NACCO Industries, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in millions of dollars unless noted. NACCO operates Coal Mining, North American Mining (NAMining) and Minerals Management businesses, with additional environmental mitigation activities.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $46.5 | $61.8 | $158.0 | $178.2 |
| Gross profit (loss) | $(2.2) | $17.8 | $7.6 | $49.3 |
| Operating profit (loss) | $(6.3) | $9.8 | $(2.7) | $54.4 |
| Net income (loss) | $(3.8) | $10.6 | $4.4 | $60.4 |
| Diluted EPS | $(0.51) | $1.45 | $0.58 | $8.24 |
- Cash flow: Nine-month operating cash flow was $63.0 million, versus $54.9 million in 2022. Investing activities used $37.6 million, including $37.9 million of property, equipment and mineral-interest expenditures. Cash flow before financing activities was $25.5 million. Cash increased $17.4 million to $128.2 million.
- Debt and liquidity: Total debt was $22.5 million at September 30, 2023, against cash of $128.2 million. NACCO Natural Resources’ $150 million revolving facility had no borrowings and $122.0 million of availability after $28.0 million of outstanding letters of credit; it matures in November 2025. The company reported compliance with financial covenants.
- Balance sheet: Total assets were $580.9 million and stockholders’ equity was $428.4 million. Current assets were $258.1 million versus current liabilities of $60.9 million.
- Capital returns: Nine-month cash dividends were $4.8 million. The company repurchased 24,762 Class A shares for $0.8 million in Q3.
Material changes and drivers
- Q3 revenue fell 24.7% year over year; nine-month revenue declined 11.3%. Lower Minerals Management revenue, driven mainly by lower oil and natural gas prices, was a major factor.
- Coal Mining posted an operating loss of $4.7 million in Q3 and $9.1 million for the nine months, compared with profits of $6.1 million and $34.6 million, respectively, in 2022. MLMC incurred higher costs moving to a new mine area, faced rainy-weather and operational challenges, and recorded inventory impairment charges of $2.4 million in Q3 and $6.6 million year to date. Lower Coteau customer requirements also reduced earnings from unconsolidated operations.
- NAMining operating profit improved to $0.9 million in Q3 and $3.9 million year to date. Improved results reflected lower employee-related costs and the absence of a $0.8 million voluntary retirement charge recorded in 2022.
- Minerals Management operating profit was $3.6 million in Q3 and $16.9 million for the nine months, down from $10.6 million and $35.3 million. Lower commodity prices and settlement income contributed; 2022 also included a $2.4 million land-sale gain and a $3.9 million impairment charge.
- Comparisons with 2022 are affected by unusual items: the prior-year results included a $14.0 million Coal Mining contract-termination settlement and $16.9 million of other contract-termination settlement income. The 2023 results included a $1.2 million post-closing payment adjustment related to the sale of the MAG investment.
- Nine-month earnings from unconsolidated operations were $37.7 million, down from $43.8 million. The company accounts for several mine operations as equity-method investments rather than consolidating their revenue and expenses.
Outlook, risks and contingencies
- Management expects Q4 2023 operating profit and net income to improve from Q3 losses, but Q4 and full-year 2023 operating results and Adjusted EBITDA to decline significantly from 2022. The filing anticipates modest net income for full-year 2023.
- For 2024, management expects significantly higher consolidated net income and EBITDA, primarily from improved Coal Mining results, with growth at NAMining and Mitigation Resources also contributing. The expected 2024 effective tax rate is 10%–13%.
- Management expects 2023 capital expenditures of approximately $84 million, including about $37 million for a planned Permian Basin mineral-interest acquisition and $24 million related to Thacker Pass. The acquisition was expected to close in Q4; the filing does not confirm its completion. Full-year 2023 cash flow before financing activities is expected to be a moderate use of cash. For 2024, expected capital expenditures are approximately $39 million and cash flow before financing activities is expected to be positive.
- MLMC costs are expected to remain above historical levels through 2024 while a pit extension is completed. Coal deliveries and results remain sensitive to customer power-plant dispatch, weather, natural gas prices and renewable generation. Sabine ceased coal deliveries following the Pirkey Plant retirement; reclamation services are to continue through September 30, 2026, with SWEPCO then taking over the remaining work under the agreement.
- Thacker Pass construction began in March 2023. Sawtooth had acquired $23.1 million of equipment; Lithium Americas is expected to reimburse the capital expenditures over five years. Phase 1 lithium production is projected for the second half of 2026.
- Coal demand faces regulatory and plant-retirement risks, including proposed EPA greenhouse-gas and mercury rules and uncertainty around coal-combustion-residual requirements at Coal Creek Station. Falkirk is the station’s sole lignite supplier; a temporary plant suspension could halt coal demand during that period. Regulatory proceedings and litigation outcomes remain uncertain.
- The filing reports no legal proceedings under Part II and no material changes to previously disclosed risks other than the coal-regulatory updates. Management considers available cash, operating cash flows and facility capacity sufficient for needs and commitments over the next 12 months.
Important facts for investors to verify
- Whether the anticipated $37 million Permian Basin acquisition closed, and its price, assets and expected contribution.
- Actual MLMC production, unit costs, inventory levels and impairment exposure as the new mine area and pit extension progress.
- Customer demand and fee changes at Coteau and Falkirk, including the expected June 2024 end of Falkirk’s temporary fee concession.
- Developments in EPA rules, court challenges, and the Coal Creek Station ash-disposal plan that could affect customer operations and coal deliveries.
- Thacker Pass equipment reimbursement terms, construction activity, and the timing and economics of expected production beginning in 2026.
- Actual oil and gas prices, lessee drilling activity and resulting Minerals Management royalty income versus management’s forecasts.