NACCO Industries, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing; fourth-quarter figures below are unaudited. NACCO operates North American Coal (NACoal), Hamilton Beach Brands (HBB) and Kitchen Collection (KC).
Financial performance and liquidity
Unless stated otherwise, amounts are in millions of dollars.
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $856.4 | $915.9 |
| Gross profit / margin | $205.9 / 24.0% | $179.5 / 19.6% |
| Operating profit / margin | $41.7 / 4.9% | $31.8 / 3.5% |
| Net income | $29.6 | $22.0 |
| Diluted EPS | $4.32 | $3.13 |
| Cash from operations | $93.9 | $108.0 |
| Capital expenditures | $16.2 | $10.6 |
| Cash and cash equivalents | $80.6 | $52.5 |
| Total debt | $134.8 | $170.0 |
| Stockholders’ equity | $220.3 | $201.1 |
Operating cash flow less capital expenditures was approximately $77.8 million, versus $97.4 million in 2015. Consolidated current assets were $381.7 million and current liabilities $221.8 million at year-end. Subsidiary credit facilities had $239.5 million of unused availability, net of borrowing-base limits. NACCO reported covenant compliance. Debt is held at subsidiaries and is not guaranteed by the parent.
Material changes versus 2015
- Revenue declined 6.5%, while net income rose 34.7%. Improved gross and operating margins reflected a more profitable mix and lower costs in parts of the portfolio, alongside segment-specific items.
- NACoal: Revenue fell 24.9% to $111.1 million, primarily following Centennial’s cessation of mining. Operating profit increased to $5.6 million from $0.5 million; FY 2016 included a $17.4 million non-cash Centennial impairment and a $3.3 million charge to resolve a legal matter. Coal sold rose to 32.5 million tons from 30.6 million, partly due to newer mines ramping up.
- HBB: Revenue declined 2.5% to $605.2 million as lower U.S. retail volumes and unfavorable currency effects outweighed pricing. Operating profit rose to $43.0 million from $34.8 million, supported by improved product mix, lower costs and reduced SG&A.
- KC: Revenue decreased 4.4% to $144.4 million, reflecting store closures and lower comparable-store sales. Operating profit was $0.4 million; net loss was $0.4 million. Stores fell to 223 from 229.
- Operating cash flow decreased $14.1 million, mainly due to working-capital movements. Debt declined $35.2 million. The company repurchased $6.0 million of Class A shares and paid $1.065 per share in dividends during 2016.
Outlook, risks and unusual items
- NACoal outlook: Management expected 2017 tons sold and pretax income to increase significantly, excluding the effects of 2016 impairment and legal-resolution charges. The outlook relies on Bisti’s January 2017 start under a 15-year cost-plus contract, full-year Coyote Creek production, and new quarry work. Bisti anticipated 5–6 million tons annually at expected customer power-plant operating levels. Management expected 2017 cash flow before financing to remain strong but below 2016, with approximately $16 million of capital spending.
- NACoal’s longer-term goal to increase unconsolidated-mine earnings about 50% from the 2012 level was pushed to 2020 or 2021, from earlier expectations, with timing dependent on inflation adjustments and customer demand. Coal demand is exposed to customer power-plant utilization, alternative fuels, environmental rules and long-term contract risks.
- HBB outlook: Management expected modest revenue and net-income growth in 2017, with North American consumer markets roughly comparable to 2016 and moderate growth in international and commercial markets. Increased initiative, advertising and distribution costs were expected to offset much of the revenue benefit. Risks include concentrated retail customers (Walmart represented 32% of HBB revenue), Chinese sourcing, foreign exchange and input costs.
- KC outlook: Management expected modestly lower 2017 revenue and full-year results comparable to 2016 if customer visits met expectations. KC closed 17 stores early in 2017 and planned to continue reducing its store base. Risks include mall traffic, online competition, consumer spending and seasonal working-capital needs.
- Centennial’s 2016 impairment followed a $105.1 million impairment in 2014; reclamation obligations and asset-sale outcomes remain relevant. Consolidated asset retirement obligations totaled $42.1 million. HBB accrued $8.7 million for environmental investigation and remediation, with a further reasonably possible exposure of $0–$4.7 million. Bellaire carries legacy mine-water treatment and other closed-mine obligations.
- Management said environmental compliance was not expected to materially harm results based on current information, but identified potential adverse effects from regulatory change and coal-power demand shifts. The 2016 tax rate was 14.1%, affected by percentage-depletion benefits, tax settlements and valuation allowances. The 2016 financial statements and internal controls received unqualified auditor opinions.
Most important facts for investors to verify
- Whether Bisti, Coyote Creek and Liberty achieve planned production and customer power-plant utilization, and how those developments affect NACoal’s earnings and cash flows.
- Whether the 2017 NACoal and HBB outlooks materialize, including the impact of coal demand, retail volumes, product mix, currency and costs.
- KC’s store-closure execution, comparable sales and cash generation amid continued shifts to online shopping.
- Centennial asset-sale proceeds, reclamation spending, environmental exposures and the company’s ability to maintain liquidity and covenant compliance.