NACCO Industries, Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018. NACCO operates Coal Mining, North American Mining (NAMining) and Minerals Management; 2018 segment results were recast to the new structure. Many coal-mining contracts are accounted for as equity-method investments, so their revenue is not consolidated even though NACCO reports its share of earnings.
Financial results
- Revenue: $40.1 million, up 28.5% from $31.2 million. Minerals Management revenue rose to $12.7 million from $3.5 million, primarily as more third-party wells produced gas from NACCO’s Ohio reserves. Coal Mining revenue declined to $16.8 million from $17.6 million; NAMining revenue increased to $10.8 million from $10.2 million, largely due to higher reimbursed costs.
- Profit: Gross profit was $13.4 million versus $5.4 million; operating profit was $16.4 million versus $9.7 million; net income was $15.0 million versus $8.2 million. Diluted EPS was $2.15 versus $1.18. Earnings of unconsolidated operations were $16.3 million versus $15.6 million, a material contributor to results.
- Segment operating profit: Coal Mining $7.6 million (down from $8.7 million); NAMining $0.03 million (down from $0.6 million); Minerals Management $11.7 million (up from $2.9 million). Unallocated items and eliminations reduced operating profit by approximately $2.9 million.
- Taxes and other items: Income tax expense was $2.3 million and the effective tax rate was 13.4%, compared with $0.8 million and 9.0%. Other income, net, was $1.0 million, versus other expense of $0.7 million; the comparison included a $0.7 million gain on equity securities in 2019 versus a $0.1 million loss in 2018.
- Cash flow: Operating cash use was $0.5 million, improved from $8.0 million used in Q1 2018. Capital expenditures were $4.3 million, compared with $2.5 million; investing cash use totaled $4.2 million. Cash decreased $6.2 million to $79.1 million.
- Liquidity and debt: Current assets were $164.0 million and current liabilities $49.6 million. Total debt was $12.0 million, including $4.0 million drawn on NACoal’s revolving facility; reported debt to total capitalization was 4%. The $150 million facility expires in August 2022, with $144.6 million available after letters of credit. NACoal was in compliance with its financial covenants.
- Other balance-sheet items: Total assets were $393.8 million and equity $264.3 million. Adoption of lease accounting added $12.5 million of operating lease right-of-use assets and $13.3 million of noncurrent operating lease liabilities at quarter-end; management said adoption did not materially affect results, cash flows, liquidity or covenant compliance.
Material changes and management outlook
- Consolidated operating profit increased chiefly on higher Minerals Management earnings. Coal Mining profit fell partly because Q1 2018 included favorable Centennial reclamation-liability adjustments; Q1 2019 also had higher employee-related costs. NAMining profit declined due mainly to higher SG&A and business-development costs.
- Management expects 2019 consolidated net income to increase significantly versus 2018, driven mainly by higher Minerals Management earnings, lower interest expense and higher interest income. The expected effective tax rate is 13%–15%.
- Coal Mining deliveries are expected to decrease moderately. Full-year operating profit is expected to decline due to the absence of favorable 2018 items; excluding those items, management expects results broadly comparable to 2018. NAMining deliveries and operating profit are expected to decrease modestly.
- Minerals Management royalty income is expected to rise over the comparable 2018 period for the rest of 2019, but at a slower rate than Q1’s increase. Royalty results depend on third-party well activity, commodity prices, production, regulation, lessee investment and infrastructure.
- Management expects 2019 capital expenditures of approximately $23 million, including increased investment for an MLMC mine-area move, and expects cash flow before financing activities to increase significantly versus 2018. NACCO estimates up to $18.5 million of capital expenditures for the remainder of 2019 as of the filing’s discussion.
Risks, contingencies and unusual items
- Management cited risks including customer demand and power-plant outages, coal and aggregates deliveries, mining permits and reclamation costs, operating and fuel costs, contract changes or customer defaults, and competition. Low natural-gas prices and renewable-energy growth may weigh on coal-fired power demand.
- NACoal has Coyote Creek guarantees that could require a make-whole payment on specified default or termination events and an asset purchase if the customer terminates the sales agreement on or after 2024. Management considers performance under the guarantees remote; no liability was recorded.
- Ordinary-course legal and regulatory claims may have adverse effects if resolved unfavorably; the filing identifies no specific material proceeding. No material changes to previously disclosed risk factors were reported.
- The company repurchased 36,294 Class A shares for $1.3 million during the quarter under its $25 million repurchase program.
Important facts for investors to verify
- Whether increased Ohio gas-well activity and royalty income persist, given dependence on third parties and commodity-market and infrastructure conditions.
- How the 2019 comparison is affected by the absence of favorable 2018 coal-related adjustments and settlements.
- The cash-flow and funding implications of planned capital expenditures, including the MLMC mine-area move.
- The composition and performance of equity-method earnings, and the terms and potential exposure of the Coyote Creek guarantees.
- The impact of newly recognized lease liabilities and other reclamation obligations on future cash needs.