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EX-32 - EXHIBIT 32 - NACCO INDUSTRIES INCexhibit32q315.htm
EX-95 - EXHIBIT 95 - NACCO INDUSTRIES INCexhibit95q315.htm
EX-31.2 - EXHIBIT 31.2 - NACCO INDUSTRIES INCexhibit312q315.htm
EX-31.1 - EXHIBIT 31.1 - NACCO INDUSTRIES INCexhibit311q315.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, 2015
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 30, 2015: 5,261,119
Number of shares of Class B Common Stock outstanding at October 30, 2015: 1,571,927




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
2015
 
DECEMBER 31
2014
 
SEPTEMBER 30
2014
 
(In thousands, except share data)
ASSETS
 

 
 
 
 
Cash and cash equivalents
$
11,847

 
$
61,135

 
$
50,598

Accounts receivable, net
118,097

 
123,466

 
97,639

Accounts receivable from affiliates
2,793

 
57,421

 
44,339

Inventories, net
234,214

 
190,382

 
220,607

Deferred income taxes
23,024

 
18,566

 
11,486

Prepaid expenses and other
21,318

 
14,743

 
25,774

Total current assets
411,293

 
465,713

 
450,443

Property, plant and equipment, net
151,767

 
159,644

 
252,039

Goodwill
6,253

 
6,253

 

Other Intangibles, net

57,650

 
60,821

 
57,017

Deferred income taxes
15,984

 
15,806

 
1,175

Other non-current assets
59,770

 
62,283

 
68,486

Total assets
$
702,717

 
$
770,520

 
$
829,160

LIABILITIES AND EQUITY
 

 
 
 
 
Accounts payable
$
161,040

 
$
133,668

 
$
149,343

Revolving credit agreements of subsidiaries - not guaranteed by the parent company
13,858

 
55,000

 
69,805

Current maturities of long-term debt of subsidiaries - not guaranteed by the parent company
1,495

 
1,467

 
7,886

Accrued payroll
34,336

 
23,567

 
19,136

Other current liabilities
45,270

 
40,979

 
41,325

Total current liabilities
255,999

 
254,681

 
287,495

Long-term debt of subsidiaries - not guaranteed by the parent company
158,650

 
191,431

 
138,958

Mine closing reserves
40,453

 
37,399

 
36,217

Pension and other postretirement obligations
9,711

 
10,616

 
7,312

Deferred income taxes

 

 
23,304

Other long-term liabilities
53,160

 
64,919

 
66,632

Total liabilities
517,973

 
559,046

 
559,918

Stockholders' equity
 

 
 
 
 
Common stock:
 

 
 
 
 
Class A, par value $1 per share, 5,276,963 shares outstanding (December 31, 2014 - 5,662,214 shares outstanding; September 30, 2014 - 5,821,078 shares outstanding)
5,277

 
5,662

 
5,821

Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,572,027 shares outstanding (December 31, 2014 - 1,573,292 shares outstanding; September 30, 2014 - 1,573,804 shares outstanding)
1,572

 
1,573

 
1,574

Retained earnings
200,853

 
224,428

 
274,297

Accumulated other comprehensive loss
(22,958
)
 
(20,189
)
 
(12,450
)
Total stockholders' equity
184,744

 
211,474

 
269,242

Total liabilities and equity
$
702,717

 
$
770,520

 
$
829,160


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
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share data)
Revenues
$
239,107

 
$
221,714

 
$
629,341

 
$
599,497

Cost of sales
196,892

 
175,171

 
513,556

 
480,260

Gross profit
42,215

 
46,543

 
115,785

 
119,237

Earnings of unconsolidated mines
12,234

 
12,064

 
36,863

 
36,069

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
47,551

 
46,373

 
139,186

 
145,792

Amortization of intangible assets
1,138

 
911

 
3,173

 
2,667

 
48,689

 
47,284

 
142,359

 
148,459

Operating profit
5,760

 
11,323

 
10,289

 
6,847

Other expense (income)
 

 
 
 
 
 
 
Interest expense
1,597

 
2,046

 
5,383

 
5,450

Income from other unconsolidated affiliates
(264
)
 
(191
)
 
(1,736
)
 
(159
)
Closed mine obligations
244

 
316

 
1,071

 
940

Other, net, including interest income
908

 
86

 
1,220

 
(65
)
 
2,485

 
2,257

 
5,938

 
6,166

Income before income tax provision (benefit)
3,275

 
9,066

 
4,351

 
681

Income tax provision (benefit)
134

 
1,367

 
458

 
(1,870
)
Net income
$
3,141

 
$
7,699

 
$
3,893

 
$
2,551

 
 

 
 
 
 
 
 
Basic earnings per share
$
0.45

 
$
1.02

 
$
0.55

 
$
0.33

Diluted earnings per share
$
0.45

 
$
1.02

 
$
0.55

 
$
0.33

 
 
 
 
 
 
 
 
Dividends per share
$
0.2625

 
$
0.2575

 
$
0.7825

 
$
0.7650

 
 

 
 
 
 
 
 
Basic weighted average shares outstanding
6,924

 
7,515

 
7,051

 
7,688

Diluted weighted average shares outstanding
6,935

 
7,533

 
7,065

 
7,702


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
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Net income
$
3,141

 
$
7,699

 
$
3,893

 
$
2,551

Foreign currency translation adjustment
(1,190
)
 
(740
)
 
(2,352
)
 
(656
)
Deferred gain (loss) on available for sale securities
(229
)
 
33

 
(205
)
 
270

Current period cash flow hedging activity, net of $304 and $674 tax benefit in the three and nine months ended September 30, 2015, respectively, and $351 tax expense and $457 tax benefit in the three and nine months ended September 30, 2014, respectively.
(558
)
 
590

 
(1,216
)
 
(860
)
Reclassification of hedging activities into earnings, net of $41 and $178 tax benefit in the three and nine months ended September 30, 2015, respectively, and $137 and $324 tax benefit in the three and nine months ended September 30, 2014, respectively.

89

 
249

 
363

 
602

Reclassification of pension and postretirement adjustments into earnings, net of $97 and $300 tax benefit in the three and nine months ended September 30, 2015, respectively, and $75 and $235 tax benefit in the three and nine months ended September 30, 2014, respectively.

216

 
180

 
641

 
453

Total other comprehensive income (loss)
$
(1,672
)
 
$
312

 
$
(2,769
)
 
$
(191
)
Comprehensive income
$
1,469

 
$
8,011

 
$
1,124

 
$
2,360


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
 
2015
 
2014
 
(In thousands)
Operating activities
 

 
 
Net income
$
3,893

 
$
2,551

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

 
 
Depreciation, depletion and amortization
17,337

 
19,445

Amortization of deferred financing fees
946

 
347

Deferred income taxes
(4,636
)
 
994

Other
(533
)
 
10,086

Working capital changes:
 

 
 
Accounts receivable
59,757

 
10,511

Inventories
(43,832
)
 
(36,183
)
Other current assets
2,056

 
(1,075
)
Accounts payable
29,056

 
16,884

Other current liabilities
4,276

 
(8,909
)
Income taxes receivable/payable
(8,506
)
 
(12,433
)
Net cash provided by operating activities
59,814

 
2,218

 
 

 
 
Investing activities
 

 
 
Expenditures for property, plant and equipment
(7,484
)
 
(47,663
)
Other
1,160

 
366

Net cash used for investing activities
(6,324
)
 
(47,297
)
 
 

 
 
Financing activities
 

 
 
Additions to long-term debt
2,547

 
1,553

Reductions of long-term debt
(2,300
)
 
(2,000
)
Net additions (reductions) to revolving credit agreements
(74,143
)
 
33,345

Cash dividends paid
(5,502
)
 
(5,884
)
Purchase of treasury shares
(23,248
)
 
(26,447
)
Other
(78
)
 
(255
)
Net cash provided by (used for) financing activities
(102,724
)
 
312

 
 

 
 
Effect of exchange rate changes on cash
(54
)
 
(25
)
Cash and cash equivalents
 

 
 
Decrease for the period
(49,288
)
 
(44,792
)
Balance at the beginning of the period
61,135

 
95,390

Balance at the end of the period
$
11,847

 
$
50,598


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, 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2015
$
5,662

$
1,573

$

$
224,428

 
$
(2,699
)
 
$
1,463

 
$
56

 
$
(19,009
)
 
$
211,474

Stock-based compensation
40


856


 

 

 

 

 
896

Purchase of treasury shares
(426
)

(856
)
(21,966
)
 

 

 

 

 
(23,248
)
Conversion of Class B to Class A shares
1

(1
)


 

 

 

 

 

Net income



3,893

 

 

 

 

 
3,893

Cash dividends on Class A and Class B common stock: $0.7825 per share



(5,502
)
 

 

 

 

 
(5,502
)
Current period other comprehensive income (loss)




 
(2,352
)
 
(205
)
 
(1,216
)
 

 
(3,773
)
Reclassification adjustment to net income (loss)




 

 

 
363

 
641

 
1,004

Balance, September 30, 2015
$
5,277

$
1,572

$

$
200,853

 
$
(5,051
)
 
$
1,258

 
$
(797
)
 
$
(18,368
)
 
$
184,744


See notes to Unaudited Condensed Consolidated Financial Statements.

6


NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
(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 and specialty housewares appliances, as well as commercial products for restaurants, bars and hotels. The Kitchen Collection, LLC (“KC”) is a national specialty retailer of kitchenware 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, 2015 and the results of its operations, comprehensive income (loss), cash flows and changes in equity for the nine months ended September 30, 2015 and 2014 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, 2014.

The balance sheet at December 31, 2014 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, 2015 are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2015. 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, 2014.

NOTE 2—Recently Issued Accounting Standards

Accounting Standards Not Yet Adopted:

In May 2014, the FASB codified in ASC 606, "Revenue Recognition - Revenue from Contracts with Customers," which supersedes most current revenue recognition guidance, including industry-specific guidance, and requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to customers and provide additional disclosures. As amended, the effective date for public entities is annual reporting periods beginning after December 15, 2017 and interim periods therein. As such, the Company will be required to adopt the standard in the first quarter of fiscal year 2018. Early adoption is not permitted before the first quarter of fiscal year 2017. ASC 606 may be adopted either using a full retrospective approach, in which the standard is applied to all of the periods presented, or a modified retrospective approach. The Company is currently evaluating which transition method to use and how ASC 606 will affect 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

7


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.

In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early application is permitted. In August 2015, the FASB issued ASU 2015-15, "Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting  (SEC Update)."  ASU 2015-15 amends Subtopic 835-30 to include that the  SEC would not object to the deferral and presentation of debt issuance costs as an asset and subsequent amortization of debt issuance costs over the term of the line-of-credit arrangement, whether or not there are any outstanding borrowings on the line-of-credit arrangement. This guidance is effective for fiscal years (and interim reporting periods within fiscal years) beginning after December 15, 2015. The Company does not expect the adoption of this guidance to have a material effect on the Company's financial position, results of operations, cash flows or related disclosures.

In July 2015, the FASB issued ASU No. 2015-11, "Inventory - Simplifying the Measurement of Inventory," requiring that inventory be measured at lower of cost or net realizable value. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted. The Company does not expect the adoption of this guidance to have a material effect on the Company's financial position, results of operations, cash flows and related disclosures.  

NOTE 3—Inventories

Inventories are summarized as follows:

 
SEPTEMBER 30
2015
 
DECEMBER 31
2014
 
SEPTEMBER 30
2014
Coal - NACoal
$
20,565

 
$
29,576

 
$
25,749

Mining supplies - NACoal
21,083

 
19,774

 
18,641

Total inventories at weighted average cost
41,648

 
49,350

 
44,390

Sourced inventories - HBB
151,663

 
104,746

 
130,012

Retail inventories - KC
40,903

 
36,286

 
46,205

Total inventories at FIFO
192,566

 
141,032

 
176,217

 
$
234,214

 
$
190,382

 
$
220,607



NOTE 4—Stockholders' Equity

Stock Repurchase Program: On November 12, 2013, the Company's Board of Directors approved a stock repurchase program (the "2013 Stock Repurchase Program") providing for the purchase of up to $60.0 million of the Company's Class A Common Stock outstanding through December 31, 2015. During the three months ended September 30, 2015 and September 30, 2014, the Company repurchased 134,186 and 235,194 shares of Class A Common Stock for an aggregate purchase price of $7.2 million and $12.2 million under the 2013 Stock Repurchase Program at a weighted average purchase price of $53.95 and $51.86 per share, respectively. During the nine months ended September 30, 2015 and September 30, 2014, the Company repurchased 426,909 and 501,531 shares of Class A Common Stock for an aggregate purchase price of $23.2 million and $26.4 million under the 2013 Stock Repurchase Program at a weighted average purchase price of $54.46 and $52.73 per share.

As of October 6, 2015, the Company completed the 2013 Stock Repurchase Program. See Note 13 for further information on the completion of the 2013 Stock Repurchase Program.


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
 
2015
 
2014
 
2015
 
2014
Location of (gain) loss reclassified from AOCI into income (loss)
(Gain) loss on cash flow hedging
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$
(240
)
 
$
8

 
$
(560
)
 
$
(194
)
Cost of sales
Interest rate contracts
 
370

 
378

 
1,101

 
1,120

Interest expense
 
 
130

 
386

 
541

 
926

Total before income tax benefit
 
 
(41
)
 
(137
)
 
(178
)
 
(324
)
Income tax benefit
 
 
$
89

 
$
249

 
$
363

 
$
602

Net of tax
 
 
 
 
 
 
 
 
 
 
Pension and postretirement plan
 
 
 
 
 
 
 
 
 
Actuarial loss
 
$
326

 
$
273

 
$
983

 
$
742

(a) 
Prior-service credit
 
(13
)
 
(18
)
 
(42
)
 
(54
)
(a) 
 
 
313

 
255

 
941

 
688

Total before income tax benefit
 
 
(97
)
 
(75
)
 
(300
)
 
(235
)
Income tax benefit
 
 
$
216

 
$
180

 
$
641

 
$
453

Net of tax
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
305

 
$
429

 
$
1,004

 
$
1,055

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, 2015
 
 
 
 
 
 
Assets:
 

 
 
 
 
 
 
Available for sale securities
 
$
6,905

 
$
6,905

 
$

 
$

Foreign currency exchange contracts
 
364

 

 
364

 

 
 
$
7,269

 
$
6,905

 
$
364

 
$

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
1,804

 
$

 
$
1,804

 
$

 
 
$
1,804

 
$

 
$
1,804

 
$

 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Available for sale securities
 
$
7,220

 
$
7,220

 
$

 
$

Interest rate swap agreements
 
181

 

 
181

 

Foreign currency exchange contracts
 
292

 

 
292

 

 
 
$
7,693

 
$
7,220

 
$
473

 
$

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements

 
$
412

 
$

 
$
412

 
$

 
 
$
412

 
$

 
$
412

 
$

 
 
 
 
 
 
 
 
 
 
 
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


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 $5.0 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.


10


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.

There were no transfers into or out of Levels 1, 2 or 3 during the three and nine months ended September 30, 2015 and 2014.

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, 2015, December 31, 2014 and September 30, 2014, both the fair value and the book value of the Company's revolving credit agreements and long-term debt, excluding capital leases, was $163.5 million, $236.3 million and $204.7 million, respectively.


NOTE 6—Unconsolidated Subsidiaries

NACoal has two consolidated mining operations: Mississippi Lignite Mining Company (“MLMC”) and Centennial Natural Resources ("Centennial"), 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")

The unconsolidated subsidiaries, with the exception of NoDak (collectively, the "Unconsolidated Mines"), were formed to develop, construct and operate surface coal mines under long-term contracts and are capitalized primarily with debt financing provided by or supported by their respective customers, and without recourse to NACCO and NACoal. Coteau, Falkirk, Sabine, Liberty and Coyote supply or will supply lignite coal for power generation. Demery and Caddo Creek supply lignite coal for the production of activated carbon. Camino Real supplies sub-bituminous coal for power generation. NoDak operates and maintains 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 positions 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 owner of a coal mine in India.  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 terminated its contract with the customer and is

11


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. 

The investments in the Unconsolidated Mines and related tax positions totaled $25.9 million, $28.2 million and $28.9 million at September 30, 2015, December 31, 2014 and September 30, 2014, 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 $3.9 million, $4.0 million and $3.8 million at September 30, 2015, December 31, 2014, and September 30, 2014, respectively.

Included in "Accounts receivable from affiliates" was $53.2 million and $42.2 million as of December 31, 2014 and September 30, 2014, respectively, due to NACoal from Coyote Creek. Coyote Creek repaid NACoal the amount outstanding during the first quarter of 2015 as a result of Coyote Creek’s completion of third-party financing. 

NACoal is a party to certain guarantees related to Coyote Creek. Under certain circumstances of default or termination of Coyote Creek’s Lignite Sales Agreement (“LSA”), NACoal would be obligated for payment of a "make-whole" amount to Coyote Creek’s third party lenders. The “make-whole” amount is based on the excess, if any, of the discounted value of the remaining scheduled debt payments over the principal amount. In addition, in the event Coyote Creek’s LSA is terminated on or after January 1, 2024 by Coyote Creek’s customers, NACoal is obligated to purchase Coyote Creek’s dragline and rolling stock for the then net book value of those assets. To date, no payments have been required from NACoal since the inception of these guarantees. The Company believes that the likelihood of NACoal’s future performance under the guarantees is remote, and no amounts related to these guarantees have been recorded.

Summarized financial information for the unconsolidated subsidiaries is as follows:
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2015
 
2014
 
2015
 
2014
Revenues
$
154,545

 
$
150,529

 
$
457,719

 
$
437,127

Gross profit
$
18,112

 
$
19,504

 
$
55,057

 
$
56,123

Income before income taxes
$
12,571

 
$
12,201

 
$
38,221

 
$
36,363

Net income
$
9,777

 
$
9,372

 
$
29,495

 
$
28,046



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. The Company's policy is to expense legal fees as services are rendered and to accrue for liabilities when losses are probable and reasonably estimable. 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 losses 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.


12


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, 2015, December 31, 2014 and September 30, 2014, HBB had accrued undiscounted obligations of $8.5 million, $9.7 million and $10.0 million, respectively, for environmental investigation and remediation activities. In addition, HBB estimates that it is reasonably possible that it may incur additional expenses in the range of zero to $4.7 million related to the environmental investigation and remediation at these sites. During the nine months ended September 30, 2014, HBB recorded a $3.3 million charge to increase the liability for environmental investigation and remediation activities at the Picton, Ontario facility as a result of an environmental study performed in the second quarter of 2014.

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:
 
2015
Balance at January 1
$
5,856

Warranties issued
6,471

Settlements made
(7,042
)
Balance at September 30
$
5,285



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 Company's effective income tax rate is affected by the benefit of percentage depletion.

The effective income tax rates for the three months ended September 30, 2015 and September 30, 2014 were 4.1% and 15.1%, respectively. The effective income tax rate in the three months ended September 30, 2015 was lower due to discrete tax benefits and a shift in the mix of taxable income and/or loss toward entities with lower effective income tax rates. The effective income tax rate for the nine months ended September 30, 2015 was 10.5%. The effective income tax for the nine months ended September 30, 2014 was not meaningful as the $1.9 million income tax benefit was not directly correlated to the $0.7 million pre-tax income. The rate was impacted by net favorable discrete tax items totaling $2.0 million in the nine months ended September 30, 2014 primarily from the conclusion of the 2011 and 2012 U.S. federal tax return examinations.


13


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.

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

 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2015
 
2014
 
2015
 
2014
U.S. Pension and Postretirement Health Care
 
 
 
 
 
 
 
Service cost
$
17

 
$
18

 
$
52

 
$
53

Interest cost
675

 
691

 
2,065

 
2,180

Expected return on plan assets
(1,205
)
 
(1,143
)
 
(3,687
)
 
(3,551
)
Amortization of actuarial loss
274

 
256

 
859

 
690

Amortization of prior service credit
(13
)
 
(18
)
 
(42
)
 
(54
)
Total
$
(252
)
 
$
(196
)
 
$
(753
)
 
$
(682
)
Non-U.S. Pension
 
 
 
 
 
 
 
Interest cost
$
37

 
$
50

 
$
116

 
$
149

Expected return on plan assets
(67
)
 
(75
)
 
(208
)
 
(224
)
Amortization of actuarial loss
11

 
17

 
34

 
52

Total
$
(19
)
 
$
(8
)
 
$
(58
)
 
$
(23
)



14


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
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
NACoal
$
42,704

 
$
49,840

 
$
121,965

 
$
139,492

HBB
163,291

 
135,155

 
416,082

 
354,865

KC
34,708

 
37,551

 
94,457

 
107,231

Eliminations
(1,596
)
 
(832
)
 
(3,163
)
 
(2,091
)
Total
$
239,107

 
$
221,714

 
$
629,341

 
$
599,497

 
 
 
 
 
 
 
 
Operating profit (loss)
 

 
 

 
 
 
 
NACoal (a)
$
(4,010
)
 
$
4,362

 
$
3,579

 
$
11,198

HBB
11,643

 
9,531

 
16,711

 
12,719

KC
(843
)
 
(1,429
)
 
(6,860
)
 
(12,198
)
NACCO and Other  (b)
(1,142
)
 
(1,073
)
 
(3,267
)
 
(4,429
)
Eliminations
112

 
(68
)
 
126

 
(443
)
Total
$
5,760

 
$
11,323

 
$
10,289

 
$
6,847

 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
NACoal
$
(5,345
)
 
$
3,185

 
$
3,401

 
$
8,815

HBB
6,378

 
6,008

 
8,614

 
7,717

KC
(550
)
 
(966
)
 
(4,290
)
 
(7,656
)
NACCO and Other
(774
)
 
(906
)
 
(2,710
)
 
(3,776
)
Eliminations
3,432

 
378

 
(1,122
)
 
(2,549
)
Total
$
3,141

 
$
7,699

 
$
3,893

 
$
2,551



(a) During the third quarter of 2015, the Company recorded a $0.5 million charge for severance as a result of the decision to cease mining operations at Centennial in Alabama by the end of 2015. Revisions were also made to Centennial's asset retirement obligations due to revised estimated cash flows and the timing of those cash flows, resulting in a $7.5 million charge during the third quarter of 2015. Both of these charges are included in Cost of sales in NACoal. See Note 12 for further discussion on NACoal's asset retirement obligations.

(b) 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, 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.



15



NOTE 12—Asset Retirement Obligation

NACoal's asset retirement obligations are principally for costs to dismantle certain mining equipment at the end of the life of the mine as well as for costs to close its surface mines and reclaim the land it has disturbed as a result of its normal mining activities. The Company determined the amounts of these obligations based on estimates adjusted for inflation, projected to the estimated closure dates, and then discounted using a credit-adjusted risk-free interest rate. The accretion of the liability is being recognized over the estimated life of each individual asset retirement obligation and is recorded in the line “Cost of sales” in the accompanying Unaudited Condensed Consolidated Statements of Operations. The associated asset is recorded in “Property, Plant and Equipment, net” in the accompanying Unaudited Condensed Consolidated Balance Sheets.

On July 31, 2015, management recommended and The North American Coal Corporation’s Board of Directors approved cessation of coal production at Centennial by the end of 2015. The decision was made as a result of worsening conditions in the Alabama and global coal markets and the adverse effect regulatory changes have had on Centennial’s business. As a result of the decision to cease mining operations, revisions were made to Centennial's asset retirement obligations due to revised estimated cash flows and the timing of those cash flows, resulting in a $7.5 million charge in the third quarter of 2015. A reconciliation of the beginning and ending aggregate carrying amount of the Company's asset retirement obligation is as follows:

 
NACCO
Consolidated
Balance at January 1, 2015
$
41,819

Liabilities settled during the period
(6,182
)
Accretion expense
2,049

Revision of estimated cash flows
7,526

Balance at September 30, 2015
$
45,212



NOTE 13—Subsequent Events

As of October 6, 2015, the Company completed the 2013 Stock Repurchase Program under which the Company purchased a total of approximately 1,122,900 shares of Class A common stock for an aggregate purchase price of $60.0 million. See Note 4 for further discussion on the 2013 Stock Repurchase Program.




16



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 and specialty housewares appliances, as well as commercial products for restaurants, bars and hotels. The Kitchen Collection, LLC (“KC”) is a national specialty retailer of kitchenware 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, 2014. The Company's Critical Accounting Policies and Estimates have not materially changed since December 31, 2014.

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 2.0 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 Centennial Natural Resources ("Centennial"), 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")

The unconsolidated subsidiaries, with the exception of NoDak, were formed to develop, construct and operate surface coal mines under long-term contracts and are capitalized primarily with debt financing provided by or supported by their respective customers, and without recourse to NACCO and NACoal. Coteau, Falkirk, Sabine, Liberty and Coyote supply or will supply lignite coal for power generation. Demery and Caddo Creek supply lignite coal for the production of activated carbon. Camino Real supplies sub-bituminous coal for power generation. NoDak operates and maintains a coal processing facility.

Coteau, Falkirk and Sabine were developed between 1974 and 1984. Demery commenced delivering coal in 2012 and anticipates achieving full production levels in 2017. Caddo Creek commenced delivering coal in late 2014. Camino Real commenced delivering coal in October 2015, and expects to mine approximately 2.5 million to 3.0 million tons of coal annually when at full production.

Liberty commenced production in 2013 but will not deliver any coal for power generation in 2015. Production levels at Liberty are expected to increase gradually beginning in 2016 and build to full production of approximately 4.6 million tons of coal annually beginning in 2023, although the timing of future deliveries will be affected by the pace at which construction of the Kemper County Energy Facility is completed.


17


NACoal has one mine currently in development. 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.

The contracts with the customers of the unconsolidated subsidiaries provide for reimbursement to the company 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. The per ton fees earned at each mine escalate over time in line with various indices which reflect general inflation rates. 

North American Coal Corporation India Private Limited (“NACC India”) was formed to provide technical business advisory services to the third-party owner of a coal mine in India.  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 terminated its contract with the customer and is pursuing contractual remedies.

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
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Coteau
3.3

 
3.4

 
10.5

 
10.8

Falkirk
2.1

 
2.0

 
6.0

 
5.6

Sabine
1.1

 
1.2

 
3.1

 
3.5

Other
0.1

 

 
0.3

 

Unconsolidated mines
6.6

 
6.6

 
19.9

 
19.9

MLMC
1.0

 
0.8

 
2.6

 
2.3

     Centennial
0.1

 
0.3

 
0.4

 
0.7

Consolidated mines
1.1

 
1.1

 
3.0

 
3.0

Total tons sold
7.7

 
7.7

 
22.9

 
22.9


The limerock dragline mining operations sold 5.2 million and 14.8 million cubic yards of limerock in the three and nine months ended September 30, 2015, respectively. This compares with 5.2 million and 16.5 million cubic yards of limerock in the three and nine months ended September 30, 2014, respectively.


18


The results of operations for NACoal were as follows for the three and nine months ended September 30:
 
THREE MONTHS
 
NINE MONTHS
 
2015
 
2014
 
2015
 
2014
Revenue - consolidated mines
$
40,284

 
$
48,209

 
$
115,508

 
$
131,513

Royalty and other
2,420

 
1,631

 
6,457

 
7,979

Total revenues
42,704

 
49,840

 
121,965

 
139,492

Cost of sales - consolidated mines
49,018

 
47,403

 
128,492

 
134,941

Cost of sales - royalty and other
636

 
503

 
1,575

 
1,619

Total cost of sales
49,654

 
47,906

 
130,067

 
136,560

Gross profit (loss)
(6,950
)
 
1,934

 
(8,102
)
 
2,932

Earnings of unconsolidated mines (a)
12,234

 
12,064

 
36,863

 
36,069

Selling, general and administrative expenses
8,501

 
8,725

 
23,045

 
25,136

Amortization of intangible assets
793

 
911

 
2,137

 
2,667

Operating profit (loss)
(4,010
)
 
4,362

 
3,579

 
11,198

Interest expense
1,080

 
1,721

 
3,900

 
4,298

Other (income) or loss, including income from other unconsolidated affiliates
(181
)
 
(367
)
 
(1,884
)
 
(550
)
Income (loss) before income tax provision (benefit)
(4,909
)
 
3,008

 
1,563

 
7,450

Income tax provision (benefit)
436

 
(177
)
 
(1,838
)
 
(1,365
)
Net income (loss)
$
(5,345
)
 
$
3,185

 
$
3,401

 
$
8,815

 


 


 


 


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

 
n/m

 
n/m

 
n/m


(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
(b) The NACoal effective income tax rate is affected by the benefit of percentage depletion.
(c) The effective income tax rate is not meaningful in 2015 and 2014 as the income tax provision (benefit) amounts are not directly correlated to the pre-tax income (loss) for the three and nine months ended both September 30, 2015 and 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 2015 Compared with Third Quarter of 2014

The following table identifies the components of change in revenues for the third quarter of 2015 compared with the third quarter of 2014:
 
Revenues
2014
$
49,840

Increase (decrease) from:
 
Consolidated mining operations
(7,925
)
Royalty and other income
789

2015
$
42,704


Revenues decreased in the third quarter of 2015 compared with the third quarter of 2014 primarily due to a reduction in higher-priced tons sold at Centennial partially offset by an increase in tons sold at MLMC attributable to fewer plant outage days at the customer's power plant in the third quarter of 2015 compared with the third quarter of 2014. The reduction in tons sold at Centennial was primarily due to the wind down of operations.


19


The following table identifies the components of change in operating profit (loss) for the third quarter of 2015 compared with the third quarter of 2014:
 
Operating Profit/(Loss)
2014
$
4,362

Increase (decrease) from:
 
Centennial asset retirement obligation charge
(7,526
)
Consolidated mining operations
(1,894
)
Loss on sale of assets
(82
)
Other selling, general and administrative expenses
(63
)
Royalty and other income
1,024

Earnings of unconsolidated mines
169

2015
$
(4,010
)
NACoal reported an operating loss of $4.0 million in the third quarter of 2015 compared with operating profit of $4.4 million in the third quarter of 2014, primarily due a charge related to an increase in Centennial's asset retirement obligation. See Note 12 for further discussion of NACoal's asset retirement obligations.

At the consolidated mining operations, an operating loss at Centennial was partially offset by improved results at MLMC and an increase in royalty and other income. At Centennial, excluding the asset retirement obligation charge, the operating loss in the third quarter of 2015 resulted from a reduction in tons sold and higher labor and outside service expense, partially offset by a reduction in depreciation and amortization expense due to the $105.1 million impairment charge taken in December 2014. The higher labor costs were partially due to a $0.5 million charge for severance as a result of the decision to cease mining operations at Centennial by the end of 2015. Operating results at MLMC improved as a result of an increase in tons sold due to a decrease in outage days at the customer's power plant during the third quarter of 2015 compared with 2014.

NACoal recognized a net loss of $5.3 million in the third quarter of 2015 compared with net income of $3.2 million in the third quarter of 2014. The change in net income (loss) was due to the factors affecting operating profit (loss) and the change in the income tax provision (benefit) partially offset by decreased interest expense as a result of a reduction in average debt outstanding during the third quarter of 2015. The change in income taxes was primarily due to a change in the effective income tax rate driven by a change in the mix of earnings and the impact of discrete items.

First Nine Months of 2015 Compared with First Nine Months of 2014
The following table identifies the components of change in revenues for the first nine months of 2015 compared with the first nine months of 2014:

 
Revenues
2014
$
139,492

Increase (decrease) from:
 
Consolidated mining operations
(16,004
)
Royalty and other income
(1,523
)
2015
$
121,965


Revenues decreased in the first nine months of 2015 compared with the first nine months of 2014 as a result of a decrease in revenues at the consolidated mining operations and a reduction in royalty and other income. The decrease at the consolidated mining operations was primarily due to a reduction in higher-priced tons sold at Centennial partially offset by an increase in tons sold at MLMC. The increase in tons sold at MLMC was primarily the result of fewer outage days at its customer's power plant in the first nine months of 2015 compared with the comparable 2014 period.  


20


The following table identifies the components of change in operating profit for the first nine months of 2015 compared with the first nine months of 2014:

 
Operating Profit
2014
$
11,198

Increase (decrease) from:
 
Centennial asset retirement obligation charge
(7,526
)
Consolidated mining operations
(2,538
)
Royalty and other income
(349
)
Reimbursement of damage to customer-owned equipment in 2014
1,043

Earnings of unconsolidated mines
793

Gain on sale of assets
653

Other selling, general and administrative expenses
305

2015
$
3,579

 
Operating profit decreased in the first nine months of 2015 from the first nine months of 2014 primarily due to a charge related to an increase in Centennial's asset retirement obligation and unfavorable results at the consolidated mining operations partially offset by the absence of a $1.0 million charge to reimburse a customer for damage to certain customer-owned equipment at the limerock dragline mining operations, an increase in earnings of unconsolidated mines mainly from higher contractual compensation levels and a gain on the sale of certain assets. See Note 12 for further discussion of NACoal's asset retirement obligations.
 
At the consolidated mining operations, an operating loss at Centennial was partially offset by improved results at MLMC. At Centennial, excluding the asset retirement obligation charge, an increased operating loss in the first nine months of 2015 resulted from a reduction in tons sold and higher labor and outside service expense, partially offset by a reduction in depreciation and amortization expense at Centennial due to the $105.1 million impairment charge taken in December 2014. The higher labor costs were partially due to a $0.5 million charge for severance as a result of the decision to cease mining operations at Centennial by the end of 2015. Improved operating results at MLMC were primarily attributable to an increase in tons sold as a result of a decrease in outage days at the customer's power plant during the first nine months of 2015 compared with 2014.

NACoal recognized net income of $3.4 million in the nine months ended September 30, 2015 compared with net income of $8.8 million in the nine months ended September 30, 2014. The decrease in net income was primarily due to the factors affecting operating profit. In addition, NACoal recognized a $1.0 million after-tax charge to establish an allowance against the receivable from NACC India's customer as well as a $1.4 million discrete tax benefit resulting from the conclusion of the 2011 and 2012 U.S. federal tax return examinations during the nine months ended September 30, 2014.



21


LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following tables detail the changes in cash flow for the nine months ended September 30:
 
2015
 
2014
 
Change
Operating activities:
 
 
 
 
 
Net income
$
3,401

 
$
8,815

 
$
(5,414
)
Depreciation, depletion and amortization
12,893

 
16,063

 
(3,170
)
Other
(3,547
)
 
6,430

 
(9,977
)
Working capital changes
72,916

 
(16,804
)
 
89,720

Net cash provided by operating activities
85,663

 
14,504

 
71,159

 
 
 
 
 
 
Investing activities:
 
 
 
 
 
Expenditures for property, plant and equipment
(3,128
)
 
(43,321
)