NACCO Industries, Inc. — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020. This is an annual filing; it does not provide a standalone fourth-quarter results summary. NACCO operates Coal Mining, North American Mining (NAMining) and Minerals Management businesses, with additional mitigation banking and legacy mine-liability activities.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $128.4 million | $141.0 million |
| Gross profit | $17.0 million | $31.1 million |
| Operating profit | $13.4 million | $38.8 million |
| Income before tax | $14.3 million | $43.4 million |
| Net income | $14.8 million | $39.6 million |
| Diluted earnings per share | $2.10 | $5.66 |
| Cash from operating activities | $(2.5) million | $52.8 million |
| Cash used for investing activities | $(46.0) million | $(20.3) million |
Revenue declined about 9% and net income about 63% year over year. Gross margin was approximately 13.2%, compared with 22.1% in 2019. Operating cash flow turned negative, primarily reflecting unfavorable working-capital movements and lower net income. Investing outflows increased, including $14.2 million spent acquiring Permian Basin mineral interests.
- Coal Mining: Revenue was $72.1 million versus $68.7 million; segment operating profit fell to $25.4 million from $34.1 million. Coal deliveries declined to 31.0 million tons from 34.6 million. Lower unconsolidated mine earnings, an MLMC inventory impairment and Camino Real wind-down costs contributed to the decline.
- NAMining: Revenue was $42.4 million versus $42.8 million. Operating profit improved to $1.9 million from a $0.6 million loss, mainly due to customer and work mix.
- Minerals Management: Revenue fell to $14.7 million from $30.1 million and operating profit to $3.5 million from $25.7 million. The decline reflected lower royalties from Ohio gas wells as production declined from high initial rates, lower commodity prices, and a $7.3 million impairment charge.
Liquidity, debt and capital
At December 31, 2020, cash and cash equivalents were $88.5 million, down from $122.9 million. Total debt was $46.5 million, up from $24.9 million; debt to total capitalization increased to 13% from 8%. NACoal had $30.0 million drawn on its $150.0 million revolving facility, with approximately $117.0 million of excess availability after letters of credit. The facility expires in August 2022, and NACoal was in compliance with its financial covenants. Asset retirement obligations totaled $41.7 million.
Management expects approximately $46 million of 2021 capital expenditures: $27 million in Coal Mining, $10 million in Minerals Management and $9 million in NAMining. The company paid $5.4 million in dividends during 2020. Its share-repurchase program was suspended in March 2020.
Material developments, outlook and risks
- Coal customer transitions pose significant risks. GRE announced plans to retire Coal Creek Station in the second half of 2022, affecting Falkirk, and AEP announced the intended 2023 retirement of the Pirkey Plant, supplied by Sabine. Basin Electric is considering changes that could reduce or eliminate Synfuels Plant coal needs beginning no earlier than 2026. Customer-funded closure terms apply at Falkirk and Sabine, but plant closures could materially reduce future earnings.
- The Camino Real contract ended in July 2020 after its customer’s coal supply contract was terminated, and the Eagle Pass Mine closed. Caddo Creek’s Marshall Mine is also expected to close; NACCO contracted to conduct reclamation.
- In 2021, management expects coal deliveries broadly comparable to 2020, but Coal Mining operating profit to decrease significantly. NAMining operating profit is expected to increase moderately. Minerals Management operating profit, excluding the 2020 write-off, is expected to decline substantially. Overall 2021 net income is expected to decrease significantly from 2020; management nevertheless cited growth opportunities in NAMining, Minerals Management and mitigation banking. Cash flow before financing activities is expected to be positive, but below 2019.
- NAMining’s Thacker Pass lithium project received a Bureau of Land Management Record of Decision in January 2021. Further permits were expected later in 2021, with production then projected to begin in the second half of 2022. Project timing remains dependent on permits and development.
- 2020 included $8.4 million of asset impairment charges, a $2.0 million MLMC inventory impairment, and $1.8 million of voluntary-separation charges. The tax provision was a $0.5 million benefit, including CARES Act carryback benefits partly offset by discrete tax charges; the reported effective tax rate was negative 3.8%.
- Major ongoing risks include coal plant retirements and energy-transition regulation, customer concentration, natural gas and oil price volatility, third-party control over royalty-property development, mine reclamation estimates, and COVID-19 uncertainty. The filing also identifies potential Coyote Creek guarantees, including a make-whole payment under specified termination or default conditions; management considers performance remote and recorded no liability.
Important facts for investors to verify
- Whether announced or potential power-plant closures, customer demand changes and contract terms alter projected coal earnings, particularly at Falkirk and Sabine.
- Whether 2021 segment outlook and planned capital spending remain achievable, including the timing, permits and economics of Thacker Pass.
- Whether working capital improves enough to support positive 2021 cash flow before financing, and how debt and facility availability evolve before the August 2022 maturity.
- Whether declining Ohio gas royalties, commodity prices and operator activity affect Minerals Management results, and whether new acquisitions generate expected returns.
- Whether reclamation obligations, surety-bond transfers, Coyote Creek guarantees or future impairment indicators require additional expense or cash funding.
The financial statements received an unqualified audit opinion, and the auditor also reported effective internal control over financial reporting as of December 31, 2020.