NACCO Industries, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. NACCO is a holding company whose principal business, NACoal, operates surface coal mines and provides mining and related services. Hamilton Beach Brands was spun off in September 2017; its prior-year results are presented as discontinued operations, so reported net income is not directly comparable.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $31.2 million | $28.3 million |
| Gross profit | $5.4 million | $4.6 million |
| Earnings of unconsolidated operations | $15.6 million | $15.0 million |
| Operating profit | $9.7 million | $9.8 million |
| Income from continuing operations | $8.2 million | $8.2 million |
| Net income | $8.2 million | $5.0 million |
| Diluted EPS | $1.18 | $0.73 |
| Dividend per share | $0.1650 | $0.2675 |
Revenue increased 10% year over year, mainly from higher reimbursed costs at consolidated North American Mining operations. Gross margin was approximately 17.4%, versus 16.1%. Operating profit was nearly unchanged: higher Centennial and unconsolidated-operation earnings were offset by increased SG&A, weaker consolidated operations and smaller asset-sale gains. Operating profit includes equity-method earnings from unconsolidated operations, a material contributor to results.
Continuing-operations income was essentially flat despite higher pretax income, as the effective tax rate rose to 9.0% from 6.8%. Prior-year net income included a $3.2 million loss from discontinued operations; this explains most of the increase in total net income.
Cash flow, balance sheet and liquidity
- Consolidated operating cash flow was negative $8.0 million, compared with negative $20.0 million in Q1 2017. Investing cash outflow was $2.1 million; financing cash outflow was $8.1 million, including $8.2 million of debt repayments and $1.1 million of dividends.
- Cash declined $18.2 million from year-end to $83.4 million. The filing attributes cash-flow comparisons primarily to working-capital timing, including changes in accrued and other current liabilities.
- Total debt was $50.8 million, down from $58.1 million at December 31, 2017. Debt to total capitalization decreased to 18% from 21%. Stockholders’ equity was $224.9 million.
- Current assets were $162.3 million and current liabilities $40.8 million. NACoal had a $150 million revolving facility, with $42.0 million drawn and $106.6 million available after letters of credit. NACoal reported compliance with its financial covenants.
- Consolidated capital expenditures were $2.4 million in the quarter; full-year 2018 spending was expected to be up to $32 million.
Material changes, outlook and risks
- Management expects 2018 consolidated pretax income from continuing operations to decrease modestly versus 2017, with an effective tax rate of 9%–12%. Excluding $5.1 million of 2017 asset-sale gains, management expects pretax income to increase, helped by lower operating expenses, improved unconsolidated-operation income and lower interest expense.
- Management expects a substantial reduction in royalty and other income and lower MLMC income to partly offset those improvements. Royalty income depends on third-party activity and market forces.
- Bisti’s customer was installing environmental controls at the Four Corners plant, limiting coal deliveries and earnings in the first half of 2018. Management expected full-year Bisti income to be comparable with 2017, with a second-half recovery; production at expected levels was anticipated in 2019.
- Liberty ceased mining and deliveries after its customer directed permanent closure of the mine and began reclamation. The customer is responsible for closure costs, and management said the change did not impair Liberty’s 2018 earnings outlook, but reduced NACoal’s longer-term earnings potential from the mine.
- MLMC income was expected to decline in 2018, principally because of higher cost per ton and customer-demand variability. Persistently low demand could materially affect earnings. Centennial was expected to continue incurring reclamation costs.
- Other risks include coal-power demand pressure from low natural-gas prices and renewable generation, operational and equipment costs, permitting and regulatory changes, customer outages or reduced deliveries, and contract or customer risks. NACCO disclosed guarantees relating to Coyote Creek; management considered performance under them remote and recorded no liability. Legal and regulatory claims are described as ordinary-course matters, with outcomes subject to uncertainty.
- ASC 606 was adopted January 1, 2018, creating a $2.6 million contract liability and reducing opening retained earnings by $2.1 million, net of tax. The 2018 stock-repurchase authorization permits purchases of up to $25 million through 2019; no shares were repurchased in Q1.
Investor verification points
- Track Bisti delivery recovery and the timing and effect of the Four Corners environmental-control work.
- Monitor MLMC customer demand, cost per ton and full-year earnings against management’s outlook.
- Assess the durability of royalty income and the earnings contribution from unconsolidated operations.
- Review cash generation, planned capital spending, debt reduction and NACoal facility availability and covenant headroom.
- Follow Liberty reclamation and the longer-term effect of its mine closure, as well as any developments in the Coyote Creek guarantees or disclosed contingencies.