NACCO Industries, Inc. — Q1 2023 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2023, compared with the three months ended March 31, 2022. NACCO operates Coal Mining, North American Mining (NAMining), and Minerals Management, along with mitigation and other unallocated activities. Amounts below are in millions, except per-share data.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $50.1 | $55.0 |
| Gross profit | $3.4 | $15.8 |
| Operating profit | $1.8 | $14.9 |
| Net income | $5.7 | $12.6 |
| Diluted EPS | $0.76 | $1.72 |
| Operating cash flow | $6.3 | $(1.1) |
- Gross margin was approximately 6.7%, versus 28.8% a year earlier; operating margin was approximately 3.6%, versus 27.2%.
- Cash and equivalents were $109.6 at March 31, compared with $110.7 at year-end 2022. Total debt was $20.4, including $2.9 current maturities; debt to total capitalization was 5%.
- Working capital was approximately $222.2. NACoal’s $150.0 revolving facility had no borrowings and $117.0 of excess availability after letters of credit. The company reported compliance with financial covenants.
- Capital expenditures and mineral-interest purchases were $7.9. Cash used in investing was $6.5; financing activities used $0.9, including $1.6 in dividends.
Changes and segment results
- Revenue declined about 9% and operating profit about 88% year over year. Net income was supported by a $1.3 income tax benefit; the effective tax rate was negative 30.3%, compared with a 15.8% provision rate in Q1 2022.
- Coal Mining: Revenue was $20.7, roughly flat, but operating profit fell to $0.3 from $7.4. Results were pressured by a $2.4 inventory impairment at MLMC, higher cost per ton from opening a new mine area and adverse weather, and lower earnings from unconsolidated mines. Coal deliveries were 6.9 million tons versus 7.0 million.
- NAMining: Revenue was $20.6 versus $21.4 and operating profit was $0.8 versus $1.3. Lower reclamation activity at Caddo Creek partly offset higher customer requirements; tons delivered increased to 14.8 million from 14.0 million.
- Minerals Management: Revenue declined to $8.3 from $12.8 and operating profit to $6.0 from $11.6, reflecting lower oil and gas prices, natural well-volume declines, and a $2.1 settlement included in Q1 2022.
- Operating cash flow improved by $7.3 year over year, primarily due to a favorable working-capital change, partly offset by lower net income. Capital spending increased to $7.9 from $4.6.
Outlook, risks and unusual items
- Management expects 2023 consolidated net income to decrease significantly versus 2022, which included $30.9 of pretax contract-settlement income. It expects a negative effective tax rate of 30%–35% for 2023 and positive, but significantly lower, cash flow before financing than in 2022.
- Coal deliveries are expected to decrease moderately in 2023. Coal Mining operating profit and Segment Adjusted EBITDA are expected to fall significantly; MLMC’s higher costs and inefficiencies are expected to continue through Q3 and moderate in Q4. Falkirk’s temporary customer price concessions extend through May 2024.
- Sabine ceased deliveries in March after the Pirkey power plant retired; reclamation began April 1, with costs funded by the customer and compensation at a lower rate than active mining.
- NAMining operating profit is expected to decline moderately in 2023, while Segment Adjusted EBITDA is expected to improve. Planned 2023 capital expenditures are approximately $37 for NAMining, principally equipment for the Thacker Pass lithium project; the customer is to reimburse equipment costs over five years. Phase 1 production at Thacker Pass is projected to begin in the second half of 2026.
- Minerals Management operating profit and Segment Adjusted EBITDA are expected to decline significantly, based on lower expected oil and gas prices, declining production from existing wells, and limited new development. Planned 2023 capital expenditures are approximately $21, including up to $20 for mineral and royalty interests. Total company 2023 capital expenditures are expected to be approximately $72.
- Key risks include the Red Hills Power Plant customer’s missed lease payment and restructuring negotiations, with a possible O&M agreement termination effective June 30, 2023; and the EPA’s proposed denial of a Coal Creek Station coal-ash liner application, which could lead to temporary plant suspension and reduced lignite demand for Falkirk. Management says either matter could materially affect results.
- Other items: the company received a $1.2 post-closing adjustment on its 2022 Midwest AgEnergy divestiture and may receive contingent payments; it acquired the Marshall Mine, received $2.2 cash, assumed an estimated $1.9 reclamation obligation, and recognized an approximately $0.3 gain. The Q1 MLMC inventory impairment was $2.4.
- Management described its long-term outlook positively, including growth opportunities in minerals, mitigation and contract mining. Forward-looking results remain exposed to commodity prices, customer contracts and plant dispatch, regulation, weather, operating costs, and execution of growth investments.
Important facts for investors to verify
- Developments in Red Hills restructuring and the customer’s O&M agreement, and any effect on MLMC.
- EPA action on the Coal Creek Station CCR application and any operational consequences for Falkirk.
- MLMC cost, production and inventory trends as the new mine area progresses; confirmation of expected cost moderation.
- Actual oil and gas prices, royalty volumes and Minerals Management performance relative to management’s 2023 assumptions.
- Thacker Pass construction, equipment reimbursements, project timing, and NACCO’s planned capital spending and liquidity.
- Potential Coyote Creek guarantee exposure; management reported that performance was considered remote and no liability was recorded.