NACCO Industries, Inc. — Q1 2022 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2022, compared with Q1 2021. NACCO operates Coal Mining, North American Mining (NAMining), and Minerals Management businesses, with additional unallocated activities. Effective January 1, 2022, Caddo Creek and Demery were reclassified from Coal Mining to NAMining; prior-period segment figures were recast, with no effect on consolidated results.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $55.0 million | $45.1 million; up 22.0% |
| Gross profit and margin | $15.8 million; 28.8% | $7.7 million; 17.1% |
| Operating profit and margin | $14.9 million; 27.2% | $8.3 million; 18.5% |
| Net income | $12.6 million | $9.0 million |
| Diluted EPS | $1.72 | $1.25 |
| Income tax | $2.4 million expense; 15.8% effective rate | $0.3 million benefit; (3.4%) effective rate |
| Cash flow from operations | $(1.1) million | $(0.9) million |
| Capital expenditures and mineral-interest acquisitions | $4.6 million | $4.9 million |
| Cash and total debt at March 31 | $81.6 million cash; $25.5 million debt | Debt was $20.7 million at December 31, 2021 |
Cash declined $4.4 million during the quarter to $81.6 million. Financing provided $1.2 million, including net borrowings, while operating and investing activities used $1.1 million and $4.5 million, respectively. Total liabilities were $148.5 million and stockholders’ equity was $364.5 million. Debt to total capitalization was 7%, versus 6% at year-end 2021.
NACoal’s $150 million revolving facility had $6.0 million drawn and $113.9 million of excess availability at quarter-end, after letters of credit. NACoal was in compliance with its financial covenants. Management said cash, the facility, and operating cash flows should cover needs and commitments for the next 12 months and through facility expiration in November 2025.
Changes and segment results
- Coal Mining: Revenue decreased 4.5% to $21.0 million and operating profit fell to $7.4 million from $8.2 million. Lower earnings from unconsolidated operations—including the absence of Bisti following its 2021 contract termination—and lower Sabine demand were partly offset by contractual price increases at Coteau and a cost refund.
- NAMining: Revenue rose 19.3% to $21.4 million and operating profit increased to $1.3 million from $0.7 million. Higher customer demand, deliveries, and Caddo Creek reclamation activity supported results; higher employee costs were a partial offset.
- Minerals Management: Revenue more than doubled to $12.8 million and operating profit increased to $11.6 million from $4.2 million, reflecting higher oil and natural gas prices and $2.1 million of settlement income related to mineral rights.
- Consolidated earnings included $14.6 million from unconsolidated operations, down from $15.3 million. Equity securities generated a net gain of $0.5 million in Q1 2022, versus $0.8 million in Q1 2021.
Outlook, risks and notable items
- For full-year 2022, NACCO expects consolidated operating profit, net income, and Consolidated EBITDA to decline from 2021, excluding the GRE/Rainbow Energy settlement and the Bisti termination fee recognized in 2021. Lower Coal Mining results are expected to be partly offset by higher Minerals Management and NAMining results. The expected effective tax rate, including the GRE/Rainbow settlement, is 14%–16%.
- Coal Mining operating profit is expected to decrease significantly, including from lower anticipated MLMC demand, higher fuel and other costs, and reduced Falkirk fees through May 2024. Sabine expects deliveries to end in Q1 2023 as its customer plans to retire the Pirkey Plant. The Synfuels Plant is expected to continue operations through 2026; possible changes that could reduce coal use are not expected before 2027.
- NAMining expects full-year operating profit to increase, with growth expected primarily in Q4. Its outlook includes new contracts and expansion opportunities, including the Thacker Pass lithium project; construction early works were expected to begin in 2022, subject to project progress.
- Minerals Management expects operating profit to increase significantly, based on commodity-price expectations, partly offset by lower production. Its results remain exposed to volatile oil and gas prices and limited visibility into lessee operations.
- Planned 2022 consolidated capital expenditures are approximately $67 million. Management expects cash flow before financing to be significantly lower than in 2021, primarily because of this spending. Planned spending includes mine development at MLMC, NAMining equipment, mineral-interest acquisitions, and Mitigation Resources.
- After quarter-end, on May 2, 2022, GRE completed the Coal Creek Station sale to Rainbow Energy. GRE paid NACoal $14.0 million, transferred an office building, and conveyed Midwest AgEnergy membership units. Falkirk entered a new coal supply agreement with Rainbow Energy, with an initial expected production period of ten years; the per-ton management fee is reduced through May 2024. The company says it will recognize the building and membership units as other income; their value is not specified in the filing text provided.
- Other risks include customer contract changes or facility closures, power-plant dispatch and coal demand, commodity and diesel-price volatility, inflation and supply-chain disruption, regulatory and tax changes, reclamation obligations, and execution of growth projects. NACCO disclosed Coyote Creek guarantees; management considered performance under them remote and recorded no liability. Ordinary-course legal claims are discussed, but no specific material loss estimate is provided. No material risk-factor changes were reported.
Investor verification points
- Confirm the drivers and sustainability of the large increase in Minerals Management earnings, including the $2.1 million settlement and sensitivity to commodity prices and production.
- Track Coal Mining demand, MLMC’s cost and mine-development profile, the expected Sabine shutdown, and Falkirk’s revised agreement and fee schedule.
- Monitor whether NAMining’s anticipated contract growth and Thacker Pass project advance as planned, and whether the related capital investment produces expected returns.
- Reconcile negative operating cash flow with reported net income, and assess the expected $67 million of 2022 capital expenditures against liquidity and borrowing needs.
- Verify the accounting and realized value of consideration received in the GRE/Rainbow Energy transaction and any contingent payment if Coal Creek closes early.