NACCO Industries, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated financial statements; dollar amounts below are in millions unless stated otherwise. NACCO operates Coal Mining, North American Mining (NAMining), and Minerals Management businesses, along with mitigation activities.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $51.7 | $32.3 | $142.7 | $105.3 |
| Gross profit | $14.3 | $6.8 | $31.0 | $15.7 |
| Operating profit | $27.6 | $9.4 | $44.6 | $21.5 |
| Income before taxes | $27.4 | $9.9 | $45.5 | $21.6 |
| Net income | $24.8 | $8.0 | $40.3 | $20.2 |
| Diluted EPS | $3.47 | $1.14 | $5.63 | $2.88 |
| Gross margin | 27.7% | 21.1% | 21.7% | 14.9% |
Q3 and nine-month effective tax rates were 9.5% and 11.5%, respectively, versus 18.8% and 6.1% in the comparable 2020 periods. Management attributes the rate variation partly to the mix and timing of earnings, including percentage-depletion tax benefits.
Cash, debt, and liquidity
- Nine-month operating cash flow was $67.8, versus $2.8 in 2020. The improvement reflected higher earnings, the Bisti termination payment, and favorable working-capital changes.
- Capital expenditures and mineral-interest acquisitions were $35.5; investing cash outflow was $35.0. Cash flow before financing was $32.8, compared with an $18.4 outflow in 2020.
- Financing cash outflow was $33.7, including $30.0 of net revolver repayments and $4.2 of dividends. Cash declined $0.9 from year-end 2020 to $87.5.
- Total debt was $17.0 at September 30, 2021, versus $46.5 at year-end 2020; debt to total capitalization fell to 5% from 13%. Total current assets were $192.4 and current liabilities $40.9.
- The $150 million NACoal revolving facility had no borrowings outstanding; availability was $124.9 after $25.1 of letters of credit. It expires in August 2022, and the company said refinancing was probable by December 31, 2021. Equipment debt was $14.7.
Business results and changes
- Coal Mining: Revenue was $23.7 and operating profit $23.1 in Q3, including a $10.3 termination fee from Navajo Transitional Energy Company (NTEC) following termination of the Bisti contract effective September 30. Nine-month operating profit was $40.3, up from $25.9. Higher unconsolidated mine earnings and Caddo Creek reclamation activity also contributed.
- NAMining: Q3 revenue rose to $17.7 from $9.4, largely from reimbursable costs that have corresponding expenses and do not add operating profit. Operating profit was $0.3 versus $0.2; nine-month operating profit decreased to $1.2 from $1.5 amid higher employee and business-development costs. New Indiana, Texas, and Arkansas sand-and-gravel contracts expanded the business.
- Minerals Management: Q3 revenue increased to $10.6 from $2.7 and operating profit to $9.5 from $1.7. Drivers included $3.3 of settlement income, increased royalty production and favorable oil and gas prices. Nine-month operating profit was $17.9 versus $6.5.
- Overall, revenue growth also reflected higher service revenue and activity. Consolidated operating profit and net income benefited from the Bisti fee and segment gains; they should not be viewed as purely recurring performance.
Outlook, commentary, and risks
- Management expected significantly higher full-year 2021 net income than 2020, partly due to the Bisti payment and absence of prior-year charges. Excluding these items, it also expected improvement based on strong first-nine-month results. Expected 2021 effective tax rate: 11%–14%.
- For Q4 2021, consolidated operating profit was expected to rise significantly year over year due mainly to the absence of $11.6 of 2020 charges; excluding those items, management expected a decline, with lower Coal Mining and Minerals Management results partly offset by NAMining growth.
- For 2022, management expected a significant decline in consolidated net income and a significant use of cash before financing. It forecast consolidated capital expenditures of $55–$60, versus $44–$49 expected in 2021. Coal Mining profit was expected to decrease significantly; Minerals Management was also expected to decline, while NAMining profit was expected to increase significantly.
- The expected Coal Creek Station sale to Rainbow Energy, then anticipated in Q1 2022, remained subject to conditions. Upon closing, GRE was to pay Falkirk $14.0 and transfer an office building and Midwest AgEnergy units; a new coal-supply agreement was expected to follow. The proposed Dakota Gas sale was based on a non-binding term sheet. Sabine deliveries were expected to continue until Pirkey Plant retirement in Q1 2023; the Synfuels Plant was expected to operate through 2025 under the described arrangement.
- Key exposures include customer contract termination or reduced demand, coal-power dispatch affected by natural gas prices and renewable generation, commodity-price and production variability in royalties, cost inflation and supply-chain disruption, mine reclamation and surety requirements, permitting, tax-law changes, and COVID-19 effects. Coyote Creek has contingent guarantees; management considered performance remote and recorded no liability. The filing reports ordinary-course legal matters but no Item 1 legal proceedings.
- Management said operations had not been materially affected by COVID-19 to date, but future effects remained uncertain. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Coal Creek sale closed as expected, whether Falkirk’s new agreement became effective, and the timing and form of the $14.0 payment and asset transfers.
- The durability of earnings after excluding the $10.3 Bisti termination fee and $3.3 Minerals Management settlement, and the operating impact of Bisti’s exit.
- Whether NAMining’s new contracts, including the Thacker Pass project, progress on schedule and deliver expected returns; Thacker Pass permitting was expected in Q1 2022.
- Completion and terms of refinancing the NACoal facility before its August 2022 expiry, and the effect of letters of credit on borrowing availability.
- Actual capital spending, cash generation, and performance versus management’s 2021 and 2022 outlook, including exposure to customer demand, commodity prices, and reclamation obligations.