NACCO Industries, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2021, compared with the same period in 2020. NACCO operates Coal Mining, North American Mining (NAMining) and Minerals Management businesses, alongside stream and wetland mitigation activities. Its coal business primarily uses long-term, service-based contracts; Minerals Management earns royalties from third-party mineral development.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $45.1 million | $37.6 million |
| Gross profit / margin | $7.7 million / 17.1% | $5.1 million / 13.5% |
| Operating profit / margin | $8.3 million / 18.5% | $7.6 million / 20.1% |
| Net income | $9.0 million | $6.2 million |
| Diluted earnings per share | $1.25 | $0.88 |
| Operating cash flow | $(0.9) million | $(31.1) million |
| Capital expenditures and mineral-interest purchases | $4.9 million | $5.4 million |
Net income includes $15.3 million of earnings from unconsolidated operations and an $0.8 million gain on equity securities; the comparable periods reported $16.0 million and a $1.2 million loss, respectively. The income tax benefit was $0.3 million, an effective benefit rate of 3.4%.
At March 31, cash was $79.1 million, total assets $479.2 million, and stockholders’ equity $309.4 million. Balance-sheet debt totaled $44.4 million, down from $46.5 million at year-end 2020; debt to total capitalization was 13%. Current assets were $192.8 million and current liabilities $45.9 million. NACoal separately reported $28 million drawn on its $150 million revolving facility, with $119 million of excess availability after letters of credit. The company said available cash, facility capacity and operating cash flows should cover operating needs and commitments for the next 12 months and through the facility’s August 2022 expiry.
Changes versus prior year
- Revenue increased 19.8%, led by NAMining, whose revenue rose 38.9% mainly because of higher reimbursable costs; these costs also increased cost of sales and did not add to operating profit.
- Coal Mining operating profit increased to $8.7 million from $7.2 million, mainly on improved MLMC gross profit and lower Centennial costs, partly offset by lower earnings from unconsolidated operations.
- NAMining operating profit fell to $0.1 million from $0.7 million, reflecting lower gross profit on Thacker Pass work and higher employee-related costs.
- Minerals Management revenue rose 4.9%, but operating profit was broadly unchanged at $4.2 million. Permian Basin royalties partly offset declining production and lower natural gas prices affecting Ohio interests.
- Operating cash use improved by $30.2 million, primarily from more favorable working-capital movements. Cash nevertheless declined $9.3 million during the quarter to $79.1 million.
Outlook, risks and notable items
- Management expects 2021 coal deliveries comparable to 2020, but Coal Mining operating profit lower than 2020 excluding specified prior-year charges. NAMining expects higher full-year tons, operating profit and EBITDA; Minerals Management expects moderately lower operating profit and EBITDA excluding the 2020 impairment and post-quarter acquisitions.
- Consolidated 2021 net income is expected to be substantially lower than 2020 excluding prior-year charges and the impact of additional business-development activities. Consolidated EBITDA is expected to increase moderately on a comparable adjusted basis. Management expects a 3%–5% tax benefit rate and positive cash flow before financing, below 2019’s level.
- Full-year 2021 consolidated capital expenditures are expected to be approximately $47 million. Planned areas include MLMC mine development, NAMining draglines and mineral-interest acquisitions. Management also targets approximately $10 million of mineral and royalty acquisitions; it reported two acquisitions early in Q2, including an Eagle Ford purchase with a preliminary price of $4.7 million.
- NAMining signed a 15-year Florida quarry contract and amended another customer contract; early in Q2 it also signed a one-year Indiana sand-and-gravel contract. Thacker Pass received a federal Record of Decision in January 2021, with major permits expected by year-end.
- Coal customer and plant developments pose material longer-term risks: Four Corners seasonal operations are expected to reduce Bisti deliveries to 3.3–3.5 million tons annually beginning in 2024; the Pirkey Plant is expected to retire in 2023; and Coal Creek Station’s planned 2022 retirement or potential sale could affect Falkirk contract terms. Basin Electric is considering changes that could reduce or eliminate Synfuels Plant coal needs beginning no earlier than 2026.
- The company expects to post up to $28 million of reclamation collateral before year-end 2021 or replace some surety bonds with other acceptable financial assurance. Cash collateral could increase borrowing needs; letters of credit would reduce revolver availability.
- Other risks include customer demand and power-plant dispatch, natural gas and diesel prices, mine permitting and reclamation costs, insurance and supply-chain inflation, COVID-19 impacts, and the ability to execute growth investments. The filing reports no material change to previously disclosed risk factors, no legal proceedings, and no material change in internal controls.
Important facts for investors to verify
- Progress and economics of NAMining growth contracts, especially Thacker Pass permitting and the new quarry projects.
- Coal contract and customer developments, including the timing and effects of plant retirements, potential sales and reduced dispatch.
- Royalty production, commodity-price trends and returns from recent and planned mineral-interest acquisitions.
- How reclamation collateral requirements affect liquidity, borrowing capacity and surety-bond availability.
- Whether the expected lower net income, higher EBITDA and positive 2021 pre-financing cash flow are achieved; these are forward-looking estimates.