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EX-31.1 - EXHIBIT - NACCO INDUSTRIES INCexhibit311q314.htm
EX-31.2 - EXHIBIT - NACCO INDUSTRIES INCexhibit312q314.htm

 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 _______________________________________________________________________________________________________________________________________________________________________________________________________
FORM 10-Q
(Mark One)
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 2014
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from                      to                     
Commission file number 1-9172
 
 
NACCO INDUSTRIES, INC.
 
 
 
 
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
 
 
DELAWARE 
 
34-1505819
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
5875 LANDERBROOK DRIVE, SUITE 220, CLEVELAND, OHIO 
 
44124-4069
 
 
(Address of principal executive offices)
 
(Zip code)
 
 
 
 
 
 
 
 
(440) 229-5151
 
 
 
 
(Registrant's telephone number, including area code)
 
 
 
 
 
 
 
 
 
N/A
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
 
Accelerated filer þ 
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO þ

Number of shares of Class A Common Stock outstanding at October 24, 2014: 5,725,879
Number of shares of Class B Common Stock outstanding at October 24, 2014: 1,573,804




NACCO INDUSTRIES, INC.
TABLE OF CONTENTS

 
 
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


Part I
FINANCIAL INFORMATION
Item 1. Financial Statements

NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
SEPTEMBER 30
2014
 
DECEMBER 31
2013
 
SEPTEMBER 30
2013
 
(In thousands, except share data)
ASSETS
 

 
 
 
 
Cash and cash equivalents
$
50,598

 
$
95,390

 
$
79,353

Accounts receivable, net
97,639

 
120,789

 
107,630

Accounts receivable from affiliates
44,339

 
32,636

 
30,551

Inventories, net
220,607

 
184,445

 
207,349

Deferred income taxes
11,486

 
14,452

 
14,428

Prepaid expenses and other
25,774

 
13,578

 
15,644

Total current assets
450,443

 
461,290

 
454,955

Property, plant and equipment, net
252,039

 
219,256

 
193,864

Coal supply agreements and other intangibles, net
57,017

 
59,685

 
64,590

Other non-current assets
69,661

 
69,725

 
64,680

Total assets
$
829,160

 
$
809,956

 
$
778,089

LIABILITIES AND EQUITY
 

 
 
 
 
Accounts payable
$
149,343

 
$
133,016

 
$
141,919

Revolving credit agreements of subsidiaries - not guaranteed by the parent company
69,805

 
23,460

 
37,812

Current maturities of long-term debt of subsidiaries - not guaranteed by the parent company
7,886

 
7,859

 
7,850

Accrued payroll
19,136

 
29,030

 
22,469

Other current liabilities
41,325

 
44,754

 
40,418

Total current liabilities
287,495

 
238,119

 
250,468

Long-term debt of subsidiaries - not guaranteed by the parent company
138,958

 
152,431

 
129,123

Mine closing reserves
36,217

 
29,764

 
29,212

Pension and other postretirement obligations
7,312

 
7,648

 
6,873

Long-term deferred income taxes
23,304

 
24,786

 
23,074

Other long-term liabilities
66,632

 
59,428

 
63,618

Total liabilities
559,918

 
512,176

 
502,368

Stockholders' equity
 

 
 
 
 
Common stock:
 

 
 
 
 
Class A, par value $1 per share, 5,821,078 shares outstanding (December 31, 2013 - 6,290,414 shares outstanding; September 30, 2013 - 6,356,996 shares outstanding)
5,821

 
6,290

 
6,357

Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,573,804 shares outstanding (December 31, 2013 - 1,581,106 shares outstanding; September 30, 2013 - 1,581,406 shares outstanding)
1,574

 
1,581

 
1,581

Capital in excess of par value

 
941

 
367

Retained earnings
274,297

 
301,227

 
284,523

Accumulated other comprehensive loss
(12,450
)
 
(12,259
)
 
(17,107
)
Total stockholders' equity
269,242

 
297,780

 
275,721

Total liabilities and equity
$
829,160

 
$
809,956

 
$
778,089


See notes to Unaudited Condensed Consolidated Financial Statements.

2


NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share data)
Revenues
$
221,714

 
$
228,614

 
$
599,497

 
$
620,683

Cost of sales
175,171

 
179,395

 
480,260

 
477,573

Gross profit
46,543

 
49,219

 
119,237

 
143,110

Earnings of unconsolidated mines
12,064

 
11,808

 
36,069

 
34,187

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
46,373

 
43,269

 
145,792

 
142,054

Amortization of intangible assets
911

 
1,076

 
2,667

 
2,736

 
47,284

 
44,345

 
148,459

 
144,790

Operating profit
11,323

 
16,682

 
6,847

 
32,507

Other expense (income)
 

 
 
 
 
 
 
Interest expense
2,046

 
1,044

 
5,450

 
3,496

Income from other unconsolidated affiliates
(191
)
 
(286
)
 
(159
)
 
(1,013
)
Closed mine obligations
316

 
266

 
940

 
943

Other, net, including interest income
86

 
174

 
(65
)
 
517

 
2,257

 
1,198

 
6,166

 
3,943

Income before income tax provision (benefit)
9,066

 
15,484

 
681

 
28,564

Income tax provision (benefit)
1,367

 
3,159

 
(1,870
)
 
6,670

Net income
$
7,699

 
$
12,325

 
$
2,551

 
$
21,894

 
 

 
 
 
 
 
 
Basic earnings per share
$
1.02

 
$
1.54

 
$
0.33

 
$
2.68

Diluted earnings per share
$
1.02

 
$
1.54

 
$
0.33

 
$
2.67

 
 
 
 
 
 
 
 
Dividends per share
$
0.2575

 
$
0.2500

 
$
0.7650

 
$
0.7500

 
 

 
 
 
 
 
 
Basic weighted average shares outstanding
7,515

 
7,988

 
7,688

 
8,173

Diluted weighted average shares outstanding
7,533

 
7,996

 
7,702

 
8,193


See notes to Unaudited Condensed Consolidated Financial Statements.

3


NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net income
$
7,699

 
$
12,325

 
$
2,551

 
$
21,894

Foreign currency translation adjustment
(740
)
 
(21
)
 
(656
)
 
(85
)
Deferred gain on available for sale securities
33

 
151

 
270

 
443

Current period cash flow hedging activity, net of $351 tax expense and $457 tax benefit in the three and nine months ended September 30, 2014, respectively, and $88 tax benefit and $344 tax expense in the three and nine months ended September 30, 2013, respectively.
590

 
(124
)
 
(860
)
 
573

Reclassification of hedging activities into earnings, net of $137 and $324 tax benefit in the three and nine months ended September 30, 2014, respectively, and $24 tax expense and $146 tax benefit in the three and nine months ended September 30, 2013, respectively.
249

 
(38
)
 
602

 
235

Current period pension and postretirement plan adjustment, net of $3,497 tax expense in both the three and nine months ended September 30, 2013, respectively.

 
3,652

 

 
3,652

Current period curtailment gain into earnings, net of $578 tax expense in both the three and nine months ended September 30, 2013, respectively

 
(1,123
)
 

 
(1,123
)
Reclassification of pension and postretirement adjustments into earnings, net of $75 and $235 tax benefit in the three and nine months ended September 30, 2014, respectively, and $109 and $517 tax benefit in the three and nine months ended September 30, 2013, respectively.
180

 
254

 
453

 
1,059

Total other comprehensive income (loss)
$
312

 
$
2,751

 
$
(191
)
 
$
4,754

Comprehensive income
$
8,011

 
$
15,076

 
$
2,360

 
$
26,648


See notes to Unaudited Condensed Consolidated Financial Statements.


4


NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
2014
 
2013
 
(In thousands)
Operating activities
 

 
 
Net income
$
2,551

 
$
21,894

Adjustments to reconcile from net income to net cash provided by operating activities:
 

 
 
Depreciation, depletion and amortization
19,445

 
16,377

Amortization of deferred financing fees
347

 
442

Deferred income taxes
994

 
(7,401
)
Other
10,086

 
(15,797
)
Working capital changes:
 

 
 
Accounts receivable
10,511

 
12,199

Inventories
(36,183
)
 
(37,776
)
Other current assets
(7,921
)
 
(2,548
)
Accounts payable
16,884

 
13,843

Other current liabilities
(14,496
)
 
5,750

Net cash provided by for operating activities
2,218

 
6,983

 
 

 
 
Investing activities
 

 
 
Expenditures for property, plant and equipment
(47,663
)
 
(24,905
)
Cash in escrow for investment

 
(5,000
)
Other
366

 
1,055

Net cash used for investing activities
(47,297
)
 
(28,850
)
 
 

 
 
Financing activities
 

 
 
Additions to long-term debt
1,553

 
1,511

Reductions of long-term debt
(2,000
)
 
(11,762
)
Net additions (reductions) to revolving credit agreements
33,345

 
5,136

Cash dividends paid
(5,884
)
 
(6,133
)
Purchase of treasury shares
(26,447
)
 
(27,355
)
Other
(255
)
 
(26
)
Net cash provided by (used for) financing activities
312

 
(38,629
)
 
 

 
 
Effect of exchange rate changes on cash
(25
)
 
(6
)
Cash and cash equivalents
 

 
 
Decrease for the period
(44,792
)
 
(60,502
)
Balance at the beginning of the period
95,390

 
139,855

Balance at the end of the period
$
50,598

 
$
79,353


See notes to Unaudited Condensed Consolidated Financial Statements.

5


NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Class A Common Stock
Class B Common Stock
Capital in Excess of Par Value
Retained Earnings
Foreign Currency Translation Adjustment
Deferred Gain (Loss) on Available for Sale Securities
Deferred Gain (Loss) on Cash Flow Hedging
Pension and Postretirement Plan Adjustment
 
Total Stockholders' Equity
 
(In thousands, except per share data)
Balance, January 1, 2013
$
6,771

$
1,582

$
24,612

$
270,227

 
$
(574
)
 
$
292

 
$
(286
)
 
$
(21,293
)
 
$
281,331

Stock-based compensation
80


1,150


 

 

 

 

 
1,230

Purchase of treasury shares
(495
)

(25,395
)
(1,465
)
 

 

 

 

 
(27,355
)
Net income



21,894

 

 

 

 

 
21,894

Conversion of Class B to Class A shares
1

(1
)


 

 

 

 

 

Cash dividends on Class A and Class B common stock: $0.7500 per share



(6,133
)
 

 

 

 

 
(6,133
)
Current period other comprehensive income (loss)




 
(85
)
 
443

 
573

 
3,652

 
4,583

Current period curtailment gain
 
 
 
 
 
 
 
 
 
 
 
(1,123
)
 
(1,123
)
Reclassification adjustment to net income (loss)




 

 

 
235

 
1,059

 
1,294

Balance, September 30, 2013
$
6,357

$
1,581

$
367

$
284,523

 
$
(659
)
 
$
735

 
$
522

 
$
(17,705
)
 
$
275,721

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
$
6,290

$
1,581

$
941

$
301,227

 
$
(803
)
 
$
1,021

 
$
676

 
$
(13,153
)
 
$
297,780

Stock-based compensation
26


1,407


 

 

 

 

 
1,433

Purchase of treasury shares
(502
)

(2,348
)
(23,597
)
 

 

 

 

 
(26,447
)
Conversion of Class B to Class A shares
7

(7
)


 

 

 

 

 

Net income



2,551

 

 

 

 

 
2,551

Cash dividends on Class A and Class B common stock: $0.7650 per share



(5,884
)
 

 

 

 

 
(5,884
)
Current period other comprehensive income (loss)




 
(656
)
 
270

 
(860
)
 

 
(1,246
)
Reclassification adjustment to net income (loss)




 

 

 
602

 
453

 
1,055

Balance, September 30, 2014
$
5,821

$
1,574

$

$
274,297

 
$
(1,459
)
 
$
1,291

 
$
418

 
$
(12,700
)
 
$
269,242


See notes to Unaudited Condensed Consolidated Financial Statements.

6


NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014
(In thousands, except as noted and per share amounts)

NOTE 1—Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of NACCO Industries, Inc. (the “parent company” or “NACCO”) and its wholly owned subsidiaries (collectively, “NACCO Industries, Inc. and Subsidiaries” or the “Company”). Intercompany accounts and transactions are eliminated in consolidation. The Company's subsidiaries operate in the following principal industries: mining, small appliances and specialty retail. The Company manages its subsidiaries primarily by industry.
 
The North American Coal Corporation and its affiliated companies (collectively, “NACoal”) mine and market steam and metallurgical coal for use in power generation and steel production and provide selected value-added mining services for other natural resources companies. Hamilton Beach Brands, Inc. (“HBB”) is a leading designer, marketer and distributor of small electric household appliances, as well as commercial products for restaurants, bars and hotels. The Kitchen Collection, LLC (“KC”) is a national specialty retailer of kitchenware and gourmet foods operating under the Kitchen Collection® and Le Gourmet Chef® store names in outlet and traditional malls throughout the United States.

These financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position of the Company at September 30, 2014 and the results of its operations, comprehensive income (loss), cash flows and changes in equity for the nine months ended September 30, 2014 and 2013 have been included. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

The balance sheet at December 31, 2013 has been derived from the audited financial statements at that date but does not include all of the information or notes required by U.S. GAAP for complete financial statements.

Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2014. The HBB and KC businesses are seasonal and a majority of revenues and operating profit typically occurs in the second half of the calendar year when sales of small electric household appliances to retailers and consumers increase significantly for the fall holiday selling season. For further information regarding seasonality of these businesses, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

Certain amounts in the prior periods' Unaudited Condensed Consolidated Financial Statements have been reclassified to conform to the current period's presentation.

NOTE 2—Recently Issued Accounting Standards

Accounting Standards Adopted in 2014: In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations - that is, a major effect on the organization's operations and financial results - should be presented as discontinued operations. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. Additionally, the ASU requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The Company adopted this guidance during the first quarter of 2014.  The adoption did not have an effect on the Company’s financial position, results of operations, cash flows or related disclosures.

Accounting Standards Not Yet Adopted: In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which supersedes most current revenue recognition guidance, including industry-specific guidance, and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is

7


effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. The Company is currently assessing the impact of implementing this guidance on the Company's financial position, results of operations, cash flows and related disclosures.  

In August 2014, the FASB issued ASU No. 2014-15, "Preparation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern," to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  Specifically, the amendments (1) provide a definition of the term “substantial doubt,” (2) require an evaluation every reporting period, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that financial statements are issued.  ASU 2014-15 is effective for fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter.  Early application is permitted. The Company does not expect the adoption of this guidance to have an effect on the Company's financial position, results of operations, cash flows or related disclosures.

NOTE 3—Inventories

Inventories are summarized as follows:

 
SEPTEMBER 30
2014
 
DECEMBER 31
2013
 
SEPTEMBER 30
2013
Coal - NACoal
$
25,749

 
$
24,710

 
$
21,048

Mining supplies - NACoal
18,641

 
17,406

 
17,131

Total inventories at weighted average cost
44,390

 
42,116

 
38,179

Sourced inventories - HBB
130,012

 
90,713

 
112,250

Retail inventories - KC
46,205

 
51,616

 
56,920

Total inventories at FIFO
176,217

 
142,329

 
169,170

 
$
220,607

 
$
184,445

 
$
207,349



NOTE 4—Stockholders' Equity

Stock Repurchase Program: On November 8, 2011, the Company announced that its Board of Directors approved the repurchase of up to $50 million of the Company's Class A Common Stock outstanding (the "2011 Stock Repurchase Program"). The original authorization for the 2011 Stock Repurchase Program was set to expire on December 31, 2012; however, in November 2012, the Company's Board of Directors approved an extension of the 2011 Stock Repurchase Program through December 31, 2013. In total, the Company repurchased $35.6 million of Class A Common Stock under the 2011 Stock Repurchase Program.

On November 12, 2013, the Company's Board of Directors terminated the 2011 Stock Repurchase Program and approved a new stock repurchase program (the "2013 Stock Repurchase Program") providing for the purchase of up to $60 million of the Company's Class A Common Stock outstanding through December 31, 2015. The timing and amount of any repurchases under the 2013 Stock Repurchase Program are determined at the discretion of the Company's management based on a number of factors, including the availability of capital, other capital allocation alternatives and market conditions for the Company's Class A Common Stock. The 2013 Stock Repurchase Program does not require the Company to acquire any specific number of shares. It may be modified, suspended, extended or terminated by the Company at any time without prior notice and may be executed through open market purchases, privately negotiated transactions or otherwise. All or part of the repurchases under the 2013 Stock Repurchase Program may be implemented under a Rule 10b5-1 trading plan, which would allow repurchases under pre-set terms at times when the Company might otherwise be prevented from doing so under applicable securities laws.

During the three months ended September 30, 2014, the Company repurchased a total of 235,194 shares of Class A Common Stock for an aggregate purchase price of $12.2 million under the 2013 Stock Repurchase Program at a weighted average purchase price of $51.86 per share. During the nine months ended September 30, 2014, the Company repurchased a total of 501,531 shares of Class A Common Stock for an aggregate purchase price of $26.4 million under the 2013 Stock Repurchase Program at a weighted average purchase price of $52.73 per share.


8


Amounts Reclassified out of Accumulated Other Comprehensive Income (Loss): The following table summarizes the amounts reclassified out of Accumulated other comprehensive income (loss) ("AOCI") and recognized in the Unaudited Condensed Consolidated Statements of Operations:

 
 
Amount Reclassified from AOCI
 
 
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
 
 
September 30
 
September 30
 
Details about AOCI Components
 
2014
 
2013
 
2014
 
2013
Location of (gain) loss reclassified from AOCI into income (loss)
(Gain) loss on cash flow hedging
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$
8

 
$
(62
)
 
$
(194
)
 
$
(79
)
Cost of sales
Interest rate contracts
 
378

 

 
1,120

 
460

Interest expense
 
 
386

 
(62
)
 
926

 
381

Total before income tax expense (benefit)
 
 
(137
)
 
24

 
(324
)
 
(146
)
Income tax expense (benefit)
 
 
$
249

 
$
(38
)
 
$
602

 
$
235

Net of tax
 
 
 
 
 
 
 
 
 
 
Pension and postretirement plan
 
 
 
 
 
 
 
 
 
Actuarial loss
 
$
273

 
$
396

 
$
742

 
$
1,709

(a) 
Prior-service credit
 
(18
)
 
(33
)
 
(54
)
 
(133
)
(a) 
 
 
255

 
363

 
688

 
1,576

Total before income tax benefit
 
 
(75
)
 
(109
)
 
(235
)
 
(517
)
Income tax benefit
 
 
$
180

 
$
254

 
$
453

 
$
1,059

Net of tax
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
429

 
$
216

 
$
1,055

 
$
1,294

Net of tax

(a) These AOCI components are included in the computation of pension and postretirement health care (income) expense. See Note 10 for further discussion.



9


NOTE 5—Fair Value Disclosure

Recurring Fair Value Measurements: The following table presents the Company's assets and liabilities accounted for at fair value on a recurring basis:

 
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in
 
 
 
Significant
 
 
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
 
Identical Assets
 
Observable Inputs
 
Inputs
Description
 
Date
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
September 30, 2014
 
 
 
 
 
 
Assets:
 

 
 
 
 
 
 
Available for sale securities
 
$
6,955

 
$
6,955

 
$

 
$

Interest rate swap agreements
 
538

 

 
538

 

Foreign currency exchange contracts
 
213

 

 
213

 

 
 
$
7,706

 
$
6,955

 
$
751

 
$

Liabilities:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
$
29

 
$

 
$
29

 
$

Contingent consideration
 
1,606

 

 

 
1,606

 
 
$
1,635

 
$

 
$
29

 
$
1,606

 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Available for sale securities
 
$
6,540

 
$
6,540

 
$

 
$

Interest rate swap agreements
 
937

 

 
937

 

Foreign currency exchange contracts
 
83

 

 
83

 

 
 
$
7,560

 
$
6,540

 
$
1,020

 
$

Liabilities:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
$
14

 
$

 
$
14

 
$

Contingent consideration
 
1,581

 

 

 
1,581

 
 
$
1,595

 
$

 
$
14

 
$
1,581

 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Available for sale securities
 
$
6,010

 
$
6,010

 
$

 
$

Interest rate swap agreements
 
645

 

 
645

 

Foreign currency exchange contracts
 
111

 

 
111

 

 
 
$
6,766

 
$
6,010

 
$
756

 
$

Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
1,572

 
$

 
$

 
$
1,572

 
 
$
1,572

 
$

 
$

 
$
1,572


Bellaire Corporation (“Bellaire”) is a non-operating subsidiary of the Company with legacy liabilities relating to closed mining operations, primarily former Eastern U.S. underground coal mining operations. In connection with Bellaire's normal permit renewal with the Pennsylvania Department of Environmental Protection ("DEP"), Bellaire established a $5 million mine water treatment trust (the "Mine Water Treatment Trust") to provide a financial assurance mechanism in order to assure the long-term treatment of post-mining discharges. Bellaire's Mine Water Treatment Trust invests in available for sale securities that are reported at fair value based upon quoted market prices in active markets for identical assets; therefore, they are classified as Level 1 within the fair value hierarchy and in the table above.


10


Interest rate swap agreements and forward foreign currency exchange contracts held by the Company have been designated as hedges of forecasted cash flows. The Company does not currently hold any nonderivative instruments designated as hedges or any derivatives designated as fair value hedges. The Company uses significant other observable inputs to value derivative instruments used to hedge foreign currency and interest rate risk; therefore, they are classified within Level 2 of the valuation hierarchy. The fair value for these contracts is determined based on exchange rates and interest rates, respectively. The Company uses a present value technique that incorporates the LIBOR-swap curve, foreign currency spot rates and foreign currency forward rates to value its derivatives, including its interest rate swap agreements and foreign currency exchange contracts, and also incorporates the effect of its subsidiary and counterparty credit risk into the valuation.

The contingent consideration is structured as an earn-out payment to the sellers of Reed Minerals. The earn-out is calculated as a percentage by which the monthly average coal selling price exceeds an established threshold multiplied by the number of tons sold during the month. The earn-out period covers the first 15.0 million tons of coal sold from certain Reed Minerals coal reserves. There is no monetary cap on the amount payable under this contingent payment arrangement. The liability for contingent consideration is included in Other long-term liabilities in the Unaudited Condensed Consolidated Balance Sheets. Earn-out payments, if payable, are paid quarterly. No earn-out payments were made during the three and nine months ended September 30, 2014.

The estimated fair value of the contingent consideration was determined based on the income approach with key assumptions that include future projected metallurgical coal prices, forecasted coal deliveries and the estimated discount rate used to determine the present value of the projected contingent consideration payments. Future projected coal prices were estimated using a stochastic modeling methodology based on Geometric Brownian Motion with a risk neutral Monte Carlo simulation. Significant assumptions used in the model include coal price volatility and the risk-free interest rate based on U.S. Treasury yield curves with maturities consistent with the expected life of the contingent consideration. Volatility is considered a significant assumption and is based on historical coal prices. A significant increase or decrease in any of the aforementioned key assumptions related to the fair value measurement of the contingent consideration may result in a significantly higher or lower reported fair value for the contingent consideration liability.

The future anticipated cash flow for the contingent consideration was discounted using an interest rate that appropriately captures a market participant's view of the risk associated with the liability. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.

There were no transfers into or out of Levels 1, 2 or 3 during the three and nine months ended September 30, 2014 and 2013.

Other Fair Value Measurement Disclosures: The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments. Revolving credit agreements and long-term debt are recorded at carrying value in the Unaudited Condensed Consolidated Balance Sheets. The fair value of revolving credit agreements approximates their carrying value as the stated rates of the debt reflect recent market conditions. The fair values of revolving credit agreements and long-term debt, excluding capital leases, were determined using current rates offered for similar obligations taking into account subsidiary credit risk, which is Level 2 as defined in the fair value hierarchy. At September 30, 2014, both the fair value and the book value of the revolving credit agreements and long-term debt, excluding capital leases, was $204.7 million. At December 31, 2013, both the fair value and the book value of the revolving credit agreements and long-term debt, excluding capital leases, was $170.7 million. At September 30, 2013, the fair value of the revolving credit agreements and long-term debt, excluding capital leases, was $161.8 million compared with the book value of $161.4 million.



11


NOTE 6—Unconsolidated Subsidiaries

NACoal has two consolidated mining operations: Mississippi Lignite Mining Company (“MLMC”) and Reed Minerals, and provides dragline mining services for independently owned limerock quarries in Florida. NACoal also has the following wholly owned unconsolidated subsidiaries that each meet the definition of a variable interest entity and are accounted for using the equity method:

The Coteau Properties Company ("Coteau")
The Falkirk Mining Company ("Falkirk")
The Sabine Mining Company ("Sabine")
Demery Resources Company, LLC (“Demery”)
Caddo Creek Resources Company, LLC (“Caddo Creek”)
Coyote Creek Mining Company, LLC (“Coyote Creek”)
Camino Real Fuels, LLC (“Camino Real”)
Liberty Fuels Company, LLC (“Liberty”)
NoDak Energy Services, LLC ("NoDak")

Coteau, Falkirk and Sabine were developed between 1974 and 1981 and operate lignite coal mines under long-term contracts with various utility customers. Coteau, Falkirk and Sabine are capitalized primarily with debt financing, which the utility customers have arranged and guaranteed, and are without recourse to NACCO and NACoal. Demery, Caddo Creek, Coyote Creek, Camino Real and Liberty (collectively with Coteau, Falkirk and Sabine, the "Unconsolidated Mines") were formed to develop, construct and operate surface mines under long-term contracts. Demery commenced delivering coal to its customer in 2012 and is expected to reach full production levels in 2016. Liberty commenced production in 2013 but is not expected to produce tons for Mississippi Power Company's new Kemper County Energy Facility for the remainder of 2014. Production levels are expected to increase gradually beginning in 2015 to full production of approximately 4.3 million tons of coal annually beginning in 2019. Construction of the Kemper County Energy Facility is still ongoing which may affect the pace of the increase in deliveries. Mining permits needed to commence mining operations were issued in 2013 for Caddo Creek and Camino Real. Caddo Creek expects to begin making initial coal deliveries in late 2014. Camino Real expects initial deliveries in the second half of 2015, and expects to mine approximately 2.5 million to3.0 million tons of coal annually when at full production. Coyote Creek received its mining permit in October 2014 and is developing a mine in Mercer County, North Dakota, from which it expects to deliver approximately 2.5 million tons of coal annually beginning in mid-2016. NoDak was formed to operate and maintain a coal processing facility.

The contracts with the customers of the Unconsolidated Mines provide for reimbursement at a price based on actual costs plus an agreed pre-tax profit per ton of coal sold or actual costs plus a management fee. Although NACoal owns 100% of the equity and manages the daily operations of these entities, the Company has determined that the equity capital provided by NACoal is not sufficient to adequately finance the ongoing activities or absorb any expected losses without additional support from the customers. The customers have a controlling financial interest and have the power to direct the activities that most significantly affect the economic performance of the entities. As a result, NACoal is not the primary beneficiary and therefore does not consolidate these entities' financial position or results of operations. The income taxes resulting from the operations of the Unconsolidated Mines are solely the responsibility of the Company. The pre-tax income from the Unconsolidated Mines is reported on the line “Earnings of unconsolidated mines” in the Unaudited Condensed Consolidated Statements of Operations, with related income taxes included in the provision for income taxes. The Company has included the pre-tax earnings of the Unconsolidated Mines above operating profit because they are an integral component of the Company's business and operating results. The pre-tax income from NoDak is reported on the line "(Income) loss from other unconsolidated affiliates" in the "Other expense (income)" section of the Unaudited Condensed Consolidated Statements of Operations, with the related income taxes included in the provision for income taxes.

North American Coal Corporation India Private Limited ("NACC India") was formed to provide technical business advisory services to the third-party owners of a coal mine in India.  During the first nine months of 2014, NACoal recognized a $1.1 million after-tax charge to establish an allowance against the receivable from NACC India's customer. During the third quarter of 2014, NACC India's customer defaulted on its contractual payment obligations and as a result of this default, NACC India has terminated its contract with the customer and is pursuing contractual remedies. Prior to contract termination, NACC India met the definition of a variable interest entity of which NACoal was not the primary beneficiary and was accounted for using the equity method with net income or loss reported on the line "(Income) loss from other unconsolidated affiliates" in the "Other expense (income)" section of the Unaudited Condensed Consolidated Statements of Operations. Subsequent to contract termination, NACC India is no longer a variable interest entity and its financial position and results of operations are consolidated by NACoal as of the contract termination date. 


12


The investments in the Unconsolidated Mines and NoDak and related tax positions totaled $28.9 million at September 30, 2014. The investments in the Unconsolidated Mines, NoDak and NACC India and related tax positions totaled $33.1 million and $35.2 million at December 31, 2013 and September 30, 2013, respectively. These amounts are included on the line “Other Non-current Assets” in the Unaudited Condensed Consolidated Balance Sheets. The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $3.8 million, $5.4 million and $5.0 million at September 30, 2014, December 31, 2013, and September 30, 2013 respectively.

Included in "Accounts receivable from affiliates" is $42.2 million, $27.9 million and $26.7 million as of September 30, 2014, December 31, 2013 and September 30, 2013, respectively, due from Coyote Creek, primarily for the purchase of a dragline from NACoal.

Summarized financial information for the Unconsolidated Mines, NoDak and NACC India is as follows:
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2014
 
2013
 
2014
 
2013
Revenues
$
150,529

 
$
152,999

 
$
437,127

 
$
433,937

Gross profit
$
19,504

 
$
18,847

 
$
56,123

 
$
55,859

Income before income taxes
$
12,201

 
$
12,172

 
$
36,363

 
$
35,650

Net income
$
9,372

 
$
9,471

 
$
28,046

 
$
27,463



NOTE 7—Contingencies

Various legal and regulatory proceedings and claims have been or may be asserted against NACCO and certain subsidiaries relating to the conduct of their businesses, including product liability, patent infringement, asbestos-related claims, environmental and other claims. These proceedings and claims are incidental to the ordinary course of business of the Company. Management believes that it has meritorious defenses and will vigorously defend the Company in these actions. Any costs that management estimates will be paid as a result of these claims are accrued when the liability is considered probable and the amount can be reasonably estimated. Although the ultimate disposition of these proceedings is not presently determinable, management believes, after consultation with its legal counsel, that the likelihood is remote that material costs will be incurred in excess of accruals already recognized.

HBB is investigating or remediating historical environmental contamination at some current and former sites operated by HBB or by businesses it acquired. Based on the current stage of the investigation or remediation at each known site, HBB estimates the total investigation and remediation costs and the period of assessment and remediation activity required for each site. The estimate of future investigation and remediation costs is primarily based on variables associated with site clean-up, including, but not limited to, physical characteristics of the site, the nature and extent of the contamination and applicable regulatory programs and remediation standards. No assessment can fully characterize all subsurface conditions at a site. There is no assurance that additional assessment and remediation efforts will not result in adjustments to estimated remediation costs or the time frame for remediation at these sites.

HBB's estimates of investigation and remediation costs may change if it discovers contamination at additional sites or additional contamination at known sites, if the effectiveness of its current remediation efforts change, if applicable federal or state regulations change or if HBB's estimate of the time required to remediate the sites changes. HBB's revised estimates may differ materially from original estimates.

At September 30, 2014, December 31, 2013, and September 30, 2013, HBB had accrued an undiscounted obligation of $10.0 million, $6.9 million and $7.2 million, respectively, for environmental investigation and remediation activities. In addition, HBB estimates that it is reasonably possible that it may incur up to $4.2 million of additional expenses related to the environmental investigation and remediation at these sites.

During the nine months ended September 30, 2013, HBB recorded a $2.3 million charge to establish a liability for environmental investigation and remediation activities at the Picton, Ontario facility. During the nine months ended September 30, 2014, HBB recorded an additional $3.3 million charge to increase the liability at the Picton, Ontario facility as a result of an environmental study performed in the second quarter of 2014. 

During the nine months ended September 30, 2014 and 2013, HBB recorded a $0.8 million and $1.6 million reduction, respectively, in selling, general and administrative expenses as a result of a third party's commitment to share in anticipated remediation costs at HBB's Southern Pines and Mt. Airy locations.



13


NOTE 8—Product Warranties

HBB provides a standard warranty to consumers for all of its products. The specific terms and conditions of those warranties vary depending upon the product brand. In general, if a product is returned under warranty, a refund is provided to the consumer by HBB's customer, the retailer. Generally, the retailer returns those products to HBB for a credit. The Company estimates the costs which may be incurred under its standard warranty programs and records a liability for such costs at the time product revenue is recognized.

The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Factors that affect the Company's warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the cost per claim.

Changes in the Company's current and long-term recorded warranty liability are as follows:
 
2014
Balance at January 1
$
5,343

Warranties issued
5,325

Settlements made
(6,402
)
Balance at September 30
$
4,266



NOTE 9—Income Taxes

The income tax provision includes U.S. federal, state and local, and foreign income taxes and is based on the application of a forecasted annual income tax rate applied to the current quarter's year-to-date pre-tax income or loss. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company's annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the Company's ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated effective annual income tax rate.

The effective income tax rate for the three months ended September 30, 2014 was 15.1%. The effective income tax rate for the nine months ended September 30, 2014 was not meaningful as the $1.9 million income tax benefit is not directly correlated to the $0.7 million pre-tax income. The effective income tax rates were impacted by favorable net discrete tax items totaling $0.6 million and $2.0 million in the three and nine months ended September 30, 2014, respectively, primarily resulting from return to provision adjustments attributable to changes in estimates and the conclusion of the 2011 and 2012 U.S. federal tax return examinations. The effective income tax rates for the three and nine months ended September 30, 2013 were 20.4% and 23.4%, respectively. Discrete tax items impacting the three and nine months ended September 30, 2013 were not significant.


NOTE 10—Retirement Benefit Plans

The Company maintains various defined benefit pension plans that provide benefits based on years of service and average compensation during certain periods. The Company's policy is to make contributions to fund these plans within the range allowed by applicable regulations. Plan assets consist primarily of publicly traded stocks and government and corporate bonds. Pension benefits were frozen for all employees effective as of the close of business on December 31, 2013. All eligible employees of the Company, including employees whose pension benefits are frozen, receive retirement benefits under defined contribution retirement plans.

The Company also maintains postretirement health care plans which provide benefits to eligible retired employees. All health care plans of the Company have a cap on the Company's share of the costs. These plans have no assets. Under the Company's current policy, plan benefits are funded at the time they are due to participants.

14



The components of pension and postretirement health care expense (income) are set forth below:

 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2014
 
2013
 
2014
 
2013
U.S. Pension and Postretirement Health Care
 
 
 
 
 
 
 
Service cost
$
18

 
$
20

 
$
53

 
$
58

Interest cost
691

 
698

 
2,180

 
2,164

Expected return on plan assets
(1,143
)
 
(1,100
)
 
(3,551
)
 
(3,403
)
Amortization of actuarial loss
256

 
365

 
690

 
1,617

Amortization of prior service credit
(18
)
 
(33
)
 
(54
)
 
(133
)
Curtailment

 
(1,701
)
 

 
(1,701
)
Total
$
(196
)
 
$
(1,751
)
 
$
(682
)
 
$
(1,398
)
Non-U.S. Pension
 
 
 
 
 
 
 
Interest cost
$
50

 
$
48

 
$
149

 
$
149

Expected return on plan assets
(75
)
 
(72
)
 
(224
)
 
(215
)
Amortization of actuarial loss
17

 
31

 
52

 
92

Total
$
(8
)
 
$
7

 
$
(23
)
 
$
26




15


NOTE 11—Business Segments

NACCO is a holding company with the following principal subsidiaries: NACoal, HBB and KC. See Note 1 for a discussion of the Company's industries and product lines. NACCO's non-operating segment, NACCO and Other, includes the accounts of the parent company and Bellaire Corporation ("Bellaire"), a non-operating subsidiary of the Company.
 
Financial information for each of NACCO's reportable segments is presented in the following table. The line “Eliminations” in the Revenues section eliminates revenues from HBB sales to KC. The amounts of these revenues are based on current market prices of similar third-party transactions. No other sales transactions occur among reportable segments.
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
NACoal
$
49,840

 
$
52,870

 
$
139,492

 
$
147,584

HBB
135,155

 
134,099

 
354,865

 
354,901

KC
37,551

 
42,618

 
107,231

 
120,709

Eliminations
(832
)
 
(973
)
 
(2,091
)
 
(2,511
)
Total
$
221,714

 
$
228,614

 
$
599,497

 
$
620,683

 
 
 
 
 
 
 
 
Operating profit (loss)
 

 
 

 
 
 
 
NACoal
$
4,362

 
$
9,740

 
$
11,198

 
$
32,721

HBB
9,531

 
11,788

 
12,719

 
18,461

KC
(1,429
)
 
(3,658
)
 
(12,198
)
 
(14,045
)
NACCO and Other (a)
(1,073
)
 
(1,155
)
 
(4,429
)
 
(4,690
)
Eliminations
(68
)
 
(33
)
 
(443
)
 
60

Total
$
11,323

 
$
16,682

 
$
6,847

 
$
32,507

Net income (loss)
 
 
 
 
 
 
 
NACoal
$
3,185

 
$
7,794

 
$
8,815

 
$
26,337

HBB
6,008

 
7,427

 
7,717

 
10,913

KC
(966
)
 
(2,822
)
 
(7,656
)
 
(8,492
)
NACCO and Other
(906
)
 
(1,137
)
 
(3,776
)
 
(4,188
)
Eliminations
378

 
1,063

 
(2,549
)
 
(2,676
)
Total
$
7,699

 
$
12,325

 
$
2,551

 
$
21,894


(a) During the second quarter of 2014, the Company recorded a $1.1 million charge included in selling, general and administrative expenses in NACCO and Other to correct a prior period accounting error related to an increase in the estimated liability for certain frozen deferred compensation plans. Management, quantitatively and qualitatively, assessed the materiality of the error and the correction thereof and concluded that the effect of the previous accounting treatment was not material to prior periods, expected 2014 full-year results, or trend of earnings and determined no material misstatements existed in those prior periods and no restatement of those prior period financial statements was necessary.


NOTE 12—Acquisition

During the fourth quarter of 2013, NACoal acquired the equipment of National Coal of Alabama, Inc. ("NCOA") in exchange for the assumption of outstanding debt of $9.7 million associated with the acquired equipment. The outstanding debt was repaid concurrently with the acquisition of the equipment utilizing borrowings under NACoal's existing unsecured revolving line of credit. In April 2014, NACoal acquired coal reserves and prepaid royalties and assumed certain reclamation obligations of NCOA. The acquisition of NCOA did not include any additional cash consideration. This acquisition, which is being accounted for as a business combination, provides additional coal reserves in Alabama and equipment that can be used to mine these acquired coal reserves and coal reserves at NACoal's Reed Minerals mines, also located in Alabama. During the nine months ended September 30, 2014, the Company incurred $0.1 million in acquisition costs related to NCOA, which are

16


included in Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations. The Company has incurred total acquisition costs of $0.4 million related to NCOA.

The determination of the fair value of assets acquired and liabilities assumed as of the April 2014 acquisition date is preliminary as the Company has not finalized its analysis of the fair value of the equipment, coal reserves, prepaid royalties and reclamation obligations. The final allocation is expected to be completed as soon as practicable but no later than 12 months after the acquisition date.

NOTE 13—Subsequent Events

In October 2014, NACoal sold assets classified as held for sale at September 30, 2014 to Mississippi Power Company for $5.0 million and will recognize a gain of $3.5 million in the fourth quarter of 2014.



17


Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except as noted and per share data)

NACCO Industries, Inc. (the “parent company” or “NACCO”) and its wholly owned subsidiaries (collectively, the “Company”) operate in the following principal industries: mining, small appliances and specialty retail. Results of operations and financial condition are discussed separately by subsidiary, which corresponds with the industry groupings.

The North American Coal Corporation and its affiliated coal companies (collectively, “NACoal”) mine and market steam and metallurgical coal for use in power generation and steel production and provide selected value-added mining services for other natural resources companies. Hamilton Beach Brands, Inc. (“HBB”) is a leading designer, marketer and distributor of small electric household appliances, as well as commercial products for restaurants, bars and hotels. The Kitchen Collection, LLC (“KC”) is a national specialty retailer of kitchenware and gourmet foods operating under the Kitchen Collection® and Le Gourmet Chef® store names in outlet and traditional malls throughout the United States.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Please refer to the discussion of the Company's Critical Accounting Policies and Estimates as disclosed on pages 34 through 37 in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. The Company's Critical Accounting Policies and Estimates have not materially changed since December 31, 2013.

THE NORTH AMERICAN COAL CORPORATION

NACoal mines and markets steam and metallurgical coal for use in power generation and steel production and provides selected value-added mining services for other natural resources companies. Coal is surface mined from NACoal's developed mines in North Dakota, Texas, Mississippi, Louisiana and Alabama. Total coal reserves approximate 2.2 billion tons with approximately 1.1 billion tons committed to customers pursuant to long-term contracts.

NACoal has two consolidated mining operations: Mississippi Lignite Mining Company (“MLMC”) and Reed Minerals, and provides dragline mining services for independently owned limerock quarries in Florida. NACoal also has the following wholly owned unconsolidated subsidiaries that each meet the definition of a variable interest entity and are accounted for using the equity method:

The Coteau Properties Company ("Coteau")
The Falkirk Mining Company ("Falkirk")
The Sabine Mining Company ("Sabine")
Demery Resources Company, LLC (“Demery”)
Caddo Creek Resources Company, LLC (“Caddo Creek”)
Coyote Creek Mining Company, LLC (“Coyote Creek”)
Camino Real Fuels, LLC (“Camino Real”)
Liberty Fuels Company, LLC (“Liberty”)
NoDak Energy Services, LLC ("NoDak")

Coteau, Falkirk and Sabine were developed between 1974 and 1981 and operate lignite coal mines under long-term contracts with various utility customers. Coteau, Falkirk and Sabine are capitalized primarily with debt financing, which the utility customers have arranged and guaranteed, and are without recourse to NACCO and NACoal. Demery, Caddo Creek, Coyote Creek, Camino Real and Liberty (collectively with Coteau, Falkirk and Sabine, the "Unconsolidated Mines") were formed to develop, construct and operate surface mines under long-term contracts. Demery commenced delivering coal to its customer in 2012 and is expected to reach full production levels in 2016. Liberty commenced production in 2013 but is not expected to produce tons for Mississippi Power Company's new Kemper County Energy Facility for the remainder of 2014. Production levels are expected to increase gradually beginning in 2015 to full production of approximately 4.3 million tons of coal annually beginning in 2019. Construction of the Kemper County Energy Facility is still ongoing which may affect the pace of the increase in deliveries. Mining permits needed to commence mining operations were issued in 2013 for Caddo Creek and Camino Real. Caddo Creek expects to begin making initial coal deliveries in late 2014. Camino Real expects initial deliveries in the second half of 2015, and expects to mine approximately 2.5 million to 3.0 million tons of coal annually when at full production. Coyote Creek received its mining permit in October 2014 and is developing a mine in Mercer County, North Dakota, from which it expects to deliver approximately 2.5 million tons of coal annually beginning in mid-2016. NoDak was formed to operate and maintain a coal processing facility.


18


The contracts with the customers of the Unconsolidated Mines provide for reimbursement at a price based on actual costs plus an agreed pre-tax profit per ton of coal sold or actual costs plus a management fee.

North American Coal Corporation India Private Limited ("NACC India") was formed to provide technical business advisory services to the third-party owners of a coal mine in India.  During the first nine months of 2014, NACoal recognized a $1.1 million after-tax charge to establish an allowance against the receivable from NACC India's customer. During the third quarter of 2014, NACC India's customer defaulted on its contractual payment obligations and as a result of this default, NACC India has terminated its contract with the customer and intends to pursue contractual remedies.

Coal-fired power plants produce carbon dioxide and other greenhouse gases ("GHGs") as a by-product of their operations. GHG emissions have received increasing scrutiny from local, state, federal and international government bodies. The Environmental Protection Agency (the “EPA”) and other regulators are using existing laws, including the Clean Air Act ("CAA"), to limit emissions of carbon dioxide and other GHGs from major sources, including coal-fired power plants. On June 2, 2014, the EPA proposed new regulations limiting carbon dioxide emissions from existing power plants. Under this proposal, nationwide carbon dioxide emissions would be reduced by 30% from 2005 levels by 2030, with a focus on emissions from coal-fired generation. The final rule is expected to be issued in June 2015 with state implementation plans ("SIPs") due by June 2016 and emissions reductions scheduled to be phased in between 2020 and 2030. The proposed rule would give states a variety of approaches, including “cap-and-trade” programs, to meet proposed carbon dioxide emission standards. On June 18, 2014, the EPA also issued a carbon dioxide emission regulation for reconstructed and modified power plants, which addresses carbon dioxide emissions limits for power plants subsequent to modification. Enactment of laws and passage of regulations regarding GHG emissions by the United States or some of its states, or other actions to limit carbon dioxide emissions, such as opposition by environmental groups to expansion or modification of coal-fired power plants, could result in electric generators switching from coal to other fuel sources and could have a materially adverse effect on NACoal’s business, financial condition and results of operations.

FINANCIAL REVIEW

Tons of coal sold by NACoal's operating mines were as follows for the three and nine months ended September 30:
 
THREE MONTHS
 
NINE MONTHS
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Coteau
3.4

 
3.5

 
10.8

 
10.2

Falkirk
2.0

 
2.0

 
5.6

 
5.6

Sabine
1.2

 
1.2

 
3.5

 
3.5

Unconsolidated mines
6.6

 
6.7

 
19.9

 
19.3

MLMC
0.8

 
1.0

 
2.3

 
2.3

     Reed Minerals
0.3

 
0.2

 
0.7

 
0.7

Consolidated mines
1.1

 
1.2

 
3.0

 
3.0

Total tons sold
7.7

 
7.9

 
22.9

 
22.3


The limerock dragline mining operations sold 5.2 million and 16.5 million cubic yards of limerock in the three and nine months ended September 30, 2014, respectively. This compares with 4.9 million and 16.5 million cubic yards of limerock in the three and nine months ended September 30, 2013, respectively.


19


The results of operations for NACoal were as follows for the three and nine months ended September 30:
 
THREE MONTHS
 
NINE MONTHS
 
2014
 
2013
 
2014
 
2013
Revenue - consolidated mines
$
48,209

 
$
49,045

 
$
131,513

 
$
131,475

Royalty and other
1,631

 
3,825

 
7,979

 
16,109

Total revenues
49,840

 
52,870

 
139,492

 
147,584

Cost of sales - consolidated mines
47,403

 
48,222

 
134,941

 
125,792

Cost of sales - royalty and other
503

 
623

 
1,619

 
1,193

Total cost of sales
47,906

 
48,845

 
136,560

 
126,985

Gross profit
1,934

 
4,025

 
2,932

 
20,599

Earnings of unconsolidated mines (a)
12,064

 
11,808

 
36,069

 
34,187

Selling, general and administrative expenses
8,725

 
5,017

 
25,136

 
19,329

Amortization of intangible assets
911

 
1,076

 
2,667

 
2,736

Operating profit
4,362

 
9,740

 
11,198

 
32,721

Interest expense
1,721

 
788

 
4,298

 
2,200

Other (income) or loss, including (income) loss from other unconsolidated affiliates
(367
)
 
12

 
(550
)
 
(645
)
Income before income tax provision (benefit)
3,008

 
8,940

 
7,450

 
31,166

Income tax provision (benefit)
(177
)
 
1,146

 
(1,365
)
 
4,829

Net income
$
3,185

 
$
7,794

 
$
8,815

 
$
26,337

 


 


 


 


Effective income tax rate (b)(c)
n/m

 
12.8
%
 
n/m

 
15.5
%

(a) See Note 6 to Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
(b) The NACoal effective tax rate is affected by the benefit of percentage depletion.
(c) The effective income tax rate is not meaningful in 2014 as the income tax benefit amounts are not directly correlated to the pre-tax income for the three and nine months ended September 30, 2014. See further information regarding the consolidated effective income tax rate in Note 9 to Unaudited Condensed Consolidated Financial Statements.

Third Quarter of 2014 Compared with Third Quarter of 2013

The following table identifies the components of change in revenues for the third quarter of 2014 compared with the third quarter of 2013:
 
Revenues
2013
$
52,870

Increase (decrease) from:
 
Royalty and other income
(2,195
)
Consolidated mining operations
(835
)
2014
$
49,840


Revenues decreased in the third quarter of 2014 compared with the third quarter of 2013 due to significantly lower royalty and other income as well as a decrease in revenues at the consolidated mining operations. The decrease in revenues at the consolidated mining operations was primarily the result of fewer tons sold at MLMC due to an increase in the number of planned and unplanned outage days at the customer's power plant in the third quarter of 2014 compared with the third quarter of 2013. The decrease in revenues at MLMC was largely offset by an increase in revenues at Reed Minerals. Revenues at Reed Minerals improved due to an increase in tons sold partially offset by lower average selling prices in the third quarter of 2014 compared with the third quarter of 2013.


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The following table identifies the components of change in operating profit for the third quarter of 2014 compared with the third quarter of 2013:
 
Operating Profit
2013
$
9,740

Increase (decrease) from:
 
Selling, general and administrative expenses
(3,195
)
Royalty and other income
(2,422
)
Consolidated mining operations
(17
)
Earnings of unconsolidated mines
256

2014
$
4,362

Operating profit decreased substantially in the third quarter of 2014 from the third quarter of 2013 primarily as a result of significantly higher selling, general and administrative expenses, mainly attributable to the absence of a $1.6 million pension curtailment gain recognized in the third quarter of 2013 that did not recur in 2014 and higher professional service fees. Substantially reduced royalty and other income also contributed to the decrease in operating profit.

Operating results at the consolidated mining operations were comparable with the prior year quarter as the unfavorable effect of reduced tons sold at MLMC was largely offset by improved operating results at Reed Minerals. The increase in tons sold at Reed Minerals, combined with operating and productivity improvements implemented earlier in 2014, efficiencies and productivity improvements resulting from personnel changes in the second quarter of 2014 and investments in equipment and reserves made in late 2013 and early 2014 contributed to Reed Minerals' improved results.

NACoal recognized net income of $3.2 million in the third quarter of 2014 compared with net income of $7.8 million in the third quarter of 2013 primarily due to the factors affecting operating profit and a favorable return to provision adjustment recognized in the third quarter of 2014.
  
First Nine Months of 2014 Compared with First Nine Months of 2013

The following table identifies the components of change in revenues for the first nine months of 2014 compared with the first nine months of 2013:
 
Revenues
2013
$
147,584

Increase (decrease) from:
 
Royalty and other income
(8,130
)
Consolidated mining operations
38

2014
$
139,492


Revenues decreased in the first nine months of 2014 compared with the first nine months of 2013 primarily as a result of a decrease in royalty and other income. Overall revenues at the consolidated mining operations in the first nine months of 2014 were comparable to the prior year period as an increase in revenue at Reed Minerals and the limerock dragline mining operations was almost fully offset by reduced revenue at MLMC. The increase in Reed Minerals revenues was due to an increase in tons sold , partially offset by lower selling prices in the first nine months of 2014 compared with the first nine months of 2013 resulting from unfavorable metallurgical coal market conditions. Revenues at the the limerock dragline mining operations increased as a result of an increase in reimbursed costs. Reduced revenues at MLMC was primarily due to an increase in the number of planned and unplanned outage days at the customer's power plant in first nine months of 2014 compared with the first nine months of 2013.




21


The following table identifies the components of change in operating profit for the first nine months of 2014 compared with the first nine months of 2013:
 
Operating Profit
2013
$
32,721

Increase (decrease) from:
 
Royalty and other income
(9,814
)
Consolidated mining operations
(7,935
)
Selling, general and administrative expenses
(4,480
)
Reimbursement of damage to customer-owned equipment
(1,176
)
Earnings of unconsolidated mines
1,882

2014
$
11,198


Operating profit decreased substantially in the first nine months of 2014 from the first nine months of 2013 primarily due to significantly reduced royalty and other income, a significant decline in operating results at the consolidated mining operations, an increase in selling, general and administrative expenses and a $1.2 million charge to reimburse a customer for damage to certain customer-owned equipment at the limerock dragline mining operations. The increase in selling, general and administrative expenses was primarily due to the absence of a $1.6 million pre-tax pension curtailment gain, higher professional fees and higher management fees. These decreases were partially offset by an increase in earnings of unconsolidated mines mainly resulting from an increase in tons sold in the first nine months of 2014 compared with the first nine months of 2013.

The substantial decline in operating profit at the consolidated mining operations was largely due to a significantly larger loss at Reed Minerals than in the first nine months of 2013 and fewer tons sold at MLMC.  Operating and productivity improvements at Reed Minerals were implemented later than anticipated in 2014, primarily related to a delay in the startup of a new dragline. As a result of the delay, Reed Minerals experienced production shortfalls, which caused a decrease in inventory levels.  In addition, Reed Minerals' results were unfavorably affected by an increase in depreciation expense on equipment acquired during 2013 and in 2014 to improve efficiencies and productivity. These additional expenses were partially offset by favorable equipment rental expense, fuel and labor. 

Net income decreased to $8.8 million in the first nine months of 2014 from $26.3 million in the first nine months of 2013 primarily due to the factors affecting operating profit, increased interest expense as a result of higher debt outstanding during 2014 and a $1.1 million after-tax charge to establish an allowance against the receivable from NACC India's customer. The decrease in net income was partially offset by an income tax benefit mainly attributable to a $1.4 million discrete tax benefit resulting from the conclusion of the 2011 and 2012 U.S. federal tax return examinations and a favorable return to provision adjustment in the first nine months of 2014.


22


LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following tables detail the changes in cash flow for the nine months ended September 30:
 
2014
 
2013
 
Change
Operating activities:
 
 
 
 
 
Net income
$
8,815

 
$
26,337

 
$
(17,522
)
Depreciation, depletion and amortization
16,063

 
11,872

 
4,191

Other