NACCO Industries, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in millions unless noted. NACCO operates Coal Mining, North American Mining (NAMining) and Minerals Management businesses, plus unallocated activities.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $45.9 | $35.4 | $91.0 | $73.0 |
| Gross profit | $9.0 | $3.8 | $16.7 | $8.9 |
| Operating profit | $8.7 | $4.5 | $17.0 | $12.1 |
| Net income | $6.5 | $6.1 | $15.5 | $12.2 |
| Diluted EPS | $0.91 | $0.86 | $2.16 | $1.74 |
- Calculated gross margin was 19.6% in Q2 2021 versus 10.9% in Q2 2020; for the first six months it was 18.3% versus 12.2%. Operating margin was 18.9% versus 12.7% for Q2 and 18.7% versus 16.5% for the first half.
- Six-month operating cash flow was $29.3 million, compared with cash use of $12.5 million in 2020. Investing used $16.1 million; financing used $16.7 million. Cash decreased $3.4 million to $85.0 million.
- At June 30, total debt on the consolidated balance sheet was $32.0 million, down from $46.5 million at year-end 2020. Equity was $315.7 million; debt to total capitalization was 9%, versus 13%. Total current assets were $189.3 million and current liabilities $40.4 million.
- NACoal’s separate revolving facility had $19.0 million outstanding and $109.9 million of excess availability after letters of credit. NACoal was in compliance with facility covenants. The facility expires in August 2022.
- Six-month capital expenditures and mineral-interest acquisitions were $16.1 million. The company paid $2.8 million in dividends.
Changes and segment results
- Revenue increased 29.8% in Q2 and 24.7% for the first half. Growth reflected higher NAMining activity and reimbursable costs, increased Minerals Management royalty income, and Caddo Creek reclamation revenue. Reimbursable costs generally increase revenue and cost of sales without directly increasing operating profit.
- Coal Mining operating profit rose to $8.5 million from $7.5 million in Q2 and to $17.2 million from $14.7 million for the first half. Improvements included Caddo Creek reclamation and better MLMC per-ton economics; reduced fees at Liberty and other factors partly offset the gains.
- NAMining Q2 operating profit improved to $0.8 million from $0.5 million, but first-half profit declined to $0.9 million from $1.3 million, mainly due to higher employee-related and business-development expenses.
- Minerals Management operating profit increased to $4.2 million from $0.5 million in Q2 and to $8.4 million from $4.8 million for the first half. Higher gas and oil royalties, acquired interests and favorable commodity prices contributed.
- Q2 net income increased only modestly despite higher operating profit, in part because income tax expense was $2.9 million versus a tax benefit of $0.5 million in Q2 2020. Six-month income tax expense was $2.6 million versus a $0.5 million benefit.
Outlook, developments and risks
- Management expected full-year 2021 net income to be significantly above 2020, principally from anticipated approximately $24 million in Falkirk and Bisti termination-related payments and the absence of $12.1 million of prior-year charges. Excluding these items, management expected significantly lower net income. Consolidated adjusted EBITDA was expected to increase moderately excluding the payments and prior-year impairment charges.
- Management expected full-year capital expenditures of approximately $61 million, including approximately $45 million in the second half. Spending includes MLMC mine development, NAMining equipment and mineral-interest acquisitions. Higher MLMC investment is expected to increase future depreciation and weigh on operating profit.
- GRE agreed to sell Coal Creek Station to Rainbow Energy, subject to conditions and expected to close before year-end 2021. If completed, Falkirk was to receive $14 million cash, an office building and Midwest AgEnergy membership units; a new coal supply agreement was expected to provide a ten-year initial production period. The new arrangement includes lower management fees through May 2024. These outcomes remained conditional at the filing date.
- Bisti’s contract with Navajo Transitional Energy Company was scheduled to end September 30, 2021; NACCO anticipated an approximately $10 million termination fee. NTEC was to assume mine operations and related liabilities, including reclamation.
- Coal deliveries and earnings face risks from customer power-plant dispatch and potential plant closures: Pirkey was expected to retire in 2023, while Basin Electric was evaluating possible changes or sale of the Synfuels Plant that could affect coal demand beginning in 2026. Management expected 2021 coal deliveries to decline moderately and underlying coal earnings to weaken after excluding termination payments and nonrecurring items.
- NAMining signed new agreements, including a 15-year Florida quarry contract, an Indiana sand-and-gravel contract and, in late July, two Texas and Arkansas quarry contracts. Management expected second-half NAMining activity and profit to improve; Thacker Pass lithium development remained dependent on major permits expected by year-end.
- Minerals Management planned further mineral and royalty acquisitions. Its second-half outlook was affected by natural production declines at certain Ohio wells, partly offset by newer Permian and Eagle Ford interests and commodity prices.
- Risks include contract termination or customer default, reduced coal demand, power-plant closures, commodity and operating-cost changes, reclamation and surety requirements, permitting, COVID-19 and supply-chain disruption, and potential tax-law changes. The filing notes proposed federal tax changes could affect future tax expense. NACCO reported no legal proceedings in Part II and no material change to previously disclosed risk factors. Coyote Creek guarantees were described as remote; no related liability was recorded.
Important facts for investors to verify
- Whether the Coal Creek sale closed and the Falkirk agreement, related consideration and revised fees took effect.
- Whether NACCO received the anticipated Falkirk and Bisti payments, and the effects of Bisti’s contract termination on subsequent results.
- Actual customer demand, coal deliveries and earnings at MLMC and other coal operations, including developments involving Pirkey and the Synfuels Plant.
- Execution, production ramp-up, permits and realized returns from NAMining contracts and planned capital spending.
- Minerals Management production, royalty receipts, commodity-price exposure and returns on acquisitions; reported royalty revenue relies partly on estimates because NACCO has limited operating information.
- Liquidity and financing needs as planned capital spending proceeds, including facility renewal, letters of credit, covenant compliance and surety-bond capacity.