NACCO Industries, Inc. — Q3 2022 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2022, compared with the same periods in 2021. NACCO operates Coal Mining, North American Mining (NAMining) and Minerals Management, plus unallocated activities. Segment presentation was revised retrospectively in 2022 to move Caddo Creek and Demery from Coal Mining to NAMining; consolidated results were unchanged.
Financial performance
Amounts below are in millions of dollars except per-share data. Revenue increased, but quarterly net income declined substantially against a prior-year quarter that included a Bisti contract termination payment. Nine-month net income benefited from the 2022 GRE settlement.
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $61.8 | $51.7 | $178.2 | $142.7 |
| Gross profit | $17.8 | $14.3 | $49.3 | $31.0 |
| Operating profit | $9.8 | $27.6 | $54.4 | $44.6 |
| Net income | $10.6 | $24.8 | $60.4 | $40.3 |
| Diluted EPS | $1.45 | $3.47 | $8.24 | $5.63 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $54.9 | $67.8 |
Consolidated gross margin was approximately 28.8% in Q3 2022 versus 27.7% in Q3 2021; nine-month margin was approximately 27.7% versus 21.7%. Operating margin was approximately 15.9% and 53.3% for the respective quarters, and 30.6% and 31.2% for the respective nine-month periods.
- Segment results: Q3 Coal Mining operating profit was $6.1 million versus $22.0 million; NAMining recorded a $0.2 million operating loss versus $1.4 million profit; Minerals Management operating profit rose to $10.6 million from $9.5 million. For nine months, segment operating profit was $34.6 million in Coal Mining, $2.3 million in NAMining and $35.3 million in Minerals Management.
- Cash, investment and debt: Cash was $92.8 million at September 30, 2022, versus $86.0 million at year-end 2021. Total debt was $18.3 million, down from $20.7 million; debt-to-total-capitalization was 4%. The NACoal revolving facility had no borrowings and $119.3 million of availability after $30.7 million of letters of credit. NACCO reported covenant compliance.
- Cash flow and capital spending: Nine-month investing cash use was $39.2 million, including $42.0 million of capital expenditures and mineral-interest acquisitions; financing cash use was $8.9 million, including $4.5 million of dividends. Operating cash flow fell $12.9 million year over year, primarily due to working capital, including a larger federal income-tax receivable. Cash flow before financing was $15.7 million versus $32.8 million.
- Balance sheet: Total assets were $560.2 million and stockholders’ equity was $415.4 million at September 30, 2022. Investment in unconsolidated subsidiaries was $9.9 million versus $19.1 million at year-end.
Material changes and unusual items
- GRE’s Coal Creek Station transaction resulted in $30.9 million of total pre-tax termination consideration recognized in 2022: $14.0 million as a Coal Mining contract termination settlement and approximately $16.9 million in other contract termination settlements, including cash, an office building and private-company membership units. This makes year-over-year earnings comparisons less representative of recurring performance.
- The Q3 2021 comparison included a $10.3 million Bisti termination payment. Q3 2022 also included a $3.9 million non-cash impairment of legacy Minerals Management assets and a $0.8 million one-time voluntary-retirement charge in NAMining.
- Minerals Management results rose with higher oil and gas prices, increased production, $2.1 million of settlement income and a $2.5 million land-sale gain during the first half of 2022. Q3 included $2.2 million of equity-method income from the private ethanol-company investment. Market-value movements in equity securities were also recorded.
- Nine-month capital spending was $42.0 million. The company acquired mineral interests, including an $11.4 million acquisition in Texas and Wyoming during Q3, and invested in mine and equipment development.
Outlook, commentary and risks
- 2022: Management expected full-year consolidated operating profit, net income and adjusted EBITDA to improve significantly over 2021 excluding the GRE/Rainbow Energy and Bisti settlements. Minerals Management and the ethanol investment were expected to help offset lower Coal Mining results and higher unallocated employee costs. Full-year capital expenditures were forecast at approximately $61 million; cash flow before financing was expected to be significantly below 2021.
- 2023: Management expected consolidated net income to decrease significantly from 2022, including the effect of the $30.9 million 2022 termination income. Even excluding that settlement, management forecast materially lower Minerals Management royalties and lower Coal Mining earnings, partly offset by improved NAMining results and lower taxes. Forecast capital spending was approximately $39 million, excluding Minerals Management; the latter was targeting up to $10 million of additional acquisitions.
- Key operating exposures: Minerals Management earnings depend on volatile oil and gas prices, third-party development and production, with limited visibility into lessee activity. Coal demand depends on customer requirements and power-plant dispatch; Sabine deliveries were expected to cease in Q1 2023 following the planned Pirkey plant retirement. Coteau’s Synfuels Plant customer requirements could change, and a proposed Dakota Gas asset transfer remained conditional. MLMC faces cost inflation, especially diesel, repairs and supplies, while index-based sales-price adjustments may lag costs; TVA dispatch decisions affect demand.
- Other risks and contingencies: NACCO disclosed potential Coyote Creek guarantee obligations, but management considered performance remote and recorded no liability. The company reported no legal proceedings in Part II. It identified risks to the value and liquidity of its approximately $20.0 million Midwest AgEnergy investment, including uncertainty around carbon capture and a proposed sale. The announced sale was expected to close by year-end 2022, but completion and proceeds were not assured. Management stated liquidity was adequate for operating needs and commitments.
Important facts for investors to verify
- Whether 2022 earnings and cash generation meet the outlook after excluding the GRE settlement and other nonrecurring items.
- Actual 2023 oil and gas prices, royalty volumes and lessee development compared with management’s assumptions.
- MLMC cost inflation, price-escalation timing, TVA dispatch and the status of the Red Hills operating and maintenance agreement.
- Timing and financial terms of the Midwest AgEnergy sale, and whether it closes as anticipated.
- Coal customer requirements and plant plans, particularly Sabine’s cessation of deliveries and the Synfuels Plant outlook.
- Execution, reimbursement and returns on planned NAMining and Minerals Management investment and capital expenditures.