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EX-95 - EXHIBIT 95 - NACCO INDUSTRIES INCexhibit95q316.htm
EX-32 - EXHIBIT 32 - NACCO INDUSTRIES INCexhibit32q316.htm
EX-31.2 - EXHIBIT 31.2 - NACCO INDUSTRIES INCexhibit312q316.htm
EX-31.1 - EXHIBIT 31.1 - NACCO INDUSTRIES INCexhibit311q316.htm
EX-10.1 - EXHIBIT 10.1 - NACCO INDUSTRIES INCexhibit101q316.htm

 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 _______________________________________________________________________________________________________________________________________________________________________________________________________
FORM 10-Q
(Mark One)
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 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 October 28, 2016: 5,205,493
Number of shares of Class B Common Stock outstanding at October 28, 2016: 1,571,015
 
 
 
 
 





NACCO INDUSTRIES, INC.
TABLE OF CONTENTS

 
 
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


Part I
FINANCIAL INFORMATION
Item 1. Financial Statements

NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
SEPTEMBER 30
2016
 
DECEMBER 31
2015
 
SEPTEMBER 30
2015
 
(In thousands, except share data)
ASSETS
 

 
 
 
 
Cash and cash equivalents
$
44,266

 
$
52,499

 
$
11,847

Accounts receivable, net
97,613

 
111,020

 
118,097

Accounts receivable from affiliates
7,360

 
3,085

 
2,793

Inventories, net
201,309

 
165,016

 
234,214

Assets held for sale
5,005

 
17,497

 
1,319

Prepaid expenses and other
28,696

 
12,317

 
19,999

Total current assets
384,249

 
361,434

 
388,269

Property, plant and equipment, net
124,626

 
132,539

 
151,767

Goodwill
6,253

 
6,253

 
6,253

Other Intangibles, net
53,871

 
56,843

 
57,650

Deferred income taxes
23,812

 
42,013

 
39,008

Other non-current assets
71,299

 
56,326

 
59,770

Total assets
$
664,110

 
$
655,408

 
$
702,717

LIABILITIES AND EQUITY
 

 
 

 
 
Accounts payable
$
157,253

 
$
100,300

 
$
161,040

Revolving credit agreements of subsidiaries - not guaranteed by the parent company
5,250

 
8,365

 
13,858

Current maturities of long-term debt of subsidiaries - not guaranteed by the parent company
1,532

 
1,504

 
1,495

Accrued payroll
24,292

 
40,854

 
34,336

Accrued cooperative advertising
10,619

 
10,676

 
7,716

Other current liabilities
30,560

 
30,047

 
37,554

Total current liabilities
229,506

 
191,746

 
255,999

Long-term debt of subsidiaries - not guaranteed by the parent company
130,524

 
160,113

 
158,650

Asset retirement obligations
41,965

 
39,780

 
40,453

Pension and other postretirement obligations
12,361

 
10,046

 
9,711

Other long-term liabilities
53,446

 
52,585

 
53,160

Total liabilities
467,802

 
454,270

 
517,973

Stockholders' equity
 

 
 

 
 
Common stock:
 

 
 

 
 
Class A, par value $1 per share, 5,205,293 shares outstanding (December 31, 2015 - 5,265,446 shares outstanding; September 30, 2015 - 5,276,963 shares outstanding)
5,205

 
5,265

 
5,277

Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,571,215 shares outstanding (December 31, 2015 - 1,571,727 shares outstanding; September 30, 2015 - 1,572,027 shares outstanding)
1,571

 
1,572

 
1,572

Retained earnings
214,666

 
217,745

 
200,853

Accumulated other comprehensive loss
(25,134
)
 
(23,444
)
 
(22,958
)
Total stockholders' equity
196,308

 
201,138

 
184,744

Total liabilities and equity
$
664,110

 
$
655,408

 
$
702,717


See notes to Unaudited Condensed Consolidated Financial Statements.

2


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

 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share data)
Revenues
$
220,792

 
$
239,107

 
$
572,220

 
$
629,341

Cost of sales
169,084

 
196,892

 
439,978

 
513,556

Gross profit
51,708

 
42,215

 
132,242

 
115,785

Earnings of unconsolidated mines
15,102

 
12,234

 
40,785

 
36,863

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
47,504

 
47,551

 
141,291

 
139,186

Centennial asset impairment charge
17,443

 

 
17,443

 

Amortization of intangible assets
1,164

 
1,138

 
2,972

 
3,173

 
66,111

 
48,689

 
161,706

 
142,359

Operating profit
699

 
5,760

 
11,321

 
10,289

Other (income) expense
 

 
 
 
 
 
 
Interest expense
1,322

 
1,597

 
4,297

 
5,383

Income from other unconsolidated affiliates
(307
)
 
(264
)
 
(913
)
 
(1,736
)
Closed mine obligations
223

 
244

 
948

 
1,071

Other, net, including interest income
447

 
908

 
2,517

 
1,220

 
1,685

 
2,485

 
6,849

 
5,938

Income (loss) before income tax provision (benefit)
(986
)
 
3,275

 
4,472

 
4,351

Income tax provision (benefit)
(544
)
 
134

 
(1,004
)
 
458

Net income (loss)
$
(442
)
 
$
3,141

 
$
5,476

 
$
3,893

 
 

 
 
 
 
 
 
Basic earnings (loss) per share
$
(0.07
)
 
$
0.45

 
$
0.80

 
$
0.55

Diluted earnings (loss) per share
$
(0.07
)
 
$
0.45

 
$
0.80

 
$
0.55

 
 
 
 
 
 
 
 
Dividends per share
$
0.2675

 
$
0.2625

 
$
0.7975

 
$
0.7825

 
 

 
 
 
 
 
 
Basic weighted average shares outstanding
6,786

 
6,924

 
6,831

 
7,051

Diluted weighted average shares outstanding
6,786

 
6,935

 
6,858

 
7,065


See notes to Unaudited Condensed Consolidated Financial Statements.

3


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

 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Net income (loss)
$
(442
)
 
$
3,141

 
$
5,476

 
$
3,893

Foreign currency translation adjustment
(517
)
 
(1,190
)
 
(1,335
)
 
(2,352
)
Deferred gain (loss) on available for sale securities
134

 
(229
)
 
298

 
(205
)
Current period cash flow hedging activity, net of $169 tax expense and $819 tax benefit in the three and nine months ended September 30, 2016, respectively, and $304 and $674 tax benefit in the three and nine months ended September 30, 2015, respectively.
340

 
(558
)
 
(1,541
)
 
(1,216
)
Reclassification of hedging activities into earnings, net of $149 and $254 tax benefit in the three and nine months ended September 30, 2016 and $41 and $178 tax benefit in the three and nine months ended September 30, 2015, respectively.
312

 
89

 
420

 
363

Reclassification of pension and postretirement adjustments into earnings, net of $88 and $271 tax benefit in the three and nine months ended September 30, 2016 and net of $97 and $300 tax benefit in the three and nine months ended September 30, 2015, respectively.
166

 
216

 
468

 
641

Total other comprehensive income (loss)
$
435

 
$
(1,672
)
 
$
(1,690
)
 
$
(2,769
)
Comprehensive income (loss)
$
(7
)
 
$
1,469

 
$
3,786

 
$
1,124


See notes to Unaudited Condensed Consolidated Financial Statements.


4


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

 
 
Net income
$
5,476

 
$
3,893

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

 
 
Depreciation, depletion and amortization
13,923

 
17,337

Amortization of deferred financing fees
448

 
946

Deferred income taxes
18,201

 
(4,636
)
Centennial asset impairment charge
17,443

 

Other
(1,651
)
 
(533
)
Working capital changes:
 

 
 
Accounts receivable
9,160

 
59,757

Inventories
(39,065
)
 
(43,832
)
Other current assets
930

 
2,056

Accounts payable
55,187

 
29,056

Income taxes receivable/payable
(20,911
)
 
(8,506
)
Other current liabilities
(12,983
)
 
4,276

Net cash provided by operating activities
46,158

 
59,814

 
 

 
 
Investing activities
 

 
 
Expenditures for property, plant and equipment
(11,689
)
 
(7,484
)
Proceeds from the sale of property, plant, and equipment
4,347

 
1,843

Other
(2,587
)
 
(683
)
Net cash used for investing activities
(9,929
)
 
(6,324
)
 
 

 
 
Financing activities
 

 
 
Additions to long-term debt

 
2,547

Reductions of long-term debt
(29,560
)
 
(2,300
)
Net reductions to revolving credit agreements
(3,115
)
 
(74,143
)
Cash dividends paid
(5,450
)
 
(5,502
)
Purchase of treasury shares
(6,044
)
 
(23,248
)
Other
(189
)
 
(78
)
Net cash used for financing activities
(44,358
)
 
(102,724
)
 
 

 
 
Effect of exchange rate changes on cash
(104
)
 
(54
)
 
 
 
 
Cash and cash equivalents
 

 
 
Decrease for the period
(8,233
)
 
(49,288
)
Balance at the beginning of the period
52,499

 
61,135

Balance at the end of the period
$
44,266

 
$
11,847


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
40


856


 

 

 

 

 
896

Purchase of treasury shares
(426
)

(856
)
(21,966
)
 

 

 

 

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

(1
)
 
 
 
 
 
 
 
 
 
 
 

Net income



3,893

 

 

 

 

 
3,893

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



(5,502
)
 

 

 

 

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




 
(2,352
)
 
(205
)
 
(1,216
)
 

 
(3,773
)
Reclassification adjustment to net income




 

 

 
363

 
641

 
1,004

Balance, September 30, 2015
$
5,277

$
1,572

$

$
200,853

 
$
(5,051
)
 
$
1,258

 
$
(797
)
 
$
(18,368
)
 
$
184,744

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
$
5,265

$
1,572

$

$
217,745

 
$
(5,455
)
 
$
1,480

 
$
(112
)
 
$
(19,357
)
 
$
201,138

Stock-based compensation
48


2,830


 

 

 

 

 
2,878

Purchase of treasury shares
(109
)

(2,830
)
(3,105
)
 

 

 

 

 
(6,044
)
Conversion of Class B to Class A shares
1

(1
)
 
 
 
 
 
 
 
 
 
 
 

Net income



5,476

 

 

 

 

 
5,476

Cash dividends on Class A and Class B common stock: $0.7975 per share



(5,450
)
 

 

 

 

 
(5,450
)
Current period other comprehensive income (loss)




 
(1,335
)
 
298

 
(1,541
)
 

 
(2,578
)
Reclassification adjustment to net income




 

 

 
420

 
468

 
888

Balance, September 30, 2016
$
5,205

$
1,571

$

$
214,666

 
$
(6,790
)
 
$
1,778

 
$
(1,233
)
 
$
(18,889
)
 
$
196,308


See notes to Unaudited Condensed Consolidated Financial Statements.

6


NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2016 and the results of its operations, comprehensive income (loss), cash flows and changes in equity for the nine months ended September 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 nine months ended September 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:

 
SEPTEMBER 30
2016
 
DECEMBER 31
2015
 
SEPTEMBER 30
2015
Coal - NACoal
$
12,951

 
$
16,652

 
$
20,565

Mining supplies - NACoal
16,824

 
21,755

 
21,083

Total inventories at weighted average cost
29,775

 
38,407

 
41,648

Sourced inventories - HBB
133,396

 
97,511

 
151,663

Retail inventories - KC
38,138

 
29,098

 
40,903

Total inventories at FIFO
171,534

 
126,609

 
192,566

 
$
201,309

 
$
165,016

 
$
234,214



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 September 30, 2016 and September 30, 2015, the Company repurchased 38,766 and 134,186 shares of Class A Common Stock for an aggregate purchase price of $2.2 million and $7.2 million at a weighted average purchase price of $57.20 and $53.95 per share, respectively. During the nine months ended September 30, 2016 and September 30, 2015, the Company repurchased 109,261 and 426,909 shares of Class A Common Stock for an aggregate purchase price of $6.0 million and $23.2 million at a weighted average purchase price of $55.32 and $54.46 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
 
NINE MONTHS ENDED
 
 
 
September 30
 
September 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
 
$
187

 
$
(240
)
 
$
(179
)
 
$
(560
)
Cost of sales
Interest rate contracts
 
274

 
370

 
853

 
1,101

Interest expense
 
 
461

 
130

 
674

 
541

Total before income tax benefit
 
 
(149
)
 
(41
)
 
(254
)
 
(178
)
Income tax benefit
 
 
$
312

 
$
89

 
$
420

 
$
363

Net of tax
 
 
 
 
 
 
 
 
 
 
Pension and postretirement plan
 
 
 
 
 
 
 
 
 
Actuarial loss
 
$
265

 
$
326

 
$
774

 
$
983

(a) 
Prior-service credit
 
(11
)
 
(13
)
 
(35
)
 
(42
)
(a) 
 
 
254

 
313

 
739

 
941

Total before income tax benefit
 
 
(88
)
 
(97
)
 
(271
)
 
(300
)
Income tax benefit
 
 
$
166

 
$
216

 
$
468

 
$
641

Net of tax
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
478

 
$
305

 
$
888

 
$
1,004

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)
 
 
September 30, 2016
 
 
 
 
 
 
Assets:
 

 
 
 
 
 
 
Available for sale securities
 
$
7,705

 
$
7,705

 
$

 
$

Foreign currency exchange contracts
 
15

 
15

 

 

 
 
$
7,720

 
$
7,720

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
1,814

 
$

 
$
1,814

 
$

 
 
$
1,814

 
$

 
$
1,814

 
$

 
 
 
 
 
 
 
 
 
 
 
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

 
$

 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Available for sale securities
 
$
6,905

 
$
6,905

 
$

 
$

Foreign currency exchange contracts
 
364

 

 
364

 

 
 
$
7,269

 
$
6,905

 
$
364

 
$

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
1,804

 
$

 
$
1,804

 
$

 
 
$
1,804

 
$

 
$
1,804

 
$


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 for 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.

There were no transfers into or out of Levels 1, 2 or 3 during the three and nine months ended September 30, 2016 and 2015.


10


Nonrecurring Fair Value Measurements: Centennial Natural Resources ("Centennial") ceased coal production in the fourth quarter of 2015 and the Company began actively marketing Centennial's mine machinery and equipment. The Company classified these assets as held for sale during the fourth quarter of 2015 when management approved and committed to a formal plan of sale. The coal land and real estate did not meet the held-for-sale criteria and remained within property, plant and equipment as a long-lived asset.

As a result of various unfavorable conditions, including but not limited to weakness in the U.S. and global coal markets and certain asset-specific factors, the Company determined the carrying value of Centennial's coal land and real estate were not recoverable. The Company also conducted a review of the carrying value of Centennial's mine machinery and equipment classified as assets held for sale. The fair values of these assets were calculated using a combination of a market and income approach and reduced the carrying value of coal land and real estate to zero and assets held for sale to approximately $5.0 million. The Company recognized an aggregate impairment charge of $17.4 million during the third quarter of 2016. The asset impairment charge was recorded as "Centennial asset impairment charge" in the Unaudited Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2016 and relates exclusively to the NACoal segment.

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 September 30, 2016, December 31, 2015 and September 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 $128.3 million, $159.8 million and $163.5 million, respectively.

NOTE 6—Unconsolidated Subsidiaries

NACoal has two consolidated mining operations: Mississippi Lignite Mining Company (“MLMC”) and 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

11


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.

Coteau, Falkirk, Sabine, Liberty and Coyote Creek 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 $34.0 million, $24.6 million and $25.9 million at September 30, 2016, December 31, 2015 and September 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 $5.3 million, $4.0 million and $3.9 million at September 30, 2016, December 31, 2015, and September 30, 2015, respectively, and a $2.5 million loan receivable from Navajo Transitional Energy Company, LLC, which is Bisti's customer, at September 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
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2016
 
2015
 
2016
 
2015
Revenues
$
178,009

 
$
154,545

 
$
483,360

 
$
457,719

Gross profit
$
21,367

 
$
18,112

 
$
59,788

 
$
55,057

Income before income taxes
$
14,755

 
$
12,571

 
$
41,122

 
$
38,221

Net income
$
10,898

 
$
9,777

 
$
30,625

 
$
29,495



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.


12


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 September 30, 2016, December 31, 2015 and September 30, 2015, HBB had accrued undiscounted obligations of $9.0 million, $9.1 million and $8.5 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 $5.3 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
5,785

Settlements made
(7,038
)
Balance at September 30
$
4,854



NOTE 9—Income Taxes

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

In the nine months ended September 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 nine months ended September 30, 2016.

13



NOTE 10—Retirement Benefit Plans

The Company maintains various defined benefit pension plans that provide benefits based on years of service and average compensation during certain periods. The Company's policy is to make contributions to fund these plans within the range allowed by applicable regulations. Plan assets consist primarily of publicly traded stocks and government and corporate bonds. Pension benefits were frozen for all employees 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
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2016
 
2015
 
2016
 
2015
U.S. Pension and Postretirement Health Care
 
 
 
 
 
 
 
Service cost
$
17

 
$
17

 
$
52

 
$
52

Interest cost
668

 
675

 
2,076

 
2,065

Expected return on plan assets
(1,197
)
 
(1,205
)
 
(3,662
)
 
(3,687
)
Amortization of actuarial loss
261

 
274

 
790

 
859

Amortization of prior service credit
(11
)
 
(13
)
 
(35
)
 
(42
)
Total
$
(262
)
 
$
(252
)
 
$
(779
)
 
$
(753
)
Non-U.S. Pension
 
 
 
 
 
 
 
Interest cost
$
37

 
$
37

 
$
109

 
$
116

Expected return on plan assets
(64
)
 
(67
)
 
(188
)
 
(208
)
Amortization of actuarial loss
7

 
11

 
20

 
34

Total
$
(20
)
 
$
(19
)
 
$
(59
)
 
$
(58
)



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
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
NACoal
$
32,402

 
$
42,704

 
$
85,778

 
$
121,965

HBB
157,264

 
163,291

 
400,058

 
416,082

KC
32,895

 
34,708

 
89,912

 
94,457

Eliminations
(1,769
)
 
(1,596
)
 
(3,528
)
 
(3,163
)
Total
$
220,792

 
$
239,107

 
$
572,220

 
$
629,341

 
 
 
 
 
 
 
 
Operating profit (loss)
 

 
 

 
 
 
 
NACoal (1)
$
(10,912
)
 
$
(4,010
)
 
$
3,653

 
$
3,579

HBB
14,399

 
11,643

 
19,162

 
16,711

KC
(921
)
 
(843
)
 
(6,822
)
 
(6,860
)
NACCO and Other 
(1,867
)
 
(1,142
)
 
(4,605
)
 
(3,267
)
Eliminations

 
112

 
(67
)
 
126

Total
$
699

 
$
5,760

 
$
11,321

 
$
10,289

 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
NACoal (1)
$
(12,677
)
 
$
(5,345
)
 
$
(1,100
)
 
$
3,401

HBB
9,511

 
6,378

 
12,184

 
8,614

KC
(717
)
 
(550
)
 
(4,539
)
 
(4,290
)
NACCO and Other
(1,526
)
 
(774
)
 
(3,711
)
 
(2,710
)
Eliminations
4,967

 
3,432

 
2,642

 
(1,122
)
Total
$
(442
)
 
$
3,141

 
$
5,476

 
$
3,893


(1) During the third quarter of 2016, the Company recognized an impairment charge of $17.4 million. The asset impairment charge was recorded as "Centennial asset impairment charge" in the Unaudited Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2016 and relates exclusively to the NACoal segment. See Note 5 for further discussion of the asset impairment charge.





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 Creek 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 2.0 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 to 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 the timing of the Kemper County Energy Facility reaching full generation capacity.

Bisti anticipates that it will replace an existing contract miner at an existing mine on approximately January 1, 2017, after which it will make annual coal deliveries of between 5.0 million to 6.0 million tons when the customer's power plant is operating at expected levels.


FINANCIAL REVIEW

Tons of coal sold by NACoal's operating mines were as follows for the three and nine months ended September 30:
 
THREE MONTHS
 
NINE MONTHS
 
2016
 
2015
 
2016
 
2015
 
(In millions)
Coteau
3.3

 
3.3

 
10.3

 
10.5

Falkirk
2.1

 
2.1

 
5.3

 
6.0

Sabine
1.1

 
1.1

 
3.3

 
3.1

Camino Real
0.4

 

 
1.3

 

Other
0.9

 
0.1

 
1.3

 
0.3

Unconsolidated mines
7.8

 
6.6

 
21.5

 
19.9

MLMC
1.0

 
1.0

 
2.3

 
2.6

     Centennial

 
0.1

 

 
0.4

Consolidated mines
1.0

 
1.1

 
2.3

 
3.0

Total tons sold
8.8

 
7.7

 
23.8

 
22.9


The limerock dragline mining operations sold 6.4 million and 20.3 million cubic yards of limerock in the three and nine months ended September 30, 2016, respectively. This compares with 5.2 million and 14.8 million cubic yards of limerock in the three and nine months ended September 30, 2015, respectively.


17


The results of operations for NACoal were as follows for the three and nine months ended September 30:
 
THREE MONTHS
 
NINE MONTHS
 
2016
 
2015
 
2016
 
2015
Revenue - consolidated mines
$
30,628

 
$
40,284

 
$
79,780

 
$
115,508

Royalty and other
1,774

 
2,420

 
5,998

 
6,457

Total revenues
32,402

 
42,704

 
85,778

 
121,965

Cost of sales - consolidated mines
29,873

 
49,018

 
73,845

 
128,492

Cost of sales - royalty and other
821

 
636

 
1,908

 
1,575

Total cost of sales
30,694

 
49,654

 
75,753

 
130,067

Gross profit (loss)
1,708

 
(6,950
)
 
10,025

 
(8,102
)
Earnings of unconsolidated mines (a)
15,102

 
12,234

 
40,785

 
36,863

Selling, general and administrative expenses
9,461

 
8,501

 
27,778

 
23,045

Centennial asset impairment charge
17,443

 

 
17,443

 

Amortization of intangible assets
818

 
793

 
1,936

 
2,137

Operating profit (loss)
(10,912
)
 
(4,010
)
 
3,653

 
3,579

Interest expense
1,036

 
1,080

 
3,182

 
3,900

Other (income) expense, including income from other unconsolidated affiliates
(252
)
 
(181
)
 
1,522

 
(1,884
)
Income (loss) before income tax provision (benefit)
(11,696
)
 
(4,909
)
 
(1,051
)
 
1,563

Income tax provision (benefit)
981

 
436

 
49

 
(1,838
)
Net income (loss)
$
(12,677
)
 
$
(5,345
)
 
$
(1,100
)
 
$
3,401

 


 


 


 


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

 
n/m

 
n/m

 
n/m


(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
(b) The NACoal effective income tax rate is affected by the benefit of percentage depletion.
(c) The effective income tax rate is not meaningful as the income tax provision (benefit) amounts are not directly correlated to the pre-tax income.


Third Quarter of 2016 Compared with Third Quarter of 2015

The following table identifies the components of change in revenues for the third quarter of 2016 compared with the third quarter of 2015:
 
Revenues
2015
$
42,704

Decrease from:
 
Centennial mining operations
(8,832
)
Royalty and other income
(1,305
)
Other consolidated mining operations
(165
)
2016
$
32,402


Revenues decreased in the third quarter of 2016 compared with the third quarter of 2015 primarily due to the cessation of coal production at Centennial during the fourth quarter of 2015 and a decrease in royalty and other income. Increased revenues at the limerock mining operations from an increase in limerock yards delivered was more than offset by a reduction in revenue at MLMC due to a lower index-based coal sales price in the third quarter of 2016 compared with 2015 as a result of a decline in diesel prices.


18


The following table identifies the components of change in operating loss for the third quarter of 2016 compared with the third quarter of 2015:
 
Operating Loss
2015
$
(4,010
)
Increase (decrease) from:
 
Centennial asset impairment charge
(17,443
)
Other consolidated mining operations
(3,199
)
Royalty and other income
(1,701
)
Other selling, general and administrative expenses
(487
)
Net gain/loss on sale of assets, primarily Centennial
(472
)
Centennial asset retirement obligation charge in 2015
7,526

Centennial mining operations
6,006

Earnings of unconsolidated mines
2,868

2016
$
(10,912
)
NACoal reported an operating loss of $10.9 million in the third quarter of 2016 primarily due to the recognition of an asset impairment charge at Centennial. See Note 5 for further discussion of this charge. A decrease in other consolidated mining operations and a reduction in royalty and other income also contributed to the change in operating loss. These items were partially offset by the absence of a charge related to an increase in Centennial's asset retirement obligation, an improvement in Centennial's operating results in the third quarter of 2016 when compared with 2015, 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.
At the other consolidated mining operations, operating results at MLMC during the third quarter of 2016 were lower compared with 2015 due to the decrease in revenue in the third quarter of 2016 and an increase in cost of sales, which includes both production costs and changes in inventory. While production costs were comparable between periods, MLMC sold more tons than it produced during the third quarter of 2016, resulting in the recognition of a portion of production costs previously capitalized into inventory. The decline at MLMC was partially offset by an increase in limerock yards delivered at the limerock mining operations during the third quarter of 2016 compared with 2015.

NACoal recognized a net loss of $12.7 million in the third quarter of 2016 compared with a net loss of $5.3 million in the third quarter of 2015 primarily due to the factors affecting operating loss.

First Nine Months of 2016 Compared with First Nine Months of 2015

The following table identifies the components of change in revenues for the first nine months of 2016 compared with the first nine months of 2015:
 
Revenues
2015
$
121,965

Decrease from:
 
Centennial mining operations
(29,530
)
Other consolidated mining operations
(5,201
)
Royalty and other income
(1,456
)
2016
$
85,778


Revenues decreased in the first nine months of 2016 compared with the first nine 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 nine months of 2016 and a reduction in the price per ton sold due to a lower index-based coal sales price as a result of a decline in diesel prices during 2015 and 2016. The decline was partially offset by an increase in revenues at the limerock mining operations from an increase in limerock yards delivered.


19


The following table identifies the components of change in operating profit for the first nine months of 2016 compared with the first nine months of 2015:
 
Operating Profit
2015
$
3,579

Increase (decrease) from:
 
Centennial mining operations
14,794

Centennial asset retirement obligation charge
7,526

Earnings of unconsolidated mines
3,922

Centennial asset impairment charge
(17,443
)
Other selling, general and administrative expenses
(2,554
)
Net gain/loss on sale of assets, primarily Centennial
(2,179
)
Royalty and other income
(2,006
)
Other consolidated mining operations
(1,986
)
2016
$
3,653

NACoal reported operating profit of $3.7 million in the first nine months of 2016 compared with operating profit of $3.6 million in the first nine months of 2015. Operating profit was favorably impacted by 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, and the absence of a charge related to an increase in Centennial's asset retirement obligation. An increase in earnings of unconsolidated mines as newer mines began or increased production also contributed to the increase in operating profit.
These items were largely offset by an asset impairment charge at Centennial and an increase in Other selling, general and administrative expenses, primarily due to higher employee-related costs, as well as reductions in royalty and other income and other consolidated mining operations. See Note 5 for further discussion of the asset impairment charge. At the other consolidated mining operations, operating results at MLMC were lower during the first nine months of 2016 compared with 2015 primarily due to a reduction in tons sold as a result of an increase in outage days at the customer's power plant. The decline at MLMC was partially offset by an increase in limerock yards delivered at the limerock mining operations during the first nine months of 2016 compared with 2015.
NACoal recognized a net loss of $1.1 million in the first nine months of 2016 compared with net income of $3.4 million in the first nine months of 2015. The change in results was due to a decrease in other income, as dividend income of $0.9 million in the first nine months of 2015 did not recur in the first nine months of 2016, as well as changes in income tax. NACoal recorded an income tax provision of less than $0.1 million on a loss before income taxes of $1.1 million in the first nine months of 2016. The income tax provision for the first nine months of 2016 includes the reversal of a $2.3 million uncertain tax position. 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 nine 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 $1.8 million on income before tax of $1.6 million in the first nine months of 2015. The income tax benefit recognized in the first nine 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 nine months ended September 30:
 
2016
 
2015
 
Change
Operating activities:
 
 
 
 
 
Net income (loss)
$
(1,100
)
 
$
3,401

 
$
(4,501
)
Depreciation, depletion and amortization
9,594

 
12,893

 
(3,299
)
Centennial asset impairment charge
17,443

 

 
17,443

Other
19,891

 
(3,547
)
 
23,438

Working capital changes
(29,339
)
 
72,916

 
(102,255
)
Net cash provided by operating activities
16,489

 
85,663

 
(69,174
)
 
 
 
 
 
 
Investing activities:
 
 
 
 
 
Expenditures for property, plant and equipment
(7,280
)
 
(3,128
)
 
(4,152
)
Other
1,634

 
1,049

 
585

Net cash used for investing activities
(5,646
)
 
(2,079
)
 
(3,567
)
 
 
 
 
 
 
Cash flow before financing activities
$
10,843

 
$
83,584

 
$
(72,741
)

The change in net cash provided by operating activities was primarily the result of working capital changes, partially offset by a change in other operating activities during the first nine months of 2016 compared with the first nine 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 nine months of 2015. A significant decrease in accrued payroll as a result of payments made during the first nine months of 2016 as well as the change in net intercompany accounts receivable/payable also contributed to the change in working capital in the first nine months of 2016. The change in net intercompany accounts receivable/payable was due to the timing of intercompany tax payments to NACCO.  The change in other was mainly attributable to the change in deferred income taxes.

The increase in net cash used for investing activities was primarily attributable to increased expenditures for property, plant and equipment. In the first nine months of 2016, capital expenditures were mainly for the purchase of machinery and equipment at MLMC.
 
2016
 
2015
 
Change
Financing activities:
 
 
 
 
 
Net additions (reductions) to long-term debt and revolving credit agreements
$
(1,389
)
 
$
(82,300
)
 
$
80,911

Cash dividends paid to NACCO
(4,300
)
 

 
(4,300
)
Other

 
(54
)
 
54

Net cash used for financing activities
$
(5,689
)
 
$
(82,354
)
 
$
76,665


The change in net cash used for financing activities was primarily from repayments made in 2015 on NACoal's revolving line of credit as a result of the payment received from Coyote Creek during the first quarter of 2015.

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 $100.0 million at September 30, 2016. At September 30, 2016, the excess availability under the NACoal Facility was $123.9 million, which reflects a reduction for outstanding letters of credit of $1.1 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 September 30, 2016, 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

21


debt to EBITDA ratios. The commitment fee was 0.35% on the unused commitment at September 30, 2016. The floating rate of interest applicable to the NACoal Facility at September 30, 2016 was 3.39% 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 $100.0 million at September 30, 2016 at an average fixed rate of 1.4%.

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 September 30, 2016, NACoal was in compliance with all financial covenants in the NACoal Facility.

NACoal has a demand note payable to Coteau which bears interest based on the applicable quarterly federal short-term interest rate as announced from time to time by the Internal Revenue Service. At September 30, 2016, the balance of the note was $1.2 million and the interest rate was 0.71%.

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, 2015, 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, 2015. See Note 6 for a discussion of certain guarantees related to Coyote Creek.

Capital Expenditures

Expenditures for property, plant and equipment were $7.3 million during the first nine months of 2016. NACoal estimates that its capital expenditures for the remainder of 2016 will be an additional $7.9 million, primarily for mine machinery, equipment and land. These expenditures are expected to be funded from internally generated funds and bank borrowings.

Capital Structure

NACoal's capital structure is presented below:
 
SEPTEMBER 30
2016
 
DECEMBER 31
2015
 
Change
Cash and cash equivalents
$
17,872

 
$
12,718

 
$
5,154

Other net tangible assets
149,105

 
159,099

 
(9,994
)
Coal supply agreements, net
46,245

 
48,181

 
(1,936
)
Net assets
213,222

 
219,998

 
(6,776
)
Total debt
(110,227
)
 
(111,617
)
 
1,390

Total equity
$
102,995

 
$
108,381

 
$
(5,386
)
Debt to total capitalization
52%
 
51%
 
1%

The decrease in other net tangible assets during the first nine months of 2016 was primarily due to the Centennial asset impairment charge and the change in deferred taxes partially offset by a significant decrease in accrued payroll and a change in intercompany taxes. Accrued payroll decreased as payments were made during the first quarter of 2016.


22


OUTLOOK

NACoal expects an increase in tons sold in the fourth quarter of 2016 compared with the fourth quarter of 2015, as well as an increase in income before income taxes and net income, both including and excluding Centennial. Excluding Centennial, the increase in income is expected to be driven by additional income from the unconsolidated mining operations due to production from Coyote Creek, which began producing in 2016, partially offset by a substantial decline in MLMC results and increased Otter Creek Mine expenses associated with land leases.

At the unconsolidated mining operations, Coyote Creek expects to deliver approximately 2.5 million tons of coal annually when at full production. In July 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 approximately 4.5 million tons of coal annually beginning in 2022, although the timing of future deliveries will be affected by the timing of the Kemper County Energy Facility reaching full generation capacity. NACoal's Bisti commenced its transition into the contract miner role at the Navajo Mine on January 1, 2016. While Bisti is recognizing income during the transition period, it will not receive cash payments until the production period begins on approximately January 1, 2017. Production levels are expected to be approximately 5.0 to 6.0 million tons of coal per year when the customer's power plant is operating at expected levels.

At the consolidated mining operations, MLMC expects a significant decrease in fourth-quarter 2016 operating results compared with fourth-quarter 2015 due to an increase in production costs because the fourth quarter of 2015 included a benefit from the reversal of an accrual related to a leased asset.

During the third quarter of 2016, NACoal entered into a new dragline mining services contract with a new customer in Florida and commenced operations under that contract on October 10, 2016. Fourth-quarter 2016 results at the limerock mining operations are expected to be comparable to the fourth quarter of 2015 as activity at the new limerock mining operation is expected to be offset by reduced requirements at the existing limerock operations.

Centennial expects to incur a moderate loss in the fourth quarter of 2016 as it manages mine reclamation obligations and disposes of certain assets. Centennial will continue to evaluate strategies to maximize 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 the mines is transferred.

Cash flow before financing activities in the fourth quarter and for the full year 2016 is expected to be substantially lower compared with the respective periods in 2015. Capital expenditures are estimated to be $7.9 million for the fourth quarter of 2016 and $15.2 million for the full year.

Overall for the full year 2016, excluding Centennial, NACoal's operating profit is expected to decrease compared with 2015, as substantially improved results at the unconsolidated mines and the limerock mining operations are expected to be more than offset by significantly reduced results at MLMC and higher corporate operating expenses. At Centennial, excluding the $17.4 million asset impairment charge in 2016 and the $7.5 million asset retirement charge in 2015, the current year operating losses at Centennial are expected to be significantly less than in 2015.

In 2017, excluding the effect of the 2016 asset impairment charge, NACoal expects a significant increase in income before income taxes compared with the prior year. Results in 2017 are expected to benefit from higher income from the unconsolidated mining operations as NACoal transitions into the contract miner role at Bisti in early January when the production period begins, and from the realization of a full year of income at Coyote Creek. A lower, more moderate, operating loss at Centennial is also expected to contribute to the improvement in income before income taxes.

The improvement in income before income taxes in 2017 is expected to be partially offset by a moderate continued decrease in MLMC results, primarily in the first half of 2017. Royalty and other income is also expected to decrease in 2017 compared with 2016, as are results from the limerock mining operations as deliveries from the new limerock mining operations are not expected to offset an anticipated decline in customer requirements at the existing limerock mining operations.

Cash flow before financing activities is expected to increase in 2017 compared with 2016. Capital expenditures are expected to be approximately $14 million in 2017.

Over the longer-term, NACoal’s goal continues to be to increase earnings of its unconsolidated mines by approximately 50% from the 2012 level of $45.2 million through the development and maturation of its newer mines and normal escalation of

23


contractual compensation at its existing mines. Income related to NACoal's newer mines, as well as the commencement of production at Bisti, will contribute to this goal in 2017 and beyond. However, generally low U.S. inflation rates, as reflected in typical market indices, such as the Consumer Price Index and the Producer Price Index, will determine the extent to which contractual compensation at the unconsolidated mines will change year by year. Achievement of the goal to increase earnings of the unconsolidated mines by 50% is currently expected to occur in 2018, but timing will depend 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 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. HBB’s products are marketed primarily to retail merchants and wholesale distributors. HBB's business is seasonal, and a majority of its 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 and nine months ended September 30:
 
THREE MONTHS
 
NINE MONTHS
 
2016
 
2015
 
2016
 
2015
Revenues
$
157,264

 
$
163,291

 
$
400,058

 
$
416,082

Operating profit
$
14,399

 
$
11,643

 
$
19,162

 
$
16,711

Interest expense
$
232

 
$
476

 
$
981

 
$
1,397

Other (income) expense
$
441

 
$
926

 
$
237

 
$
1,576

Net income
$
9,511

 
$
6,378

 
$
12,184

 
$
8,614

Effective income tax rate
30.7
%
 
37.7
%
 
32.1
%
 
37.3
%

Third Quarter of 2016 Compared with Third Quarter of 2015

The following table identifies the components of change in revenues for the third quarter of 2016 compared with the third quarter of 2015:
 
Revenues
2015
$
163,291

Increase (decrease) from:
 
Unit volume and product mix
(5,359
)
Foreign currency
(850
)
Other
182

2016
$
157,264


Revenues for the third quarter of 2016 decreased 3.7% compared with the third quarter of 2015 primarily due to a reduction in sales volumes, mainly in the U.S. specialty housewares market and Canadian consumer retail market, and unfavorable foreign currency movements as the Mexican peso weakened against the U.S dollar.

The following table identifies the components of change in operating profit for the third quarter of 2016 compared with the third quarter of 2015:
 
Operating Profit
2015
$
11,643

Increase from:
 
Gross profit
1,407

Selling, general and administrative expenses
1,280

Foreign currency
69

2016
$
14,399


HBB's operating profit increased in the third quarter of 2016 from the third quarter of 2015 due to improved gross profit and reduced selling, general and administrative expenses. The increase in gross profit was mainly attributable to lower product costs and a shift in sales mix to higher-priced and higher-margin products.  Selling, general and administrative expenses decreased due to lower professional and outside service fees.

HBB recognized net income of $9.5 million in the third quarter of 2016 compared with net income of $6.4 million in the third quarter of 2015 primarily due to the factors affecting operating profit.

First Nine Months of 2016 Compared with First Nine Months of 2015

The following table identifies the components of change in revenues for the first nine months of 2016 compared with the first nine months of 2015:
 
Revenues
2015
$
416,082

Increase (decrease) from:
 
Unit volume and product mix
(10,940
)
Foreign currency
(5,236
)
Other
152

2016
$
400,058


Revenues for the first nine months of 2016 decreased 3.9% compared with the first nine months of 2015. Revenues decreased primarily due to a reduction in sales volumes, primarily in the U.S. consumer retail market, in part driven by an unexpected decline in retail demand early in the first quarter as retailers re-balanced their inventory at the end of the holiday-selling season. Unfavorable foreign currency movements also contributed to the decrease in revenues as both the Mexican peso and Canadian dollar weakened against the U.S. dollar.

The following table identifies the components of change in operating profit for the first nine months of 2016 compared with the first nine months of 2015:
 
Operating Profit
2015
$
16,711

Increase (decrease) from:
 
Selling, general and administrative expenses
2,584

Gross profit
804

Foreign currency
(937
)
2016
$
19,162


HBB's operating profit increased in the first nine months of 2016 from the first nine months of 2015 due to lower selling, general and administrative expenses and higher gross profit, partially offset by unfavorable foreign currency movements. Selling, general and administrative expenses decreased as a result of lower professional and outside service fees. The increase in gross profit was mainly attributable to a shift in sales mix to higher-priced, higher-margin products and lower costs, partially offset by reduced sales volumes. 

HBB recognized net income of $12.2 million in the first nine months of 2016 compared with net income of $8.6 million in the first nine months of 2015 primarily due to lower selling, general and administrative expenses and increased gross profit.


24


LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following tables detail the changes in cash flow for the nine months ended September 30:
 
2016
 
2015
 
Change
Operating activities:
 
 
 
 
 
Net income
$
12,184

 
$
8,614

 
$
3,570

Depreciation and amortization
3,033

 
3,088

 
(55
)
Other
403

 
(2,964
)
 
3,367

Working capital changes
28,916

 
(13,569
)
 
42,485

Net cash provided by (used for) operating activities
44,536

 
(4,831
)
 
49,367

 
 
 
 
 
 
Investing activities:
 
 
 
 
 
Expenditures for property, plant and equipment
(3,288
)
 
(3,155
)
 
(133
)
Other
15

 
3

 
12

Net cash used for investing activities
(3,273
)
 
(3,152
)
 
(121
)
 
 
 
 
 
 
Cash flow before financing activities
$
41,263

 
$
(7,983
)
 
$
49,246

 
Net cash provided by (used for) operating activities increased $49.4 million in the first nine months of 2016 compared with the first nine months of 2015 primarily as a result of the change in working capital. The change in working capital was mainly attributable to changes in accounts payable, accounts receivable and inventory in the first nine months of 2016 compared with the first nine months of 2015. Accounts payable had a larger increase during the first nine months of 2016 compared with the first nine months of 2015 primarily due to a change in the timing of payments. Accounts receivable had a larger decrease during the first nine months of 2016 compared with the first nine months of 2015 attributable to lower sales and strong cash collections. Inventory increased less in the first nine months of 2016 compared with the first nine months of 2015, resulting in a source of cash, due to HBB's inventory management initiative.
 
2016
 
2015
 
Change
Financing activities:
 
 
 
 
 
Net (reductions) additions to revolving credit agreement and other
$
(36,722
)
 
$
7,079

 
$
(43,801
)
Net cash provided by (used for) financing activities
$
(36,722
)
 
$
7,079

 
$
(43,801
)

The change in net cash provided by (used for) financing activities was mainly the result of a decrease in borrowings as HBB required less cash to fund working capital during the first nine months of 2016 compared with the first nine months of 2015.

Financing Activities

HBB has a $115.0 million senior secured floating-rate revolving credit facility (the “HBB Facility”) that expires June 30, 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 $278.6 million as of September 30, 2016. At September 30, 2016, the borrowing base under the HBB Facility was $110.6 million and borrowings outstanding under the HBB Facility were $21.4 million. At September 30, 2016, the excess availability under the HBB Facility was $89.2 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 September 30, 2016, for base rate loans and LIBOR loans denominated in U.S. dollars were 0.00% and 1.50%, respectively. The applicable margins, effective September 30, 2016, for base rate loans and bankers' acceptance loans denominated in Canadian dollars were 0.00% and 1.50%, respectively. The HBB Facility also requires 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

25


applicable to the HBB Facility at September 30, 2016 was 2.85% including the floating rate margin and the effect of interest rate swap agreements discussed below.

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 September 30, 2016 at an average fixed rate of 1.4%. HBB also has delayed start interest rate swaps with notional values totaling $25.0 million at September 30, 2016, at an average fixed rate of 1.6%.

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 September 30, 2016, 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 nine months ended September 30, 2016, 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, 2015, other than the extension of the HBB facility from July 2019 to June 2021.

Capital Expenditures

Expenditures for property, plant and equipment were $3.3 million for the first nine months of 2016 and are estimated to be an additional $2.8 million for the remainder of 2016. These planned capital expenditures are primarily for tooling for new products and improvements to HBB's information technology infrastructure. 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 September 30, 2016 compared with both September 30, 2015 and December 31, 2015.

September 30, 2016 Compared with September 30, 2015
 
SEPTEMBER 30
2016
 
SEPTEMBER 30
2015
 
Change
Cash and cash equivalents
$
4,911

 
$
484

 
$
4,427

Other net tangible assets
64,606

 
100,942

 
(36,336
)
Goodwill and intangible assets, net
13,879

 
15,260

 
(1,381
)
Net assets
83,396

 
116,686

 
(33,290
)
Total debt
(21,829
)
 
(60,532
)
 
38,703

Total equity
$
61,567

 
$
56,154

 
$
5,413

Debt to total capitalization
26
%
 
52
%
 
(26
)%

Net assets decreased $33.3 million from September 30, 2015 primarily due to a decrease in other net tangible assets. Other net tangible assets decreased $36.3 million from September 30, 2015 mainly as a result of a decrease in accounts receivable and inventory. The change in accounts receivable was primarily attributable to strong cash collections and lower sales in the first nine months of 2016 compared with the first nine months of 2015. The decrease in inventory was primarily attributable to HBB's inventory management initiative during the first nine months of 2016.

Total debt decreased $38.7 million as HBB required less cash for working capital purposes.

26



September 30, 2016 Compared with December 31, 2015
 
SEPTEMBER 30
2016
 
DECEMBER 31
2015
 
Change
Cash and cash equivalents
$
4,911

 
$
474

 
$
4,437

Other net tangible assets
64,606

 
94,353

 
(29,747
)
Goodwill and intangible assets, net
13,879

 
14,915

 
(1,036
)
Net assets
83,396

 
109,742

 
(26,346
)
Total debt
(21,829
)
 
(58,365
)
 
36,536

Total equity
$
61,567

 
$
51,377

 
$
10,190

Debt to total capitalization
26
%
 
53
%
 
(27
)%

Other net tangible assets decreased $29.7 million from December 31, 2015 primarily due to a significant increase in accounts payable and a decrease in accounts receivable partially offset by an increase in inventory during the first nine months of 2016. These changes were primarily attributable to the seasonality of the business.

Total debt decreased $36.5 million mainly as a result of strong cash collections during the first nine months of 2016.

OUTLOOK

Overall consumer confidence and financial pressures experienced by the middle-market consumer continue to create uncertainty about the overall growth prospects for the U.S. retail market for small appliances, including growth prospects for both in-store and internet sales. As a result, market volumes for the fourth quarter of 2016 in the market in which HBB's core brands participate are projected to be comparable or down slightly compared with the same period in 2015. The Canadian retail market is also expected to be difficult as the Canadian economy continues to struggle. International and commercial markets in which HBB participates are expected to grow moderately in the fourth quarter of 2016, but at a slower pace than in the first part of 2016.

In spite of current market conditions, HBB expects its consolidated sales volumes to increase in the 2016 fourth quarter compared with the fourth quarter of 2015 as a result of increased placements and promotions of higher-priced products in its core small kitchen appliance business for the fourth quarter holiday-selling season, as well as anticipated improvements in its other U.S. consumer product lines. HBB's international and commercial product sales volumes are expected to increase in the fourth quarter of 2016 compared with the same period in 2015 as a result of the continued execution of its strategic initiatives.

HBB continues to focus on strengthening the consumer market position of its various product lines through product innovation, promotions, increased placements and branding programs. The company will continue to introduce new innovative products, as well as upgrades to certain existing products across a wide range of brands, price points and categories in both the retail and commercial marketplaces, and leverage its strong brand portfolio. HBB also expects its growing global commercial business to benefit from broader distribution of several newer products. The company continues to pursue other opportunities to create or add product lines and new brands that can be distributed in high-end or specialty stores and on the Internet, including the introduction of the Hamilton Beach® Professional premium line of counter-top kitchen appliances in the third quarter of 2016.

As a result of anticipated increases in 2016 sales volumes from new product introductions and execution of its strategic initiatives, both domestically and internationally, HBB expects fourth quarter 2016 revenues to increase compared with the fourth quarter of 2015, provided consumer spending is at expected fourth quarter levels. The fourth-quarter revenue increase is expected to offset the nine months ended September 30, 2016 revenue decline compared with the prior year period. As a result, full year 2016 revenues are expected to be comparable to 2015.
 
Overall, HBB expects net income in the fourth quarter of 2016 to increase substantially compared with the fourth quarter of 2015, resulting in a significant increase in full year 2016 net income compared with 2015. The anticipated increase in revenues in the fourth quarter of 2016, resulting from increased distribution and continued implementation and execution of HBB's strategic initiatives, as well as increased sales of higher-margin products and reduced product costs, are expected to be partially offset by higher transportation and warehousing costs from the higher sales volumes and increased selling, general and administrative expenses. 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.


27


The fourth quarter 2016 cash flow before financing activities is expected to be positive but substantially lower than the fourth quarter of 2015. However, full year 2016 cash flow before financing activities is expected to be substantially higher than in 2015. Capital expenditures are estimated to be $2.8 million in the fourth quarter of 2016 and $6.1 million for the full year.

In 2017, the consumer retail market for small kitchen appliances is expected to be comparable to 2016. The international markets in which HBB participates are expected to continue to grow moderately. Overall HBB's sales volumes and revenues are expected to increase in 2017 compared with 2016 due to enhanced distribution and increased higher-margin product placements resulting from the execution of the company's strategic initiatives. Net income in 2017 is expected to be comparable to 2016 as the benefits of the increased revenues are expected to be offset by the costs to implement these initiatives, increased advertising costs, modest increases in distribution costs and higher income tax expense. In 2017, cash flow before financing activities is expected to be substantial but lower than 2016 and capital expenditures are expected to be approximately $8 million.

Longer term, HBB will work to improve return on sales through economies of scale derived from market growth and its five strategic revenue growth initiatives focused on enhancing its placements in the North American consumer business, enhancing internet sales, growing its participation in the "only-the-best" market by investing in new products to be sold under the Jamba®, Wolf Gourmet®, Weston® and Hamilton Beach® Professional brand names, expanding internationally, and growing its global commercial presence through enhanced global product lines for chains and distributors serving the global food service and hospitality markets.

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.

FINANCIAL REVIEW

The results of operations for KC were as follows for the three and nine months ended September 30:
 
THREE MONTHS
 
NINE MONTHS
 
2016
 
2015
 
2016
 
2015
Revenues
$
32,895

 
$
34,708

 
$
89,912

 
$
94,457

Operating loss
$
(921
)
 
$
(843
)
 
$
(6,822
)
 
$
(6,860
)
Interest expense
$
54

 
$
40

 
$
134

 
$
85

Other expense, net
$
16

 
$
21

 
$
51

 
$
68

Net loss
$
(717
)
 
$
(550
)
 
$
(4,539
)
 
$
(4,290
)
Effective income tax rate
27.6
%
 
39.2
%
 
35.2
%
 
38.8
%

Third Quarter of 2016 Compared with Third Quarter of 2015

The following table identifies the components of change in revenues for the third quarter of 2016 compared with the third quarter of 2015:
 
Revenues
2015
$
34,708

Increase (decrease) from:
 
Closed stores
(1,999
)
Comparable stores
(1,073
)
New stores
1,249

Other
10

2016
$
32,895


Revenues for the third quarter of 2016 decreased compared with the third quarter of 2015 primarily due to the loss of sales from closing unprofitable stores since September 30, 2015 and a decline in comparable store sales. The decrease in comparable store sales was mainly attributable to fewer customer visits and a decline in the number of store transactions, partially offset by improvements in the average sales transaction value. These decreases were partially offset by sales at newly opened stores.

28



At September 30, 2016, KC operated a total of 221 stores compared with 224 stores at September 30, 2015 and 229 stores at December 31, 2015.

The following table identifies the components of change in operating loss for the third quarter of 2016 compared with the third quarter of 2015:
 
Operating Loss
2015
$
(843
)
(Increase) decrease from:
 
New stores
(165
)
Closed stores
(59
)
Selling, general and administrative expenses and other
81

Comparable stores
65

2016
$
(921
)

KC's operating loss in the third quarter of 2016 was comparable to the operating loss in the the third quarter of 2015 despite the reduction in revenues, primarily as a result of seasonal losses at newly opened stores partially offset by lower selling, general and administrative expenses.

KC reported a net loss of $0.7 million in the third quarter of 2016 compared with a net loss of $0.6 million in the third quarter of 2015 primarily due to the factors affecting the operating loss as well as a lower effective income tax rate that resulted in a reduced tax benefit on KC's pre-tax loss.


First Nine Months of 2016 Compared with First Nine Months of 2015

The following table identifies the components of change in revenues for the first nine months of 2016 compared with the first nine months of 2015:
 
Revenues
2015
$
94,457

Increase (decrease) from:
 
Closed stores
(5,639
)
Comparable stores
(2,942
)
Other
(40
)
New stores
4,076

2016
$
89,912


Revenues for the first nine months of 2016 decreased compared with the first nine months of 2015 primarily due to the loss of sales from closing unprofitable stores since September 30, 2015 and a decline in comparable store sales. The decrease in comparable store sales resulted from a reduction in store transactions as customer traffic declined in the first nine months of 2016 compared with the first nine months of 2015. These decreases were partially offset by sales at newly opened stores.

The following table identifies the components of change in operating loss for the first nine months of 2016 compared with the first nine months of 2015:
 
Operating Loss
2015
$
(6,860
)
(Increase) decrease from:
 
Closed stores
545

Selling, general and administrative expenses and other
95

New stores
(322
)
Comparable stores
(280
)
2016
$
(6,822
)

29



KC's operating loss in the first nine months of 2016 was comparable to the first nine months of 2015 despite the reduction in revenues, primarily as the favorable effect of closing unprofitable stores was partially offset by seasonal losses at newly opened stores and a reduction in store transactions at comparable stores.

KC reported a net loss of $4.5 million in first nine months of 2016 compared with a net loss of $4.3 million in the first nine months of 2015, primarily due to the factors affecting the operating loss as well as a lower effective income tax rate that resulted in a reduced tax benefit on KC's pre-tax loss.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following tables detail the changes in cash flow for the nine months ended September 30:
 
2016
 
2015
 
Change
Operating activities:
 
 
 
 
 
Net loss
$
(4,539
)
 
$
(4,290
)
 
$
(249
)
Depreciation and amortization
1,020

 
1,146

 
(126
)
Other
953

 
415

 
538

Working capital changes
(7,462
)
 
(2,495
)
 
(4,967
)
Net cash used for operating activities
(10,028
)
 
(5,224
)
 
(4,804
)
 
 
 
 
 
 
Investing activities:
 
 
 
 
 
Expenditures for property, plant and equipment
(1,104
)
 
(1,173
)
 
69

Other
51

 
37

 
14

Net cash used for investing activities
(1,053
)
 
(1,136
)
 
83

 
 
 
 
 
 
Cash flow before financing activities
$
(11,081
)
 
$
(6,360
)
 
$
(4,721
)

The $4.8 million increase in net cash used for operating activities was primarily the result of the change in working capital in the first nine months of 2016 compared with the first nine months of 2015. The change in working capital was primarily the result of a change in net intercompany accounts receivable/payable and a larger increase in inventory partially offset by a larger increase in accounts payable in the first nine months of 2016 compared with the first nine months of 2015. The change in net intercompany accounts receivable/payable was due to the timing of intercompany tax payments to NACCO.  The larger increase in inventory during the first nine months of 2016 was primarily attributable to lower inventory per store at December 31, 2015, partially offset by a larger increase in accounts payable in the first nine months of 2016 due to the timing of inventory purchases.

 
2016
 
2015
 
Change
Financing activities:
 
 
 
 
 
Net additions to revolving credit agreement
$
5,250

 
$
1,325

 
$
3,925

Cash dividends paid to NACCO
(10,000
)
 

 
(10,000
)
Other

 
(15
)
 
15

Net cash provided by (used for) financing activities
$
(4,750
)
 
$
1,310

 
$
(6,060
)

The change in net cash provided by (used for) financing activities was the result of cash dividends paid to NACCO in the first nine months of 2016, partially offset by an increase in borrowings as KC required more cash for working capital during the first nine months of 2016 than it did in the first nine months of 2015.

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 collateralized under the KC Facility was $46.4 million as of September 30, 2016. At September 30, 2016, the borrowing base under the KC Facility was $20.7 million and borrowings outstanding under the KC Facility were $5.3 million. At September 30, 2016, the excess availability under the KC Facility was $15.4 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 September 30, 2016. The KC Facility also requires a commitment fee of 0.32% per annum on the unused commitment. The floating rate of interest applicable to the KC Facility at September 30, 2016 was 3% including the floating rate margin.

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-month period, so long as KC has excess availability, as defined in the KC Facility, of at least $7.5 million after giving effect to such payment and maintaining a minimum fixed charge coverage ratio of 1.1 to 1.0, as defined in the KC Facility; (ii) $2.0 million in any twelve-month period, so long as KC has excess availability, as defined in the KC Facility, of at least $7.5 million after giving effect to such payment or (iii) in such amounts as determined by KC, so long as KC has excess availability under the KC Facility of $15.0 million after giving effect to such payment. At September 30, 2016, 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, 2015, 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 61 in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

Capital Expenditures

Expenditures for property, plant and equipment were $1.1 million for the first nine months of 2016 and are estimated to be an additional $0.4 million for the remainder of 2016. 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 September 30, 2016 compared with both September 30, 2015 and December 31, 2015.


30


September 30, 2016 Compared with September 30, 2015
 
SEPTEMBER 30
2016
 
SEPTEMBER 30
2015
 
Change
Cash and cash equivalents
$
483

 
$
484

 
$
(1
)
Other net tangible assets
21,977

 
28,722

 
(6,745
)
Net assets
22,460

 
29,206

 
(6,746
)
Total debt
(5,250
)
 
(1,326
)
 
(3,924
)
Total equity
$
17,210

 
$
27,880

 
$
(10,670
)
Debt to total capitalization
23
%
 
5
%
 
18
%

The $6.7 million decrease in other net tangible assets at September 30, 2016 compared with September 30, 2015 was mainly attributable to an increase in accounts payable due to timing and a reduction in inventory resulting from a decrease in average inventory per store at September 30, 2016.

September 30, 2016 Compared with December 31, 2015
 
SEPTEMBER 30
2016
 
DECEMBER 31
2015
 
Change
Cash and cash equivalents
$
483

 
$
16,314

 
$
(15,831
)
Other net tangible assets
21,977

 
15,436

 
6,541

Net assets
22,460

 
31,750

 
(9,290
)
Total debt
(5,250
)
 

 
(5,250
)
Total equity
$
17,210

 
$
31,750

 
$
(14,540
)
Debt to total capitalization
23
%
 
n/m

 
n/m


Other net tangible assets increased $6.5 million at September 30, 2016 compared with December 31, 2015 primarily as a result of an increase in inventory and a change in intercompany taxes, partially offset by an increase in accounts payable. The increase in inventory and accounts payable was the result of lower inventory levels and purchases at the end of the 2015 holiday-selling season.

OUTLOOK

Changing consumer habits have led to declining consumer traffic to physical retail locations 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 have also adversely affected sales trends in these categories over the last few years, while the recent strengthening of the U.S. dollar has adversely affected sales trends at retail locations near the Mexican and Canadian borders, as well as at stores in areas with high international tourism. All of these factors are expected to continue to limit KC's target consumers' spending on housewares and small appliances in the remainder of 2016 and in 2017. Given this market environment, KC has continued to reduce the number of stores and to focus on a smaller core number of Kitchen Collection® outlet stores.

As a result of ongoing market weakness and fewer stores, KC anticipates revenues to decline modestly in the fourth quarter of 2016 and for the 2016 full year compared with the respective 2015 periods. Fourth quarter and full year 2016 results are expected to be comparable to the prior year periods as a result of a lower effective income tax rate. KC believes its smaller core store portfolio is well positioned to allow it to perform at improved operating levels, take advantage of any future market rebound and optimize its operating performance over time. Cash flow before financing activities is expected to be positive in 2016 but substantially lower than 2015. Capital expenditures are expected to be $0.4 million in the fourth quarter of 2016 and $1.5 million for the 2016 full year.

KC's continued focus on increasing the average sale per transaction, the average closure rate and increasing the number of items per transaction through continued refinement of its format and improved customer interactions to enhance customers' store experience is expected to generate comparable store 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 the expense structure is expected to generate improved operating profit over time. As a result of these initiatives, KC expects near breakeven results in 2017, provided customer visits are at expected levels, on lower revenues.

31


Revenues in 2017 are expected to decrease modestly compared with 2016 as KC continues to prudently close non-performing stores. Cash flow before financing activities is expected to be positive in 2017 but lower than 2016.

NACCO AND OTHER

NACCO and Other includes the parent company operations and Bellaire.

FINANCIAL REVIEW

Operating Results

The results of operations at NACCO and Other were as follows for the nine months ended September 30:
 
THREE MONTHS
 
NINE MONTHS
 
2016
 
2015
 
2016
 
2015
Revenues
$

 
$

 
$

 
$

Operating loss
$
(1,867
)
 
$
(1,142
)
 
$
(4,605
)
 
$
(3,267
)
Other expense
$
158

 
$
123

 
$
742

 
$
796

Net loss
$
(1,526
)
 
$
(774
)
 
$
(3,711
)
 
$
(2,710
)

Third Quarter of 2016 Compared with Third Quarter of 2015 and First Nine Months of 2016 Compared with First Nine Months of 2015

The increase in the operating loss and net loss for both the three and nine months ended September 30, 2016 compared with the 2015 comparable periods was primarily due to higher employee-related expenses partially offset by an increase in management fees charged to the subsidiaries.

Management Fees
The management fees charged to the operating subsidiaries represent an allocation of corporate overhead of the parent company. Management fees are allocated among all subsidiaries based upon the relative size and complexity of each subsidiary. The Company believes the allocation method is consistently applied and reasonable.

Following are the parent company management fees included in each subsidiary's selling, general and administrative expenses for the three and nine months ended September 30:

 
THREE MONTHS
 
NINE MONTHS
 
2016
 
2015
 
2016
 
2015
NACoal
$
1,786

 
$
950

 
$
4,419

 
$
2,457

HBB
$
964

 
$
928

 
$
2,894

 
$
2,905

KC
$
70

 
$
67

 
$
210

 
$
202



Stock Repurchase Program
See Item 2 and Note 4 to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q for a discussion of the Company's stock repurchase program.

LIQUIDITY AND CAPITAL RESOURCES

Although NACCO's subsidiaries have entered into substantial borrowing agreements, NACCO has not guaranteed any borrowings of its subsidiaries. The borrowing agreements at NACoal, HBB and KC allow for the payment to NACCO of dividends and advances under certain circumstances. Dividends (to the extent permitted by its subsidiaries' borrowing agreements) and management fees from its subsidiaries are the primary sources of cash for NACCO.


32


The Company believes funds available from cash on hand, its subsidiaries' credit facilities and anticipated funds generated from operations are sufficient to finance all of the subsidiaries' scheduled principal repayments, and its operating needs and commitments arising during the next twelve months and until the expiration of its subsidiaries' credit facilities.

Contractual Obligations, Contingent Liabilities and Commitments

Since December 31, 2015, there have been no significant changes in the total amount of NACCO and Other contractual obligations, contingent liabilities or commercial commitments, or the timing of cash flows in accordance with those obligations as reported on page 64 in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

Capital Structure

NACCO's consolidated capital structure is presented below:
 
SEPTEMBER 30
2016
 
DECEMBER 31
2015
 
Change
Cash and cash equivalents
$
44,266

 
$
52,499

 
$
(8,233
)
Other net tangible assets
252,240

 
278,786

 
(26,546
)
Goodwill and intangible assets, net
60,124

 
63,096

 
(2,972
)
Net assets
356,630

 
394,381

 
(37,751
)
Total debt
(137,306
)
 
(169,982
)
 
32,676

Bellaire closed mine obligations
(23,016
)
 
(23,261
)
 
245

Total equity
$
196,308

 
$
201,138

 
$
(4,830
)
Debt to total capitalization
41%
 
46%
 
(5)%

EFFECTS OF FOREIGN CURRENCY

HBB operates internationally and enters into transactions denominated in foreign currencies. As a result, the Company is subject to the variability that arises from exchange rate movements. The effects of foreign currency fluctuations on revenues, operating profit and net income at HBB are addressed in the previous discussions of operating results. See also Item 3, "Quantitative and Qualitative Disclosures About Market Risk,” in Part I of this Form 10-Q.

FORWARD-LOOKING STATEMENTS

The statements contained in this Form 10-Q that are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are made subject to certain risks and uncertainties, which could cause actual results to differ materially from those presented. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Such risks and uncertainties with respect to each subsidiary's operations include, without limitation:

NACoal: (1) changes in tax laws or regulatory requirements, including changes in mining or power plant emission regulations and health, safety or environmental legislation, (2) changes in costs related to geological conditions, repairs and maintenance, new equipment and replacement parts, fuel or other similar items, (3) regulatory actions, changes in mining permit requirements or delays in obtaining mining permits that could affect deliveries to customers, (4) weather conditions, extended power plant outages or other events that would change the level of customers' coal or limerock requirements, (5) weather or equipment problems that could affect deliveries to customers, (6) changes in the power industry that would affect demand for NACoal's reserves, (7) changes in the costs to reclaim NACoal mining areas, (8) costs to pursue and develop new mining opportunities, (9) changes to or termination of a long-term mining contract, or a customer default under a contract, (10) the timing and pricing of transactions to dispose of assets at the Centennial operations, (11) delays or reductions in coal deliveries at NACoal's newer mines, and (12) increased competition, including consolidation within the industry.

HBB: (1) changes in the sales prices, product mix or levels of consumer purchases of small electric and specialty housewares appliances, (2) changes in consumer retail and credit markets, (3) bankruptcy of or loss of major retail customers or suppliers, (4) changes in costs, including transportation costs, of sourced products, (5) delays in delivery of sourced products, (6) changes in or unavailability of quality or cost effective suppliers, (7) exchange rate fluctuations, changes in the foreign import tariffs and monetary policies and other changes in the regulatory climate in the foreign countries in which HBB buys, operates and/or

33


sells products, (8) product liability, regulatory actions or other litigation, warranty claims or returns of products, (9) customer acceptance of, changes in costs of, or delays in the development of new products, (10) increased competition, including consolidation within the industry and (11) changes mandated by federal, state and other regulation, including health, safety or environmental legislation.

KC: (1) changes in consumer buying habits, gasoline prices, weather conditions, the level of consumer confidence and disposable income as a result of economic conditions, unemployment rates or other events or conditions that may adversely affect the number of customers visiting Kitchen Collection® stores, (2) changes in the sales prices, product mix or levels of consumer purchases of kitchenware, small electric appliances and gourmet foods, (3) changes in costs, including transportation costs, of inventory, (4) delays in delivery or the unavailability of inventory, (5) customer acceptance of new products, (6) the anticipated impact of the opening of new stores, the ability to renegotiate existing leases and effectively and efficiently close under-performing stores and (7) increased competition.






34


Item 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK
The Company's subsidiaries, NACoal, HBB and KC, have entered into certain financing arrangements that require interest payments based on floating interest rates. As such, the Company's financial results are subject to changes in the market rate of interest. There is an inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. To reduce the exposure to changes in the market rate of interest, NACoal and HBB have entered into interest rate swap agreements for a portion of their floating rate financing arrangements. The Company does not enter into interest rate swap agreements for trading purposes. Terms of the interest rate swap agreements provide for the subsidiaries to receive a variable interest rate and pay a fixed interest rate.

The fair value of the Company's interest rate swap agreements was a net payable of $1.8 million at September 30, 2016. A hypothetical 10% change in interest rates would not cause a material change in the fair value of the interest rate swap agreements at September 30, 2016 and, assuming no changes in the Company's financial structure as it stands, would not have a material effect on annual interest expense.

FOREIGN CURRENCY EXCHANGE RATE RISK
HBB operates internationally and enters into transactions denominated in foreign currencies, principally the Canadian dollar, the Mexican peso and, to a lesser extent, the Chinese yuan and Brazilian real. As such, its financial results are subject to the variability that arises from exchange rate movements. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. The potential impact of currency fluctuation increases as international expansion increases.
HBB uses forward foreign currency exchange contracts to partially reduce risks related to transactions denominated in foreign currencies and not for trading purposes. These contracts generally mature within twelve months and require HBB to buy or sell the functional currency in which the applicable subsidiary operates and buy or sell U.S. dollars at rates agreed to at the inception of the contracts. The fair value of these contracts was a net receivable of less than $0.1 million at September 30, 2016.

For purposes of risk analysis, the Company uses sensitivity analyses to measure the potential loss in fair value of financial instruments sensitive to changes in foreign currency exchange rates. The Company assumes that a loss in fair value is either a decrease to its assets or an increase to its liabilities. Assuming a hypothetical 10% weakening of the U.S. dollar compared with other foreign currencies at September 30, 2016, the fair value of foreign currency-sensitive financial instruments, which primarily represent forward foreign currency exchange contracts, would not cause a material change in the fair value of the contracts at September 30, 2016. It is important to note that the change in fair value indicated in this sensitivity analysis would be somewhat offset by changes in the fair value of the underlying receivables and payables, which would not be material.

COMMODITY PRICE RISK
The Company uses certain commodities, including steel and diesel fuel, in the normal course of its mining processes. As such, the cost of operations is subject to variability as the market for these commodities changes. The Company monitors this risk and utilizes forward purchase contracts to manage a portion of NACoal's exposure related to diesel fuel volatility. There have been no material changes in the Company's commodity price risk during the third quarter of 2016.


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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures: An evaluation was carried out under the supervision and with the participation of the Company's management, including the principal executive officer and the principal financial officer, of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, these officers have concluded that the Company's disclosure controls and procedures are effective.

Changes in internal control over financial reporting: During the third quarter of 2016, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


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PART II
OTHER INFORMATION

Item 1    Legal Proceedings
None.

Item 1A    Risk Factors
No material changes to the risk factors for NACoal, HBB, KC or General from the Company's Annual Report on Form 10-K for the year ended December 31, 2015

Item 2    Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Issuer Purchases of Equity Securities
Period
(a)
Total Number of Shares Purchased
(b)
Average Price Paid per Share
(c)
Total Number of Shares Purchased as Part of the Publicly Announced Program
(d)
Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Program (1)
Month #1
(July 1 to 31, 2016)
29,041
$57.06
29,041
$
44,516,544

Month #2
(August 1 to 31, 2016)
9,725
$57.62
9,725
$
43,956,174

Month #3
(September 1 to 30, 2016)
$
43,956,174

     Total
38,766
$57.20
38,766
$
43,956,174


(1)
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 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.

Item 3    Defaults Upon Senior Securities
None.

Item 4    Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 filed with this Quarterly Report on Form 10-Q for the period ended September 30, 2016.

Item 5    Other Information
None.

Item 6    Exhibits
Incorporated by reference to the Exhibit Index on page 39 of this Quarterly Report on Form 10-Q for the period ended September 30, 2016.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
NACCO Industries, Inc.
(Registrant)
 
 
Date:
November 1, 2016
/s/ Elizabeth I. Loveman
 
 
 
Elizabeth I. Loveman
 
 
 
Vice President and Controller
(principal financial and accounting officer)
 

38



Exhibit Index
Exhibit
 
 
Number*
 
Description of Exhibits
 
 
 
10.1
 
Red Hills Refined Coal Facility; Lignite Sales Agreement/Inventory Letter Agreement dated August 30, 2016**

31(i)(1)
 
Certification of Alfred M. Rankin, Jr. pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act
31(i)(2)
 
Certification of Elizabeth I. Loveman pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act
32
 
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed and dated by Alfred M. Rankin, Jr. and Elizabeth I. Loveman
95
 
Mine Safety Disclosure Exhibit
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
*    Numbered in accordance with Item 601 of Regulation S-K.
**    Filed herewith.



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