NACCO Industries, Inc. — FY2019 Form 10-K
Reporting period: Year ended December 31, 2019; comparisons are to FY2018. This is an annual filing, not a standalone fourth-quarter report. Unless indicated otherwise, figures below are in U.S. dollars.
Business context
NACCO is a holding company operating in mining and natural resources through Coal Mining, North American Mining (NAMining) and Minerals Management. Coal Mining primarily earns management fees under long-term contracts; NAMining provides contract mining services, primarily for aggregates; Minerals Management earns royalties from third-party development of mineral interests. Several coal and mining operations are unconsolidated and accounted for under the equity method, which materially affects how reported revenue compares with the scale of those operations.
Financial and operating results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $141.0 million | $135.4 million |
| Gross profit | $31.1 million | $30.0 million |
| Operating profit | $38.8 million | $43.6 million |
| Income before tax | $43.4 million | $42.2 million |
| Net income | $39.6 million | $34.8 million |
| Diluted EPS | $5.66 | $5.00 |
| Operating cash flow | $52.8 million | $54.6 million |
| Capital expenditures | $24.7 million | $20.9 million |
Revenue increased 4.1%, while operating profit declined 11.0% and net income rose 13.9%. Gross margin was approximately 22.1% in both years; operating margin was approximately 27.5% versus 32.2%, and net margin was 28.1% versus 25.7%. Operating profit includes $63.9 million of earnings from unconsolidated operations. Those entities reported $734.5 million of revenue, largely including customer-reimbursed mine costs, which is not consolidated into NACCO’s revenue.
- Coal Mining: Revenue fell 15.8% to $68.7 million and operating profit fell to $23.3 million from $38.3 million. Coal deliveries declined to 34.6 million tons from 38.5 million. Lower dispatch at the Red Hills power plant reduced MLMC customer demand; lower unconsolidated mine earnings and higher SG&A also weighed on results.
- NAMining: Revenue rose 15.9% to $42.8 million, but the segment recorded a $0.7 million operating loss versus $1.9 million profit. Higher labor, repair, supply, business-development and employee costs offset growth in fixed-price contract activity.
- Minerals Management: Revenue increased to $30.1 million from $17.4 million and operating profit to $25.7 million from $14.3 million, primarily from increased third-party natural-gas well activity on Ohio acreage.
The effective tax rate declined to 8.7% from 17.5%; FY2019 included a $2.5 million discrete tax benefit. Excluding discrete items, the rates were approximately 14.5% and 14.7%, respectively.
Cash, debt and liquidity
- Cash and cash equivalents were $122.9 million at year-end, up from $85.3 million. Total debt was $24.9 million, versus $11.0 million; debt to total capitalization was 8%, versus 4%. The resulting cash balance exceeded reported debt, though cash and borrowing arrangements are held across the parent and subsidiaries.
- Cash flow before financing activities was $32.5 million, down from $36.2 million. Operating cash flow decreased mainly because of working-capital changes, including a $9.3 million inventory increase, largely at MLMC amid lower customer requirements.
- The NACoal revolving facility provides up to $150 million and expires in August 2022. Borrowings were $16.0 million, with $132.6 million of excess availability at year-end. NACoal was in compliance with its financial covenants.
- Asset retirement obligations were $36.9 million. Contractual cash obligations totaled $104.8 million, including $68.2 million due in 2020; the filing separately notes that certain reclamation, pension and tax obligations are not fully reflected in that table.
Material changes, outlook and key risks
- FY2019 operating profit included unfavorable revisions to mine-reclamation estimates, including a $2.5 million adverse Centennial revision and a $3.1 million increase to MLMC’s obligation. Centennial permit transfers also reduced reclamation obligations, with associated escrow and cash transfers and a net loss recorded.
- NACCO received $2.7 million from a former India customer in 2019: $1.4 million for past invoices and $1.3 million of interest. The filing also reports a $0.9 million pension settlement charge.
- For 2020, management expected a modest decrease in consolidated operating profit and lower net income, mainly because Minerals Management royalty income was expected to fall substantially from 2019’s elevated levels, and because the India receipt and 2019 tax benefit would not recur. The expected 2020 effective tax rate was 10%–12%, excluding discrete items.
- Management expected modestly higher coal deliveries and higher Coal Mining profit, significantly improved NAMining results, and approximately $33 million of consolidated capital expenditures in 2020. Planned spending included about $24 million in Coal Mining and $9 million in NAMining; elevated MLMC spending was expected through 2021.
- During 2019, NAMining secured a 20-year contract to mine the Thacker Pass lithium project, subject to the project’s permits and development. Sawtooth Mining committed up to $3.5 million in development cash, of which $1.5 million had been provided by year-end. Equipment purchases of up to $50 million are contemplated after permits and financing; project construction and production were then expected to begin in 2021 and 2023, respectively.
- Customer concentration is significant: Choctaw Generation represented 48% of consolidated revenue, CEMEX 21%, and Ascent Resources 12% in 2019. Two customers contributed approximately 60% of Coal Mining earnings from unconsolidated operations. Great River Energy announced in early 2020 that it was evaluating the economics of Coal Creek Station, which its long-term contract serves.
- Other material risks include coal-demand pressure from natural gas and renewables, customer dispatch and plant closures, regulatory and environmental requirements, reclamation-cost estimates, commodity prices and third-party well-development decisions. The filing also identifies pandemic disruption, including coronavirus, as a potential operational and liquidity risk. NoDak’s coal-drying contract expired in the first quarter of 2020.
Most important facts for investors to verify
- Whether customer dispatch, especially at Red Hills and Coal Creek Station, supports management’s coal-delivery and earnings expectations.
- How quickly Ohio gas production and royalty income decline, and the resulting impact on Minerals Management and consolidated earnings.
- Whether NAMining can convert growth and the Thacker Pass agreement into sustained profit, and whether lithium-project permitting, financing and timing assumptions hold.
- Whether MLMC’s customer demand, inventory levels, mine-development capital spending and reclamation estimates remain consistent with the outlook.
- The availability and restrictions on cash held at subsidiaries, covenant headroom, and the timing and funding of contractual, reclamation and other long-term obligations.