NACCO Industries, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with fiscal 2020. NACCO operates Coal Mining, North American Mining (NAMining) and Minerals Management, and also has Mitigation Resources and legacy mine-liability activities outside its reportable segments.
Financial performance
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $191.8 million | $128.4 million |
| Gross profit | $43.5 million | $17.0 million |
| Operating profit | $55.4 million | $13.4 million |
| Net income | $48.1 million | $14.8 million |
| Diluted earnings per share | $6.69 | $2.10 |
| Operating cash flow | $74.9 million | $(2.5) million |
| Capital expenditures and mineral-interest acquisitions | $44.6 million | $44.4 million |
Consolidated gross, operating and net margins were approximately 22.6%, 28.9% and 25.1%, respectively, in 2021. Revenue includes reimbursed customer costs, which generally have offsetting costs and do not contribute to profit; segment revenue is therefore not directly comparable across business models.
At December 31, 2021, cash was $86.0 million, total debt was $20.7 million and equity was $352.1 million; debt to total capitalization was 6%, down from 13%. Current assets were $203.1 million and current liabilities $46.0 million. NACoal’s $150 million revolving facility had $4.0 million drawn and $116.2 million of excess availability after letters of credit. The Company paid $5.6 million in dividends.
Material changes and significant items
- Total revenue rose 49% and operating profit increased to $55.4 million. Coal Mining profit benefited from a $10.3 million Bisti contract termination payment, improved MLMC results and Caddo Creek reclamation revenue. 2020 included a $2.0 million MLMC inventory impairment and other impairment and separation charges.
- Minerals Management revenue more than doubled to $31.0 million, driven by higher oil and gas prices, production from acquired interests and a $3.6 million settlement. Its 2020 results included a $7.3 million asset impairment.
- NAMining revenue rose 65%, largely because reimbursable costs increased; operating profit declined to $0.1 million from $1.9 million as selling, general and administrative expenses increased.
- Operating cash flow improved by $77.4 million, reflecting higher net income and more favorable working-capital movements. Investing cash outflow was $44.1 million; financing cash outflow was $33.2 million, mainly reflecting debt repayments.
- The effective tax rate was 15.3%, versus a 3.8% tax benefit in 2020. The prior-year result included significant discrete tax items, including CARES Act carryback benefits.
Outlook, risks and contingencies
- Management expects 2022 consolidated net income and adjusted EBITDA to decrease significantly from 2021. Coal Mining and Minerals Management are expected to decline; NAMining is expected to improve significantly. Forecast results exclude neither uncertainty nor the impact of future business development and acquisitions.
- 2022 capital expenditures are forecast at approximately $68 million: $27 million for NAMining, $22 million for Coal Mining, $10 million for Minerals Management and up to $9 million for Mitigation Resources. Management expects cash flow before financing activities to return to a significant use of cash.
- The anticipated 2022 Coal Mining decline reflects lower deliveries, the Bisti contract termination, reduced expected MLMC earnings and a temporary reduction in Falkirk’s management fee under the planned Coal Creek ownership transition. Management expects a $14 million payment and other consideration from GRE if the Rainbow Energy sale closes. The sale was expected in the second quarter of 2022 and remained subject to conditions.
- Management expects Minerals Management profit to decrease significantly in 2022 because of natural well declines, expected commodity-price moderation and the absence of the 2021 settlement. It targeted about $10 million of additional mineral-interest investment in 2022.
- Key risks include dependence on major customers and coal-fired power plant dispatch; potential early plant closures; regulatory, environmental and climate-policy changes; commodity-price and third-party production variability; reclamation obligations and bonding availability; and execution, permitting and return risks on growth projects. Two customers represented 43% and 19% of 2021 consolidated revenue; Basin Electric and GRE generated approximately 68% of Coal Mining earnings from unconsolidated operations.
- Other notable exposures include NACoal guarantees related to Coyote Creek, for which management said payment was remote and no liability was recorded; $29.8 million of outstanding letters of credit, primarily supporting mine reclamation surety bonds; and $43.9 million of asset retirement obligations. The filing reports ordinary-course legal matters but no material legal proceeding.
Important facts for investors to verify
- Whether the Coal Creek sale to Rainbow Energy closed, whether the new Falkirk coal sales agreement took effect, and the realized value of GRE’s cash and other consideration.
- Actual 2022 customer demand, coal deliveries and MLMC costs versus management’s forecast, including potential effects on MLMC asset impairment risk.
- Whether NAMining contracts and Thacker Pass permitting, construction and equipment plans progressed as anticipated, and whether forecast growth justifies planned capital spending.
- Minerals Management production declines, realized oil and gas prices, acquisition performance and the timing of new development by third-party operators.
- Liquidity, debt and covenant headroom after planned 2022 investment and the expected use of cash; also monitor letters of credit, reclamation funding and Coyote Creek guarantee exposure.
- The contribution of one-time settlement income and market-value gains to reported profit, and the sustainability of earnings excluding those items.