NACCO Industries, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. NACCO operates Coal Mining, North American Mining (NAMining), and Minerals Management businesses, plus mitigation activities.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $61.4 million | $45.9 million | $116.4 million | $91.0 million |
| Gross profit | $15.6 million | $9.0 million | $31.5 million | $16.7 million |
| Operating profit | $29.7 million | $8.7 million | $44.6 million | $17.0 million |
| Net income | $37.2 million | $6.5 million | $49.8 million | $15.5 million |
| Diluted EPS | $5.07 | $0.91 | $6.79 | $2.16 |
| Operating cash flow | Not presented for the quarter | $40.5 million | $29.3 million |
Reported gross margin was approximately 25.5% in Q2 and 27.1% for the first half, versus 19.6% and 18.3% in the comparable 2021 periods. Operating profit and net income comparisons were substantially affected by the GRE settlement described below.
- Segment performance, first half: Coal Mining revenue was $47.6 million and operating profit $28.5 million; NAMining revenue was $44.2 million and operating profit $2.5 million; Minerals Management revenue was $24.7 million and operating profit $24.7 million. Coal Mining operating profit included a $14.0 million termination settlement.
- Cash and investment: Cash was $97.1 million at June 30, up from $86.0 million at year-end. First-half capital expenditures and mineral-interest acquisitions were $24.9 million; cash flow before financing was $18.4 million.
- Debt and liquidity: Total debt was $18.4 million, down from $20.7 million at year-end; debt to total capitalization was 4%. No borrowings were outstanding under NACoal’s $150 million revolving facility at quarter-end, with $119.9 million of excess availability after letters of credit. The company reported compliance with covenants.
- Balance sheet: Total assets were $547.3 million and stockholders’ equity $402.6 million at June 30, 2022. Total liabilities were $144.7 million.
Material changes and unusual items
- Revenue rose 33.7% in Q2 and 27.9% in the first half year over year. Minerals Management benefited from higher oil and gas prices; NAMining revenue also increased, including reimbursable costs that have offsetting expense.
- GRE’s May 2022 sale of Coal Creek Station triggered termination of agreements with Falkirk. NACCO recorded a total gain of approximately $30.9 million: $14.0 million in operating profit and $16.9 million in other income. Consideration included $14.0 million cash, an office building valued at $4.1 million, and private-company units valued at $12.8 million.
- The GRE transaction also increased the company’s investment in the ethanol-related private company to $17.8 million. NACCO will account for it using the equity method, with a one-quarter reporting lag; no share of earnings or losses was recorded through June 30.
- Other favorable first-half Minerals Management items included $2.1 million of settlement income relating to mineral rights and a $2.4 million gain on sale of land. Fair-value changes in marketable equity securities were a loss of $1.4 million for the first half, versus a gain of $2.1 million a year earlier.
- First-half operating cash flow increased by $11.2 million, but included the effects of higher net income and noncash gains. Investing outflows increased with higher capital spending; dividends paid were $3.0 million.
Outlook, commentary, and risks
- Consolidated outlook: For full-year 2022, excluding GRE/Rainbow Energy and the 2021 Bisti termination settlements, management expects operating profit and net income to decline moderately from 2021. Consolidated Adjusted EBITDA is expected to be comparable to 2021. The expected effective tax rate, including GRE-related settlements, is 15%–17%.
- Coal Mining: Management expects 2022 operating profit to decrease significantly versus 2021, both in the second half and full year. Drivers include lower expected MLMC demand, cost inflation in diesel, repairs and supplies, higher depreciation, the Falkirk management-fee reduction through May 2024, and the Bisti contract termination. Coal Mining capital spending is expected to be about $23 million for 2022, mainly to develop a new MLMC mine area.
- NAMining: Management expects operating profit to increase in the second half and full year versus 2021. Full-year capital spending is now forecast at $13 million, reduced from a prior $28 million estimate, primarily because Thacker Pass equipment spending shifted from 2022 to 2023. The Thacker Pass project depends on development progress and customer execution.
- Minerals Management: Full-year operating profit is expected to rise significantly from 2021, while second-half results are expected to fall significantly from the first half as commodity prices and production volumes moderate. Management is targeting approximately $12 million of additional mineral-interest investments in the second half.
- Capital spending: Consolidated 2022 capital expenditures are expected to be about $61 million. Management expects 2022 cash flow before financing to be significantly lower than in 2021 due to increased capital spending.
- Key risks: Coal results depend on customer demand, power-plant dispatch and contract continuity; MLMC bears its own operating and capital costs and is exposed to diesel costs and potential asset impairment. The Pirkey plant served by Sabine is intended to retire in Q1 2023, after which reclamation is expected to begin, funded by the customer. The Red Hills plant’s operating and maintenance agreement was subject to a termination notice effective June 2023, with restructuring discussions ongoing; the outcome could materially affect MLMC.
- Other risks include volatile oil and gas prices and limited visibility into royalty-property operations; supply-chain, labor, inflation, regulatory and environmental factors; and Coyote Creek guarantees that management considers unlikely to require payment. The private ethanol investment is illiquid and its valuation partly assumes implementation of carbon capture and storage; failure or delay could lead to impairment.
- There were no material changes to previously disclosed risk factors except those described in the filing. Management reported effective disclosure controls and no material change in internal control during the quarter; no legal proceedings were reported.
Important facts for investors to verify
- How much of reported earnings growth reflects the approximately $30.9 million GRE settlement and other one-time gains, versus recurring operations?
- Whether MLMC demand, cost per ton, and Red Hills operating arrangements support the company’s outlook and avoid impairment.
- Progress on the Thacker Pass project, NAMining growth plans, and Minerals Management acquisitions, including their timing, funding, and returns.
- The valuation, liquidity, carbon-capture assumptions, and eventual equity-method earnings contribution of the $17.8 million ethanol-company investment.
- Whether planned capital expenditures, cash generation, and revolver availability remain consistent with management’s liquidity outlook.