NACCO Industries, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited. NACCO operates in lift trucks (NMHG), small appliances (HBB), specialty retail (KC) and mining (NACoal). HBB and KC are seasonal, with a significant share of sales and operating profit typically in the second half.
Financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $823.4 million | $664.9 million | $2,379.9 million | $1,821.3 million |
| Gross profit | $137.5 million | $130.1 million | $412.0 million | $358.9 million |
| Operating profit | $37.4 million | $32.1 million | $103.8 million | $83.6 million |
| Net income attributable to stockholders | $25.7 million | $13.5 million | $107.7 million | $41.1 million |
| Diluted EPS | $3.05 | $1.62 | $12.81 | $4.93 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $51.3 million | $4.4 million |
Revenue rose 23.8% in Q3 and 30.7% for the first nine months. Gross margin was approximately 16.7% in Q3 and 17.3% year to date, compared with 19.6% and 19.7%, respectively, in 2010. Operating margin was approximately 4.5% in Q3 and 4.4% year to date, versus 4.8% and 4.6%. The nine-month net income increase includes a $57.2 million benefit in the Applica settlement and litigation line; the company received a $60 million settlement in February 2011.
At September 30, cash and cash equivalents were $217.6 million, down $44.3 million from year-end 2010. Current assets were $1,331.0 million and current liabilities $842.6 million. Total debt, including current maturities and revolver borrowings, was approximately $336.8 million, versus $391.5 million at December 31, 2010. Consolidated debt to total capitalization was 38%, down from 47%. Nine-month cash flow from operations was $51.3 million; investing used $25.3 million and financing used $70.7 million.
Segment performance and changes
- NMHG: Q3 revenue increased 42% to $628.8 million and operating profit rose to $24.1 million from $8.2 million. Nine-month revenue was $1,863.4 million and operating profit $82.0 million, versus $1,231.8 million and $28.3 million. Higher unit and parts volumes, pricing and production levels supported results; higher employee costs and unfavorable currency effects partly offset improvement. Worldwide backlog was about 25,600 units.
- HBB: Q3 revenue declined 5% to $126.7 million and operating profit fell to $7.9 million from $10.9 million. Nine-month revenue was $331.6 million and operating profit $14.8 million, down from $339.2 million and $26.1 million. Lower U.S. consumer sales, pricing and margin pressure from product and transportation costs weighed on results. Q3 included a $1.3 million write-off of a capital lease asset; nine-month results also included $0.9 million of distribution-center relocation costs.
- KC: Q3 revenue increased 2.9% to $48.9 million, but the segment recorded a $0.6 million operating loss. Nine-month revenue declined to $129.8 million from $131.2 million and operating loss widened to $10.3 million from $5.7 million, amid weaker comparable-store results, store growth and higher costs. KC operated 250 stores and 62 Le Gourmet Chef stores at quarter-end.
- NACoal: Q3 revenue declined 50.5% to $21.0 million and operating profit fell to $7.0 million from $15.0 million. Nine-month revenue was $58.3 million versus $122.3 million; operating profit was $21.8 million versus $41.7 million. The San Miguel contract expiration, power-plant outages, lower customer requirements and the absence of 2010 pre-development reimbursement reduced results. Earnings from unconsolidated mines increased modestly.
Liquidity, outlook and risks
- Management stated that consolidated liquidity and subsidiary financing resources were expected to cover operating needs and commitments over the next 12 months. Subsidiaries reported covenant compliance at September 30. NMHG had $132.3 million of excess availability under its revolver; HBB had no revolver borrowings and a $97.4 million borrowing base; KC had $12.0 million of excess availability; NACoal had $90.3 million of excess availability.
- HBB’s $115 million revolving facility expires in July 2012; NACoal’s $100 million facility expires in October 2012. NMHG’s facility expires in June 2014 and KC’s in April 2013. HBB had $54.2 million outstanding on its term loan after a voluntary $60 million repayment in Q3; maturity is May 2013.
- NMHG outlook: Management expected moderate market growth, slightly higher 2012 bookings and shipments, and modest parts growth. Price increases were expected to offset a significant portion of higher materials costs. Q4 2011 net income was expected to improve modestly year over year; full-year 2011 cash flow before financing was expected to exceed 2010.
- HBB outlook: Management expected a soft U.S. consumer market, with stronger international and commercial demand. Q4 net income was expected to be comparable with 2010; full-year 2011 net income was expected to be lower, while 2012 revenue was expected to rise modestly.
- KC outlook: Management expected full-year 2011 revenue to increase but net income and cash flow before financing to decline modestly. It expected improved results in 2012, while recognizing ongoing consumer weakness and higher product and transportation costs.
- NACoal outlook: Management expected full-year 2011 net income to decline significantly versus 2010, reflecting the San Miguel contract expiration, lower royalties, power-plant outages and absence of prior-year reimbursement. It expected Q4 net income comparable with Q4 2010 and 2012 coal deliveries slightly above 2011, conditional on customer operations.
- Notable exposures include foreign exchange and interest-rate movements, commodity and transportation costs, consumer demand, customer power-plant outages, mining and environmental regulation, and product liability or warranty claims. NACCO reported $196.2 million of lift-truck guarantees and recourse or repurchase obligations, with $2.7 million of anticipated losses reserved. Management said material losses beyond recorded accruals on ordinary-course legal claims were considered remote.
- NMHG recognized an approximately $2.9 million gain from retiree benefit plan amendments in Q3. NACCO also reported $31.4 million of assets held for sale, primarily mining equipment, with sales expected in Q4 2011 and 2012.
Important facts for investors to verify
- How much of nine-month earnings growth reflects the nonrecurring Applica settlement rather than ongoing operations.
- Whether NMHG’s volume, pricing and backlog support margin improvement as material costs and foreign exchange fluctuate.
- HBB’s ability to protect margins and meet liquidity needs ahead of its July 2012 revolver expiry.
- KC’s seasonal holiday performance, store economics and ability to reduce operating losses and inventory-related cash use.
- Whether NACoal customer outages, delivery levels and the end of San Miguel continue to pressure revenue and earnings.
- Working-capital demands, scheduled debt repayments, guarantee exposure and the assumptions underlying management’s cash-flow and outlook statements.