NACCO Industries, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts below are in millions of dollars unless otherwise noted. NACCO operates Coal Mining, North American Mining (NAMining), and Minerals Management businesses, alongside environmental mitigation activities.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $61.4 | $61.4 | $111.5 | $116.4 |
| Gross profit | $6.4 | $15.6 | $9.8 | $31.5 |
| Operating profit | $1.8 | $29.7 | $3.6 | $44.6 |
| Net income | $2.5 | $37.2 | $8.2 | $49.8 |
| Diluted EPS | $0.34 | $5.07 | $1.09 | $6.79 |
| Operating cash flow | Not stated for the quarter | $23.3 | $40.5 |
Gross margin was approximately 10.4% in Q2 2023 versus 25.5% in Q2 2022; for the first half, approximately 8.8% versus 27.1%. The sharp earnings comparison reflects both weaker current operations and significant 2022 one-time items, including a $14.0 million Coal Mining contract termination settlement and a $16.9 million related gain presented in other income.
Segments and material changes
- Coal Mining: Q2 operating loss of $4.7 million versus $21.2 million profit a year earlier; first-half loss of $4.4 million versus $28.5 million profit. MLMC faced rain-related mining disruption, new-area startup costs, lower production and a $1.8 million Q2 inventory impairment ($4.2 million in the first half). Unconsolidated mine earnings also fell, including the effect of Sabine ending deliveries after the Pirkey plant retired.
- NAMining: Q2 operating profit rose to $2.2 million from $1.3 million; first-half profit was $3.0 million versus $2.5 million. Higher quarry earnings and dragline parts sales helped, while reduced reclamation work at Caddo Creek weighed on revenue.
- Minerals Management: Q2 operating profit fell to $7.3 million from $13.1 million; first-half profit fell to $13.3 million from $24.7 million. Lower oil and natural gas prices and less settlement income were key factors; Q2 2022 also included a $2.4 million land-sale gain.
Cash, debt and liquidity
- Cash was $117.0 million at June 30, 2023, up from $110.7 million at year-end 2022. First-half operating cash flow of $23.3 million was below the prior-year $40.5 million, mainly reflecting lower net income and less favorable working capital.
- First-half capital spending was $14.1 million. Cash flow before financing activities was $10.6 million, compared with $18.4 million in the prior-year period. Dividends paid were $3.2 million.
- Total debt was $23.7 million, comprising $3.7 million current maturities and $20.1 million long-term debt. The company reported debt equal to 5% of total capitalization.
- The $150 million revolving facility had no borrowings outstanding; availability was $117.2 million after $32.8 million of letters of credit. NACCO Natural Resources was in compliance with facility covenants. Management said cash, facility capacity and operating cash flow should meet needs for the next 12 months and through the facility’s November 2025 expiration.
Outlook, risks and unusual items
- Management expects consolidated results to decline in Q3 2023 and improve in Q4, but the Q4 improvement is not expected to offset the Q3 decline. Second-half earnings are forecast below both first-half 2023 and second-half 2022; full-year 2023 net income is expected to decrease significantly from 2022. The forecast assumes a negative full-year effective tax rate of 5% to 10%.
- Expected 2023 capital expenditures are approximately $68 million, including up to $20 million for Minerals Management acquisitions. Cash flow before financing is expected to remain positive but decline significantly from 2022.
- Coal deliveries are expected to fall year over year, largely because Sabine ceased deliveries following the Pirkey plant retirement. Coal Mining earnings are expected to be lower, with MLMC costs and reduced unconsolidated mine earnings among the drivers. Management expects MLMC inefficiencies to moderate from Q4 2023 and sees potential segment improvement in 2024.
- NAMining expects second-half and full-year operating profit to exceed 2022 levels, though to be below first-half 2023. Equipment spending supports the Thacker Pass lithium contract; Phase 1 production is projected to begin in the second half of 2026, with customer reimbursement of eligible equipment capital expenditures over five years.
- Minerals Management expects lower 2023 earnings, driven by market expectations for oil and gas prices. Commodity-price volatility and limited visibility into third-party production are key uncertainties.
- Important coal-related risks include proposed EPA greenhouse-gas and mercury rules, coal-combustion-residuals requirements that could temporarily affect Coal Creek Station, and the uncertain operating and maintenance arrangement at the Red Hills Power Plant. Any customer plant closure or suspension could reduce coal demand and materially affect results.
- Other unusual items include the $1.2 million post-closing purchase-price adjustment received in Q1 2023 from the sale of Midwest AgEnergy. Potential earn-out and escrow proceeds of up to approximately $12.9 million remain contingent and are not assured.
- The filing reported no legal proceedings and no material changes to previously disclosed risk factors other than the updated coal regulatory risks. Management stated disclosure controls were effective.
Investor facts to verify
- Whether MLMC’s production, cost per ton and inventory impairment improve as the new mine area ramps up.
- Developments in customer demand and the Red Hills and Coal Creek regulatory and operating matters.
- Actual oil and gas prices, royalty receipts and Minerals Management acquisition spending versus the company’s assumptions.
- Thacker Pass equipment investment, reimbursement timing and progress toward the projected 2026 production start.
- Full-year cash flow, capital expenditures, tax-rate outcome and compliance with revolving-facility covenants.