NACCO Industries, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. NACCO operates Coal Mining, North American Mining (NAMining) and Minerals Management. Many coal mines are accounted for as equity-method investments, so their revenues and costs are not consolidated; NACCO reports its share of earnings instead.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $37.6 million | $40.1 million; down 6.1% |
| Gross profit | $5.1 million; 13.5% margin | $13.4 million; 33.4% margin |
| Operating profit | $7.6 million | $16.4 million; down 53.7% |
| Net income | $6.2 million | $15.0 million; down 58.9% |
| Diluted earnings per share | $0.88 | $2.15 |
| Operating cash flow | $(31.1) million | $(0.5) million |
| Capital expenditures | $5.4 million | $4.3 million |
| Cash and cash equivalents | $93.7 million at March 31 | $122.9 million at December 31, 2019 |
| Total debt | $34.6 million at March 31 | $24.9 million at December 31, 2019 |
Cash declined by $29.2 million during the quarter. Operating cash use primarily reflected deferred and incentive compensation payments, lower earnings and higher receivables, partly offset by lower inventory. Financing provided $7.3 million, including increased borrowings; dividends paid were $1.3 million. Debt to total capitalization rose to 11% from 8% at year-end. NACoal had $20 million outstanding under its $150 million revolving facility and $128.6 million of excess availability; it was in compliance with covenants. Management said available cash, facility capacity and operating cash flows should cover needs and commitments for the next 12 months.
Changes and segment performance
- Coal Mining: Revenue rose to $20.9 million from $16.8 million, but operating profit fell to $7.2 million from $10.0 million. Higher consolidated MLMC deliveries and pass-through costs lifted revenue; heavy rain reduced mining and raised cost per ton. Unconsolidated mine earnings also declined with lower deliveries.
- NAMining: Revenue increased to $11.6 million from $10.8 million and operating profit to $0.7 million from $0.1 million, reflecting new contracts and higher customer volumes.
- Minerals Management: Revenue fell to $5.2 million from $12.7 million and operating profit to $4.3 million from $11.7 million. Q1 2019 benefited from significant royalties on newly producing Ohio gas wells; natural production decline reduced 2020 royalties.
- Taxes and other items: The company recorded a $0.1 million tax benefit, versus $2.3 million tax expense in Q1 2019; the effective tax rate was negative 1.1%, versus 13.4%. A $1.2 million investment loss at Bellaire’s Mine Water Treatment Trust compared with a $0.7 million gain a year earlier. NoDak income also declined after its contract expired in January 2020.
Outlook, risks and contingencies
- Management expected 2020 consolidated net income to decrease significantly from 2019, mainly because of lower Minerals Management results, the absence of a prior-year India venture gain, and an anticipated mark-to-market loss on trust investments. NAMining improvement, lower unallocated costs and a favorable tax change were expected to partly offset this. Full-year effective tax rate was expected to be approximately zero.
- Coal Mining deliveries and operating profit were expected to be comparable to 2019, although excluding a prior-year reclamation adjustment, profit was expected to decline. The outlook assumed improved MLMC demand; its customer, TVA, had issued a COVID-19-related force majeure notice, but no demand reduction had occurred as of the filing. Coal Mining capital spending was expected to be about $24 million.
- NAMining expected higher limestone deliveries and significantly improved full-year results; planned capital expenditures were $8 million. The Thacker Pass lithium project was then expected to begin construction in 2021 and production in 2023, subject to permitting.
- Minerals Management expected royalties substantially below 2019 because of lower natural gas prices, fewer expected new wells and declining production from newer wells. Consolidated capital expenditures were projected at approximately $33 million for 2020, and cash flow before financing was expected to be negative.
- COVID-19 could disrupt operations, suppliers or customers; the company said its operations were continuing as an essential business, but the potential financial impact could not be estimated. Other risks include coal-plant dispatch and closures, weak gas prices, weather and mining conditions, regulation, reclamation costs and customer contract changes.
- On May 7, 2020, Great River Energy announced plans to retire Coal Creek Station in the second half of 2022 and convert Spiritwood Station to natural gas. Falkirk is Coal Creek’s sole coal supplier; a closure could materially harm NACCO’s long-term earnings. The company was exploring a potential sale of the plant. GRE’s contract provides for it to bear specified mine-closure costs.
- Coyote Creek guarantees could require a make-whole payment upon certain defaults or contract terminations, and a qualifying termination on or after 2024 could require asset purchases. Management considered performance under the guarantees remote; no amount was recorded. Legal proceedings were described as ordinary-course matters; no separate legal proceedings were listed.
Important facts for investors to verify
- Whether COVID-19, TVA demand or subsequent power-sector decisions affect coal deliveries, especially at MLMC and Falkirk.
- Great River Energy’s Coal Creek retirement plans, potential sale process and implications for Falkirk’s long-term contract and earnings.
- Natural gas prices, new-well activity and production declines driving Minerals Management royalty revenue.
- Execution, timing, permitting and capital needs for NAMining contracts and the Thacker Pass lithium project.
- Cash use, projected capital spending, borrowing levels and continued compliance with NACoal Facility covenants.