NACCO Industries, Inc. — 2017 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017. NACCO is a holding company whose principal business, North American Coal (NACoal), operates surface mines under long-term customer contracts and provides mining services for aggregates quarries. On September 29, 2017, NACCO spun off Hamilton Beach Brands Holding Company (HBBHC); its results are presented as discontinued operations for all periods shown. Accordingly, 2017 continuing-operations figures reflect a substantially narrower company than consolidated figures for prior years.
Financial performance and position
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $104.8 million | $111.1 million |
| Operating profit (loss) | $32.8 million | $(1.7) million |
| Income from continuing operations | $28.5 million | $3.0 million |
| Net income, including discontinued operations | $30.3 million | $29.6 million |
| Diluted EPS, continuing operations | $4.14 | $0.43 |
| Diluted EPS, total | $4.41 | $4.32 |
| Cash provided by operating activities, total | $41.3 million | $93.9 million |
| Cash provided by continuing operating activities | $49.0 million | $31.4 million |
| Capital expenditures, total | $15.7 million | $10.2 million |
| Cash and cash equivalents at year-end | $101.6 million | $69.3 million |
| Total debt at year-end | $58.1 million | $96.0 million |
| Stockholders’ equity at year-end | $219.4 million | $220.3 million |
Reported gross profit was $16.9 million, about 16.1% of revenue. Operating profit was $32.8 million, about 31.3% of revenue; this measure includes $61.4 million of earnings from unconsolidated mines and should not be read as a conventional operating margin on consolidated sales alone. The filing does not provide a comparable EBITDA figure.
At December 31, 2017, NACoal had $50.0 million outstanding on its $150 million revolving facility, with $98.6 million of availability after letters of credit. NACoal was in compliance with its financial covenants. Total debt declined by $37.9 million year over year. Cash exceeded reported total debt by approximately $43.5 million, although cash and borrowing arrangements are held at different subsidiaries and parent-company access to subsidiary funds is subject to restrictions.
For the fourth quarter of 2017, revenue was $26.4 million, operating profit was $6.5 million, continuing-operations income was $9.7 million and net income was $10.2 million. Fourth-quarter 2016 net income of $24.1 million included substantial discontinued-operations income, so total net income is not directly comparable.
Material changes versus the prior comparable period
- Revenue declined 5.7% from 2016, primarily because power-plant outages reduced coal deliveries at consolidated Mississippi Lignite Mining Company (MLMC). Higher royalty and other revenue and increased aggregate-mining activity partly offset the decline.
- Operating profit improved by $34.5 million, from a loss to a profit. Drivers included lower Centennial impairment charges, higher royalty and other income, stronger unconsolidated-mine earnings as newer mines ramped up, asset-sale gains, and favorable Centennial reclamation-liability revisions. Lower MLMC results and higher employee-related expenses at NAM partly offset these improvements.
- Coal delivered increased to 37.2 million tons from 32.5 million tons, largely reflecting ramp-up at Bisti’s Navajo Mine and Coyote Creek. Limerock deliveries increased to 30.0 million cubic yards from 26.1 million.
- Cash from total operating activities fell to $41.3 million from $93.9 million, principally because HBBHC’s discontinued-operation cash flows were included in 2016 but not for a full year in 2017. Continuing-operations operating cash flow increased to $49.0 million from $31.4 million.
- HBBHC paid NACCO $38.0 million in dividends during 2017, including a one-time $35.0 million payment before the spin-off. Total assets fell to $389.6 million from $668.0 million, largely reflecting the separation of HBBHC.
Outlook, commentary, risks and unusual items
- 2018 outlook: Management expected continuing-operations pretax income to decline from reported 2017 levels, with an effective tax rate of 9%–12%. Excluding 2017 gains on asset sales and favorable reclamation adjustments, management expected pretax income to increase, driven by lower operating expenses, improved mine results and lower interest expense; a substantial decline in royalty and other income was expected to partly offset gains.
- Management expected MLMC results to improve as customer plant outages declined, but noted that many 2018 outage days were expected in the second half. Continued weak customer demand could materially reduce earnings. Bisti expected 2018 income comparable to 2017 despite reduced first-half deliveries while environmental controls were installed at the customer’s power plant; production of 5–6 million tons annually was anticipated once the plant operated at expected levels, then projected for 2019.
- Mississippi Power directed Liberty Mine to permanently cease mining and deliveries in February 2018 and begin reclamation. The customer is responsible for closure costs, and Liberty is to be compensated for reclamation work. Management said the decision did not adversely affect Liberty’s 2018 earnings outlook but reduced NACoal’s longer-term earnings potential.
- Management forecast 2018 capital expenditures of approximately $33.4 million, mainly for MLMC and NAM equipment and land. Cash flow before financing activities was expected to decrease substantially from 2017.
- Notable 2017 items included $4.6 million of gains on asset sales, primarily at Centennial; a $2.8 million favorable revision to Centennial reclamation liabilities; and a $1.0 million Centennial impairment charge. The Tax Cuts and Jobs Act produced a provisional $3.1 million tax benefit; management expected the lower federal tax rate to benefit the ongoing effective tax rate.
- Key risks include concentration in long-term contracts and customers, power-plant outage and demand variability, competition from natural gas and renewables, environmental and mine-safety regulation, permitting and reclamation costs, reserve-estimation uncertainty, and possible customer contract termination or default. Two customers represented over 70% of consolidated revenue in 2017. Bellaire had a $16.4 million accrued liability for legacy mine-water treatment; total reported asset retirement obligations were $40.1 million.
- Unconsolidated mines are accounted for under the equity method. NACoal reported $61.4 million in earnings from these mines; their aggregate revenue of $791.3 million is not consolidated into NACCO’s revenue. NACoal received $54.7 million in dividends from them in 2017. The filing also discloses Coyote Creek guarantees, but management considered performance under them remote and recorded no liability.
Important facts for investors to verify
- Separate ongoing NACCO results from HBBHC discontinued operations, particularly when comparing 2017 with prior years or evaluating total net income and cash flow.
- Assess sustainability of 2017 operating profit, including the contribution of asset-sale gains, reclamation-liability revisions, royalty income and equity-method mine earnings.
- Monitor MLMC customer demand and outage timing, Bisti delivery recovery, and the economic and reclamation implications of Liberty’s closure.
- Review customer concentration, long-term contract terms, covenant headroom, subsidiary-level restrictions on cash transfers, and NACCO’s planned 2018 capital spending.
- Track the final accounting and tax effects of the spin-off and tax-law changes, along with reclamation, environmental and other contingent obligations.