NACCO Industries, Inc. — Q1 2013 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012. NACCO’s continuing businesses are coal mining and mining services (NACoal), small appliances (Hamilton Beach Brands, or HBB), and specialty retail (The Kitchen Collection, or KC). Hyster-Yale was spun off in September 2012 and is reported as discontinued operations for comparative periods through the spin-off date.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $196.1 million | $173.7 million |
| Gross profit | $46.3 million | $45.5 million |
| Operating profit | $7.0 million | $8.1 million |
| Continuing-operations income | $4.4 million | $4.7 million |
| Net income | $4.4 million | $25.3 million |
| Basic and diluted EPS | $0.53 | $3.01 basic; $3.00 diluted |
| Cash from continuing operating activities | $(25.0) million | $(16.5) million |
Revenue rose about 13%, while operating profit fell about 13%. Gross margin was approximately 23.6%, versus 26.2%; operating margin was approximately 3.6%, versus 4.6%. The large year-over-year decline in net income and EPS chiefly reflects the absence of Hyster-Yale discontinued-operations income recorded in Q1 2012 ($20.5 million after tax); continuing-operations income was down about 6%.
Cash and cash equivalents were $96.9 million at March 31, down $43.0 million from year-end 2012. Total debt was approximately $173.6 million, compared with $177.7 million at year-end; cash less debt was approximately $(76.7) million. Consolidated current assets were $406.9 million and current liabilities $181.3 million. Subsidiaries had reported unused facility availability of $48.9 million at NACoal, $59.8 million at HBB and $18.8 million at KC, subject to facility terms and borrowing-base limits. NACCO had no guarantee of subsidiary borrowings.
Capital expenditures were $7.5 million. Financing cash outflows included $10.1 million of long-term debt repayments, $2.1 million of dividends and $5.1 million of share repurchases. The quarterly dividend was $0.25 per share, versus $0.5325 in Q1 2012. The effective income tax rate was 24.2%, compared with 30.2%.
Material changes and segment results
- NACoal: Revenue increased to $51.1 million from $24.3 million, primarily reflecting the Reed Minerals acquisition, higher MLMC deliveries and limerock activity. Operating profit was broadly flat at $11.8 million (prior year $11.9 million); Reed Minerals incurred an operating loss amid lower-than-expected sales and weather-related delays. Net income rose to $9.6 million from $9.2 million.
- HBB: Revenue increased to $106.2 million from $104.9 million; operating profit rose to $2.7 million from $2.1 million and net income to $1.5 million from $1.0 million. Higher gross profit and favorable currency effects were partly offset by increased strategic-initiative expenses.
- KC: Revenue declined to $39.7 million from $45.3 million, reflecting weaker comparable-store sales and store closures. Operating loss widened to $5.0 million from $4.6 million; net loss widened to $3.3 million from $2.8 million. KC and Le Gourmet Chef operated 255 and 44 stores, respectively, at quarter-end.
- NACCO and Other: Operating loss increased to $2.4 million from $1.5 million, mainly due to lower management fees after the Hyster-Yale spin-off.
Outlook, risks and unusual items
- NACoal: Management expected 2013 net income to decline from 2012, principally because 2012 included approximately $7 million of pre-tax asset-sale gains; excluding those gains, results were expected to be comparable. Cash flow before financing was expected to exceed 2012, but increased capital spending was anticipated. Steam-coal deliveries were expected to increase, conditional on customers’ power-plant operating levels. Reed Minerals’ near-term metallurgical coal sales were expected below initial expectations; limerock deliveries and royalty income were also expected to be lower year over year.
- HBB: Management expected 2013 revenue to grow faster than its market forecast, supported by new products and strategic initiatives, but full-year net income was expected to be comparable with 2012 as higher operating expenses offset revenue-related gains. Cash flow before financing was expected to be moderately lower, partly due to working capital.
- KC: Management expected 2013 revenue to decline but forecast modest full-year net income and positive cash flow before financing, compared with a 2012 net loss and approximately break-even cash flow. Consumer traffic and spending remained uncertain; store closures and the timing and success of new formats and openings were relevant factors.
- Development and spending: NACoal forecast an additional $35.1 million of 2013 capital expenditures after Q1, mainly for mine equipment, dragline refurbishment and development. Several mine projects were in development, with planned initial deliveries spanning 2014 to 2016. Results remain exposed to permitting, weather, customer demand, coal markets and project execution.
- Contingencies and acquisition: HBB had accrued approximately $5.0 million for environmental investigation and remediation, with a further $0–$2.9 million reasonably possible. Reed Minerals’ contingent consideration liability was $4.4 million at quarter-end; its purchase-price allocation remained preliminary. The company cited ordinary-course legal claims and said material costs above recorded accruals were considered remote.
- Other items: NACCO repurchased 89,485 Class A shares for $5.1 million in Q1; $39.7 million remained under the $50 million authorization, which ran through December 31, 2013. Management reported effective disclosure controls and no material risk-factor changes from the 2012 Form 10-K.
Management cautioned that Q1 results are not necessarily indicative of the full year. HBB and KC are seasonal, with most revenue and operating profit typically generated in the second half.
Important facts for investors to verify
- Whether NACoal’s coal-delivery assumptions, Reed Minerals integration and metallurgical-coal sales recover as planned, and whether development projects meet permitting and delivery milestones.
- Whether HBB’s new-product growth offsets strategic spending, cost pressures and working-capital needs.
- Whether KC achieves its expected improvement despite falling comparable-store sales, store closures and uncertain consumer demand.
- How operating cash flow, capital spending and working capital affect liquidity; confirm subsidiary borrowing-base availability and covenant compliance.
- Potential changes in HBB environmental remediation estimates and the final Reed Minerals purchase-price allocation and contingent consideration.
- For year-over-year comparisons, account for the Hyster-Yale spin-off and the absence of its prior-year discontinued-operations results.