal-industry trends, regulation, reclamation costs, foreign exchange, and interest rates.
Important facts for investors to verify
- Whether the Kemper gasifier decision changes Liberty’s deliveries, contract economics, or long-term earnings contribution.
- How much of NACoal’s profit improvement is repeatable versus attributable to asset-sale gains and changing mine volumes or costs.
- Whether HBB achieves its expected second-half sales and margin improvement, and how working-capital needs affect borrowing.
- Whether KC’s store closures and expense reductions stabilize comparable-store performance and cash needs.
- Whether HBB’s environmental estimates, possible additional remediation costs, or other contingencies change materially.
- How the expected seasonality of HBB and KC affects second-half results and the full-year outlook.