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EX-95 - EXHIBIT 95 - NACCO INDUSTRIES INCexhibit95q216.htm
EX-32 - EXHIBIT 32 - NACCO INDUSTRIES INCexhibit32q216.htm
EX-31.2 - EXHIBIT 31.2 - NACCO INDUSTRIES INCexhibit312q216.htm
EX-31.1 - EXHIBIT 31.1 - NACCO INDUSTRIES INCexhibit311q216.htm
EX-10.1 - EXHIBIT 10.1 - NACCO INDUSTRIES INCexhibit101q216.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 June 30, 2016
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 July 29, 2016: 5,240,910
Number of shares of Class B Common Stock outstanding at July 29, 2016: 1,571,385




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
 
JUNE 30
2016
 
DECEMBER 31
2015
 
JUNE 30
2015
 
(In thousands, except share data)
ASSETS
 

 
 
 
 
Cash and cash equivalents
$
34,257

 
$
52,499

 
$
19,323

Accounts receivable, net
77,173

 
111,020

 
88,295

Accounts receivable from affiliates
4,450

 
3,085

 
3,137

Inventories, net
167,589

 
165,016

 
203,167

Assets held for sale
15,570

 
17,497

 
1,319

Prepaid expenses and other
21,925

 
12,317

 
24,658

Total current assets
320,964

 
361,434

 
339,899

Property, plant and equipment, net
132,290

 
132,539

 
154,020

Goodwill
6,253

 
6,253

 
6,253

Other Intangibles, net
55,034

 
56,843

 
58,786

Deferred income taxes
29,997

 
42,013

 
31,480

Other non-current assets
64,985

 
56,326

 
60,961

Total assets
$
609,523

 
$
655,408

 
$
651,399

LIABILITIES AND EQUITY
 

 
 

 
 
Accounts payable
$
100,878

 
$
100,300

 
$
116,246

Revolving credit agreements of subsidiaries - not guaranteed by the parent company
6,158

 
8,365

 
11,340

Current maturities of long-term debt of subsidiaries - not guaranteed by the parent company
1,523

 
1,504

 
1,485

Accrued payroll
18,513

 
40,854

 
29,484

Accrued cooperative advertising
7,217

 
10,676

 
7,540

Other current liabilities
27,395

 
30,047

 
26,708

Total current liabilities
161,684

 
191,746

 
192,803

Long-term debt of subsidiaries - not guaranteed by the parent company
143,471

 
160,113

 
166,239

Asset retirement obligations
41,588

 
39,780

 
38,320

Pension and other postretirement obligations
12,747

 
10,046

 
9,831

Other long-term liabilities
51,061

 
52,585

 
52,112

Total liabilities
410,551

 
454,270

 
459,305

Stockholders' equity
 

 
 

 
 
Common stock:
 

 
 

 
 
Class A, par value $1 per share, 5,240,777 shares outstanding (December 31, 2015 - 5,265,446 shares outstanding; June 30, 2015 - 5,407,112 shares outstanding)
5,241

 
5,265

 
5,407

Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,571,518 shares outstanding (December 31, 2015 - 1,571,727 shares outstanding; June 30, 2015 - 1,572,627 shares outstanding)
1,572

 
1,572

 
1,573

Capital in excess of par value

 

 

Retained earnings
217,728

 
217,745

 
206,400

Accumulated other comprehensive loss
(25,569
)
 
(23,444
)
 
(21,286
)
Total stockholders' equity
198,972

 
201,138

 
192,094

Total liabilities and equity
$
609,523

 
$
655,408

 
$
651,399


See notes to Unaudited Condensed Consolidated Financial Statements.

2


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

 
THREE MONTHS ENDED
 
SIX MONTHS ENDED
 
JUNE 30
 
JUNE 30
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share data)
Revenues
$
178,007

 
$
196,500

 
$
351,428

 
$
390,234

Cost of sales
137,478

 
161,119

 
270,894

 
316,664

Gross profit
40,529

 
35,381

 
80,534

 
73,570

Earnings of unconsolidated mines
13,035

 
12,076

 
25,683

 
24,629

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
47,528

 
45,219

 
93,787

 
91,635

Amortization of intangible assets
826

 
950

 
1,808

 
2,035

 
48,354

 
46,169

 
95,595

 
93,670

Operating profit
5,210

 
1,288

 
10,622

 
4,529

Other (income) expense
 

 
 
 
 
 
 
Interest expense
1,470

 
1,661

 
2,975

 
3,786

Income from other unconsolidated affiliates
(303
)
 
(300
)
 
(606
)
 
(1,472
)
Closed mine obligations
349

 
425

 
725

 
827

Other, net, including interest income
2,017

 
(167
)
 
2,070

 
312

 
3,533

 
1,619

 
5,164

 
3,453

Income (loss) before income tax provision (benefit)
1,677

 
(331
)
 
5,458

 
1,076

Income tax provision (benefit)
(1,439
)
 
(56
)
 
(460
)
 
324

Net income (loss)
$
3,116

 
$
(275
)
 
$
5,918

 
$
752

 
 

 
 
 
 
 
 
Basic earnings (loss) per share
$
0.45

 
$
(0.04
)
 
$
0.86

 
$
0.11

Diluted earnings (loss) per share
$
0.45

 
$
(0.04
)
 
$
0.86

 
$
0.11

 
 
 
 
 
 
 
 
Dividends per share
$
0.2675

 
$
0.2625

 
$
0.5300

 
$
0.5200

 
 

 
 
 
 
 
 
Basic weighted average shares outstanding
6,856

 
7,048

 
6,853

 
7,114

Diluted weighted average shares outstanding
6,874

 
7,048

 
6,878

 
7,129


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
 
SIX MONTHS ENDED
 
JUNE 30
 
JUNE 30
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Net income (loss)
$
3,116

 
$
(275
)
 
$
5,918

 
$
752

Foreign currency translation adjustment
(1,025
)
 
(339
)
 
(818
)
 
(1,162
)
Deferred gain (loss) on available for sale securities
99

 
(14
)
 
164

 
24

Current period cash flow hedging activity, net of $308 and $988 tax benefit in the three and six months ended June 30, 2016, respectively, and $50 and $370 tax benefit in the three and six months ended June 30, 2015, respectively.
(514
)
 
(63
)
 
(1,881
)
 
(658
)
Reclassification of hedging activities into earnings, net of $44 and $105 tax benefit in the three and six months ended June 30, 2016 and $38 and $137 tax benefit in the three and six months ended June 30, 2015, respectively.
33

 
89

 
108

 
274

Reclassification of pension and postretirement adjustments into earnings, net of $84 and $183 tax benefit in the three and six months ended June 30, 2016 and net of $95 and $203 tax benefit in the three and six months ended June 30, 2015, respectively.
153

 
166

 
302

 
425

Total other comprehensive income (loss)
$
(1,254
)
 
$
(161
)
 
$
(2,125
)
 
$
(1,097
)
Comprehensive income (loss)
$
1,862

 
$
(436
)
 
$
3,793

 
$
(345
)

See notes to Unaudited Condensed Consolidated Financial Statements.


4


NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
SIX MONTHS ENDED
 
JUNE 30
 
2016
 
2015
 
(In thousands)
Operating activities
 

 
 
Net income
$
5,918

 
$
752

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

 
 
Depreciation, depletion and amortization
8,708

 
11,559

Amortization of deferred financing fees
314

 
790

Deferred income taxes
12,016

 
2,892

Other
(1,871
)
 
(6,922
)
Working capital changes:
 

 
 
Accounts receivable
32,559

 
89,406

Inventories
(2,768
)
 
(12,785
)
Other current assets
115

 
(1,860
)
Accounts payable
(1,227
)
 
(16,465
)
Income taxes receivable/payable
(9,972
)
 
(6,672
)
Other current liabilities
(26,823
)
 
(10,814
)
Net cash provided by operating activities
16,969

 
49,881

 
 

 
 
Investing activities
 

 
 
Expenditures for property, plant and equipment
(8,694
)
 
(4,152
)
Proceeds from the sale of property, plant, and equipment
2,630

 
1,479

Other
(2,542
)
 
(391
)
Net cash used for investing activities
(8,606
)
 
(3,064
)
 
 

 
 
Financing activities
 

 
 
Additions to long-term debt

 
2,047

Reductions of long-term debt
(16,623
)
 
(728
)
Net reductions to revolving credit agreements
(2,207
)
 
(70,153
)
Cash dividends paid
(3,638
)
 
(3,688
)
Purchase of treasury shares
(3,826
)
 
(16,009
)
Other
(202
)
 
(42
)
Net cash used for financing activities
(26,496
)
 
(88,573
)
 
 

 
 
Effect of exchange rate changes on cash
(109
)
 
(56
)
 
 
 
 
Cash and cash equivalents
 

 
 
Decrease for the period
(18,242
)
 
(41,812
)
Balance at the beginning of the period
52,499

 
61,135

Balance at the end of the period
$
34,257

 
$
19,323


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, 2015
$
5,662

$
1,573

$

$
224,428

 
$
(2,699
)
 
$
1,463

 
$
56

 
$
(19,009
)
 
$
211,474

Stock-based compensation
37


625


 

 

 

 

 
662

Purchase of treasury shares
(292
)

(625
)
(15,092
)
 

 

 

 

 
(16,009
)
Net income



752

 

 

 

 

 
752

Cash dividends on Class A and Class B common stock: $0.5200 per share



(3,688
)
 

 

 

 

 
(3,688
)
Current period other comprehensive income (loss)




 
(1,162
)
 
24

 
(658
)
 

 
(1,796
)
Reclassification adjustment to net income




 

 

 
274

 
425

 
699

Balance, June 30, 2015
$
5,407

$
1,573

$

$
206,400

 
$
(3,861
)
 
$
1,487

 
$
(328
)
 
$
(18,584
)
 
$
192,094

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
$
5,265

$
1,572

$

$
217,745

 
$
(5,455
)
 
$
1,480

 
$
(112
)
 
$
(19,357
)
 
$
201,138

Stock-based compensation
46


1,459


 

 

 

 

 
1,505

Purchase of treasury shares
(70
)

(1,459
)
(2,297
)
 

 

 

 

 
(3,826
)
Net income



5,918

 

 

 

 

 
5,918

Cash dividends on Class A and Class B common stock: $0.5300 per share



(3,638
)
 

 

 

 

 
(3,638
)
Current period other comprehensive income (loss)




 
(818
)
 
164

 
(1,881
)
 

 
(2,535
)
Reclassification adjustment to net income




 

 

 
108

 
302

 
410

Balance, June 30, 2016
$
5,241

$
1,572

$

$
217,728

 
$
(6,273
)
 
$
1,644

 
$
(1,885
)
 
$
(19,055
)
 
$
198,972


See notes to Unaudited Condensed Consolidated Financial Statements.

6


NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
(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 coal primarily for use in power generation 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 June 30, 2016 and the results of its operations, comprehensive income (loss), cash flows and changes in equity for the six months ended June 30, 2016 and 2015 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, 2015.

The balance sheet at December 31, 2015 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 six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2016. 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, 2015.

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 2016

In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," which requires 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 adoption of this guidance did not have a material effect on the Company's financial position, results of operations, cash flows or related disclosures.


7


In July 2015, the FASB issued ASU No. 2015-11, "Inventory - Simplifying the Measurement of Inventory," which requires 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. The adoption of this guidance did not have a material effect on the Company's financial position, results of operations, cash flows and related disclosures.  

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. Early adoption is not permitted before the first quarter of fiscal year 2017. As such, the Company will be required to adopt the standard in the first quarter of fiscal year 2018. 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 has developed a project plan to evaluate how ASC 606 will affect the Company's financial position, results of operations, cash flows and related disclosures.  The Company is currently evaluating which transition method to use.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which modifies how entities measure equity investments and present changes in the fair value of financial liabilities; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; changes presentation and disclosure requirements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the impact that this new guidance will have on the Company’s financial position, results of operations, cash flows and related disclosures.  

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)," which requires an entity to recognize assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating how and to what extent ASU 2016-02 will affect the Company's financial position, results of operations, cash flows and related disclosures.  

NOTE 3—Inventories

Inventories are summarized as follows:

 
JUNE 30
2016
 
DECEMBER 31
2015
 
JUNE 30
2015
Coal - NACoal
$
18,533

 
$
16,652

 
$
25,235

Mining supplies - NACoal
19,868

 
21,755

 
20,727

Total inventories at weighted average cost
38,401

 
38,407

 
45,962

Sourced inventories - HBB
96,401

 
97,511

 
116,368

Retail inventories - KC
32,787

 
29,098

 
40,837

Total inventories at FIFO
129,188

 
126,609

 
157,205

 
$
167,589

 
$
165,016

 
$
203,167



NOTE 4—Stockholders' Equity

Stock Repurchase Program: On May 10, 2016, the Company's Board of Directors approved a stock repurchase program (the "2016 Stock Repurchase Program") providing for the purchase of up to $50 million of the Company's Class A Common Stock outstanding through December 31, 2017. The Company’s previous $60 million stock repurchase program, announced in December 2013, was completed in October 2015. The timing and amount of any repurchases under the 2016 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 2016 Stock Repurchase Program does not require the Company to acquire any specific number of shares. It may be

8


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 2016 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.
During the three months ended June 30, 2016 and June 30, 2015, the Company repurchased 70,495 and 170,960 shares of Class A Common Stock for an aggregate purchase price of $3.8 million and $9.1 million at a weighted average purchase price of $54.28 and $53.22 per share, respectively. During the six months ended June 30, 2016 and June 30, 2015, the Company repurchased 70,495 and 292,723 shares of Class A Common Stock for an aggregate purchase price of $3.8 million and $16.0 million at a weighted average purchase price of $54.28 and $54.69 per share, respectively.

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
 
SIX MONTHS ENDED
 
 
 
June 30
 
June 30
 
Details about AOCI Components
 
2016
 
2015
 
2016
 
2015
Location of (gain) loss reclassified from AOCI into income (loss)
(Gain) loss on cash flow hedging
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$
(210
)
 
$
(235
)
 
$
(366
)
 
$
(320
)
Cost of sales
Interest rate contracts
 
287

 
362

 
579

 
731

Interest expense
 
 
77

 
127

 
213

 
411

Total before income tax benefit
 
 
(44
)
 
(38
)
 
(105
)
 
(137
)
Income tax benefit
 
 
$
33

 
$
89

 
$
108

 
$
274

Net of tax
 
 
 
 
 
 
 
 
 
 
Pension and postretirement plan
 
 
 
 
 
 
 
 
 
Actuarial loss
 
$
249

 
$
276

 
$
509

 
$
657

(a) 
Prior-service credit
 
(12
)
 
(15
)
 
(24
)
 
(29
)
(a) 
 
 
237

 
261

 
485

 
628

Total before income tax benefit
 
 
(84
)
 
(95
)
 
(183
)
 
(203
)
Income tax benefit
 
 
$
153

 
$
166

 
$
302

 
$
425

Net of tax
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
186

 
$
255

 
$
410

 
$
699

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 information.


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)
 
 
June 30, 2016
 
 
 
 
 
 
Assets:
 

 
 
 
 
 
 
Available for sale securities
 
$
7,498

 
$
7,498

 
$

 
$

 
 
$
7,498

 
$
7,498

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
2,491

 
$

 
$
2,491

 
$

Foreign currency exchange contracts
 
295

 

 
295

 

 
 
$
2,786

 
$

 
$
2,786

 
$

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Available for sale securities
 
$
7,247

 
$
7,247

 
$

 
$

Interest rate swap agreements
 
3

 

 
3

 

Foreign currency exchange contracts
 
386

 

 
386

 

 
 
$
7,636

 
$
7,247

 
$
389

 
$

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
698

 
$

 
$
698

 
$

 
 
$
698

 
$

 
$
698

 
$

 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Available for sale securities
 
$
7,256

 
$
7,256

 
$

 
$

Interest rate swap agreements
 
30

 

 
30

 

Foreign currency exchange contracts
 
240

 

 
240

 

 
 
$
7,526

 
$
7,256

 
$
270

 
$

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
951

 
$

 
$
951

 
$

 
 
$
951

 
$

 
$
951

 
$


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.

During the second quarter of 2016, HBB entered into four delayed start interest rate swap agreements. These swaps have been designated as cash flow hedges. The interest rate swap agreements were executed to fix a portion of the interest rates on HBB's variable rate debt that have a combined notional amount of $25.0 million. Two of the delayed start interest rate swap agreements, with a notional amount of $15.0 million, are effective January 2018, have rates of 1.6% and expire in January 2024. The two remaining delayed start interest rate swap agreements, with a notional amount of $10.0 million, are effective

10


January 2020, have rates of 1.7% and expire in January 2024. The fair value of these swap agreements are included in the table above. Since these delayed start interest rate swap agreements qualify for hedge accounting, the changes in fair value are recorded in other comprehensive income (loss), net of tax.

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 six months ended June 30, 2016 and 2015.

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 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 June 30, 2016, December 31, 2015 and June 30, 2015, both the fair value and the book value of the Company's revolving credit agreements and long-term debt, excluding capital leases, was $141.7 million, $159.8 million and $168.2 million, respectively.

NOTE 6—Unconsolidated Subsidiaries

NACoal has two consolidated mining operations: Mississippi Lignite Mining Company (“MLMC”) and Centennial Natural Resources ("Centennial"). Centennial ceased coal production in the fourth quarter of 2015 but wind-down and reclamation activities are continuing. In addition, NACoal 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:

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

The unconsolidated subsidiaries, with the exception of NoDak (collectively, the "Unconsolidated Mines"), were formed to develop, construct and/or 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. 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 upon pre-tax profit per ton of coal sold, actual costs plus an agreed upon fee per btu of heating value delivered or actual costs plus a management fee. The fees earned at each mine adjust over time in line with various indices which reflect general inflation rates. 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 (income) expense" section of the Unaudited Condensed Consolidated Statements of Operations, with the related income taxes included in the provision for income taxes.


11


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 and Bisti will supply sub-bituminous coal for power generation. NoDak operates and maintains a coal processing facility.

The investments in the Unconsolidated Mines and related tax positions totaled $30.6 million, $24.6 million and $27.1 million at June 30, 2016, December 31, 2015 and June 30, 2015, 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 $4.8 million, $4.0 million and $4.0 million at June 30, 2016, December 31, 2015, and June 30, 2015, respectively, and a $2.5 million loan receivable from Navajo Transitional Energy Company, LLC, which is Bisti's customer, at June 30, 2016. The loan receivable is included in "Other non-current assets."

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
 
SIX MONTHS ENDED
 
JUNE 30
 
JUNE 30
 
2016
 
2015
 
2016
 
2015
Revenues
$
160,281

 
$
155,103

 
$
305,351

 
$
303,174

Gross profit
$
19,673

 
$
18,068

 
$
38,421

 
$
36,946

Income before income taxes
$
13,246

 
$
12,531

 
$
26,367

 
$
25,650

Net income
$
9,717

 
$
9,563

 
$
19,727

 
$
19,718



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.  If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss. 

These matters are subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of an adverse impact on the Company’s financial position, results of operations and cash flows of the period in which the ruling occurs, or in future periods.

Litigation


12


The Company is subject to several actions that allege the Company abandoned certain mineral interests pursuant to the Ohio Dormant Mineral Act ("ODMA") by failing to engage in a title transaction or other savings event within a statutory 20-year period. The Company maintains that it preserved its mineral interests by engaging in title transactions or other savings events within the statutory period.  The U.S. District Court for the Southern District of Ohio is expected to issue decisions on certain matters related to the ODMA in 2016.  It is reasonably possible the Company could be required to repay an oil and gas lessee up to $4.5 million of royalties the Company has received since 2011 if the Court determines the Company did not preserve its mineral interests under the ODMA.

Environmental matters

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 June 30, 2016, December 31, 2015 and June 30, 2015, HBB had accrued undiscounted obligations of $9.2 million, $9.1 million and $9.3 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 $5.4 million related to the environmental investigation and remediation at these sites.

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:
 
2016
Balance at January 1
$
6,107

Warranties issued
3,819

Settlements made
(5,103
)
Balance at June 30
$
4,823



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

13


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.

In the second quarter and six months ended June 30, 2016, the Company recorded an income tax benefit of $2.3 million as a result of the reversal of an uncertain tax position recorded as part of the Centennial acquisition.  The Company also reversed a corresponding indemnification receivable related to the uncertain tax position that resulted in $2.2 million of other expense, included on the line "Other, net, including interest income," in the second quarter and six months ended June 30, 2016.


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 as of 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
 
SIX MONTHS ENDED
 
JUNE 30
 
JUNE 30
 
2016
 
2015
 
2016
 
2015
U.S. Pension and Postretirement Health Care
 
 
 
 
 
 
 
Service cost
$
18

 
$
18

 
$
35

 
$
35

Interest cost
690

 
673

 
1,408

 
1,390

Expected return on plan assets
(1,195
)
 
(1,205
)
 
(2,465
)
 
(2,482
)
Amortization of actuarial loss
246

 
274

 
529

 
585

Amortization of prior service credit
(12
)
 
(15
)
 
(24
)
 
(29
)
Total
$
(253
)
 
$
(255
)
 
$
(517
)
 
$
(501
)
Non-U.S. Pension
 
 
 
 
 
 
 
Interest cost
$
37

 
$
40

 
$
72

 
$
79

Expected return on plan assets
(64
)
 
(71
)
 
(124
)
 
(141
)
Amortization of actuarial loss
7

 
12

 
13

 
23

Total
$
(20
)
 
$
(19
)
 
$
(39
)
 
$
(39
)



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.
 
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
 
SIX MONTHS ENDED
 
JUNE 30
 
JUNE 30
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
NACoal
$
23,089

 
$
37,942

 
$
53,376

 
$
79,261

HBB
127,054

 
129,498

 
242,794

 
252,791

KC
28,634

 
29,782

 
57,017

 
59,749

Eliminations
(770
)
 
(722
)
 
(1,759
)
 
(1,567
)
Total
$
178,007

 
$
196,500

 
$
351,428

 
$
390,234

 
 
 
 
 
 
 
 
Operating profit (loss)
 

 
 

 
 
 
 
NACoal
$
4,823

 
$
2,382

 
$
14,565

 
$
7,589

HBB
4,696

 
2,880

 
4,763

 
5,068

KC
(3,011
)
 
(2,972
)
 
(5,901
)
 
(6,017
)
NACCO and Other 
(1,297
)
 
(836
)
 
(2,738
)
 
(2,125
)
Eliminations
(1
)
 
(166
)
 
(67
)
 
14

Total
$
5,210

 
$
1,288

 
$
10,622

 
$
4,529

 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
NACoal
$
3,324

 
$
4,199

 
$
11,577

 
$
8,746

HBB
2,934

 
1,618

 
2,673

 
2,236

KC
(1,954
)
 
(1,847
)
 
(3,822
)
 
(3,740
)
NACCO and Other
(1,118
)
 
(697
)
 
(2,185
)
 
(1,936
)
Eliminations
(70
)
 
(3,548
)
 
(2,325
)
 
(4,554
)
Total
$
3,116

 
$
(275
)
 
$
5,918

 
$
752







15



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 coal primarily for use in power generation 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 36 through 39 in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. The Company's Critical Accounting Policies and Estimates have not materially changed since December 31, 2015.

THE NORTH AMERICAN COAL CORPORATION

NACoal mines coal primarily for use in power generation 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 and Louisiana. 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"). Centennial ceased coal production in the fourth quarter of 2015 but wind-down and reclamation activities are continuing. In addition, NACoal 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:

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

The unconsolidated subsidiaries, with the exception of NoDak, were formed to develop, construct and/or 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. 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 upon pre-tax profit per ton of coal sold, actual costs plus an agreed upon fee per btu of heating value delivered or actual costs plus a management fee. The fees earned at each mine adjust over time in line with various indices which reflect general inflation rates. 

Coteau, Falkirk, Sabine, Liberty and Coyote supply lignite coal for power generation. Demery and Caddo Creek supply lignite coal for the production of activated carbon. Camino Real supplies and Bisti will supply 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. 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 2.7 million tons of coal annually when at full production. Coyote Creek began delivering coal in the second quarter of 2016 and expects to deliver approximately 2.5 million tons of coal annually, when at full production.

16



Liberty began delivering coal to its customer in July 2016 for facility testing and commissioning. Production levels at Liberty are expected to increase gradually and build to full production of approximately 4.5 million tons of coal annually beginning in 2022, although the timing of future deliveries will be affected by when the Kemper County Energy Facility will reach full generation capacity.

Bisti anticipates that it will replace an existing contract miner at an existing mine by December 31, 2016, after which it will make annual coal deliveries of between 5.0 million to 6.0 million tons.


FINANCIAL REVIEW

Tons of coal sold by NACoal's operating mines were as follows for the three and six months ended June 30:
 
THREE MONTHS
 
SIX MONTHS
 
2016
 
2015
 
2016
 
2015
 
(In millions)
Coteau
3.4

 
3.4

 
7.0

 
7.2

Falkirk
1.5

 
2.0

 
3.2

 
3.9

Sabine
1.1

 
1.0

 
2.2

 
2.0

Camino Real
0.4

 

 
0.9

 

Other
0.3

 
0.1

 
0.4

 
0.2

Unconsolidated mines
6.7

 
6.5

 
13.7

 
13.3

MLMC
0.6

 
0.7

 
1.4

 
1.6

     Centennial

 
0.2

 

 
0.3

Consolidated mines
0.6

 
0.9

 
1.4

 
1.9

Total tons sold
7.3

 
7.4

 
15.1

 
15.2


The limerock dragline mining operations sold 7.1 million and 13.9 million cubic yards of limerock in the three and six months ended June 30, 2016, respectively. This compares with 5.1 million and 9.6 million cubic yards of limerock in the three and six months ended June 30, 2015, respectively.


17


The results of operations for NACoal were as follows for the three and six months ended June 30:
 
THREE MONTHS
 
SIX MONTHS
 
2016
 
2015
 
2016
 
2015
Revenue - consolidated mines
$
21,904

 
$
36,078

 
$
49,152

 
$
75,224

Royalty and other
1,185

 
1,864

 
4,224

 
4,037

Total revenues
23,089

 
37,942

 
53,376

 
79,261

Cost of sales - consolidated mines
20,263

 
39,748

 
43,971

 
79,474

Cost of sales - royalty and other
537

 
499

 
1,088

 
939

Total cost of sales
20,800

 
40,247

 
45,059

 
80,413

Gross profit (loss)
2,289

 
(2,305
)
 
8,317

 
(1,152
)
Earnings of unconsolidated mines (a)
13,035

 
12,076

 
25,683

 
24,629

Selling, general and administrative expenses
10,020

 
6,785

 
18,317

 
14,544

Amortization of intangible assets
481

 
604

 
1,118

 
1,344

Operating profit
4,823

 
2,382

 
14,565

 
7,589

Interest expense
1,095

 
1,139

 
2,146

 
2,820

Other (income) expense, including income from other unconsolidated affiliates (c)
1,999

 
(218
)
 
1,774

 
(1,703
)
Income before income tax provision (benefit)
1,729

 
1,461

 
10,645

 
6,472

Income tax provision (benefit)
(1,595
)
 
(2,738
)
 
(932
)
 
(2,274
)
Net income
$
3,324

 
$
4,199

 
$
11,577

 
$
8,746

 


 


 


 


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) During the second quarter and six months ended June 30, 2016, the Company recorded an income tax benefit of $2.3 million as a result of the reversal of an uncertain tax position recorded as part of the Centennial acquisition.  The Company also reversed a corresponding indemnification receivable related to the uncertain tax position that resulted in $2.2 million of other expense during the second quarter and six months ended June 30, 2016.

Second Quarter of 2016 Compared with Second Quarter of 2015

The following table identifies the components of change in revenues for the second quarter of 2016 compared with the second quarter of 2015:
 
Revenues
2015
$
37,942

Increase (decrease) from:
 
Centennial mining operations
(11,597
)
Other consolidated mining operations
(2,307
)
Royalty and other income
(949
)
2016
$
23,089


Revenues decreased in the second quarter of 2016 compared with the second quarter of 2015 primarily due to a decrease in revenues at Centennial as a result of the cessation of coal production during the fourth quarter of 2015. The decline in revenue at the other consolidated mining operations was due to a reduction in tons sold at MLMC as a result of an increase in outage days at the customer's power plant in the second quarter of 2016, as well as a reduction in the price per ton sold in the second quarter of 2016 compared with 2015 as the decline in diesel prices during 2015 and 2016 resulted in a lower index-based coal sales price. The decline in revenues was partially offset by higher revenues at the limerock mining operations from an increase in limerock yards delivered.


18


The following table identifies the components of change in operating profit for the second quarter of 2016 compared with the second quarter of 2015:
 
Operating Profit
2015
$
2,382

Increase (decrease) from:
 
Centennial mining operations
6,188

Earnings of unconsolidated mines
959

Other selling, general and administrative expenses
(1,790
)
Net gain/loss on sale of assets, primarily Centennial
(1,447
)
Royalty and other income
(974
)
Other consolidated mining operations
(495
)
2016
$
4,823

NACoal reported operating profit of $4.8 million in the second quarter of 2016 compared with operating profit of $2.4 million in the second quarter of 2015. The increase in operating profit is primarily due to an improvement in Centennial's operating results as well as an increase in earnings of unconsolidated mines as newer mines began or increased production. Centennial's operating loss declined as a result of the cessation of coal production at Centennial during the fourth quarter of 2015, which resulted in substantially lower operating costs to conduct the remaining day-to-day operations of selling equipment, maintaining permits and completing mine reclamation. The increase in operating profit was partially offset by higher selling, general and administrative expenses, the change in the net gains and losses on sale of assets and a reduction in royalty and other income. Selling, general and administrative expenses were higher due to an increase in employee-related costs, higher professional fees and the impairment of prepaid royalties upon the expiration of certain leases. At the other consolidated mining operations, operating results at MLMC during the second quarter of 2016 were lower compared with 2015 due to a decrease in revenue in the second quarter of 2016 partially offset by a reduction in cost of sales, which includes both production costs and changes in inventory. The reduction in cost of sales was due to a decrease in total production costs, as well as the capitalization of more production costs into coal inventory in the second quarter of 2016 compared with 2015. The decline at MLMC was partially offset by an increase in limerock yards delivered at the limerock mining operations during the second quarter of 2016 compared with 2015.

NACoal recognized net income of $3.3 million in the second quarter of 2016 compared with net income of $4.2 million in the second quarter of 2015. The increase in operating profit was offset by changes in income taxes. NACoal recorded an income tax benefit of $1.6 million on income before taxes of $1.7 million in the second quarter of 2016. The income tax benefit in the second quarter of 2016 was due to the reversal of a $2.3 million uncertain tax position which more than offset income tax expense associated with current period earnings. The Company also reversed a corresponding indemnification receivable related to the uncertain tax position that resulted in $2.2 million of other expense in the second quarter of 2016. The uncertain tax position and the indemnification receivable were initially recorded as part of the Centennial acquisition. In the second quarter of 2015, NACoal recorded an income tax benefit of $2.7 million on income before taxes of $1.5 million. The income tax benefit recognized in the second quarter of 2015 was impacted by the mix of taxable earnings and losses, including losses related to Centennial.

First Six Months of 2016 Compared with First Six Months of 2015

The following table identifies the components of change in revenues for the first six months of 2016 compared with the first six months of 2015:
 
Revenues
2015
$
79,261

Increase (decrease) from:
 
Centennial mining operations
(20,698
)
Other consolidated mining operations
(5,037
)
Royalty and other income
(150
)
2016
$
53,376



19


Revenues decreased in the first six months of 2016 compared with the first six months of 2015 primarily due to a decrease in revenues at Centennial as a result of the cessation of coal production during the fourth quarter of 2015. The decline in revenue at the other consolidated mining operations was due to a reduction in tons sold at MLMC as a result of an increase in outage days at the customer's power plant in the first six months of 2016, as well as a reduction in the price per ton sold as the decline in diesel prices during 2015 and 2016 resulted in a lower index-based coal sales price. The decline was partially offset by an increase in revenues at the limerock mining operations from an increase in limerock yards delivered.

The following table identifies the components of change in operating profit for the first six months of 2016 compared with the first six months of 2015:
 
Operating Profit
2015
$
7,589

Increase (decrease) from:
 
Centennial mining operations
8,760

Other consolidated mining operations
1,213

Earnings of unconsolidated mines
1,054

Other selling, general and administrative expenses
(2,066
)
Net gain/loss on sale of assets, primarily Centennial
(1,707
)
Royalty and other income
(278
)
2016
$
14,565

NACoal reported operating profit of $14.6 million in the first six months of 2016 compared with operating profit of $7.6 million in the first six months of 2015. The increase was primarily due to the cessation of coal production at Centennial during the fourth quarter of 2015, which resulted in substantially lower operating costs to conduct the remaining day-to-day operations of selling equipment, maintaining permits and completing mine reclamation. Operating profit was also favorably impacted by improved results at the other consolidated mining operations and an increase in earnings of unconsolidated mines as newer mines began or increased production. The increase in operating profit was partially offset by higher selling, general and administrative expenses and the change in the net gains and losses on sale of assets. Selling, general and administrative expenses were higher due to an increase in employee-related costs, higher professional fees and the impairment of prepaid royalties upon the expiration of certain leases.
The improvement in other consolidated mining operations was primarily due to increased customer demand at the limerock mining operations during the first six months of 2016 compared with the first six months of 2015. Operating results at MLMC during the first six months of 2016 were comparable to the first six months of 2015 as the reduction in revenue was offset by a reduction in total cost of sales, which includes both production costs and changes in inventory. A decrease in production costs in the first six months of 2016 and the capitalization of a portion of production costs into coal inventory in the first six months of 2016 compared with the recognition in the first six months of 2015 of a portion of production costs previously capitalized into coal inventory all contributed to the reduction in MLMC’s cost of sales.
NACoal recognized net income of $11.6 million in the first six months of 2016 compared with net income of $8.7 million in the first six months of 2015. The change in net income was due to the factors affecting operating profit partially offset by a decrease in other income, as $0.9 million of dividend income in the first six months of 2015 did not recur in the first six months of 2016, as well as changes in income tax. NACoal recorded an income tax benefit of $0.9 million on income before income taxes of $10.6 million in the first six months of 2016. The income tax benefit in the first six months of 2016 was due to the reversal of a $2.3 million uncertain tax position which more than offset income tax expense associated with current period earnings. The Company also reversed a corresponding indemnification receivable related to the uncertain tax position that resulted in $2.2 million of other expense in the first six months of 2016. The uncertain tax position and the indemnification receivable were initially recorded as part of the Centennial acquisition. NACoal recorded an income tax benefit of $2.3 million on income before tax of $6.5 million in the first six months of 2015. The income tax benefit recognized in the first six months of 2015 was impacted by the mix of taxable earnings and losses, including losses related to Centennial.


20


LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following tables detail the changes in cash flow for the six months ended June 30:
 
2016
 
2015
 
Change
Operating activities:
 
 
 
 
 
Net income
$
11,577

 
$
8,746

 
$
2,831

Depreciation, depletion and amortization
5,964

 
8,554

 
(2,590
)
Other
10,247

 
(4,522
)
 
14,769

Working capital changes
(27,679
)
 
62,448

 
(90,127
)
Net cash provided by operating activities
109

 
75,226

 
(75,117
)
 
 
 
 
 
 
Investing activities:
 
 
 
 
 
Expenditures for property, plant and equipment
(5,623
)
 
(2,124
)
 
(3,499
)
Other
(18
)
 
1,009

 
(1,027
)
Net cash used for investing activities
(5,641
)
 
(1,115
)
 
(4,526
)
 
 
 
 
 
 
Cash flow before financing activities
$
(5,532
)
 
$
74,111

 
$
(79,643
)

The change in net cash provided by operating activities was primarily the result of working capital changes during the first six months of 2016 compared with the first six months of 2015. The change in working capital was mainly attributable to a significant decrease in accounts receivable from affiliates as NACoal received payment from Coyote Creek, an unconsolidated mine, in the first six months of 2015. The change in working capital in the first six months of 2016 was primarily the result of a significant decrease in accrued payroll as a result of payments made during the first six months of 2016.