NACCO Industries, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unless stated otherwise, amounts are in millions. The figures below are for continuing operations; Hyster-Yale was spun off in September 2012 and is reported as discontinued operations in the 2012 comparisons.
Business context and financial performance
NACCO operates in coal mining (NACoal), small appliances (Hamilton Beach Brands, or HBB), and specialty retail (The Kitchen Collection, or KC). HBB and KC are seasonal, with most revenue and operating profit typically generated in the second half of the year.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $196.0 | $171.4 | $392.1 | $345.1 |
| Gross profit | $47.6 | $43.3 | $93.9 | $88.8 |
| Operating profit | $8.8 | $7.6 | $15.8 | $15.7 |
| Continuing-operations net income | $5.1 | $3.4 | $9.6 | $8.2 |
| Continuing-operations diluted EPS | $0.63 | $0.42 | $1.16 | $0.97 |
Revenue increased 14% in Q2 and 14% for the first half, substantially reflecting Reed Minerals, acquired in August 2012. Operating profit rose 16% in Q2 but was nearly flat for the first half. Gross margin was approximately 24.3% in Q2 and 23.9% for the first half, compared with 25.3% and 25.7%, respectively, a year earlier. Q2 net income in 2012 included $18.3 million from discontinued operations; first-half 2012 net income included $38.8 million from discontinued operations. Thus, total reported net income and EPS are not directly comparable with 2013.
- NACoal: First-half revenue rose to $94.7 million from $43.5 million, principally from Reed Minerals and higher royalty and other income. First-half operating profit was $23.0 million versus $21.1 million. Reed Minerals incurred operating losses amid lower-than-expected metallurgical coal sales, weather-related delays, equipment repairs, and productivity below target.
- HBB: First-half revenue increased to $220.8 million from $215.6 million, but operating profit declined to $6.7 million from $7.2 million. A $2.3 million environmental charge and higher employee and advertising costs partly offset improved product mix and gross profit. Net income was $3.5 million versus $3.2 million.
- KC: First-half revenue fell to $78.1 million from $87.6 million and operating loss widened to $10.4 million from $9.7 million. Store closures and lower comparable sales weighed on revenue; KC reported a $5.7 million net loss versus $6.0 million.
Cash flow, debt, and liquidity
- Consolidated cash and cash equivalents were $85.1 million at June 30, down $54.8 million from December 31, 2012. Continuing-operations operating cash flow was negative $2.6 million for the first half; investing cash outflow was $12.7 million and financing cash outflow was $39.5 million.
- First-half capital expenditures were $13.8 million. Financing outflows included $21.6 million of share repurchases and $4.1 million of dividends. The company had repurchased 469,471 Class A shares for $26.8 million under its authorization by June 30, 2013.
- Consolidated debt was approximately $163.9 million, comprising subsidiary borrowings that are not guaranteed by the parent. The filing reports debt to total capitalization of 38%, versus 39% at year-end 2012. NACCO stated that cash, subsidiary credit facilities, and operating cash flows should cover expected needs for the next 12 months.
- NACoal had $102.0 million drawn and $46.9 million of excess availability on its $150 million facility; HBB had $20.2 million drawn and $72.9 million available under its facility; KC had $12.2 million drawn and $14.8 million available under its facility. Each subsidiary was reported in compliance with its applicable financial covenants.
- Current assets were $392.6 million and current liabilities were $173.5 million at June 30, 2013. Cash, debt, and facility availability are held at subsidiaries; parent-level access is subject to facility restrictions.
Outlook, risks, and unusual items
- NACoal: Management expected second-half net income to decline year over year, primarily because the prior-year period included approximately $4.5 million of pre-tax asset-sale gains. Reed Minerals’ second-half coal sales were expected to improve from the first half but remain below initial expectations; management cited operational improvements and a new dragline as important to future efficiency. NACoal forecast 2013 remaining capital expenditures of $31.1 million.
- HBB: Management expected second-half revenue and volume to increase year over year and second-half net income to be comparable to or slightly higher than 2012, while anticipating higher strategic and promotional spending. Full-year cash flow before financing was expected to be moderately below 2012.
- KC: Management expected a moderate full-year 2013 loss, with second-half revenue below 2012 as store count declined. It expected positive full-year cash flow before financing, but cited pressured consumer spending and an unfavorable sales mix. Six additional Le Gourmet Chef stores were expected to close in the second half.
- HBB had accrued $7.1 million for environmental investigation and remediation at June 30, including a $2.3 million charge relating to its Picton, Ontario facility. Additional reasonably possible costs were estimated at $0–$4.7 million; actual costs or timing could change as investigations proceed.
- Reed Minerals’ contingent consideration liability was $1.6 million at June 30, following a $2.4 million reduction in its estimate during the first half. The earn-out has no monetary cap and depends on coal prices and volumes.
- Other risks include customer power-plant outages and coal demand, mining permits and regulatory changes, weather and equipment reliability, consumer demand, sourcing and foreign-exchange exposure, and store execution. Management reported disclosure controls as effective and no material changes to risk factors from the 2012 annual report.
- Subsequent to quarter-end, the company approved freezing pension benefits for certain employees of NACoal unconsolidated mines effective January 1, 2014; the expected curtailment impact had not been determined but was not expected to be significant.
Important facts for investors to verify
- Separate continuing-operations performance from 2012 discontinued Hyster-Yale results when assessing growth and earnings comparisons.
- Track Reed Minerals’ coal demand, repair costs, productivity improvements, and expected dragline commissioning.
- Monitor KC comparable-store trends, planned closures, cash needs, and use of its revolving facility.
- Review changes in HBB environmental remediation estimates, including the Picton site, and the possible additional exposure disclosed.
- Confirm subsidiary covenant compliance, facility availability, and the extent to which subsidiary cash and borrowing capacity are accessible to the parent.