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EX-95 - EXHIBIT 95 - NACCO INDUSTRIES INCexhibit95q117.htm
EX-32 - EXHIBIT 32 - NACCO INDUSTRIES INCexhibit32q117.htm
EX-31.2 - EXHIBIT 31.2 - NACCO INDUSTRIES INCexhibit312q117.htm
EX-31.1 - EXHIBIT 31.1 - NACCO INDUSTRIES INCexhibit311q117.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 March 31, 2017
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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 April 28, 2017: 5,263,374
Number of shares of Class B Common Stock outstanding at April 28, 2017: 1,570,448
 
 
 
 
 





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
 
MARCH 31
2017
 
DECEMBER 31
2016
 
MARCH 31
2016
 
(In thousands, except share data)
ASSETS
 

 
 
 
 
Cash and cash equivalents
$
56,426

 
$
80,648

 
$
35,718

Accounts receivable, net
79,718

 
117,463

 
73,851

Accounts receivable from unconsolidated subsidiaries
13,469

 
7,404

 
4,590

Inventories, net
158,982

 
157,342

 
164,334

Assets held for sale
1,824

 
2,016

 
17,593

Prepaid expenses and other
20,476

 
16,859

 
19,680

Total current assets
330,895

 
381,732

 
315,766

Property, plant and equipment, net
132,158

 
131,049

 
132,345

Goodwill
6,253

 
6,253

 
6,253

Other Intangibles, net
52,026

 
52,959

 
55,858

Deferred income taxes
26,333

 
28,380

 
33,588

Investments in unconsolidated subsidiaries
35,906

 
31,054

 
29,532

Deferred costs
10,311

 
10,037

 
7,338

Other non-current assets
26,409

 
26,557

 
25,834

Total assets
$
620,291

 
$
668,021

 
$
606,514

LIABILITIES AND EQUITY
 

 
 

 
 
Accounts payable
$
87,119

 
$
128,248

 
$
90,247

Revolving credit agreements of subsidiaries - not guaranteed by the parent company
30,978

 
12,714

 
4,170

Current maturities of long-term debt of subsidiaries - not guaranteed by the parent company
1,757

 
1,744

 
1,513

Accrued payroll
14,033

 
32,925

 
13,057

Accrued cooperative advertising
6,683

 
15,056

 
6,437

Other current liabilities
26,634

 
31,141

 
25,373

Total current liabilities
167,204

 
221,828

 
140,797

Long-term debt of subsidiaries - not guaranteed by the parent company
125,313

 
120,295

 
157,468

Asset retirement obligations
38,823

 
38,262

 
41,286

Pension and other postretirement obligations
13,783

 
14,271

 
13,088

Other long-term liabilities
50,642

 
53,072

 
51,856

Total liabilities
395,765

 
447,728

 
404,495

Stockholders' equity
 

 
 

 
 
Common stock:
 

 
 

 
 
Class A, par value $1 per share, 5,263,307 shares outstanding (December 31, 2016 - 5,207,955 shares outstanding; March 31, 2016 - 5,307,743 shares outstanding)
5,263

 
5,208

 
5,308

Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,570,515 shares outstanding (December 31, 2016 - 1,570,915 shares outstanding; March 31, 2016 - 1,571,528 shares outstanding)
1,571

 
1,571

 
1,571

Capital in excess of par value

 

 
712

Retained earnings
242,379

 
239,441

 
218,743

Accumulated other comprehensive loss
(24,687
)
 
(25,927
)
 
(24,315
)
Total stockholders' equity
224,526

 
220,293

 
202,019

Total liabilities and equity
$
620,291

 
$
668,021

 
$
606,514


See notes to Unaudited Condensed Consolidated Financial Statements.

2


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

 
THREE MONTHS ENDED
 
MARCH 31
 
2017
 
2016
 
(In thousands, except per share data)
Revenues
$
168,582

 
$
173,421

Cost of sales
129,447

 
133,416

Gross profit
39,135

 
40,005

Earnings of unconsolidated mines
14,955

 
12,648

Operating expenses
 
 
 
Selling, general and administrative expenses
45,790

 
46,259

Amortization of intangible assets
932

 
982

 
46,722

 
47,241

Operating profit
7,368

 
5,412

Other expense (income)
 

 
 
Interest expense
1,347

 
1,505

Income from other unconsolidated affiliates
(308
)
 
(303
)
Closed mine obligations
383

 
376

Other, net, including interest income
(702
)
 
53

 
720

 
1,631

Income before income tax provision
6,648

 
3,781

Income tax provision
1,670

 
979

Net income
$
4,978

 
$
2,802

 
 

 
 
Basic earnings per share
$
0.73

 
$
0.41

Diluted earnings per share
$
0.73

 
$
0.41

 
 
 
 
Dividends per share
$
0.2675

 
$
0.2625

 
 

 
 
Basic weighted average shares outstanding
6,806

 
6,857

Diluted weighted average shares outstanding
6,843

 
6,885


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
 
MARCH 31
 
2017
 
2016
 
(In thousands)
Net income
$
4,978

 
$
2,802

Foreign currency translation adjustment
1,071

 
207

Deferred gain on available for sale securities
226

 
65

Current period cash flow hedging activity, net of $86 and $680 tax benefit in the three months ended March 31, 2017 and March 31, 2016, respectively.
(239
)
 
(1,367
)
Reclassification of hedging activities into earnings, net of $12 and $61 tax benefit in the three months ended March 31, 2017 and March 31, 2016, respectively.
6

 
75

Reclassification of pension and postretirement adjustments into earnings, net of $50 and $99 tax benefit in the three months ended March 31, 2017 and March 31, 2016, respectively.
176

 
149

Total other comprehensive income (loss)
$
1,240

 
$
(871
)
Comprehensive income
$
6,218

 
$
1,931


See notes to Unaudited Condensed Consolidated Financial Statements.

4



NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
THREE MONTHS ENDED
 
MARCH 31
 
2017
 
2016
 
(In thousands)
Operating activities
 

 
 
Net income
$
4,978

 
$
2,802

Adjustments to reconcile from net income to net cash used for operating activities:
 

 
 
Depreciation, depletion and amortization
4,488

 
4,192

Amortization of deferred financing fees
148

 
157

Deferred income taxes
2,047

 
8,425

Other
(7,592
)
 
(1,973
)
Working capital changes:
 

 
 
Accounts receivable
29,974

 
35,095

Inventories
(1,651
)
 
632

Other current assets
(2,722
)
 
(2,207
)
Accounts payable
(41,454
)
 
(12,580
)
Other current liabilities
(30,420
)
 
(38,362
)
Net cash used for operating activities
(42,204
)
 
(3,819
)
 
 

 
 
Investing activities
 

 
 
Expenditures for property, plant and equipment
(4,650
)
 
(4,359
)
Other
814

 
18

Net cash used for investing activities
(3,836
)
 
(4,341
)
 
 

 
 
Financing activities
 

 
 
Additions to long-term debt
5,461

 
137

Reductions of long-term debt
(432
)
 
(2,772
)
Net additions (reductions) to revolving credit agreements
18,263

 
(4,195
)
Cash dividends paid
(1,827
)
 
(1,804
)
Net cash provided by (used for) financing activities
21,465

 
(8,634
)
 
 

 
 
Effect of exchange rate changes on cash
353

 
13

 
 
 
 
Cash and cash equivalents
 

 
 
Decrease for the period
(24,222
)
 
(16,781
)
Balance at the beginning of the period
80,648

 
52,499

Balance at the end of the period
$
56,426

 
$
35,718


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, 2016
$
5,265

$
1,572

$

$
217,745

 
$
(5,455
)
 
$
1,480

 
$
(112
)
 
$
(19,357
)
 
$
201,138

Stock-based compensation
42


712


 

 

 

 

 
754

Conversion of Class B to Class A shares
1

(1
)
 
 
 
 
 
 
 
 
 
 
 

Net income



2,802

 

 

 

 

 
2,802

Cash dividends on Class A and Class B common stock: $0.2625 per share



(1,804
)
 

 

 

 

 
(1,804
)
Current period other comprehensive income (loss)




 
207

 
65

 
(1,367
)
 

 
(1,095
)
Reclassification adjustment to net income




 

 

 
75

 
149

 
224

Balance, March 31, 2016
$
5,308

$
1,571

$
712

$
218,743

 
$
(5,248
)
 
$
1,545

 
$
(1,404
)
 
$
(19,208
)
 
$
202,019

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
$
5,208

$
1,571

$

$
239,441

 
$
(7,533
)
 
$
1,893

 
$
393

 
$
(20,680
)
 
$
220,293

Stock-based compensation
55



(213
)
 

 

 

 

 
(158
)
Net income



4,978

 

 

 

 

 
4,978

Cash dividends on Class A and Class B common stock: $0.2675 per share



(1,827
)
 

 

 

 

 
(1,827
)
Current period other comprehensive income (loss)




 
1,071

 
226

 
(239
)
 

 
1,058

Reclassification adjustment to net income




 

 

 
6

 
176

 
182

Balance, March 31, 2017
$
5,263

$
1,571

$

$
242,379

 
$
(6,462
)
 
$
2,119

 
$
160

 
$
(20,504
)
 
$
224,526


See notes to Unaudited Condensed Consolidated Financial Statements.

6


NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(In thousands, except as noted and per share amounts)

NOTE 1—Nature of Operations and Basis of Presentation

Nature of Operations

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 value-added services for natural resource 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 operating under the Kitchen Collection® store name in outlet and traditional malls throughout the United States.

NACoal has the following operating coal mining subsidiaries: 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”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”).

All of the operating coal mining subsidiaries other than MLMC are unconsolidated (collectively the "Unconsolidated Mines"). 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 Mines 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 or actual costs plus an agreed upon fee per btu of heating value delivered. The fees earned at each mine adjust over time in line with various indices which reflect general U.S. inflation rates.  

Although NACoal owns 100% of the equity and manages the daily operations of the Unconsolidated Mines, the Company has determined that the equity capital provided by NACoal is not sufficient to adequately finance the ongoing activities or absorb any expected losses without additional support from the customers. The customers have a controlling financial interest and have the power to direct the activities that most significantly affect the economic performance of the entities. As a result, NACoal is not the primary beneficiary and therefore does not consolidate these entities' financial position or results of operations. The income taxes resulting from 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 Consolidated Statements of Operations, with related taxes included in the provision for income taxes. The Company has included the pre-tax earnings of the Unconsolidated Mines above operating profit as they are an integral component of the Company's business and operating results.

MLMC is a consolidated entity because NACoal pays all operating costs and provides the capital for the mine. MLMC sells coal to its customer at a contractually agreed upon price which adjusts monthly, primarily based on changes in the level of established indices which reflect general U.S. inflation rates. Centennial Natural Resources, LLC ("Centennial"), which ceased coal production in the fourth quarter of 2015, is also a consolidated entity.

NACoal provides value-added mining services for independently owned limerock quarries through its North American Mining ("NAM") division. NAM is reimbursed by its customers based on actual costs plus a management fee. The financial results for NAM are included in consolidated mining operations or unconsolidated mining operations based on each entity's structure.

NACoal also provides coal handling, processing and drying services for a number of customers. For example, NoDak Energy Services, LLC ("NoDak") operates and maintains a coal processing facility for a customer's power plant. The pre-tax income from NoDak is reported on the line "Income from other unconsolidated affiliates" in the "Other (income) expense" section of the Consolidated Statements of Operations, with the related income taxes included in the provision for income taxes. North
American Coal Royalty Company, a consolidated entity, provides surface and mineral acquisition and lease maintenance services related to the Company's operations.

All of the unconsolidated subsidiaries are accounted for under the equity method. See Note 6 for further discussion.

Basis of Presentation

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 March 31, 2017 and the results of its operations, comprehensive income (loss), cash flows and changes in equity for the three months ended March 31, 2017 and 2016 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, 2016.

The balance sheet at December 31, 2016 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 months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2017. 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, 2016.

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 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. The Company anticipates adopting the new revenue guidance effective January 1, 2018 using the modified retrospective method with the cumulative effect of initially applying the standard recognized as an adjustment to equity. The Company has developed a project plan with respect to its implementation of this standard, including identification of revenue streams and review of contracts and procedures currently in place, and is evaluating the impact on the Company's financial position, results of operations and cash flows. The adoption of this guidance will result in increased disclosures to help users of financial statements understand the nature, amount and timing of revenue and cash flows arising from contracts. The Company is in the process of identifying and implementing changes to processes and controls to meet the standard's updated reporting and disclosure requirements and continues to update its assessment of the impact of the standard. The Company expects to further its assessment of the financial impact of the new guidance on its consolidated financial statements by mid-2017.  
 

7




NOTE 3—Inventories

Inventories are summarized as follows:

 
MARCH 31
2017
 
DECEMBER 31
2016
 
MARCH 31
2016
Coal - NACoal
$
13,155

 
$
13,137

 
$
16,305

Mining supplies - NACoal
16,100

 
15,790

 
20,810

Total inventories at weighted average cost
29,255

 
28,927

 
37,115

Sourced inventories - HBB
98,688

 
95,008

 
94,482

Retail inventories - KC
31,039

 
33,407

 
32,737

 Total inventories
$
158,982

 
$
157,342

 
$
164,334



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 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 March 31, 2017, the Company did not repurchase any shares of Class A Common Stock under the 2016 Stock Repurchase Program.



8


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)
 
 
March 31, 2017
 
 
 
 
 
 
Assets:
 

 
 
 
 
 
 
Available for sale securities
 
$
8,229

 
$
8,229

 
$

 
$

Interest rate swap agreements
 
802

 

 
802

 

Foreign currency exchange contracts
 
27

 

 
27

 

 
 
$
9,058

 
$
8,229

 
$
829

 
$

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
103

 
$

 
$
103

 
$

Foreign currency exchange contracts
 
489

 

 
489

 

 
 
$
592

 
$

 
$
592

 
$

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Available for sale securities
 
$
7,882

 
$
7,882

 
$

 
$

Interest rate swap agreements
 
774

 

 
774

 

Foreign currency exchange contracts
 
147

 

 
147

 

 
 
$
8,803

 
$
7,882

 
$
921

 
$

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
339

 
$

 
$
339

 
$

 
 
$
339

 
$

 
$
339

 
$

 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Available for sale securities
 
$
7,347

 
$
7,347

 
$

 
$

 
 
$
7,347

 
$
7,347

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
1,850

 
$

 
$
1,850

 
$

     Foreign currency exchange contracts
 
491

 

 
491

 

 
 
$
2,341

 
$

 
$
2,341

 
$


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 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.

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.


9


There were no transfers into or out of Levels 1, 2 or 3 during the three months ended March 31, 2017 and 2016.

NOTE 6—Unconsolidated Subsidiaries

NACoal's wholly owned unconsolidated subsidiaries each meet the definition of a variable interest entity. See Note 1 for a discussion of these entities.

The investment in the unconsolidated subsidiaries and related tax positions totaled $35.9 million, $31.1 million and $29.5 million at March 31, 2017, December 31, 2016 and March 31, 2016, respectively. The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $6.2 million, $4.6 million and $3.9 million at March 31, 2017, December 31, 2016, and March 31, 2016, respectively.

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
 
MARCH 31
 
2017
 
2016
Revenues
$
194,174

 
$
145,070

Gross profit
$
21,997

 
$
18,748

Income before income taxes
$
15,710

 
$
13,121

Net income
$
11,681

 
$
10,010



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.

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

10


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 March 31, 2017, December 31, 2016 and March 31, 2016, HBB had accrued undiscounted obligations of $9.0 million, $8.7 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 $5.0 million related to the environmental investigation and remediation at these sites.

NOTE 8—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
 
MARCH 31
 
2017
 
2016
Revenues
 
 
 
NACoal
$
28,300

 
$
30,287

HBB
114,154

 
115,740

KC
26,665

 
28,383

Eliminations
(537
)
 
(989
)
Total
$
168,582

 
$
173,421

 
 
 
 
Operating profit (loss)
 

 
 

NACoal
$
11,326

 
$
9,742

HBB
782

 
67

KC
(3,279
)
 
(2,890
)
NACCO and Other 
(1,520
)
 
(1,441
)
Eliminations
59

 
(66
)
Total
$
7,368

 
$
5,412

 
 
 
 
Net income (loss)
 
 
 
NACoal
$
9,289

 
$
8,253

HBB
689

 
(261
)
KC
(2,143
)
 
(1,868
)
NACCO and Other
(1,338
)
 
(1,067
)
Eliminations
(1,519
)
 
(2,255
)
Total
$
4,978

 
$
2,802







11



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 value-added mining services for natural resource 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, 2016. The Company's Critical Accounting Policies and Estimates have not materially changed since December 31, 2016.

THE NORTH AMERICAN COAL CORPORATION

NACoal mines coal primarily for use in power generation and provides value-added mining services for natural resource companies. Coal is surface mined from NACoal's mines in North Dakota, Texas, Mississippi, Louisiana and on the Navajo Nation in New Mexico. NACoal provides value-added services such as maintaining and operating draglines for independently owned limerock quarries through its North American Mining ("NAM") division and providing ash hauling services for power plants and other facilities.

NACoal has the following operating coal mining subsidiaries: 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”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”). Centennial Natural Resources, LLC ("Centennial"), which ceased coal production in the fourth quarter of 2015, was also a coal mining subsidiary.

NAM provides value-added services for independently owned limerock quarries and is reimbursed by its customers based on actual costs plus a management fee. The financial results for NAM are included in the consolidated mining operations or unconsolidated mining operations based on each entity's structure.

NACoal also provides coal handling, processing and drying services for a number of customers. For example, NoDak Energy Services, LLC ("NoDak") operates and maintains a coal processing facility for a customer's power plant. North American Coal Royalty Company provides surface and mineral acquisition and lease maintenance services related to the Company's operations.

12


FINANCIAL REVIEW

Tons of coal sold by NACoal's operating mines were as follows for the three months ended March 31:
 
THREE MONTHS
 
2017
 
2016
 
(In millions)
Coteau
3.8

 
3.6

Falkirk
1.7

 
1.7

Sabine
1.0

 
1.1

Camino Real
0.5

 
0.5

Coyote Creek
0.5

 

Bisti
1.3

 

Other
0.4

 
0.1

Unconsolidated mines
9.2

 
7.0

MLMC
0.7

 
0.8

Total tons sold
9.9

 
7.8


NAM sold 7.8 million cubic yards of limerock in the three months ended March 31, 2017. This compares with 6.8 million cubic yards of limerock in the three months ended March 31, 2016.

The results of operations for NACoal were as follows for the three months ended March 31:
 
THREE MONTHS
 
2017
 
2016
Revenue - consolidated mines
$
25,201

 
$
27,247

Revenue - royalty and other
3,099

 
3,040

Total revenues
28,300

 
30,287

Cost of sales - consolidated mines
23,184

 
23,709

Cost of sales - royalty and other
524

 
550

Total cost of sales
23,708

 
24,259

Gross profit
4,592

 
6,028

Earnings of unconsolidated mines (a)
14,955

 
12,648

Selling, general and administrative expenses
8,034

 
8,049

Amortization of intangible assets
587

 
637

(Gain) loss on sale of assets
(400
)
 
248

Operating profit
11,326

 
9,742

Interest expense
932

 
1,051

Other income, including income from other unconsolidated affiliates
(243
)
 
(225
)
Income before income tax provision
10,637

 
8,916

Income tax provision
1,348

 
663

Net income
$
9,289

 
$
8,253

 


 


Effective income tax rate (b)
12.7
%
 
7.4
%

(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.

13



First Quarter of 2017 Compared with First Quarter of 2016

The following table identifies the components of change in revenues for the first quarter of 2017 compared with the first quarter of 2016:
 
Revenues
2016
$
30,287

Increase (decrease) from:
 
Consolidated mines, excluding Centennial
(1,748
)
Centennial
(333
)
Royalty and other
94

2017
$
28,300


Revenues decreased in the first quarter of 2017 compared with the first quarter of 2016 primarily due to a decrease in revenues at the consolidated mines as fewer tons were sold at MLMC as a result of reduced customer requirements. The decline was partially offset by an increase in revenues at NAM's consolidated operations due to an increase in limerock yards delivered.

The following table identifies the components of change in operating profit for the first quarter of 2017 compared with the first quarter of 2016:
 
Operating Profit
2016
$
9,742

Increase (decrease) from:
 
Earnings of unconsolidated mines
2,307

Centennial
1,483

Net gain on sale of assets, primarily Centennial
648

Royalty and other
32

Selling, general and administrative expenses
15

Consolidated mines, excluding Centennial
(2,901
)
2017
$
11,326

Operating profit increased in the first quarter of 2017 compared with the first quarter of 2016 primarily as a result of an increase in earnings of unconsolidated mines, as new mines began or increased production, and lower costs at Centennial, including the absence of a $0.8 million charge related to an increase in Centennial's asset retirement obligation recognized in the first quarter of 2016.  These improvements were partially offset by a decrease in results at MLMC as a result of the decrease in tons sold.

NACoal recognized net income of $9.3 million in the first quarter of 2017 compared with net income of $8.3 million in the first quarter of 2016. The change in net income was primarily due to the factors affecting operating profit.


14


LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following tables detail the changes in cash flow for the three months ended March 31:
 
2017
 
2016
 
Change
Operating activities:
 
 
 
 
 
Net income
$
9,289

 
$
8,253

 
$
1,036

Depreciation, depletion and amortization
3,088

 
2,944

 
144

Other
(3,767
)
 
6,399

 
(10,166
)
Working capital changes
(19,971
)
 
(21,067
)
 
1,096

Net cash used for operating activities
(11,361
)
 
(3,471
)
 
(7,890
)
 
 
 
 
 
 
Investing activities:
 
 
 
 
 
Expenditures for property, plant and equipment
(3,421
)
 
(2,517
)
 
(904
)
Other
789

 
(49
)
 
838

Net cash used for investing activities
(2,632
)
 
(2,566
)
 
(66
)
 
 
 
 
 
 
Cash flow before financing activities
$
(13,993
)
 
$
(6,037
)
 
$
(7,956
)

The change in net cash used for operating activities was primarily the result of the change in other during the first three months of 2017 compared with the first three months of 2016, mainly attributable to changes in deferred income taxes and NACoal's pension obligation.

The increase in net cash used for investing activities was primarily attributable to increased expenditures for property, plant and equipment. In the first three months of 2017, capital expenditures were mainly for the purchase of machinery and equipment and dragline relocation.
 
2017
 
2016
 
Change
Financing activities:
 
 
 
 
 
Net additions (reductions) to long-term debt and revolving credit agreements
$
3,029

 
$
(235
)
 
$
3,264

Net cash provided by (used for) financing activities
$
3,029

 
$
(235
)
 
$
3,264


The change in net cash provided by (used for) financing activities was primarily from an increase in borrowings on NACoal's revolving credit facility during the first quarter of 2017 compared with a reduction in borrowings during the first quarter of 2016.

Financing Activities

NACoal has an unsecured revolving line of credit of up to $225.0 million (the “NACoal Facility”) that expires in November 2018. Borrowings outstanding under the NACoal Facility were $82.0 million at March 31, 2017. At March 31, 2017, the excess availability under the NACoal Facility was $140.9 million, which reflects a reduction for outstanding letters of credit of $2.1 million.

The NACoal Facility has performance-based pricing, which sets interest rates based upon achieving various levels of debt to EBITDA ratios, as defined in the NACoal Facility. Borrowings bear interest at a floating rate plus a margin based on the level of debt to EBITDA ratio achieved. The applicable margins, effective March 31, 2017, for base rate and LIBOR loans were 1.00% and 2.00%, respectively. The NACoal Facility has a commitment fee which is based upon achieving various levels of debt to EBITDA ratios. The commitment fee was 0.35% on the unused commitment at March 31, 2017. The floating rate of interest applicable to the NACoal Facility at March 31, 2017 was 3.38% including the floating rate margin and the effect of the interest rate swap agreement discussed below.

To reduce the exposure to changes in the market rate of interest, NACoal has entered into an interest rate swap agreement for a portion of the NACoal Facility. Terms of the interest rate swap agreement require NACoal to receive a variable interest rate and pay a fixed interest rate. NACoal has interest rate swaps with notional values totaling $80.0 million at March 31, 2017 at an average fixed rate of 1.4%.

15



The NACoal Facility contains restrictive covenants, which require, among other things, NACoal to maintain a maximum debt to EBITDA ratio of 3.50 to 1.00 and an interest coverage ratio of not less than 4.00 to 1.00. The NACoal Facility provides the ability to make loans, dividends and advances to NACCO, with some restrictions based on maintaining a maximum debt to EBITDA ratio of 3.00 to 1.00 in conjunction with maintaining unused availability thresholds of borrowing capacity, as defined in the NACoal Facility, of $15.0 million. At March 31, 2017, NACoal was in compliance with all financial covenants in the NACoal Facility.

NACoal believes funds available from cash on hand at the Company, the NACoal Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the NACoal Facility.

Contractual Obligations, Contingent Liabilities and Commitments

Since December 31, 2016, there have been no significant changes in the total amount of NACoal's contractual obligations, contingent liabilities or commercial commitments, or the timing of cash flows in accordance with those obligations as reported on page 48 in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. See Note 6 for a discussion of certain guarantees related to Coyote Creek.

Capital Expenditures

Expenditures for property, plant and equipment were $3.4 million during the first three months of 2017. NACoal estimates that its capital expenditures for the remainder of 2017 will be an additional $13.5 million, primarily for mine machinery and equipment. These expenditures are expected to be funded from internally generated funds and bank borrowings.

Capital Structure

NACoal's capital structure is presented below:
 
MARCH 31
2017
 
DECEMBER 31
2016
 
Change
Cash and cash equivalents
$
14

 
$
10,978

 
$
(10,964
)
Other net tangible assets
169,127

 
145,028

 
24,099

Coal supply agreements, net
45,090

 
45,678

 
(588
)
Net assets
214,231

 
201,684

 
12,547

Total debt
(99,070
)
 
(96,039
)
 
(3,031
)
Total equity
$
115,161

 
$
105,645

 
$
9,516

Debt to total capitalization
46%
 
48%
 
(2)%

The increase in other net tangible assets during the first three months of 2017 was primarily due to increases in accounts receivable from unconsolidated subsidiaries and in accounts receivable primarily due to higher limerock deliveries at NAM, as well as decreases in accrued payroll and accrued legal. Accrued payroll and accrued legal decreased because payments were made during the first quarter of 2017.

OUTLOOK

In 2017, NACoal expects a significant increase in tons sold and income before income tax compared with 2016, including and excluding the effect of Centennial's 2016 asset impairment and legal resolution charges.

Income before income tax in 2017 is expected to benefit from an increase in earnings from the unconsolidated mining operations due to the start of production at Bisti on January 1, 2017 and to a full year of production at the Coyote Creek mine. In addition, NAM has commenced operations at additionallimerock quarries for a new customer, which is also expected to contribute to the increase in income from the unconsolidated mining operations.

Bisti expects to deliver between 5.0 to 6.0 million tons of coal per year when the power plant supplied by its customer is operating at anticipated levels. Coyote Creek expects to deliver between 2.0 to 2.5 million tons of coal annually when its customer's power plant operates at anticipated levels. In 2016, Liberty began delivering coal to its customer for facility testing and commissioning. Production levels at Liberty are expected to increase gradually and to build to full production of

16


approximately 4.5 million tons of coal annually beginning in 2023, although the pace of future deliveries will be affected by the timing of the Kemper County Energy Facility reaching full operating capacity.

Income before income tax is also expected to benefit moderately from lower expenses related to the Otter Creek reserves in North Dakota and a lower, more moderate, operating loss at Centennial as it manages ongoing mine reclamation obligations. Centennial will continue to evaluate strategies to optimize cash flow, including through the sale of mineral reserves and equipment. The company is evaluating a range of strategies for its Alabama mineral reserves, including holding reserves with substantial unmined coal tons for sale or contract mining when conditions in Alabama and global coal markets improve. Cash expenditures related to mine reclamation will continue until reclamation is complete, or ownership of, or responsibility for, the mines is transferred.

The improvement in income before income tax is expected to be partially offset by a decrease in MLMC's 2017 results, with a substantial decrease in the first half of the year expected to be partially offset by improvements in the second half. Lower results from NAM's consolidated limerock mining operations due to an anticipated decline in customer requirements is also expected to partially offset improved income before income tax. As a result of a new oil and gas royalty agreement finalized in the first quarter of 2017, royalty and other income in 2017 is expected to be comparable to 2016.

Cash flow before financing activities is expected to be strong in 2017 but decrease significantly compared with 2016. Capital expenditures are estimated to be approximately $17 million in 2017, of which $3.4 million was expended in the first quarter of 2017.

Over the longer-term, NACoal continues to expect that the earnings of its unconsolidated operations will increase by approximately 50% from the 2012 level of $45.2 million through the development and maturation of its newer operations and normal escalation of contractual compensation at its existing operations. Income related to NACoal's newer mines, including the commencement of production at Bisti and increased deliveries at Liberty, are expected to advance progress toward this goal in 2017 and beyond. In recent years, generally low U.S. inflation rates have slowed the rate by which fees at unconsolidated mines have escalated and some newer mines, such as Liberty, have experienced slower than anticipated growth in customer demand. As a result, achievement of the goal to increase earnings of the unconsolidated operations by 50% is currently expected to occur in 2020 or 2021, later than previously anticipated, with the timing ultimately dependent on future inflation rates and customer demand.

NACoal expects to continue its efforts to develop new mining projects and is pursuing opportunities for new or expanded coal mining projects, although future opportunities are likely to be very limited. In addition, NACoal continues to pursue additional non-coal mining opportunities, principally in aggregates.

HAMILTON BEACH BRANDS, INC.

HBB’s business is seasonal and a majority of revenues and operating profit typically occurs in the second half of the year when sales of small electric appliances to retailers and consumers increase significantly for the fall holiday-selling season.


FINANCIAL REVIEW

The results of operations for HBB were as follows for the three months ended March 31:
 
THREE MONTHS
 
2017
 
2016
Revenues
$
114,154

 
$
115,740

Operating profit
$
782

 
$
67

Interest expense
$
380

 
$
426

Other expense (income)
$
(700
)
 
$
43

Net income (loss)
$
689

 
$
(261
)
Effective income tax rate
37.5
%
 
35.1
%


17


First Quarter of 2017 Compared with First Quarter of 2016

The following table identifies the components of change in revenues for the first quarter of 2017 compared with the first quarter of 2016:
 
Revenues
2016
$
115,740

Increase (decrease) from:
 
Unit volume and product mix
(1,243
)
Foreign currency
(468
)
Other
125

2017
$
114,154


Revenues for the first quarter of 2017 decreased 1.4% compared with the first quarter of 2016 primarily due to reduced sales volumes, mainly in the U.S. consumer retail market in part driven by retailers re-balancing inventory after the holiday-selling season, partially offset by increased sales of new and higher-priced products.
 
The following table identifies the components of change in operating profit for the first quarter of 2017 compared with the first quarter of 2016:
 
Operating Profit
2016
$
67

Increase (decrease) from:
 
Gross profit
1,617

Selling, general and administrative expenses
(742
)
Foreign currency
(160
)
2017
$
782


HBB's operating profit increased in the first quarter of 2017 compared with the first quarter of 2016 primarily as a result of an increase in gross profit. The increase in gross profit mainly resulted from a shift in sales mix to higher-priced and higher-margin products and lower costs, partially offset by reduced sales volumes and an increase in transportation and warehousing costs. 

HBB recognized net income of $0.7 million in the first quarter of 2017 compared with a net loss of $0.3 million in the first quarter of 2016 primarily due to the factors affecting operating profit and a foreign currency gain in the first quarter of 2017 compared with a loss during the first quarter of 2016.


18


LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following tables detail the changes in cash flow for the three months ended March 31:
 
2017
 
2016
 
Change
Operating activities:
 
 
 
 
 
Net income (loss)
$
689

 
$
(261
)
 
$
950

Depreciation and amortization
1,026

 
799

 
227

Other
(1,355
)
 
(447
)
 
(908
)
Working capital changes
(11,836
)
 
12,922

 
(24,758
)
Net cash provided by (used for) operating activities
(11,476
)
 
13,013

 
(24,489
)
 
 
 
 
 
 
Investing activities:
 
 
 
 
 
Expenditures for property, plant and equipment
(972
)
 
(1,280
)
 
308

Other
5

 

 
5

Net cash used for investing activities
(967
)
 
(1,280
)
 
313

 
 
 
 
 
 
Cash flow before financing activities
$
(12,443
)
 
$
11,733

 
$
(24,176
)
 
Net cash provided by (used for) operating activities changed by $24.5 million in the first three months of 2017 compared with the first three months of 2016 primarily as a result of the change in working capital. The change in working capital was mainly due to a larger decrease in accounts payable and an increase in inventory during the first three months of 2017 compared with a decrease in inventory during 2016. The changes in accounts payable and inventory were primarily attributable to the timing of purchases and lower sales in the first three months of 2017 compared with the sales forecast.

 
2017
 
2016
 
Change
Financing activities:
 
 
 
 
 
Net additions (reductions) to revolving credit agreement and other
$
14,863

 
$
(10,595
)
 
$
25,458

Net cash provided by (used for) financing activities
$
14,863

 
$
(10,595
)
 
$
25,458


The change in net cash provided by (used for) financing activities was mainly the result of an increase in borrowings as HBB required more cash to fund working capital during the first three months of 2017 compared with the first three months of 2016.

Financing Activities

HBB has a $115.0 million senior secured floating-rate revolving credit facility (the “HBB Facility”) that expires in June 2021. The obligations under the HBB Facility are secured by substantially all of HBB's assets. The approximate book value of HBB's assets held as collateral under the HBB Facility was $221.0 million as of March 31, 2017. At March 31, 2017, the borrowing base under the HBB Facility was $98.6 million and borrowings outstanding under the HBB Facility were $53.6 million. At March 31, 2017, the excess availability under the HBB Facility was $45.0 million.

The maximum availability under the HBB Facility is governed by a borrowing base derived from advance rates against eligible accounts receivable, inventory and trademarks of the borrowers, as defined in the HBB Facility. Adjustments to reserves booked against these assets, including inventory reserves, will change the eligible borrowing base and thereby impact the liquidity provided by the HBB Facility. A portion of the availability is denominated in Canadian dollars to provide funding to HBB's Canadian subsidiary. Borrowings bear interest at a floating rate, which can be a base rate or LIBOR, as defined in the HBB Facility, plus an applicable margin. The applicable margins, effective March 31, 2017, for base rate loans and LIBOR loans denominated in U.S. dollars were 0.00% and 1.50%, respectively. The applicable margins, effective March 31, 2017, for base rate loans and bankers' acceptance loans denominated in Canadian dollars were 0.00% and 1.50%, respectively. The HBB Facility also required a fee of 0.25% per annum on the unused commitment. The margins and unused commitment fee under the HBB Facility are subject to quarterly adjustment based on average excess availability. The floating rate of interest applicable to the HBB Facility at March 31, 2017 was 2.78% including the floating rate margin and the effect of interest rate swap agreements discussed below.

19



To reduce the exposure to changes in the market rate of interest, HBB has entered into interest rate swap agreements for a portion of the HBB Facility. Terms of the interest rate swap agreements require HBB to receive a variable interest rate and pay a fixed interest rate. HBB has interest rate swaps with notional values totaling $20.0 million at March 31, 2017 at an average fixed rate of 1.4%. HBB also has delayed start interest rate swaps with notional values totaling $25.0 million at March 31, 2017, with fixed rates of 1.6% and 1.7%.

The HBB Facility includes restrictive covenants, which, among other things, limit the payment of dividends to NACCO, subject to achieving availability thresholds. Dividends are discretionary to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less than $25.0 million. The HBB Facility also requires HBB to achieve a minimum fixed charge coverage ratio in certain circumstances, as defined in the HBB Facility. At March 31, 2017, HBB was in compliance with all financial covenants in the HBB Facility.

HBB believes funds available from cash on hand at the Company, the HBB Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the HBB Facility.

Contractual Obligations, Contingent Liabilities and Commitments

In the three months ended March 31, 2017, there were no significant changes in the total amount of HBB's contractual obligations, contingent liabilities or commercial commitments, or the timing of cash flows in accordance with those obligations as reported on page 55 in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Capital Expenditures

Expenditures for property, plant and equipment were $1.0 million for the first three months of 2017 and are estimated to be an additional $6.9 million for the remainder of 2017. These planned capital expenditures are primarily for improvements to HBB's information technology infrastructure and tooling for new products. These expenditures are expected to be funded from internally generated funds and bank borrowings.

Capital Structure

Working capital is significantly affected by the seasonality of HBB's business. The following is a discussion of the changes in HBB's capital structure at March 31, 2017 compared with both March 31, 2016 and December 31, 2016.

March 31, 2017 Compared with March 31, 2016
 
MARCH 31
2017
 
MARCH 31
2016
 
Change
Cash and cash equivalents
$
5,094

 
$
1,625

 
$
3,469

Other net tangible assets
80,806

 
82,169

 
(1,363
)
Goodwill and intangible assets, net
13,189

 
14,568

 
(1,379
)
Net assets
99,089

 
98,362

 
727

Total debt
(53,578
)
 
(47,770
)
 
(5,808
)
Total equity
$
45,511

 
$
50,592

 
$
(5,081
)
Debt to total capitalization
54
%
 
49
%
 
5
%

Total debt increased $5.8 million to fund working capital.

20



March 31, 2017 Compared with December 31, 2016
 
MARCH 31
2017
 
DECEMBER 31
2016
 
Change
Cash and cash equivalents
$
5,094

 
$
2,321

 
$
2,773

Other net tangible assets
80,806

 
66,916

 
13,890

Goodwill and intangible assets, net
13,189

 
13,534

 
(345
)
Net assets
99,089

 
82,771

 
16,318

Total debt
(53,578
)
 
(38,714
)
 
(14,864
)
Total equity
$
45,511

 
$
44,057

 
$
1,454

Debt to total capitalization
54
%
 
47
%
 
7
%

Other net tangible assets increased $13.9 million from December 31, 2016 primarily due to decreases in accounts payable, accrued payroll and accrued cooperative advertising, partially offset by a decrease in accounts receivable. The changes in accounts payable and accounts receivable were primarily attributable to the seasonality of the business. Accrued payroll and accrued cooperative advertising decreased as payments were made during the first quarter of 2017.

Total debt decreased $14.9 million mainly as a result of the seasonality of the business.

OUTLOOK

Overall consumer confidence, financial pressures experienced by the middle-market consumer and changing consumer buying patterns continue to create uncertainty about the overall growth prospects for the U.S. retail market for small appliances. In this context, 2017 U.S. and Canadian consumer retail markets for small kitchen appliances are expected to be comparable to 2016, while international and commercial markets in which HBB participates are expected to continue to grow moderately. Sales are expected to continue to shift from in-store channels to internet sales channels.

HBB continues to focus on strengthening the consumer market position of its various product lines through product innovation, promotions, increased placements and branding programs. HBB will continue to leverage its strong brand portfolio by introducing new innovative products, as well as upgrades to certain existing products across a wide range of brands, price points and categories in both retail and commercial marketplaces. HBB continues to pursue opportunities to create or add product lines and brands that can be distributed in high-end or specialty stores and on the Internet, including the addition of a new CHI®-branded garment care line under a multi-year licensing deal, which began initial shipments during the first quarter of 2017. HBB also expects its growing global commercial business to benefit from broader distribution of several newer products.

As a result of this market environment and its product introductions, HBB's sales volumes and revenues are expected to increase modestly in 2017 compared with 2016, provided consumer spending is at expected levels. This increase is expected to be slightly more than the anticipated market growth due to enhanced distribution and increased higher-margin product placements resulting from the execution of the company's strategic initiatives, both domestically and internationally.

Net income in 2017 is also expected to increase modestly compared with 2016 as benefits of the increased revenues are expected to be mostly offset by the costs to implement these initiatives, as well as increased advertising and distribution costs. HBB continues to monitor currency effects, as well as commodity and other input costs, closely, and intends to continue to adjust product prices and product placements as market conditions permit.

In 2017, cash flow before financing activities is expected to be substantial but lower than 2016. Capital expenditures are expected to be approximately $8 million in 2017, of which $1.0 million was expended in the first quarter of 2017.

Longer term, HBB will work to improve return on sales through economies of scale derived from market growth and its strategic revenue growth initiatives. These initiatives are focused on enhancing HBB's placements in the North American consumer business, enhancing sales in the e-commerce market, expanding its participation in the "only-the-best" market by investing in new products to be sold under the Wolf Gourmet®, Weston®, Hamilton Beach® Professional and CHI® brand names, expanding internationally in emerging growth markets, increasing its global commercial presence through enhanced global product lines for chains and distributors serving the global food service and hospitality markets and leveraging its other strategic initiatives to drive category and channel expansion.


21


THE KITCHEN COLLECTION, LLC

KC is a national specialty retailer of kitchenware in outlet and traditional malls throughout the United States. KC's business is seasonal, and a majority of its revenues and operating profit is typically earned in the second half of the year when sales of kitchenware to consumers increase significantly for the fall holiday-selling season.

At March 31, 2017, KC operated a total of 208 stores compared with 222 stores at March 31, 2016 and 223 stores at December 31, 2016.

FINANCIAL REVIEW

The results of operations for KC were as follows for the three months ended March 31:
 
THREE MONTHS
 
2017
 
2016
Revenues
$
26,665

 
$
28,383

Operating loss
$
(3,279
)
 
$
(2,890
)
Net loss
$
(2,143
)
 
$
(1,868
)
Effective income tax rate
35.7
%
 
36.4
%

First Quarter of 2017 Compared with First Quarter of 2016

The following table identifies the components of change in revenues for the first quarter of 2017 compared with the first quarter of 2016:
 
Revenues
2016
$
28,383

Increase (decrease) from:
 
Closed stores
(2,273
)
Comparable stores
(626
)
New stores
875

Other, primarily e-commerce
306

2017
$
26,665


Revenues for the first quarter of 2017 decreased compared with the first quarter of 2016 primarily due to the loss of sales from closing underperforming stores since March 31, 2016 and a decline in comparable store sales. The decrease in comparable store sales resulted from fewer customer visits and a reduction in store transactions, partially offset by an increase in the average sales transaction value for the first quarter of 2017 compared with the first quarter of 2016. These decreases were partially offset by sales at newly opened stores and e-commerce sales.

The following table identifies the components of change in operating loss for the first quarter of 2017 compared with the first quarter of 2016:
 
Operating Loss
2016
$
(2,890
)
(Increase) decrease from:
 
Comparable stores
(302
)
New stores
(105
)
Selling, general and administrative expenses and other
(18
)
Closed stores
36

2017
$
(3,279
)

KC recognized an increased operating loss in the first quarter of 2017 compared with the first quarter of 2016 primarily as a result of a decline in comparable store operating margins due to a shift in sales mix to lower-margin products.


22


KC reported a net loss of $2.1 million in the first quarter of 2017 compared with a net loss of $1.9 million in the first quarter of 2016 primarily due to the factors affecting the operating loss.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following tables detail the changes in cash flow for the three months ended March 31:
 
2017
 
2016
 
Change
Operating activities:
 
 
 
 
 
Net loss
$
(2,143
)
 
$
(1,868
)
 
$
(275
)
Depreciation and amortization
282

 
355

 
(73
)
Other
(430
)
 
129

 
(559
)
Working capital changes
(8,394
)
 
(7,898
)
 
(496
)
Net cash used for operating activities
(10,685
)
 
(9,282
)
 
(1,403
)
 
 
 
 
 
 
Investing activities:
 
 
 
 
 
Expenditures for property, plant and equipment
(253
)
 
(558
)
 
305

Other

 
47

 
(47
)
Net cash used for investing activities
(253
)
 
(511
)
 
258

 
 
 
 
 
 
Cash flow before financing activities
$
(10,938
)
 
$
(9,793
)
 
$
(1,145
)

The $1.4 million change in net cash used for operating activities was primarily the result of the change in other in the first three months of 2017 compared with the first three months of 2016. The change in other was primarily the result of the change in deferred income taxes. 
 
2017
 
2016
 
Change
Financing activities:
 
 
 
 
 
Net additions to revolving credit agreement
$
5,400

 
$
4,000

 
$
1,400

Cash dividends paid to NACCO
(3,000
)
 
(10,000
)
 
7,000

Net cash provided by (used for) financing activities
$
2,400

 
$
(6,000
)
 
$
8,400


The change in net cash provided by (used for) financing activities was primarily the result of a decrease in cash dividends paid to NACCO during the first three months of 2017 compared with the first three months of 2016, as well as an increase in borrowings during the first three months of 2017 compared with the first three months of 2016.

Financing Activities

KC has a $25.0 million secured revolving line of credit that expires in September 2019 (the “KC Facility”). The obligations under the KC Facility are secured by substantially all of the assets of KC. The approximate book value of KC's assets held as collateral under the KC Facility was $39.0 million as of March 31, 2017. At March 31, 2017, the borrowing base under the KC Facility was $17.7 million and borrowings outstanding under the KC Facility were $5.4 million. At March 31, 2017, the excess availability under the KC Facility was $12.3 million.

The maximum availability under the KC Facility is derived from a borrowing base formula using KC's eligible inventory and eligible credit card accounts receivable, as defined in the KC Facility. Borrowings bear interest at a floating rate plus a margin based on the excess availability under the agreement, as defined in the KC Facility, which can be either a base rate plus a margin of 1.00% or LIBOR plus a margin of 2.00% as of March 31, 2017. The KC Facility also requires a commitment fee of 0.32% per annum on the unused commitment.

The KC Facility allows for the payment of dividends to NACCO, subject to certain restrictions based on availability and meeting a fixed charge coverage ratio as described in the KC Facility. Dividends are limited to (i) $6.0 million in any twelve-

23



March 31, 2017, KC was in compliance with all financial covenants in the KC Facility.

KC believes funds available from cash on hand at the Company, the KC Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the KC Facility.

Contractual Obligations, Contingent Liabilities and Commitments

Since December 31, 2016, there have been no significant changes in the total amount of KC's contractual obligations, contingent liabilities or commercial commitments, or the timing of cash flows in accordance with those obligations as reported on page 62 in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Capital Expenditures

Expenditures for property, plant and equipment were $0.3 million for the first three months of 2017 and are estimated to be an additional $1.3 million for the remainder of 2017. These planned capital expenditures are primarily for improvements to KC's information technology infrastructure, store remodels and new store fixtures. These expenditures are expected to be funded from internally generated funds and bank borrowings.

Capital Structure

Working capital is significantly affected by the seasonality of KC's business. The following is a discussion of the changes in KC's capital structure at March 31, 2017 compared with both March 31, 2016 and December 31, 2016.

March 31, 2017 Compared with March 31, 2016
 
MARCH 31
2017
 
MARCH 31
2016
 
Change
Cash and cash equivalents
$
472

 
$
521

 
$
(49
)
Other net tangible assets
21,180

 
23,361

 
(2,181
)
Net assets
21,652

 
23,882

 
(2,230
)
Total debt
(5,400
)
 
(4,000
)
 
(1,400
)
Total equity
$
16,252

 
$
19,882

 
$
(3,630
)
Debt to total capitalization
25
%
 
17
%
 
8
%

The $2.2 million decrease in other net tangible assets at March 31, 2017 compared with March 31, 2016 was mainly due to the changes in net intercompany tax receivable/payable and a decrease in inventory, partially offset by a decrease in accounts payable at March 31, 2017. The decreases in inventory and accounts payable are the result of fewer stores at March 31, 2017 compared with March 31, 2016.

March 31, 2017 Compared with December 31, 2016
 
MARCH 31
2017
 
DECEMBER 31
2016
 
Change
Cash and cash equivalents
$
472

 
$
9,010

 
$
(8,538
)
Other net tangible assets
21,180

 
12,384

 
8,796

Net assets
21,652

 
21,394

 
258

Total debt
(5,400
)
 

 
(5,400
)
Total equity
$
16,252

 
$
21,394

 
$
(5,142
)
Debt to total capitalization
25
%
 
(a)

 
(a)

(a) Debt to total capitalization is not meaningful.


24


Other net tangible assets increased $8.8 million at March 31, 2017 compared with December 31, 2016 primarily as a result of a decrease in accounts payable partially offset by a decrease in inventory. Both of these decreases are due to the seasonality of the business and fewer stores at March 31, 2017 compared with December 31, 2016.

OUTLOOK

A shift in consumer shopping patterns has led to declining consumer traffic to physical retail locations and reduced in-store transactions as consumers buy more over the Internet or utilize the Internet for comparison shopping. Financial pressures on middle-market consumers interested in housewares and small appliances continue to persist and have also adversely affected sales trends in these categories over the last few years. These factors are expected to continue to limit KC's target consumers' spending on housewares and small appliances, resulting in continued market softness in 2017. Given this market environment, KC expects to continue to aggressively manage its store portfolio and continue its focus on a smaller core group of profitable Kitchen Collection® outlet stores. The company closed 17 stores early in the first quarter of 2017 and plans to open a limited number of stores throughout the remainder of the year in more favorable mall locations. As a result of these actions, KC anticipates revenues to decline modestly in 2017 compared with 2016, with full-year 2017 operating results comparable to 2016, provided customer visits are at expected levels. KC also expects to generate modest cash flow before financing activities in 2017. Capital expenditures are expected to be approximately $1.5 million in 2017, of which $0.3 million was expended in the first quarter of 2017.

KC aims to provide consumers with products they want at affordable prices. KC's continued focus on increasing the average sale per transaction, the average closure rate and the number of items per transaction through the continued refinement of its format and improved customer interactions to enhance customers' store experience is expected to generate sales growth over time. Additionally, improved product offerings, a focus on sales of higher-margin products, merchandise mix and displays, new store profitability, closure of underperforming stores and optimizing expense structure are expected to generate improved operating profit over time. As a result, KC believes its smaller core store portfolio is well positioned to take advantage of any future market rebound.