NACCO Industries, Inc. — FY 2022 Form 10-K
Reporting period: Year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter earnings filing. NACCO operates in Coal Mining, North American Mining (NAMining) and Minerals Management; Mitigation Resources and legacy-liability activities are included in unallocated items.
Financial performance
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $241.7 million | $191.8 million |
| Gross profit / gross margin | $67.8 million / 28.1% | $43.5 million / 22.7% |
| Operating profit / operating margin | $70.0 million / 29.0% | $55.4 million / 28.9% |
| Income before tax | $87.7 million | $56.9 million |
| Net income / diluted EPS | $74.2 million / $10.06 | $48.1 million / $6.69 |
| Operating cash flow | $67.7 million | $74.9 million |
| Cash and cash equivalents at year-end | $110.7 million | $86.0 million |
| Total debt at year-end | $19.7 million | $20.7 million |
Revenue rose about 26% and net income about 54% year over year. Reported growth includes substantial nonrecurring contract-termination consideration: $30.9 million in total from the Falkirk–Great River Energy settlement, recorded across operating profit and other income. Other unusual items included a $3.9 million noncash impairment of legacy mineral assets and a $2.1 million mineral-rights settlement. The reported effective tax rate was 15.5%; excluding $1.5 million of discrete tax benefits, it was 17.1%.
Investing activities used $33.2 million, including $42.5 million of property and equipment expenditures and $11.9 million for mineral-interest acquisitions, partly offset by $18.6 million received from the sale of the MAG investment. Cash flow before financing activities was $34.6 million. The current ratio was approximately 5.9, based on reported current assets and liabilities. NACoal had no year-end borrowings under its revolving facility and $116.3 million of net availability after letters of credit; the $150 million facility expires in November 2025. Debt was 4% of total capitalization.
Segments and material changes
- Coal Mining: Revenue increased to $95.2 million from $82.8 million, while operating profit decreased to $38.3 million from $45.8 million. Higher MLMC sales prices and customer requirements lifted revenue, but higher diesel-linked costs, lower unconsolidated-mine earnings and expenses weighed on profit. Coal deliveries fell to 28.5 million tons from 30.8 million.
- NAMining: Revenue increased to $85.7 million from $78.9 million; operating profit declined to $2.2 million from $3.4 million. Higher overhead and a $0.8 million voluntary-retirement charge offset improved gross profit. Management said 2022 results did not meet expectations.
- Minerals Management: Revenue rose to $60.2 million from $31.0 million and operating profit to $52.2 million from $26.1 million. Higher oil and gas prices, increased production from newly developed wells, settlement income and a land-sale gain contributed.
- Effective January 1, 2022, Caddo Creek and Demery were reclassified from Coal Mining to NAMining; prior-period segment figures were recast, with no effect on consolidated results.
Outlook, risks and contingencies
- Management expects 2023 consolidated net income to decrease substantially from 2022, including because 2022 contained $30.9 million of contract-termination income. Cash flow before financing is expected to remain positive but decline significantly. The expected 2023 effective tax rate is 2%–5%.
- Coal Mining: Deliveries and operating profit are expected to fall significantly. Sabine deliveries are expected to stop in March 2023 as the customer plans to retire the Pirkey Plant; reclamation was expected to begin April 1, with the customer responsible for funding it. Falkirk’s temporary management-fee reduction continues through May 2024. MLMC faces start-up costs and higher depreciation as it develops a new mine area; management expects improvement after 2023 as costs and contractual price adjustments catch up.
- NAMining: 2023 operating profit is expected to decline, mainly because Caddo Creek reclamation work substantially finished in 2022; Segment Adjusted EBITDA is expected to increase. Planned 2023 capital expenditures are about $39 million, primarily Thacker Pass equipment. The customer is to reimburse those expenditures over five years. Thacker Pass production is projected by the project owner to begin in the second half of 2026.
- Minerals Management: Operating profit and Segment Adjusted EBITDA are expected to decrease significantly in 2023 because of lower expected commodity prices, natural well declines and modest anticipated new development. The company is targeting up to $20 million of mineral and royalty acquisitions in 2023.
- Red Hills exposure: CGLP missed a December 2022 lease payment for the Red Hills Power Plant; the related Southern Company subsidiary could not make its debt payment. A termination notice for the operating and maintenance agreement is subject to restructuring negotiations and a forbearance agreement. The outcome is unresolved and could materially affect NACCO if the agreement is terminated.
- Other key risks include customer concentration (one Coal Mining customer represented 39% of consolidated revenue and one NAMining customer 17% in 2022), coal-plant dispatch and retirement decisions, environmental and climate regulation, fuel and commodity-price volatility, reclamation estimates, and Coyote Creek guarantee exposure. Management considered performance under the Coyote Creek guarantees remote; no liability was recorded.
- Management expressed a positive long-term view of diversification and growth in Minerals Management, NAMining and Mitigation Resources. Independent auditor Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Investor facts to verify
- Track the Red Hills restructuring and whether the operating and maintenance agreement remains in effect.
- Confirm Pirkey Plant retirement timing, Sabine’s transition to customer-funded reclamation, and the financial effect of the closure.
- Monitor MLMC’s new mine-area costs, delivery volumes, inventory and timing of contractual cost recovery.
- Compare actual 2023 oil and gas prices, production and new-well activity with management’s assumptions behind the expected Minerals Management decline.
- Assess Thacker Pass construction progress, contract economics, capital reimbursement schedule and expected production start date.
- Reconcile reported earnings with the $30.9 million termination settlement and other one-time items when evaluating recurring profitability and cash generation.