UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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

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

YES þ NO o

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

YES þ NO o

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

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

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

YES o NO þ

Number of shares of Class A Common Stock outstanding at July 25, 2014 : 6,046,238
Number of shares of Class B Common Stock outstanding at July 25, 2014 : 1,580,590



NACCO INDUSTRIES, INC.
TABLE OF CONTENTS

 
 
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1
Table of Contents

Part I
FINANCIAL INFORMATION
Item 1. Financial Statements

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

 
 
 
 
Cash and cash equivalents
$
60,907

 
$
95,390

 
$
85,058

Accounts receivable, net
85,001

 
120,789

 
81,271

Accounts receivable from affiliates
36,351

 
32,636

 
29,029

Inventories, net
188,148

 
184,445

 
167,470

Deferred income taxes
12,740

 
14,452

 
13,701

Prepaid expenses and other
23,195

 
13,578

 
16,111

Total current assets
406,342

 
461,290

 
392,640

Property, plant and equipment, net
254,362

 
219,256

 
185,626

Coal supply agreements and other intangibles, net
57,929

 
59,685

 
65,666

Other non-current assets
70,160

 
69,725

 
54,185

Total assets
$
788,793

 
$
809,956

 
$
698,117

LIABILITIES AND EQUITY
 

 
 
 
 
Accounts payable
$
99,319

 
$
133,016

 
$
90,334

Revolving credit agreements of subsidiaries - not guaranteed by the parent company
74,524

 
23,460

 
27,264

Current maturities of long-term debt of subsidiaries - not guaranteed by the parent company
7,877

 
7,859

 
6,969

Accrued payroll
14,837

 
29,030

 
18,378

Other current liabilities
37,868

 
44,754

 
30,510

Total current liabilities
234,425

 
238,119

 
173,455

Long-term debt of subsidiaries - not guaranteed by the parent company
147,257

 
152,431

 
129,687

Mine closing reserves
35,930

 
29,764

 
28,928

Pension and other postretirement obligations
7,355

 
7,648

 
14,573

Long-term deferred income taxes
23,026

 
24,786

 
22,961

Other long-term liabilities
66,013

 
59,428

 
60,487

Total liabilities
514,006

 
512,176

 
430,091

Stockholders' equity
 

 
 
 
 
Common stock:
 

 
 
 
 
Class A, par value $1 per share, 6,046,238 shares outstanding (December 31, 2013 - 6,290,414 shares outstanding; June 30, 2013 - 6,454,764 shares outstanding)
6,046

 
6,290

 
6,455

Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,580,590 shares outstanding (December 31, 2013 - 1,581,106 shares outstanding; June 30, 2013 - 1,581,835 shares outstanding)
1,581

 
1,581

 
1,582

Capital in excess of par value
—

 
941

 
4,185

Retained earnings
279,922

 
301,227

 
275,662

Accumulated other comprehensive loss
(12,762
)
 
(12,259
)
 
(19,858
)
Total stockholders' equity
274,787

 
297,780

 
268,026

Total liabilities and equity
$
788,793

 
$
809,956

 
$
698,117


See notes to Unaudited Condensed Consolidated Financial Statements.

2
Table of Contents

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

 
THREE MONTHS ENDED
 
SIX MONTHS ENDED
 
JUNE 30
 
JUNE 30
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share data)
Revenues
$
200,370

 
$
196,017

 
$
377,783

 
$
392,069

Cost of sales
163,847

 
148,387

 
305,089

 
298,178

Gross profit
36,523

 
47,630

 
72,694

 
93,891

Earnings of unconsolidated mines
11,567

 
10,281

 
24,005

 
22,379

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
50,990

 
48,489

 
99,419

 
98,785

Amortization of intangible assets
991

 
619

 
1,756

 
1,660

 
51,981

 
49,108

 
101,175

 
100,445

Operating profit (loss)
(3,891
)
 
8,803

 
(4,476
)
 
15,825

Other expense (income)
 

 
 
 
 
 
 
Interest expense
1,950

 
1,148

 
3,404

 
2,452

(Income) loss from other unconsolidated affiliates
420

 
(336
)
 
32

 
(727
)
Closed mine obligations
308

 
272

 
624

 
677

Other, net, including interest income
(273
)
 
476

 
(151
)
 
343

 
2,405

 
1,560

 
3,909

 
2,745

Income (loss) before income tax provision (benefit)
(6,296
)
 
7,243

 
(8,385
)
 
13,080

Income tax provision (benefit)
(2,672
)
 
2,096

 
(3,237
)
 
3,511

Net income (loss)
$
(3,624
)
 
$
5,147

 
$
(5,148
)
 
$
9,569

 
 

 
 
 
 
 
 
Basic earnings (loss) per share
$
(0.47
)
 
$
0.63

 
$
(0.66
)
 
$
1.16

Diluted earnings (loss) per share
$
(0.47
)
 
$
0.63

 
$
(0.66
)
 
$
1.16

 
 
 
 
 
 
 
 
Dividends per share
$
0.2575

 
$
0.2500

 
$
0.5075

 
$
0.5000

 
 

 
 
 
 
 
 
Basic weighted average shares outstanding
7,712

 
8,179

 
7,777

 
8,259

Diluted weighted average shares outstanding
7,718

 
8,184

 
7,787

 
8,284


See notes to Unaudited Condensed Consolidated Financial Statements.

3
Table of Contents

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

 
THREE MONTHS ENDED
 
SIX MONTHS ENDED
 
JUNE 30
 
JUNE 30
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net income (loss)
$
(3,624
)
 
$
5,147

 
$
(5,148
)
 
$
9,569

Foreign currency translation adjustment
258

 
(543
)
 
84

 
(64
)
Deferred gain on available for sale securities
174

 
48

 
237

 
292

Current period cash flow hedging activity, net of $583 and $808 tax benefit in the three and six months ended June 30, 2014, respectively, and $356 and $432 tax expense in the three and six months ended June 30, 2013, respectively.
(1,043
)
 
577

 
(1,450
)
 
697

Reclassification of hedging activities into earnings, net of $91 and $187 tax benefit in the three and six months ended June 30, 2014, respectively, and $77 and $170 tax benefit in the three and six months ended June 30, 2013, respectively.
173

 
124

 
353

 
273

Reclassification of pension and postretirement adjustments into earnings, net of $77 and $160 tax benefit in the three and six months ended June 30, 2014, respectively, and $264 and $408 tax benefit in the three and six months ended June 30, 2013, respectively.
115

 
363

 
273

 
805

Total other comprehensive income (loss)
$
(323
)
 
$
569

 
$
(503
)
 
$
2,003

Comprehensive income (loss)
$
(3,947
)
 
$
5,716

 
$
(5,651
)
 
$
11,572


See notes to Unaudited Condensed Consolidated Financial Statements.


4
Table of Contents

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

 
 
Net income (loss)
$
(5,148
)
 
$
9,569

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

 
 
Depreciation, depletion and amortization
12,597

 
10,209

Amortization of deferred financing fees
270

 
295

Deferred income taxes
(248
)
 
(3,333
)
Other
7,569

 
(12,444
)
Working capital changes:
 

 
 
Accounts receivable
31,466

 
40,334

Inventories
(3,723
)
 
2,070

Other current assets
(9,163
)
 
(4,131
)
Accounts payable
(33,695
)
 
(37,738
)
Other current liabilities
(21,337
)
 
(7,389
)
Net cash used for operating activities
(21,412
)
 
(2,558
)
 
 

 
 
Investing activities
 

 
 
Expenditures for property, plant and equipment
(41,180
)
 
(13,816
)
Other
380

 
1,101

Net cash used for investing activities
(40,800
)
 
(12,715
)
 
 

 
 
Financing activities
 

 
 
Additions to long-term debt
1,553

 
1,768

Reductions of long-term debt
(1,710
)
 
(7,264
)
Net additions (reductions) to revolving credit agreements
46,063

 
(8,280
)
Cash dividends paid
(3,957
)
 
(4,134
)
Purchase of treasury shares
(14,247
)
 
(21,608
)
Other
2

 
(10
)
Net cash provided by (used for) financing activities
27,704

 
(39,528
)
 
 

 
 
Effect of exchange rate changes on cash
25

 
4

Cash and cash equivalents
 

 
 
Decrease for the period
(34,483
)
 
(54,797
)
Balance at the beginning of the period
95,390

 
139,855

Balance at the end of the period
$
60,907

 
$
85,058


See notes to Unaudited Condensed Consolidated Financial Statements.

5
Table of Contents

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

$
1,582

$
24,612

$
270,227

 
$
(574
)
 
$
292

 
$
(286
)
 
$
(21,293
)
 
$
281,331

Stock-based compensation
78

—

787

—

 
—

 
—

 
—

 
—

 
865

Purchase of treasury shares
(394
)
—

(21,214
)
—

 
—

 
—

 
—

 
—

 
(21,608
)
Net income (loss)
—

—

—

9,569

 
—

 
—

 
—

 
—

 
9,569

Cash dividends on Class A and Class B common stock: $0.50 per share
—

—

—

(4,134
)
 
—

 
—

 
—

 
—

 
(4,134
)
Current period other comprehensive income (loss)
—

—

—

—

 
(64
)
 
292

 
697

 
—

 
925

Reclassification adjustment to net income (loss)
—

—

—

—

 
—

 
—

 
273

 
805

 
1,078

Balance, June 30, 2013
$
6,455

$
1,582

$
4,185

$
275,662

 
$
(638
)
 
$
584

 
$
684

 
$
(20,488
)
 
$
268,026

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
$
6,290

$
1,581

$
941

$
301,227

 
$
(803
)
 
$
1,021

 
$
676

 
$
(13,153
)
 
$
297,780

Stock-based compensation
22

—

840

—

 
—

 
—

 
—

 
—

 
862

Purchase of treasury shares
(266
)
—

(1,781
)
(12,200
)
 
—

 
—

 
—

 
—

 
(14,247
)
Net income (loss)
—

—

—

(5,148
)
 
—

 
—

 
—

 
—

 
(5,148
)
Cash dividends on Class A and Class B common stock: $0.5075 per share
—

—

—

(3,957
)
 
—

 
—

 
—

 
—

 
(3,957
)
Current period other comprehensive income (loss)
—

—

—

—

 
84

 
237

 
(1,450
)
 
—

 
(1,129
)
Reclassification adjustment to net income (loss)
—

—

—

—

 
—

 
—

 
353

 
273

 
626

Balance, June 30, 2014
$
6,046

$
1,581

$
—

$
279,922

 
$
(719
)
 
$
1,258

 
$
(421
)
 
$
(12,880
)
 
$
274,787


See notes to Unaudited Condensed Consolidated Financial Statements.

6
Table of Contents

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

NOTE 1— Basis of Presentation

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

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

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

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

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

NOTE 2— Recently Issued Accounting Standards

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

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

7

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


NOTE 3— Inventories

Inventories are summarized as follows:

 
JUNE 30
2014
 
DECEMBER 31
2013
 
JUNE 30
2013
Coal - NACoal
$
24,377

 
$
24,710

 
$
22,154

Mining supplies - NACoal
19,659

 
17,406

 
15,994

Total inventories at weighted average cost
44,036

 
42,116

 
38,148

Sourced inventories - HBB
97,545

 
90,713

 
79,778

Retail inventories - KC
46,567

 
51,616

 
49,544

Total inventories at FIFO
144,112

 
142,329

 
129,322

 
$
188,148

 
$
184,445

 
$
167,470



NOTE 4— Stockholders' Equity

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

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

During the three months ended June 30, 2014 , the Company repurchased a total of 175,359 shares of Class A Common Stock for an aggregate purchase price of $9.3 million under the 2013 Stock Repurchase Program at an average purchase price of $52.82 per share. During the six months ended June 30, 2014 , the Company repurchased a total of 266,337 shares of Class A Common Stock for an aggregate purchase price of $14.2 million under the 2013 Stock Repurchase Program at an average purchase price of $53.49 per share.




8

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

 
 
Amount Reclassified from AOCI
 
 
 
THREE MONTHS ENDED
 
SIX MONTHS ENDED
 
 
 
June 30
 
June 30
 
Details about AOCI Components
 
2014
 
2013
 
2014
 
2013
Location of (gain) loss reclassified from AOCI into income (loss)
(Gain) loss on cash flow hedging
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$
(114
)
 
$
(27
)
 
$
(202
)
 
$
(17
)
Cost of sales
Interest rate contracts
 
378

 
228

 
742

 
460

Interest expense
 
 
264

 
201

 
540

 
443

Total before income tax benefit
 
 
(91
)
 
(77
)
 
(187
)
 
(170
)
Income tax benefit
 
 
$
173

 
$
124

 
$
353

 
$
273

Net of tax
 
 
 
 
 
 
 
 
 
 
Pension and postretirement plan
 
 
 
 
 
 
 
 
 
Actuarial loss
 
$
209

 
$
682

 
$
469

 
$
1,313

(a)  
Prior-service credit
 
(17
)
 
(55
)
 
(36
)
 
(100
)
(a)  
 
 
192

 
627

 
433

 
1,213

Total before income tax benefit
 
 
(77
)
 
(264
)
 
(160
)
 
(408
)
Income tax benefit
 
 
$
115

 
$
363

 
$
273

 
$
805

Net of tax
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
288

 
$
487

 
$
626

 
$
1,078

Net of tax

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



9

NOTE 5— Fair Value Disclosure

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

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

 
 
 
 
 
 
Available for sale securities
 
$
6,906

 
$
6,906

 
$
—

 
$
—

Interest rate swap agreements
 
278

 
—

 
278

 
—

 
 
$
7,184

 
$
6,906

 
$
278

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
602

 
$
—

 
$
602

 
$
—

Foreign currency exchange contracts
 
393

 
—

 
393

 
—

Contingent consideration
 
1,597

 
—

 
—

 
1,597

 
 
$
2,592

 
$
—

 
$
995

 
$
1,597

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

 
$
6,540

 
$
—

 
$
—

Interest rate swap agreements
 
937

 
—

 
937

 
—

Foreign currency exchange contracts
 
83

 
—

 
83

 
—

 
 
$
7,560

 
$
6,540

 
$
1,020

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
$
14

 
$
—

 
$
14

 
$
—

Contingent consideration
 
1,581

 
—

 
—

 
1,581

 
 
$
1,595

 
$
—

 
$
14

 
$
1,581

 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Available for sale securities
 
$
5,869

 
$
5,869

 
$
—

 
$
—

Interest rate swap agreements
 
764

 
—

 
764

 
—

Foreign currency exchange contracts
 
326

 
—

 
326

 
—

 
 
$
6,959

 
$
5,869

 
$
1,090

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
1,564

 
$
—

 
$
—

 
$
1,564

 
 
$
1,564

 
$
—

 
$
—

 
$
1,564


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


10

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

The valuation techniques and Level 3 inputs used to estimate the fair value of contingent consideration payable in connection with the Company's 2012 acquisition of Reed Minerals are described below. The following table summarizes changes in Level 3 liabilities measured at fair value on a recurring basis:

 
 
 
Contingent Consideration
Balance at January 1, 2014
 
$
1,581

Accretion expense
 
16

Payments
 
—

Balance at June 30, 2014
 
$
1,597


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

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

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

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

Other Fair Value Measurement Disclosures: The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments. Revolving credit agreements and long-term debt are recorded at carrying value in the Unaudited Condensed Consolidated Balance Sheets. The fair value of revolving credit agreements approximates their carrying value as the stated rates of the debt reflect recent market conditions.  The fair values of revolving credit agreements and long-term debt, excluding capital leases, were determined using current rates offered for similar obligations taking into account subsidiary credit risk, which is Level 2 as defined in the fair value hierarchy. At June 30, 2014 , both the fair value and the book value of the revolving credit agreements and long-term debt, excluding capital leases, was $217.3 million . At December 31, 2013 , both the fair value and the book value of the revolving credit agreements and long-term debt, excluding capital leases, was $170.7 million . At June 30, 2013 , the fair value of the revolving credit agreements and long-term debt, excluding capital leases, was $152.9 million compared with the book value of $152.5 million .



11

NOTE 6— Unconsolidated Subsidiaries

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

The Coteau Properties Company ("Coteau")
The Falkirk Mining Company ("Falkirk")
The Sabine Mining Company ("Sabine")
Demery Resources Company, LLC (“Demery”)
Caddo Creek Resources Company, LLC (“Caddo Creek”)
Coyote Creek Mining Company, LLC (“Coyote Creek”)
Camino Real Fuels, LLC (“Camino Real”)
Liberty Fuels Company, LLC (“Liberty”)
NoDak Energy Services, LLC ("NoDak")
North American Coal Corporation India Private Limited ("NACC India")

Coteau, Falkirk and Sabine were developed between 1974 and 1981 and operate lignite coal mines under long-term contracts with various utility customers. Coteau, Falkirk and Sabine are capitalized primarily with debt financing, which the utility customers have arranged and guaranteed, and are without recourse to NACCO and NACoal. Demery, Caddo Creek, Coyote Creek, Camino Real and Liberty (collectively with Coteau, Falkirk and Sabine, the "Unconsolidated Mines") were formed to develop, construct and operate surface mines under long-term contracts. Demery commenced delivering coal to its customer in 2012 and is expected to reach full production levels in late 2015. Liberty commenced production in 2013 and is expected to increase production levels gradually from approximately 0.5 million tons in 2014 to full production of approximately 4.7 million tons of coal annually in 2019. Caddo Creek, Coyote Creek and Camino Real are still in development and are not expected to be at full production for several years. NoDak was formed to operate and maintain a coal processing facility. NACC India was formed to provide technical advisory services to the third-party owners of a coal mine in India. See Note 13 to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q for a discussion of a subsequent event related to NACC India's contract with its Indian customer.

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

The investments in the Unconsolidated Mines, NoDak and NACC India and related tax positions totaled $30.3 million , $ 33.1 million , and $34.5 million at June 30, 2014 , December 31, 2013 , and June 30, 2013 , respectively, and is included on the line “Other Non-current Assets” in the Unaudited Condensed Consolidated Balance Sheets. The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $4.5 million , $ 5.4 million , and $4.2 million at June 30, 2014 , December 31, 2013 , and June 30, 2013 respectively.

Included in "Accounts receivable from affiliates" is $32.5 million , $27.9 million and $25.9 million as of June 30, 2014 , December 31, 2013 and June 30, 2013 , respectively, due from Coyote Creek, primarily for the purchase of a dragline from NACoal.


12

Summarized financial information for the Unconsolidated Mines, NoDak and NACC India is as follows:
 
THREE MONTHS ENDED
 
SIX MONTHS ENDED
 
JUNE 30
 
JUNE 30
 
2014
 
2013
 
2014
 
2013
Revenues
$
148,075

 
$
141,302

 
$
286,598

 
$
280,938

Gross profit
$
17,126

 
$
17,515

 
$
36,619

 
$
37,012

Income before income taxes
$
10,994

 
$
10,695

 
$
24,162

 
$
23,478

Net income
$
8,530

 
$
8,191

 
$
18,674

 
$
17,992



NOTE 7— Contingencies

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

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

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

At June 30, 2014 , December 31, 2013 , and June 30, 2013 , HBB had accrued an undiscounted obligation of $10.3 million , $6.9 million and $7.1 million , respectively, for environmental investigation and remediation activities. In addition, HBB estimates that it is reasonably possible that it may incur up to $4.2 million of additional expenses related to the environmental investigation and remediation at these sites.

During the three and six months ended June 30, 2014 , HBB recorded a $3.3 million charge to increase the liability for environmental investigation and remediation activities at the Picton, Ontario facility as a result of an environmental study performed in the second quarter of 2014. Partially offsetting the increase in the Picton, Ontario facility environmental reserve in the first six months of 2014 is a $0.8 million reduction in selling, general and administrative expenses in the second quarter and the first six months of 2014 as a result of a third-party's commitment to share in anticipated remediation costs at HBB's Southern Pines and Mt. Airy locations. During the three and six months ended June 30, 2013 , HBB recorded a $2.3 million charge to establish a liability for environmental investigation and remediation activities at the Picton, Ontario facility.

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.


13

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

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

Warranties issued
3,541

Settlements made
(4,567
)
Balance at June 30
$
4,317



NOTE 9— Income Taxes

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

The effective income tax rates for the three and six months ended June 30, 2014 were 42.4% and 38.6% , respectively. These rates were impacted by favorable net discrete tax items totaling $1.4 million in the three and six months ended June 30, 2014 primarily resulting from the conclusion of the 2011 and 2012 U.S. federal tax return examinations. The effective income tax rates for the three and six months ended June 30, 2013 were 28.9% and 26.8% , respectively. Discrete tax items impacting the three and six months ended June 30, 2013 were not significant.


NOTE 10— Retirement Benefit Plans

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

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

14


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

 
THREE MONTHS ENDED
 
SIX MONTHS ENDED
 
JUNE 30
 
JUNE 30
 
2014
 
2013
 
2014
 
2013
U.S. Pension and Postretirement Health Care
 
 
 
 
 
 
 
Service cost
$
17

 
$
18

 
$
35

 
$
38

Interest cost
695

 
686

 
1,489

 
1,466

Expected return on plan assets
(1,141
)
 
(1,087
)
 
(2,408
)
 
(2,303
)
Amortization of actuarial loss
190

 
651

 
434

 
1,252

Amortization of prior service credit
(17
)
 
(55
)
 
(36
)
 
(100
)
Total
$
(256
)
 
$
213

 
$
(486
)
 
$
353

Non-U.S. Pension
 
 
 
 
 
 
 
Service cost
$
—

 
$
—

 
$
—

 
$
—

Interest cost
50

 
51

 
99

 
101

Expected return on plan assets
(75
)
 
(71
)
 
(149
)
 
(143
)
Amortization of actuarial loss
19

 
31

 
35

 
61

Total
$
(6
)
 
$
11

 
$
(15
)
 
$
19



NOTE 11— Business Segments

NACCO is a holding company with the following principal subsidiaries: NACoal, HBB and KC. See Note 1 for a discussion of the Company's industries and product lines. NACCO's non-operating segment, NACCO and Other, includes the accounts of the parent company and Bellaire Corporation ("Bellaire"), a non-operating subsidiary of the Company.
 
Financial information for each of NACCO's reportable segments is presented in the following table. The line “Eliminations” in the Revenues section eliminates revenues from HBB sales to KC. The amounts of these revenues are based on current market prices of similar third-party transactions. No other sales transactions occur among reportable segments.
 
THREE MONTHS ENDED
 
SIX MONTHS ENDED
 
JUNE 30
 
JUNE 30
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
NACoal
$
49,780

 
$
43,567

 
$
89,652

 
$
94,714

HBB
118,385

 
114,651

 
219,710

 
220,802

KC
32,804

 
38,380

 
69,680

 
78,091

Eliminations
(599
)
 
(581
)
 
(1,259
)
 
(1,538
)
Total
$
200,370

 
$
196,017

 
$
377,783

 
$
392,069

 
 
 
 
 
 
 
 
Operating profit (loss)
 

 
 

 
 
 
 
NACoal
$
183

 
$
11,196

 
$
6,836

 
$
22,981

HBB
2,251

 
4,005

 
3,188

 
6,673

KC
(4,255
)
 
(5,407
)
 
(10,769
)
 
(10,387
)
NACCO and Other  (a)
(2,004
)
 
(1,099
)
 
(3,356
)
 
(3,535
)
Eliminations
(66
)
 
108

 
(375
)
 
93

Total
$
(3,891
)
 
$
8,803

 
$
(4,476
)
 
$
15,825


15

Net income (loss)
 
 
 
 
 
 
 
NACoal
$
(75
)
 
$
8,952

 
$
5,630

 
$
18,543

HBB
1,359

 
1,985

 
1,709

 
3,486

KC
(2,657
)
 
(2,403
)
 
(6,690
)
 
(5,670
)
NACCO and Other
(1,673
)
 
(1,048
)
 
(2,870
)
 
(3,051
)
Eliminations
(578
)
 
(2,339
)
 
(2,927
)
 
(3,739
)
Total
$
(3,624
)
 
$
5,147

 
$
(5,148
)
 
$
9,569


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


NOTE 12— Acquisition

During the fourth quarter of 2013, NACoal acquired the equipment of National Coal of Alabama, Inc. ("NCOA") in exchange for the assumption of outstanding debt of $9.7 million associated with the acquired equipment. The outstanding debt was repaid concurrently with the acquisition of the equipment utilizing borrowings under NACoal's existing unsecured revolving line of credit. In April 2014, NACoal acquired coal reserves and prepaid royalties and assumed certain reclamation obligations of NCOA. No cash payment was made to NCOA. This acquisition, which is being accounted for as a business combination, provides additional coal reserves in Alabama and equipment that can be used to mine these new coal reserves and at NACoal's Reed Minerals mines, also located in Alabama. During the six months ended June 30, 2014 , the Company incurred $0.1 million in acquisition costs related to NCOA, which are included in Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations. The Company has incurred total acquisition costs of $0.4 million related to NCOA.

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


NOTE 13— Subsequent Events

During the three and six months ended June 30, 2014, NACoal recognized a $1.0 million after-tax charge to establish an allowance against the receivable from NACC India's customer as a result of its Indian customer disputing, and ultimately defaulting on, its contractual payment obligations. As a result of this default, NACC India has terminated its contract with the Indian customer, and intends to pursue its contractual remedies.

On July 29, 2014, HBB amended its $115.0 million  secured, floating-rate revolving credit facility (the “Amended HBB Facility”), extending the term through July 2019. The terms of the Amended HBB Facility are substantially similar to the terms under the existing HBB Facility.



16

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

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

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

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

THE NORTH AMERICAN COAL CORPORATION

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

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

The Coteau Properties Company ("Coteau")
The Falkirk Mining Company ("Falkirk")
The Sabine Mining Company ("Sabine")
Demery Resources Company, LLC (“Demery”)
Caddo Creek Resources Company, LLC (“Caddo Creek”)
Coyote Creek Mining Company, LLC (“Coyote Creek”)
Camino Real Fuels, LLC (“Camino Real”)
Liberty Fuels Company, LLC (“Liberty”)
NoDak Energy Services, LLC ("NoDak")
North American Coal Corporation India Private Limited ("NACC India")

Coteau, Falkirk and Sabine were developed between 1974 and 1981 and operate lignite coal mines under long-term contracts with various utility customers. Coteau, Falkirk and Sabine are capitalized primarily with debt financing, which the utility customers have arranged and guaranteed, and are without recourse to NACCO and NACoal. Demery, Caddo Creek, Coyote Creek, Camino Real and Liberty (collectively with Coteau, Falkirk and Sabine, the "Unconsolidated Mines") were formed to develop, construct and operate surface mines under long-term contracts. Demery commenced delivering coal to its customer in 2012 and is expected to reach full production levels in late 2015. Liberty commenced production in 2013 and is expected to increase production levels gradually from approximately 0.5 million tons in 2014 to full production of approximately 4.7 million tons of coal annually in 2019. Caddo Creek, Coyote Creek and Camino Real are still in development and are not expected to be at full production for several years. NoDak was formed to operate and maintain a coal processing facility. NACC India was formed to provide technical advisory services to the third-party owners of a coal mine in India.

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

Coal-fired power plants produce carbon dioxide and other greenhouse gases ("GHGs") as a by-product of their operations. GHG emissions have received increasing scrutiny from local, state, federal and international government bodies. The

17
Table of Contents

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


FINANCIAL REVIEW

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

 
2.9

 
7.4

 
6.7

Falkirk
1.6

 
1.6

 
3.6

 
3.6

Sabine
1.2

 
1.1

 
2.3

 
2.3

Unconsolidated mines
6.2

 
5.6

 
13.3

 
12.6

MLMC
0.9

 
0.4

 
1.5

 
1.3

     Reed Minerals
0.2

 
0.3

 
0.4

 
0.5

Consolidated mines
1.1

 
0.7

 
1.9

 
1.8

Total tons sold
7.3

 
6.3

 
15.2

 
14.4


The limerock dragline mining operations sold 6.3 million and 11.3 million cubic yards of limerock in the three and six months ended June 30, 2014 , respectively. This compares with 5.3 million and 11.6 million cubic yards of limerock in the three and six months ended June 30, 2013 , respectively.


18
Table of Contents

The results of operations for NACoal were as follows for the three and six months ended June 30 :
 
THREE MONTHS
 
SIX MONTHS
 
2014
 
2013
 
2014
 
2013
Revenue - consolidated mines
$
45,809

 
$
36,595

 
$
83,304

 
$
82,430

Royalty and other
3,971

 
6,972

 
6,348

 
12,284

Total revenues
49,780

 
43,567

 
89,652

 
94,714

Cost of sales - consolidated mines
50,958

 
35,412

 
87,539

 
77,570

Cost of sales - royalty and other
669

 
310

 
1,115

 
570

Total cost of sales
51,627

 
35,722

 
88,654

 
78,140

Gross profit (loss)
(1,847
)
 
7,845

 
998

 
16,574

Earnings of unconsolidated mines (a)
11,567

 
10,281

 
24,005

 
22,379

Selling, general and administrative expenses
8,546

 
6,311

 
16,411

 
14,312

Amortization of intangible assets
991

 
619

 
1,756

 
1,660

Operating profit
183

 
11,196

 
6,836

 
22,981

Interest expense
1,506

 
628

 
2,577

 
1,412

Other (income) or loss [including (income) loss from other unconsolidated affiliates]
290

 
(297
)
 
(183
)
 
(657
)
Income (loss) before income tax provision
(1,613
)
 
10,865

 
4,442

 
22,226

Income tax provision (benefit)
(1,538
)
 
1,913

 
(1,188
)
 
3,683

Net income (loss)
$
(75
)
 
$
8,952

 
$
5,630

 
$
18,543

 


 


 


 


Effective income tax rate (b)
n/m

 
17.6
%
 
n/m

 
16.6
%

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

See further information regarding the consolidated effective income tax rate in Note 9 to Unaudited Condensed Consolidated Financial Statements.

Second Quarter of 2014 Compared with Second Quarter of 2013

The following table identifies the components of change in revenues for the second quarter of 2014 compared with the second quarter of 2013 :
 
Revenues
2013
$
43,567

Increase (decrease) from:
 
Consolidated mining operations
9,213

Royalty and other income
(3,000
)
2014
$
49,780


Revenues increased in the second quarter of 2014 compared with the second quarter of 2013 primarily due to the increase at the consolidated mining operations, partially offset by a decrease in royalty and other income. The increase at the consolidated mining operations was primarily due to fewer outage days at MLMC's customer's power plant in the second quarter of 2014 compared with the second quarter of 2013 , which resulted in increased tons sold, and increased customer requirements at the limerock dragline mining operations, which resulted in increased yards sold. These increases were partially offset by a reduction in revenue at Reed Minerals due to lower selling prices resulting from unfavorable market conditions and a decrease in tons sold.


19
Table of Contents

The following table identifies the components of change in operating profit for the second quarter of 2014 compared with the second quarter of 2013 :
 
Operating Profit
2013
$
11,196

Increase (decrease) from:
 
Consolidated mining operations
(5,995
)
Royalty and other income
(4,124
)
Other selling, general and administrative expenses
(1,137
)
Reimbursement of damage to customer-owned equipment
(1,043
)
Earnings of unconsolidated mines
1,286

2014
$
183

Operating profit decreased substantially in the second quarter of 2014 from the second quarter of 2013 primarily due to a significant decline in operating results at the consolidated mining operations, reduced royalty and other income, increased selling, general and administrative expenses primarily from higher employee-related expenses and higher professional service fees, and a $1.0 million charge to reimburse a customer for damage to certain customer-owned equipment at the limerock dragline mining operations. These decreases were partially offset by an increase in earnings of unconsolidated mines mainly due to an increase in tons sold in the the second quarter of 2014 compared with the second quarter of 2013 .
The substantial decline in operating profit at the consolidated mining operations was largely due to a significantly larger loss at Reed Minerals than in the second quarter of 2013.  Operating and productivity improvements at Reed Minerals were implemented later than anticipated in the second quarter of 2014, primarily related to a delay in the startup of a new dragline. As a result of the delay, Reed Minerals experienced production shortfalls, which caused a decrease in inventory levels and reduced tons sold.  In addition, Reed Minerals results were unfavorably affected by an increase in depreciation expense on equipment acquired during 2013 and 2014 to improve efficiencies and productivity, and higher repairs and maintenance expense.  The lower operating results at the consolidated mining operations were slightly offset by marginally improved results at MLMC as higher revenues were almost fully offset by higher operating expenses and fewer costs were capitalized into inventory in the second quarter of 2014 compared with second quarter of 2013 .
NACoal recognized a net loss of $0.1 million in the second quarter of 2014 compared with net income of $9.0 million in the second quarter of 2013 primarily due to the factors affecting operating profit and a $1.0 million after-tax charge to establish an allowance against the receivable from NACC India's customer. The net loss was partially offset by a $1.4 million discrete tax benefit resulting from the conclusion of the 2011 and 2012 U.S. federal tax return examinations in the second quarter of 2014 and a higher tax benefit from percentage depletion.
  
First Six Months of 2014 Compared with First Six Months of 2013

The following table identifies the components of change in revenues for the first six months of 2014 compared with the first six months of 2013 :
 
Revenues
2013
$
94,714

Increase (decrease) from:
 
Royalty and other income