NACCO Industries, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited consolidated results cover NACoal (coal mining), Hamilton Beach Brands (HBB; small appliances), Kitchen Collection (KC; specialty retail), and corporate/other activities. HBB and KC are seasonal, with most revenue and operating profit typically in the second half.
Unless otherwise noted, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $200.4 | $196.0 | $377.8 | $392.1 |
| Gross profit / margin | $36.5 / 18.2% | $47.6 / 24.3% | $72.7 / 19.2% | $93.9 / 24.0% |
| Operating profit (loss) | $(3.9) | $8.8 | $(4.5) | $15.8 |
| Net income (loss) | $(3.6) | $5.1 | $(5.1) | $9.6 |
| Diluted EPS | $(0.47) | $0.63 | $(0.66) | $1.16 |
Six-month revenue declined 3.6% year over year; the second-quarter increase was 2.2%. NACCO’s consolidated operating margin was negative in both 2014 periods, versus positive margins in 2013. Dividends were $0.2575 per share in Q2 and $0.5075 per share for the first half.
Balance sheet, cash flow and liquidity
- At June 30, cash was $60.9, total assets $788.8, total liabilities $514.0, and stockholders’ equity $274.8. Cash was down $34.5 from December 31, 2013.
- Total debt, including current maturities and subsidiary revolving borrowings, was approximately $229.7, versus $183.8 at year-end. Debt is at subsidiaries and is not guaranteed by the parent. Debt to total capitalization increased to 46% from 38%.
- For the six months, consolidated operating cash flow was $(21.4), capital expenditures were $(41.2), and financing provided $27.7, including $46.1 of net revolving-credit borrowings. Cash decreased by $34.5 to $60.9.
- Reported excess availability at June 30 was $61.0 under NACoal’s facility, $65.2 under HBB’s facility, and $11.6 under KC’s facility. The subsidiaries reported covenant compliance. HBB’s $115.0 secured revolver was amended July 29, 2014, extending maturity to July 2019.
Segment results and changes versus prior year
- NACoal: Q2 revenue rose to $49.8 from $43.6, but operating profit fell to $0.2 from $11.2. First-half revenue was $89.7 versus $94.7 and operating profit $6.8 versus $23.0. Reed Minerals suffered production shortfalls after a delayed dragline startup, lower selling prices, higher depreciation, and repair costs. Lower royalty and other income also weighed on results. Unconsolidated mine earnings increased.
- HBB: Q2 revenue rose to $118.4 from $114.7, while operating profit declined to $2.3 from $4.0 and net income to $1.4 from $2.0. First-half revenue was $219.7 versus $220.8; operating profit was $3.2 versus $6.7. Higher-priced product mix helped gross profit, offset by higher SG&A, foreign-exchange headwinds, and initiative-related expenses.
- KC: Q2 revenue fell to $32.8 from $38.4; operating loss narrowed to $4.3 from $5.4, while net loss widened to $2.7 from $2.4. First-half revenue declined to $69.7 from $78.1, and operating loss widened to $10.8 from $10.4. Store closures reduced sales but helped second-quarter operating results; comparable-store sales remained weak.
Outlook, risks and unusual items
- NACoal: Expects improved second-half operating performance and net income versus the second half of 2013, with Reed Minerals targeted to break even in that half; this is not expected to offset its first-half losses. A planned customer power-plant outage is expected to reduce MLMC deliveries. Full-year 2014 cash flow before financing is expected to be positive. Reed’s higher-cost mining area is idled at least through year-end while permitting and economics are assessed.
- HBB: Expects second-half revenue growth and sales-volume growth above the market, but second-half net income comparable to or moderately below the prior-year period. Costs of strategic initiatives, advertising, outside services, product/transportation costs, and currency effects are expected to pressure profit. Full-year cash flow before financing is expected to be substantial but significantly below 2013.
- KC: Plans to operate with fewer stores after closing 56 in the first half; second-half revenue is expected to decrease substantially. Management expects substantial second-half net income versus a year-earlier loss, but a full-year 2014 loss; positive full-year cash flow before financing is expected.
- Environmental and other items: HBB recorded a $3.3 charge in Q2 for Picton, Ontario remediation; its environmental accrual was $10.3 at June 30, with up to $4.2 of additional reasonably possible costs. NACoal recorded a $1.0 after-tax allowance for a receivable after its Indian customer disputed and defaulted on payments; NACC India terminated the contract and intends to pursue remedies.
- Accounting correction/acquisition: A $1.1 charge was recorded for a prior-period estimate error involving frozen deferred-compensation liabilities. Management concluded prior periods were not materially misstated and no restatement was necessary. The April 2014 NCOA assets-and-obligations acquisition’s purchase-price allocation remained preliminary.
- Principal risks: NACoal faces coal-demand and regulatory uncertainty, including proposed EPA carbon-emissions rules, mine productivity and permitting risks, and metallurgical coal market conditions. HBB faces consumer-market, foreign-currency, product-cost and execution risks. KC faces continued weak mall traffic and pressured consumer spending. The filing states that legal claims are ordinary-course matters and management believes material costs beyond accruals are remote.
Investor verification priorities
- Track Reed Minerals’ dragline startup, production, costs, idled-area permit process, and progress toward the second-half break-even target.
- Assess the subsidiaries’ cash generation, rising borrowings, available revolver capacity, and covenant headroom as capital spending continues.
- Monitor HBB’s seasonal sales, inventory and working-capital needs, margins, currency exposure, and remediation exposure at Picton and other sites.
- Check whether KC’s store reductions and cost actions deliver the expected second-half profit improvement despite falling revenue and a projected full-year loss.
- Follow EPA rulemaking and other regulatory or customer developments that could affect coal demand, and the collection or recovery of the disputed Indian receivable.