NACCO Industries, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. NACCO operates in materials handling, small appliances, specialty retail and mining. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $773.4 | $811.0 | $1,576.6 | $1,556.5 |
| Gross profit | $140.1 | $137.9 | $284.7 | $274.5 |
| Operating profit | $31.5 | $31.1 | $69.3 | $66.4 |
| Net income attributable to stockholders | $21.8 | $19.2 | $47.0 | $82.0 |
| Diluted EPS | $2.60 | $2.28 | $5.60 | $9.76 |
| Comprehensive income | $9.5 | $28.4 | $47.2 | $100.5 |
Gross margin was approximately 18.1% in Q2 (17.0% prior year) and 18.1% for the first half (17.6% prior year). Operating margin was approximately 4.1% in Q2 (3.8%) and 4.4% for the first half (4.3%). These percentages are calculated from reported figures.
- Cash flow: First-half operating cash flow was $51.7, investing cash flow was negative $2.2, and financing cash flow was negative $84.8. Cash declined $35.4 to $303.2. Capital expenditures were $40.3; asset-sale proceeds were $23.7 and note-receivable proceeds were $14.4.
- Debt and liquidity: Total debt was approximately $307.5 at June 30, down from $374.2 at year-end 2011. Current assets were $1,274.1 and current liabilities $690.3. Subsidiary facilities reported availability of $190.7 for NMHG, $66.6 for HBB and $12.0 for Kitchen Collection; NACoal had $67.8 excess availability.
- Equity and distributions: Total equity was $616.7, versus $577.0 at December 31, 2011. First-half dividends were $9.1, or $1.08 per share.
Material changes and segment results
- Consolidated: First-half revenue rose 1.3%, but attributable net income fell to $47.0 from $82.0. The 2011 comparison included a $57.2 net benefit from the Applica settlement; the $60 million settlement was received in February 2011. Q2 earnings increased year over year.
- Materials handling (NMHG): First-half revenue was $1,231.5, essentially flat, while operating profit declined to $54.4 from $57.9. Q2 revenue fell 7.1% to $602.0 and operating profit fell to $24.6 from $27.5, reflecting currency effects, lower shipments and higher SG&A, partly offset by pricing and mix. First-half shipments were 38,807 versus 39,296; backlog was approximately 24,200 units, versus 25,100 a year earlier.
- Hamilton Beach Brands: First-half revenue increased 5.2% to $215.6, operating profit rose to $7.2 from $6.9, and net income rose to $3.2 from $2.3. Higher-priced and higher-margin product mix helped; currency and costs were offsets.
- Kitchen Collection: First-half revenue rose 8.3% to $87.6, but the operating loss remained $9.7 and net loss $6.0. New stores and comparable sales increased revenue; store costs and remodeling weighed on Q2 performance.
- NACoal: First-half revenue increased 16.6% to $43.5 and operating profit to $21.1 from $14.8. Results included a $2.3 asset-sale gain and improved consolidated mine performance. Q2 coal deliveries at the consolidated mine were affected by a customer power-plant outage.
Outlook, risks and other notable items
- Outlook: No consolidated earnings guidance is stated. NMHG expected moderating lift-truck markets, modestly higher shipments and parts volumes in the remainder of 2012, and modestly lower second-half net income year over year. HBB anticipated stronger second-half revenue and net income; Kitchen Collection expected second-half revenue and net income improvement; NACoal expected second-half net income comparable to 2011. These businesses are seasonal, so interim results may not indicate full-year performance.
- Proposed spin-off: Hyster-Yale filed a registration statement on June 28, 2012 for a proposed spin-off of the materials-handling business, expected to close in Q3 2012 and intended to be tax-free. Completion, tax treatment and exchange listing remained subject to conditions. The filing expected incremental annual public-company costs of up to $3.5 at Hyster-Yale and up to $0.5 at NACCO, excluding the spun-off business.
- Refinancing: NMHG replaced its prior term loan with a $130.0 term loan maturing December 2017; its $200.0 revolver runs to March 2017 and had no borrowings outstanding. HBB refinanced its prior term loan with a $115.0 revolver maturing July 2017, with $41.4 drawn. Refinancing generated deferred fees and NMHG recognized a $1.4 loss related to interest-rate swaps.
- Taxes and unusual items: An IRS ruling led to release of $2.1 of deferred tax liability in Q2; HBB’s refinancing included a write-off of remaining prior-loan financing fees. The consolidated first-half effective tax rate was 20.6%, versus 27.7%.
- Contingencies and risks: NMHG had $154.3 of customer financing recourse or repurchase obligations, with collateral estimated at $171.3; it also guaranteed $150.4 of NFS debt. Management said expected losses on recourse obligations were not significant and reported no known circumstances indicating NFS default. Ordinary-course legal and regulatory claims were disclosed; management considered material costs beyond recorded accruals unlikely. Principal risks include economic and currency exposure, customer demand and financing, product costs and acceptance, retail consumer spending, mine operating interruptions, permits and regulation. Subsidiary credit agreements contain restrictive covenants; all were reported in compliance at June 30.
- Controls: Management concluded disclosure controls were effective; no material change in internal control was reported. No changes to risk factors were reported.
Investor verification points
- Confirm progress, terms, timing, tax treatment and listing conditions for the proposed Hyster-Yale spin-off, including the allocation of costs and liabilities.
- Assess whether NMHG’s market, shipment, backlog, pricing and currency assumptions support its outlook, and monitor second-half margins and costs.
- Track borrowing-base availability, covenant headroom, scheduled term-loan repayments and the effects of floating interest rates across subsidiaries.
- Review the nature and potential exposure of customer financing guarantees, especially NMHG’s NFS debt guarantee and recourse obligations.
- Separate recurring operating performance from the Applica settlement comparison, the NACoal asset-sale gain and refinancing-related charges.
- Evaluate seasonal working-capital needs and the execution of the stated HBB and Kitchen Collection sales and earnings expectations.