NACCO Industries, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results; dollar figures are in millions unless otherwise noted. NACCO operates Coal Mining, North American Mining (NAMining) and Minerals Management, with many coal mines accounted for under the equity method.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $32.3 | $32.6 | $105.3 | $114.1 |
| Gross profit | $6.8 | $6.2 | $15.7 | $28.2 |
| Operating profit | $9.4 | $8.7 | $21.5 | $34.2 |
| Net income | $8.0 | $10.3 | $20.2 | $33.3 |
| Diluted EPS | $1.14 | $1.47 | $2.88 | $4.76 |
| Operating cash flow | Not separately stated for the quarter | $2.8 | $47.3 |
- Q3 revenue was nearly flat year over year; operating profit improved, but net income fell, reflecting lower non-operating income and higher tax expense.
- Nine-month revenue declined 7.7% and net income declined 39.1% year over year. Operating profit decreased 37.2%.
- Cash and equivalents were $97.6 at September 30, versus $122.9 at year-end 2019. Nine-month cash decreased $25.3; cash flow before financing was a use of $18.4.
- Capital expenditures were $19.8 for the first nine months. Total debt was $23.1, and debt to total capitalization was 7%. NACCO reported $159.4 of total liabilities and $306.5 of stockholders’ equity.
- NACoal’s $150 million revolving facility expires August 2022. Borrowings were $9 million, with $138 million of excess availability after letters of credit. NACoal was in compliance with its financial covenants; the filing says available liquidity and operating cash flows should cover needs for the next 12 months and until facility expiry.
Business and segment changes
- Coal Mining: Q3 segment operating profit rose to $11.2 from $10.5, mainly on improved MLMC profit per ton and lower employee costs, partly offset by reduced earnings from unconsolidated mines. Nine-month operating profit fell to $25.9 from $27.8, primarily due to lower unconsolidated mine earnings and deliveries.
- NAMining: Q3 operating profit was $0.2 versus a $0.4 loss; nine-month profit was $1.5 versus a $0.7 loss. Higher gross profit and favorable customer mix contributed to the improvement; Thacker Pass lithium project work supported revenue.
- Minerals Management: Q3 operating profit decreased to $1.7 from $3.9; nine-month profit decreased to $6.5 from $22.4. The comparison reflects unusually strong 2019 royalties from recently commissioned Ohio gas wells, declining well production and lower commodity prices. A $0.5 charge for leasehold write-offs also affected 2020.
- Coal deliveries were 8.3 million tons in Q3 versus 9.4 million; for nine months, 23.5 million versus 26.4 million. Sabine deliveries were down 43% for the nine-month period as its customer’s power plant was dispatched less.
Outlook, risks and unusual items
- Management expects full-year 2020 consolidated operating profit and net income to be significantly below 2019. It forecasts a 2020 effective tax rate of 5%–7%; the nine-month rate was 6.1%, including discrete tax charges and benefits. CARES Act loss carrybacks contributed to tax benefits.
- For Q4 2020, management expects a modest increase in consolidated operating profit versus Q4 2019, which included a $2.0 unfavorable reclamation adjustment. Excluding that item, Q4 operating profit and net income are expected to decrease significantly year over year.
- For 2021, management expects consolidated net income to decrease significantly from 2020, while cash flow before financing is expected to improve and generate cash. Planned capital expenditures are approximately $41 million in 2021, versus approximately $50 million for 2020.
- Major coal exposures include Great River Energy’s stated intent to retire Coal Creek Station in the second half of 2022, which could materially affect Falkirk-related earnings; Sabine’s customer lowered expected annual lignite requirements to 1.4–1.7 million tons; and Camino Real’s contract ended July 1, 2020 after its customer lost its coal supply contract. AES announced intent to close the Marshall Mine; Caddo Creek is contracted to perform reclamation.
- COVID-19 effects remain uncertain. Other significant risks include coal plant dispatch and competition from gas and renewables, commodity prices, natural gas production and royalties, reclamation costs, permitting and environmental requirements, and customer contract termination or default.
- Unusual balance-sheet and commitment items: MLMC recorded a $9.8 asset retirement obligation and corresponding asset for a new mine area. After Centennial mine permits were transferred, $10.7 of surety bonds remained outstanding at quarter-end pending transfer or replacement; NACCO retained related contingent exposure. Coyote Creek guarantees could require a lender make-whole payment or, in specified circumstances after 2023, purchase of equipment; management considers performance remote and recorded no liability.
- The company suspended share repurchases in March 2020 amid pandemic uncertainty. It paid $4.0 in dividends over nine months and repurchased $1.0 of shares before suspension.
Important facts for investors to verify
- Whether Coal Creek Station’s planned retirement proceeds, and the resulting implications for Falkirk and NACCO’s long-term earnings.
- Actual customer deliveries and dispatch at Sabine, MLMC and other coal operations, and the impact on 2020–2021 segment results.
- Whether Minerals Management royalty income stabilizes as well production declines and gas prices and new drilling affect revenues.
- Execution, permitting and timing of the Thacker Pass lithium project and planned mineral-interest investments.
- Cash generation versus planned capital spending, availability and covenant headroom under NACoal’s revolving facility, and the final timing of outstanding surety-bond transfers.
- Actual tax outcomes, including the effect of CARES Act carrybacks, discrete tax items and forecast effective tax rates.