NACCO Industries, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. NACCO operates in coal mining, small appliances and specialty retail through NACoal, Hamilton Beach Brands (HBB) and The Kitchen Collection (KC). HBB and KC are seasonal, with most revenue and operating profit typically earned in the second half.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $193.7 million | $177.4 million |
| Gross profit | $38.2 million | $36.2 million |
| Operating profit (loss) | $3.2 million | $(0.6) million |
| Net income (loss) | $1.0 million | $(1.5) million |
| Diluted EPS | $0.14 | $(0.19) |
| Operating cash flow | $37.5 million | $(26.0) million |
| Capital expenditures | $2.4 million | $31.8 million |
Revenue grew 9.2%. Gross margin was approximately 19.7%, versus 20.4%; operating margin improved to approximately 1.7% from a loss. Operating cash flow improved mainly because of working-capital movements, especially collection of amounts due from affiliate Coyote Creek. Cash was $29.3 million at quarter-end, down $31.8 million from December 31, 2014. Total debt was approximately $188.9 million, compared with $247.9 million at year-end; consolidated debt-to-capitalization was 48%, down from 54%. Current assets were $355.0 million and current liabilities $185.2 million.
Material changes and segment performance
- NACoal: Revenue rose to $41.3 million from $39.9 million, but operating profit declined to $5.2 million from $6.7 million and net income to $4.5 million from $5.7 million. Lower Centennial results outweighed improvement at MLMC. Earnings from unconsolidated mines were $12.6 million, slightly above the prior-year quarter.
- HBB: Revenue increased 21.7% to $123.3 million, including $3.9 million from Weston Brands and higher product volume/mix. Operating profit rose to $2.2 million from $0.9 million; net income was $0.6 million. Higher SG&A, Weston’s seasonal operating loss and unfavorable currency movements partly offset gross-profit gains.
- KC: Revenue declined to $30.0 million from $36.9 million, primarily due to store closures. Operating loss narrowed to $3.0 million from $6.5 million and net loss to $1.9 million from $4.0 million, reflecting improved comparable-store margins, lower expenses and store rationalization. KC operated 223 stores versus 258 a year earlier.
- The company repurchased 121,763 Class A shares for $6.9 million during the quarter; $17.1 million remained available under the repurchase program at March 31.
Outlook, risks and contingencies
- Company outlook: Management expected 2015 pretax income, excluding the prior-year $105.1 million impairment charge and asset-sale gains, to increase significantly from 2014. Cash flow before financing was expected to be positive, compared with negative in 2014. Planned 2015 capital expenditures were reduced to $12.4 million.
- NACoal: Management expected improved overall 2015 operating performance. MLMC was expected to benefit from the absence of planned power-plant outages experienced in 2014. Centennial remained challenged by weak coal markets and higher processing costs; management anticipated substantial losses, including cash losses in the remaining quarters, despite cost and mine-area reductions. Newer unconsolidated mines and project schedules remain dependent on customer demand and construction progress.
- HBB: Management expected 2015 revenue to increase and full-year net income to be moderately higher than 2014. Risks include soft consumer demand, retail traffic, foreign exchange, transportation costs, execution and integration of Weston Brands, and product acceptance.
- KC: Management expected lower 2015 revenue but net income near break-even after store closures and expense actions; cash flow before financing was expected to remain positive. Soft mall traffic and constrained consumer spending remain risks.
- HBB had accrued $9.3 million for environmental investigation and remediation, with up to $5.0 million of additional costs considered reasonably possible. Management said material losses beyond recorded legal accruals were considered remote. NACoal disclosed Coyote Creek guarantees; no related liability was recorded because management considered future performance under them remote.
- Subsidiary credit facilities were reported in compliance with financial covenants. NACoal had $115.9 million of excess facility availability; HBB, $44.9 million; and KC, $19.4 million. The company identified interest-rate, foreign-currency, commodity, coal-market, regulatory, environmental, customer and consumer-demand risks.
Important facts for investors to verify
- Whether Q1 cash generation is repeatable: the improvement was substantially driven by working-capital collections, not solely earnings.
- Centennial’s losses, coal-processing costs, customer requirements and ability to improve cash generation as planned.
- Progress and costs in integrating Weston Brands, and whether HBB’s growth and margin outlook is achieved amid currency and consumer-market pressures.
- KC’s store closures, remaining Le Gourmet Chef closures and progress toward near break-even results.
- Actual environmental remediation costs and any developments concerning the Coyote Creek guarantees or other contingencies.