Business context and reporting period
NACCO Industries, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2017. Its remaining primary business is NACoal, which operates coal mines and provides mining and related services. On September 29, 2017, NACCO spun off Hamilton Beach Brands Holding Company (HBBHC); HBBHC’s results are presented as discontinued operations for all periods shown. The spin-off materially changes the company’s composition and limits direct balance-sheet comparisons with December 31, 2016.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $21.9 | $32.4 | $78.3 | $85.8 |
| Gross profit / margin | $2.5 / 11.3% | $1.6 / 5.1% | $11.6 / 14.8% | $9.9 / 11.5% |
| Operating profit (loss) | $7.0 | $(12.8) | $26.3 | $(1.0) |
| Income from continuing operations | $3.3 | $(2.1) | $18.8 | $7.6 |
| Net income (loss), including discontinued operations | $8.4 | $(0.4) | $20.2 | $5.5 |
| Diluted EPS | $1.23 | $(0.06) | $2.94 | $0.80 |
Revenue and gross profit reflect consolidated operations; NACoal also reports earnings from unconsolidated mines separately. Their pre-tax earnings were $16.2 million in Q3 2017 versus $15.1 million, and $44.6 million for the first nine months versus $40.8 million.
- Cash flow: Continuing-operations operating cash flow was $34.8 million for the first nine months, versus $21.3 million. Consolidated operating cash flow was $27.1 million versus $46.2 million, including discontinued-operations cash flows. Total capital expenditures were $9.2 million.
- Liquidity and debt: Cash was $93.9 million at September 30, 2017, compared with $69.3 million at year-end 2016. Total debt was $58.7 million versus $96.0 million; debt to total capitalization declined to 22% from 30%. NACoal had $98.6 million of availability under its $150 million revolving facility, and was in compliance with its financial covenants.
- Dividends: Dividends per share were $0.2725 in Q3 and $0.8125 for the first nine months, compared with $0.2675 and $0.7975, respectively, in 2016.
Material changes versus prior periods
- Q3 revenue fell 32% year over year, primarily because MLMC sold fewer tons during a customer power-plant outage. Nine-month revenue declined 9%, also mainly due to lower MLMC volumes.
- Operating results improved substantially, but comparisons are affected by the $17.4 million Centennial impairment recorded in Q3 2016 and absent in 2017. Other year-to-date contributors included $3.5 million of gains on asset sales, higher royalty income, and increased earnings from unconsolidated mines. Lower consolidated-mine results, principally MLMC, partly offset those gains.
- The HBBHC spin-off removed the appliance and specialty-retail businesses from continuing operations. HBBHC paid NACCO a $35 million cash dividend immediately before separation, in addition to $3 million paid earlier in 2017. NACCO expects approximately $1 million in net transition-service fees over the agreement’s term.
- Cash used for debt reduction was $35.0 million in the first nine months of 2017. The cash-flow statement also reports $38.0 million of dividends received from HBBHC.
Outlook, risks and unusual items
- 2017 outlook: Management expected a substantial Q4 increase in continuing-operations pre-tax income versus Q4 2016, primarily from NACoal. Full-year continuing-operations effective tax rate was expected at 20%–25%; the Q4 rate excluding discrete items was expected to be about 15%. NACoal expected modestly higher Q4 coal tons sold, but lower Q4 earnings than Q3 because of reduced unconsolidated-mine customer requirements and lower royalty and other income.
- 2018 outlook: Management expected continuing-operations pre-tax income to decrease moderately versus 2017, with an effective tax rate of about 25%. Lower royalty and other income and higher NACoal operating expenses were expected to weigh on results, partly offset by improved MLMC and unconsolidated-mine results. Expected capital expenditures were about $21 million; cash flow before financing was expected to decline.
- Liberty/Kemper exposure: The future of the Kemper County coal gasification facility and Liberty Mine remained uncertain after the customer suspended gasifier start-up and operating activities. Permanent suspension could adversely affect NACoal’s long-term contract earnings, although the customer is responsible for mine closure costs under the contract.
- Taxes: Discrete tax expense of $1.9 million for Q3 and $1.6 million year to date primarily reflected a deferred-tax valuation allowance and remeasurement as NACCO expected to be subject to Alternative Minimum Tax beginning in 2018 following the spin-off.
- Guarantees and contingencies: NACoal has contingent obligations related to Coyote Creek, including a potential make-whole payment under specified default or termination circumstances and a future equipment purchase obligation in certain circumstances. Management considered performance under the guarantees remote; no liability was recorded. The filing also describes ordinary-course legal and regulatory claims, including asbestos-related matters, without a clear aggregate potential-loss value.
- Coal demand, natural-gas prices, renewable generation, customer outages, mine reclamation costs, permits, contract changes and volatile royalty income are among the risks cited. Management said no material risk-factor changes had occurred since the 2016 Form 10-K.
Important facts for investors to verify
- Assess continuing-operations performance separately from HBBHC discontinued operations and account for the September 29 spin-off when comparing periods.
- Separate recurring operating improvement from the absent 2016 impairment charge and 2017 asset-sale gains.
- Track MLMC customer demand and outage effects, and monitor whether Kemper’s suspension becomes permanent and affects Liberty.
- Review the assumptions behind volatile royalty income, the 2018 earnings outlook, and the AMT-related tax provision and valuation allowance.
- Confirm NACoal’s revolver availability, covenant compliance, planned capital spending, and exposure under Coyote Creek guarantees.