UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_______________________________________________________________________________________________________________________________________________________________________________________________________
FORM 10-Q
|
| | |
(Mark One) | | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the quarterly period ended September 30, 2017March 31, 2020 |
OR
|
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
Commission file number 1-9172
|
| | | | |
| | NACCO INDUSTRIES, INC. | | |
| | (Exact name of registrant as specified in its charter) | | |
| | | | |
| DELAWARE | | 34-1505819 | |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | |
| | | | |
| 5875 LANDERBROOK DRIVE, SUITE 220, CLEVELAND, OHIO | | 44124-4069 | |
| (Address of principal executive offices) | | (Zip code) | |
| | | | |
| | (440) 229-5151 | | |
| | (Registrant's telephone number, including area code) | | |
| | | | |
| | N/A | | |
| | (Former name, former address and former fiscal year, if changed since last report) | | |
Securities registered pursuant to Section 12(b) of the Act |
| | | | |
Title of each class
| | Trading Symbol
| | Name of each exchange on which registered
|
Class A Common Stock, $1 par value per share | | NC | | New York Stock Exchange |
Class B Common Stock is not publicly listed for trade on any exchange or market system; however, Class B Common Stock is convertible into Class A Common Stock on a share-for-share basis.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | |
Large accelerated filer o | | Accelerated filer þ | | Non-accelerated filer o | | Smaller reporting company oþ | | Emerging growth company o |
| | | | (Do not check if a smaller reporting company) | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
Number of shares of Class A Common Stock outstanding at October 27, 2017: 5,276,050May 1, 2020: 5,452,834
Number of shares of Class B Common Stock outstanding at October 27, 2017: 1,570,148May 1, 2020: 1,568,550
NACCO INDUSTRIES, INC.
TABLE OF CONTENTS
Part I
FINANCIAL INFORMATION
Item 1. Financial Statements
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| | | SEPTEMBER 30 2017 | | DECEMBER 31 2016 | MARCH 31 2020 | | DECEMBER 31 2019 |
| (In thousands, except share data) | (In thousands, except share data) |
ASSETS | | | | | | |
Cash and cash equivalents | $ | 93,938 |
| | $ | 69,308 |
| $ | 93,726 |
| | $ | 122,892 |
|
Accounts receivable, net | 9,070 |
| | 13,389 |
| |
Trade accounts receivable, net | | 21,122 |
| | 15,444 |
|
Accounts receivable from affiliates | 22,964 |
| | 7,404 |
| 6,377 |
| | 6,411 |
|
Inventories, net | 30,580 |
| | 28,927 |
| |
Assets held for sale | 1,373 |
| | 2,016 |
| |
Inventories | | 35,996 |
| | 40,465 |
|
Refundable federal income taxes | | 14,638 |
| | 8,928 |
|
Prepaid expenses and other | 6,323 |
| | 8,273 |
| 17,068 |
| | 6,528 |
|
Current assets of discontinued operations | — |
| | 252,415 |
| |
Total current assets | 164,248 |
| | 381,732 |
| 188,927 |
| | 200,668 |
|
Property, plant and equipment, net | 116,336 |
| | 115,106 |
| 139,609 |
| | 138,061 |
|
Intangibles, net | 44,036 |
| | 45,678 |
| 37,125 |
| | 37,902 |
|
Deferred income taxes | 7,145 |
| | 10,876 |
| |
Investments in unconsolidated subsidiaries | 27,281 |
| | 31,054 |
| 27,384 |
| | 24,611 |
|
Deferred costs | 3,163 |
| | 2,069 |
| |
Operating lease right-of-use assets | | 11,081 |
| | 11,398 |
|
Other non-current assets | 22,740 |
| | 23,089 |
| 31,794 |
| | 32,133 |
|
Long-term assets of discontinued operations | — |
| | 58,417 |
| |
Total assets | $ | 384,949 |
| | $ | 668,021 |
| $ | 435,920 |
| | $ | 444,773 |
|
LIABILITIES AND EQUITY | |
| | |
| |
| | |
|
Accounts payable | $ | 8,466 |
| | $ | 6,995 |
| $ | 8,383 |
| | $ | 9,374 |
|
Accounts payable to affiliates | 3,228 |
| | 3,565 |
| 157 |
| | 577 |
|
Revolving credit agreements | | 11,000 |
| | 7,000 |
|
Current maturities of long-term debt | 1,168 |
| | 1,744 |
| 933 |
| | 795 |
|
Asset retirement obligations | | 2,285 |
| | 2,285 |
|
Accrued payroll | 12,400 |
| | 15,482 |
| 6,519 |
| | 19,583 |
|
Asset retirement obligations | 3,555 |
| | 3,843 |
| |
Accrued income taxes | 3,442 |
| | — |
| |
Deferred compensation | | — |
| | 13,465 |
|
Deferred revenue | | 2,203 |
| | 1,908 |
|
Other current liabilities | 10,964 |
| | 9,954 |
| 6,627 |
| | 6,979 |
|
Current liabilities of discontinued operations | — |
| | 180,245 |
| |
Total current liabilities | 43,223 |
| | 221,828 |
| 38,107 |
| | 61,966 |
|
Long-term debt | 57,573 |
| | 94,295 |
| 22,649 |
| | 17,148 |
|
Operating lease liabilities | | 12,117 |
| | 12,448 |
|
Asset retirement obligations | 39,482 |
| | 38,262 |
| 34,633 |
| | 34,574 |
|
Pension and other postretirement obligations | 12,924 |
| | 14,271 |
| 8,322 |
| | 8,807 |
|
Deferred compensation | 13,571 |
| | 13,578 |
| |
Deferred income taxes | | 18,573 |
| | 12,338 |
|
Other long-term liabilities | 11,113 |
| | 9,737 |
| 7,682 |
| | 8,100 |
|
Long-term liabilities of discontinued operations | — |
| | 55,757 |
| |
Total liabilities | 177,886 |
| | 447,728 |
| 142,083 |
| | 155,381 |
|
Stockholders' equity | |
| | |
| |
| | |
|
Common stock: | |
| | |
| |
| | |
|
Class A, par value $1 per share, 5,276,050 shares outstanding (December 31, 2016 - 5,207,955 shares outstanding) | 5,276 |
| | 5,208 |
| |
Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,570,148 shares outstanding (December 31, 2016 - 1,570,915 shares outstanding) | 1,570 |
| | 1,571 |
| |
Class A, par value $1 per share, 5,452,830 shares outstanding (December 31, 2019 - 5,397,458 shares outstanding) | | 5,453 |
| | 5,397 |
|
Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,568,554 shares outstanding (December 31, 2019 - 1,568,670 shares outstanding) | | 1,569 |
| | 1,569 |
|
Capital in excess of par value | 2,219 |
| | — |
| 8,318 |
| | 8,911 |
|
Retained earnings | 207,447 |
| | 239,441 |
| 289,679 |
| | 284,852 |
|
Accumulated other comprehensive loss | (9,449 | ) | | (25,927 | ) | (11,182 | ) | | (11,337 | ) |
Total stockholders' equity | 207,063 |
| | 220,293 |
| 293,837 |
| | 289,392 |
|
Total liabilities and equity | $ | 384,949 |
| | $ | 668,021 |
| $ | 435,920 |
| | $ | 444,773 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | NINE MONTHS ENDED |
| SEPTEMBER 30 | | SEPTEMBER 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands, except per share data) |
Revenues | $ | 21,941 |
| | $ | 32,402 |
| | $ | 78,341 |
| | $ | 85,778 |
|
Cost of sales | 19,466 |
| | 30,755 |
| | 66,711 |
| | 75,926 |
|
Gross profit | 2,475 |
| | 1,647 |
| | 11,630 |
| | 9,852 |
|
Earnings of unconsolidated mines | 16,197 |
| | 15,102 |
| | 44,627 |
| | 40,785 |
|
Operating expenses | | | | | | | |
Selling, general and administrative expenses | 11,723 |
| | 10,765 |
| | 31,809 |
| | 30,786 |
|
Centennial asset impairment charge | — |
| | 17,443 |
| | — |
| | 17,443 |
|
(Gain) loss on sale of assets
| (475 | ) | | 502 |
| | (3,500 | ) | | 1,424 |
|
Amortization of intangible assets | 435 |
| | 818 |
| | 1,641 |
| | 1,936 |
|
| 11,683 |
| | 29,528 |
| | 29,950 |
| | 51,589 |
|
Operating profit (loss) | 6,989 |
| | (12,779 | ) | | 26,307 |
| | (952 | ) |
Other expense (income) | | | | | | | |
Interest expense | 946 |
| | 1,036 |
| | 2,806 |
| | 3,182 |
|
Income from other unconsolidated affiliates | (313 | ) | | (307 | ) | | (932 | ) | | (913 | ) |
Closed mine obligations | 336 |
| | 223 |
| | 1,071 |
| | 948 |
|
Other, net, including interest income | 64 |
| | (10 | ) | | 15 |
| | 2,229 |
|
| 1,033 |
| | 942 |
| | 2,960 |
| | 5,446 |
|
Income (loss) from continuing operations before income tax provision (benefit) | 5,956 |
| | (13,721 | ) | | 23,347 |
| | (6,398 | ) |
Income tax provision (benefit) from continuing operations | 2,625 |
| | (11,589 | ) | | 4,564 |
| | (13,970 | ) |
Income (loss) from continuing operations | 3,331 |
| | (2,132 | ) | | 18,783 |
| | 7,572 |
|
Discontinued operations, net of tax expense of $236 and $2,655 in the three and nine months ended September 30, 2017, respectively, and net of tax expense of $11,044 and $12,966 in the three and nine months ended September 30, 2016, respectively. | $ | 5,067 |
| | $ | 1,691 |
| | $ | 1,381 |
| | $ | (2,096 | ) |
Net income (loss) | $ | 8,398 |
| | $ | (441 | ) | | $ | 20,164 |
| | $ | 5,476 |
|
| |
| | | | | | |
| | | | | | | |
Basic earnings (loss) per share: | | | | | | | |
Continuing operations | $ | 0.49 |
| | $ | (0.31 | ) | | $ | 2.75 |
| | $ | 1.11 |
|
Discontinued operations | 0.74 |
| | 0.25 |
| | 0.20 |
| | (0.31 | ) |
Basic earnings (loss) per share | $ | 1.23 |
| | $ | (0.06 | ) | | $ | 2.95 |
| | $ | 0.80 |
|
| | | | | | | |
Diluted earnings (loss) per share: | | | | | | | |
Continuing operations | $ | 0.49 |
| | $ | (0.31 | ) | | $ | 2.74 |
| | $ | 1.10 |
|
Discontinued operations | 0.74 |
| | 0.25 |
| | 0.20 |
| | (0.30 | ) |
Diluted earnings (loss) per share | $ | 1.23 |
| | $ | (0.06 | ) | | $ | 2.94 |
| | $ | 0.80 |
|
| | | | | | | |
Dividends per share | $ | 0.2725 |
| | $ | 0.2675 |
| | $ | 0.8125 |
| | $ | 0.7975 |
|
| |
| | | | | | |
Basic weighted average shares outstanding | 6,839 |
| | 6,786 |
| | 6,825 |
| | 6,831 |
|
Diluted weighted average shares outstanding | 6,866 |
| | 6,786 |
| | 6,854 |
| | 6,858 |
|
|
| | | | | | | |
| THREE MONTHS ENDED |
| MARCH 31 |
| 2020 | | 2019 |
| (In thousands, except per share data) |
Revenues | $ | 37,644 |
| | $ | 40,097 |
|
Cost of sales | 32,563 |
| | 26,712 |
|
Gross profit | 5,081 |
| | 13,385 |
|
Earnings of unconsolidated operations | 16,003 |
| | 16,270 |
|
Operating expenses | | | |
Selling, general and administrative expenses | 12,727 |
| | 12,653 |
|
Amortization of intangible assets | 777 |
| | 647 |
|
Gain on sale of assets
| — |
| | (18 | ) |
| 13,504 |
| | 13,282 |
|
Operating profit | 7,580 |
| | 16,373 |
|
Other expense (income) | | | |
Interest expense | 403 |
| | 231 |
|
Interest income | (401 | ) | | (553 | ) |
Income from other unconsolidated affiliates | (133 | ) | | (322 | ) |
Closed mine obligations | 434 |
| | 366 |
|
Loss (gain) on equity securities | 1,196 |
| | (698 | ) |
Other, net | (15 | ) | | 11 |
|
| 1,484 |
| | (965 | ) |
Income before income tax (benefit) provision | 6,096 |
| | 17,338 |
|
Income tax (benefit) provision | (70 | ) | | 2,320 |
|
Net income | $ | 6,166 |
| | $ | 15,018 |
|
| |
| | |
Earnings per share: | | | |
Basic earnings per share | $ | 0.88 |
| | $ | 2.16 |
|
Diluted earnings per share | $ | 0.88 |
| | $ | 2.15 |
|
| |
| | |
Basic weighted average shares outstanding | 7,000 |
| | 6,949 |
|
Diluted weighted average shares outstanding | 7,040 |
| | 6,998 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | NINE MONTHS ENDED |
| SEPTEMBER 30 | | SEPTEMBER 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Net income (loss) | $ | 8,398 |
| | $ | (441 | ) | | $ | 20,164 |
| | $ | 5,476 |
|
Foreign currency translation adjustment | (18 | ) | | (517 | ) | | 1,725 |
| | (1,335 | ) |
Deferred gain on available for sale securities | 78 |
| | 134 |
| | 542 |
| | 298 |
|
Current period cash flow hedging activity, net of $1,310 and $941 tax expense in the three and nine months ended September 30, 2017, and $169 tax expense and $819 tax benefit in the three and nine months ended September 30, 2016, respectively. | 2,402 |
| | 340 |
| | 1,543 |
| | (1,541 | ) |
Reclassification of hedging activities into earnings, net of $1,344 and $1,255 tax expense in the three and nine months ended September 30, 2017, respectively, and $149 and $254 tax benefit in the three and nine months ended September 30, 2016, respectively. | (2,509 | ) | | 312 |
| | (2,369 | ) | | 420 |
|
Reclassification of pension and postretirement adjustments into earnings, net of $38 and $228 tax benefit in the three and nine months ended September 30, 2017, and $88 and $271 tax benefit in the three and nine months ended September 30, 2016, respectively. | 191 |
| | 166 |
| | 515 |
| | 468 |
|
Total other comprehensive income (loss) | $ | 144 |
| | $ | 435 |
| | $ | 1,956 |
| | $ | (1,690 | ) |
Comprehensive income (loss) | $ | 8,542 |
| | $ | (6 | ) | | $ | 22,120 |
| | $ | 3,786 |
|
|
| | | | | | | |
| THREE MONTHS ENDED |
| MARCH 31 |
| 2020 | | 2019 |
| (In thousands) |
Net income | $ | 6,166 |
| | $ | 15,018 |
|
Reclassification of pension and postretirement adjustments into earnings, net of $45 and $24 tax benefit in the three months ended March 31, 2020 and March 31, 2019, respectively. | 155 |
| | 101 |
|
Total other comprehensive income | 155 |
| | 101 |
|
Comprehensive income | $ | 6,321 |
| | $ | 15,119 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | |
| NINE MONTHS ENDED |
| SEPTEMBER 30 |
| 2017 | | 2016 |
| (In thousands) |
Operating activities | | | |
Net income | $ | 20,164 |
| | $ | 5,476 |
|
Income (loss) from discontinued operations | 1,381 |
| | (2,096 | ) |
Income from continuing operations | 18,783 |
| | 7,572 |
|
Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | | | |
Depreciation, depletion and amortization | 9,580 |
| | 9,870 |
|
Amortization of deferred financing fees | 387 |
| | 278 |
|
Centennial asset impairment charge | — |
| | 17,443 |
|
Deferred income taxes | 3,731 |
| | 14,858 |
|
Other | 610 |
| | 506 |
|
Working capital changes: | | | |
Affiliates receivable/payable | 513 |
| | 5,892 |
|
Accounts receivable | (2,792 | ) | | (9,840 | ) |
Inventories | (1,693 | ) | | 5,860 |
|
Other current assets | (100 | ) | | 984 |
|
Accounts payable | 2,289 |
| | (638 | ) |
Income taxes receivable/payable | 5,594 |
| | (20,966 | ) |
Other current liabilities | (2,084 | ) | | (10,525 | ) |
Net cash provided by operating activities of continuing operations | 34,818 |
| | 21,294 |
|
Net cash (used for) provided by operating activities of discontinued operations | (7,700 | ) | | 24,864 |
|
Net cash provided by (used for) operating activities | 27,118 |
| | 46,158 |
|
| | | |
Investing activities | | | |
Expenditures for property, plant and equipment | (9,211 | ) | | (7,297 | ) |
Proceeds from the sale of property, plant and equipment | 2,006 |
| | 4,281 |
|
Other | 901 |
| | (2,587 | ) |
Net cash used for investing activities of continuing operations | (6,304 | ) | | (5,603 | ) |
Net cash used for investing activities of discontinued operations | (4,345 | ) | | (4,326 | ) |
Net cash used for investing activities | (10,649 | ) | | (9,929 | ) |
| | | |
Financing activities | | | |
Reductions of long-term debt | (35,008 | ) | | (1,389 | ) |
Cash dividends paid | (5,552 | ) | | (5,450 | ) |
Cash dividends received from Hamilton Beach Brands Holding Co. (See Note 10) | 38,000 |
| | 10,000 |
|
Purchase of treasury shares | — |
| | (6,044 | ) |
Other | (1,324 | ) | | (3 | ) |
Net cash used for financing activities of continuing operations | (3,884 | ) | | (2,886 | ) |
Net cash provided by (used for) financing activities of discontinued operations | 3,747 |
| | (41,472 | ) |
Net cash used for financing activities | (137 | ) | | (44,358 | ) |
| | | |
Effect of exchange rate changes on cash of continuing operations | — |
| | — |
|
Effect of exchange rate changes on cash of discontinued operations | 71 |
| | (104 | ) |
| | | |
Cash and cash equivalents | | | |
Total increase (decrease) for the period | 16,403 |
| | (8,233 | ) |
Net decrease related to discontinued operations | 8,227 |
| | 11,395 |
|
Balance at the beginning of the period | 69,308 |
| | 35,701 |
|
Balance at the end of the period | $ | 93,938 |
| | $ | 38,863 |
|
|
| | | | | | | |
| THREE MONTHS ENDED |
| MARCH 31 |
| 2020 | | 2019 |
| (In thousands) |
Operating activities | | | |
Net cash used for operating activities | $ | (31,122 | ) | | $ | (544 | ) |
| | | |
Investing activities | | | |
Expenditures for property, plant and equipment | (5,358 | ) | | (4,252 | ) |
Proceeds from the sale of property, plant and equipment | — |
| | 18 |
|
Other | 16 |
| | (13 | ) |
Net cash used for investing activities | (5,342 | ) | | (4,247 | ) |
| | | |
Financing activities | | | |
Additions to long-term debt | 6,232 |
| | 1,206 |
|
Reductions of long-term debt | (593 | ) | | (161 | ) |
Net additions to revolving credit agreements | 4,000 |
| | — |
|
Cash dividends paid | (1,339 | ) | | (1,153 | ) |
Purchase of treasury shares | (1,002 | ) | | (1,300 | ) |
Net cash provided by (used for) financing activities | 7,298 |
| | (1,408 | ) |
| | | |
Cash and cash equivalents | | | |
Total decrease for the period | (29,166 | ) | | (6,199 | ) |
Balance at the beginning of the period | 122,892 |
| | 85,257 |
|
Balance at the end of the period | $ | 93,726 |
| | $ | 79,058 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Accumulated Other Comprehensive Income (Loss) | | |
| Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings | Foreign Currency Translation Adjustment | Deferred Gain (Loss) on Available for Sale Securities | Deferred Gain (Loss) on Cash Flow Hedging | Pension and Postretirement Plan Adjustment | | Total Stockholders' Equity |
| (In thousands, except per share data) |
Balance, January 1, 2016 | $ | 5,265 |
| $ | 1,572 |
| $ | — |
| $ | 217,745 |
| | $ | (5,455 | ) | | $ | 1,480 |
| | $ | (112 | ) | | $ | (19,357 | ) | | $ | 201,138 |
|
Stock-based compensation | 48 |
| — |
| 2,830 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 2,878 |
|
Conversion of Class B to Class A shares | 1 |
| (1 | ) | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Purchase of treasury shares | (109 | ) | — |
| (2,830 | ) | (3,105 | ) | | — |
| | — |
| | — |
| | — |
| | (6,044 | ) |
Net income | — |
| — |
| — |
| 5,476 |
| | — |
| | — |
| | — |
| | — |
| | 5,476 |
|
Cash dividends on Class A and Class B common stock: $0.7975 per share | — |
| — |
| — |
| (5,450 | ) | | — |
| | — |
| | — |
| | — |
| | (5,450 | ) |
Current period other comprehensive income (loss) | — |
| — |
| — |
| — |
| | (1,335 | ) | | 298 |
| | (1,541 | ) | | — |
| | (2,578 | ) |
Reclassification adjustment to net income | — |
| — |
| — |
| — |
| | — |
| | — |
| | 420 |
| | 468 |
| | 888 |
|
Balance, September 30, 2016 | $ | 5,205 |
| $ | 1,571 |
| $ | — |
| $ | 214,666 |
| | $ | (6,790 | ) | | $ | 1,778 |
| | $ | (1,233 | ) | | $ | (18,889 | ) | | $ | 196,308 |
|
| | | | | | | | | | | | | | |
Balance, January 1, 2017 | $ | 5,208 |
| $ | 1,571 |
| $ | — |
| $ | 239,441 |
| | $ | (7,533 | ) | | $ | 1,893 |
| | $ | 393 |
| | $ | (20,680 | ) | | $ | 220,293 |
|
Stock-based compensation | 67 |
| — |
| 2,219 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 2,286 |
|
Conversion of Class B to Class A shares | 1 |
| (1 | ) | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net income | — |
| — |
| — |
| 20,164 |
| | — |
| | — |
| | — |
| | — |
| | 20,164 |
|
Cash dividends on Class A and Class B common stock: $0.8125 per share | — |
| — |
| — |
| (5,552 | ) | | — |
| | — |
| | — |
| | — |
| | (5,552 | ) |
Current period other comprehensive income (loss) | — |
| — |
| — |
| — |
| | 1,725 |
| | 542 |
| | 1,543 |
| | — |
| | 3,810 |
|
Reclassification adjustment to net income | — |
| — |
| — |
| — |
| | — |
| | — |
| | (2,369 | ) | | 515 |
| | (1,854 | ) |
Hamilton Beach Brands Holding Company stock dividend (See Note 10) | — |
| — |
| — |
| (46,606 | ) | | 5,808 |
| | — |
| | 433 |
| | 8,281 |
| | (32,084 | ) |
Balance, September 30, 2017 | $ | 5,276 |
| $ | 1,570 |
| $ | 2,219 |
| $ | 207,447 |
| | $ | — |
| | $ | 2,435 |
| | $ | — |
| | $ | (11,884 | ) | | $ | 207,063 |
|
|
| | | | | | | | | | | | | | | | | | |
| | | | | Accumulated Other Comprehensive Income (Loss) | |
| Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings | Pension and Postretirement Plan Adjustment | Total Stockholders' Equity |
| (In thousands, except per share data) |
Balance, January 1, 2019 | $ | 5,352 |
| $ | 1,569 |
| $ | 7,042 |
| $ | 250,352 |
| $ | (13,611 | ) | $ | 250,704 |
|
Stock-based compensation | 102 |
| — |
| 795 |
| — |
| — |
| 897 |
|
Purchase of treasury shares | (36 | ) | — |
| (1,264 | ) | — |
| — |
| (1,300 | ) |
Net income | — |
| — |
| — |
| 15,018 |
| — |
| 15,018 |
|
Cash dividends on Class A and Class B common stock: $0.1650 per share | — |
| — |
| — |
| (1,153 | ) | — |
| (1,153 | ) |
Reclassification adjustment to net income, net of tax | — |
| — |
| — |
| — |
| 101 |
| 101 |
|
Balance, March 31, 2019 | $ | 5,418 |
| $ | 1,569 |
| $ | 6,573 |
| $ | 264,217 |
| $ | (13,510 | ) | $ | 264,267 |
|
|
|
| |
|
| | |
|
|
Balance, January 1, 2020 | $ | 5,397 |
| $ | 1,569 |
| $ | 8,911 |
| $ | 284,852 |
| $ | (11,337 | ) | $ | 289,392 |
|
Stock-based compensation | 88 |
| — |
| 377 |
| — |
| — |
| 465 |
|
Purchase of treasury shares | (32 | ) | — |
| (970 | ) | — |
| — |
| (1,002 | ) |
Net income | — |
| — |
| — |
| 6,166 |
| — |
| 6,166 |
|
Cash dividends on Class A and Class B common stock: $0.1900 per share | — |
| — |
| — |
| (1,339 | ) | — |
| (1,339 | ) |
Reclassification adjustment to net income, net of tax | — |
| — |
| — |
| — |
| 155 |
| 155 |
|
Balance, March 31, 2020 | $ | 5,453 |
| $ | 1,569 |
| $ | 8,318 |
| $ | 289,679 |
| $ | (11,182 | ) | $ | 293,837 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 31, 2020
(In thousands, except as noted and per share amounts)
NOTE 1—Nature of Operations and Basis of Presentation
Nature of Operations
The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of NACCO Industries, Inc. (the “parent company” or “NACCO”® (“NACCO”) and its wholly owned subsidiaries (collectively, “NACCO Industries, Inc. and Subsidiaries” or the “Company”). Intercompany accounts and transactions are eliminated in consolidation. The Company's primary operating subsidiary operates inNACCO is the mining industry.public holding company for The North American Coal Corporation and its affiliated companies (collectively, “NACoal”) mine coal primarily for use in power generation and provide value-added services for natural resource companies.
On September 29, 2017, the Company spun-off Hamilton Beach Brands Holding Company® ("HBBHC"), a former wholly owned subsidiary. HBBHC is an operating holding company for two separate businesses: consumer, commercial and specialty small appliances (Hamilton Beach Brands, Inc. or "HBB") and specialty retail (The Kitchen Collection, LLC or "KC"NACoal"). The financial position, results of operationsCompany has three operating segments: Coal Mining, North American Mining (“NAMining”) and cash flows of HBBHC are reflected as discontinued operations for all periods presented through the date of the spin-off.Minerals Management. The Company also has unallocated items not directly attributable to a reportable segment. See Note 109 to the Unaudited Condensed Consolidated Financial Statements for further details regarding the spin-off.discussion of segment reporting.
NACoal has the followingThe Company’s operating segments are further described below:
Coal Mining Segment
The operating coal mining subsidiaries:mines are: Bisti Fuels Company, LLC ("Bisti"(“Bisti”), Caddo Creek Resources Company, LLC (“Caddo Creek”), Camino Real Fuels, LLC (“Camino Real”), The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), Demery Resources Company, LLC (“Demery”), The Falkirk Mining Company (“Falkirk”), Liberty Fuels Company, LLC (“Liberty”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”). As of March 31, 2020, all of the Liberty Fuels Company, LLC mine areas have been reclaimed and final mine reclamation activities, primarily monitoring, will continue until final bond release.
All of theAt all operating coal mining subsidiariesmines other than MLMC, the Company is paid a management fee per ton of coal or heating unit (MMBtu) delivered. Each contract specifies the indices and mechanics by which fees change over time, generally in line with broad measures of U.S. inflation. The customers are unconsolidated (collectivelyresponsible for funding all mine operating costs, including final mine reclamation, and directly or indirectly provide all of the "Unconsolidated Mines"). The Unconsolidated Mines were formedcapital required to develop, construct and/orbuild and operate surfacethe mine. This contract structure eliminates exposure to spot coal mines under long-term contractsmarket price fluctuations while providing steady income and are capitalized primarilycash flow with minimal capital investment. Other than at Coyote Creek, debt financing provided by or supported by their respectivethe customers andis without recourse to NACCO and NACoal. The contracts with the customersSee Note 7 for further discussion of the Unconsolidated Mines provide for reimbursement to the company at a price based on actual costs plus an agreed upon pre-tax profit per ton of coal sold or actual costs plus an agreed upon fee per btu of heating value delivered. The fees earned at each mine adjust over time in line with various indices which reflect general U.S. inflation rates. Coyote Creek's guarantees.
Although NACoal owns 100%All operating coal mines other than MLMC meet the definition of the equity and manages the daily operations of the Unconsolidated Mines, the Company has determined that the equity capital provided by NACoal is not sufficient to adequately finance the ongoing activities or absorb any expected losses without additional support from the customers. The customers have a controlling financialvariable interest and have the power to direct the activities that most significantly affect the economic performance of the entities. As a result, NACoalentity (“VIE”). In each case, NACCO is not the primary beneficiary andof the VIE as it does not exercise financial control; therefore, NACCO does not consolidate these entities' financial position orthe results of operations.these operations within its financial statements. Instead, these contracts are accounted for as equity method investments. The income before income taxes resulting fromassociated with these VIE's is reported as Earnings of unconsolidated operations on the Consolidated Statements of Operations and the Unconsolidated Mines are solely the responsibility of the Company. The pre-tax income from the Unconsolidated MinesCompany’s investment is reported on the line “EarningsInvestments in Unconsolidated Subsidiaries in the Consolidated Balance Sheets. The mines that meet the definition of unconsolidated mines” ina VIE are referred to collectively as the “Unconsolidated Subsidiaries.” For tax purposes, the Unconsolidated Subsidiaries are included within the NACCO consolidated U.S. tax return; therefore, the income tax expense line on the Consolidated Statements of Operations withincludes income taxes related taxes included in the provision for income taxes. The Company has included the pre-tax earningsto these entities. All of the Unconsolidated Mines above operating profit as theySubsidiaries are an integral component ofaccounted for under the Company's business and operating results.equity method. See Note 7 for further discussion.
The MLMC contract is a consolidated entity because NACoal paysthe only operating coal contract in which the Company is responsible for all operating costs, capital requirements and provides the capital for the mine.final mine reclamation; therefore, MLMC is consolidated within NACCO’s financial statements. MLMC sells coal to its customer at a contractually agreed uponagreed-upon price which adjusts monthly, primarily based on changes in the level of established indices which reflect general U.S. inflation rates.
Centennial Natural Resources LLC ("Centennial"(“Centennial”), whichlocated in Alabama, ceased coal production inat the fourth quarterend of 2015. Since 2015, the Company has sold or transferred certain Centennial equipment and mineral reserves. The Company continues to evaluate strategies for the remaining mineral reserves and a dragline, which have no remaining book value. Cash expenditures related to mine reclamation at Centennial will continue until mine reclamation is alsocomplete, or ownership of, or responsibility for, the remaining mines is transferred. Centennial is a consolidated entity.entity within the Coal Mining segment as the Company is responsible for carrying costs and final mine reclamation.
NACoal
NAMining Segment
The NAMining segment provides value-added contract mining and other services for producers of aggregates, lithium and other minerals. The segment is a primary platform for the Company’s growth and diversification outside of the coal industry. NAMining provides contract mining services for independently owned limerockmines and quarries, through its North American Mining ("NAM") division. NAM is reimbursed bycreating value for its customers basedby performing the mining aspects of its customers’ operations. This allows customers to focus on actual coststheir areas of expertise: materials handling and processing, product sales and distribution. NAMining operates primarily at limestone quarries in Florida, but is focused on expanding outside of Florida and into mining materials other than limestone. During 2019, the Company entered into a mining agreement to serve as exclusive contract miner for the Thacker Pass lithium project in northern Nevada. NAMining utilizes both fixed price and cost plus a management fee. fee contract structures. Certain of the entities within NAMining segment are VIEs and are accounted for under the equity method as Unconsolidated Subsidiaries. See Note 7 for further discussion.
Minerals Management Segment
The financial resultsMinerals Management segment promotes the development of the Company’s gas, oil and coal reserves, generating income primarily from royalty-based lease payments from third parties. The Company’s gas, oil and undeveloped coal reserves are located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus shale natural gas), Alabama (coal and coalbed methane and natural gas) and North Dakota (coal).
The majority of the Company’s existing reserves were acquired as part of its historical coal mining operations. The Minerals Management segment derives income primarily by entering into contracts with third-party operators, granting them the rights to explore, produce and sell natural resources in exchange for NAM are included in consolidated mining operations or unconsolidated mining operationsroyalty payments based on each NAM entity's structure.
NACoal also provides coal handling, processingthe lessees' sales of natural gas and, drying services forto a number of customers. For example, NoDak Energy Services, LLC ("NoDak") operateslesser extent, oil and maintains a coal processing facility for a customer's power plant. The pre-tax income from NoDak is reported on the line "Income from other unconsolidated affiliates"coal. Specialized employees in the "Other (income) expense" section of the Consolidated Statements of Operations, with the related income taxes included in the provision for income taxes. North American Coal Royalty Company, a consolidated entity, providesMinerals Management segment also provide surface and mineral acquisition and lease maintenance services related to the Company'sCompany operations.
All of the unconsolidated subsidiaries are accounted for under the equity method. See Note 6 for further discussion.
Basis of Presentation
Presentation: These financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position of the Company at September 30, 2017 andMarch 31, 2020, the results of its operations, comprehensive income, (loss), cash flows and changes in equity for the ninethree months endedSeptember 30, 2017 March 31, 2020 and 20162019 have been included. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2019.
The balance sheet at December 31, 20162019 has been derived from the audited financial statements at that date but does not include all of the information or notes required by U.S. GAAP for complete financial statements.
Certain amounts in prior period Unaudited Condensed Consolidated Financial Statements have been reclassified to conform to the current period's presentation.
NOTE 2—Recently Issued Accounting StandardsRevenue Recognition
Accounting Standards Not Yet AdoptedNature of Performance Obligations
In May 2014,At contract inception, the FASB codified ASC 606, "Revenue Recognition - Revenue from ContractsCompany assesses the goods and services promised in its contracts with Customers," which supersedes most current revenue recognition guidance, including industry-specific guidance,customers and requires an entity to recognize revenue in an amountidentifies a performance obligation for each promised good or service that reflectsis distinct. To identify the consideration to whichperformance obligations, the entity expects to be entitled in exchange for transferringCompany considers all of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.
Each mine or mine area has a contract with its respective customer that represents a contract under ASC 606. For its consolidated entities, the Company’s performance obligations vary by contract and consist of the following:
At MLMC, each MMBtu delivered during the production period is considered a separate performance obligation. Revenue is recognized at the point in time that control of each MMBtu of lignite transfers to customersthe customer. Fluctuations in revenue from period to period generally result from changes in customer demand.
At NAMining entities, the management service to oversee the operation of the equipment and provide additional disclosures.delivery of limestone is the performance obligation accounted for as a series. Performance momentarily creates an asset that the customer simultaneously receives and consumes; therefore, control is transferred to the customer over time. Consistent with the conclusion that the customer simultaneously receives and consumes the benefits provided, an input-based measure of progress is appropriate. As amended, the effective date for public entities is annual reporting periods beginning after December 15, 2017 and interim periods therein.
each month of service is completed, revenue is recognized for the amount of actual costs incurred, plus the management fee and the general and administrative fee (as applicable). Fluctuations in revenue from period to period result from changes in customer demand and variances in reimbursable costs primarily due to increases and decreases in activity levels on individual contracts.
The Company anticipates adoptingenters into royalty contracts which grant the newright to explore, develop, produce and sell minerals controlled by the Company. These arrangements result in the transfer of mineral rights for a period of time; however, no rights to the actual land are granted other than access for purposes of exploration, development, production and sales. The mineral rights revert back to the Company at the expiration of the contract.
Under these royalty contracts, granting exclusive right, title, and interest in and to minerals, if any, is the performance obligation. The performance obligation under these contracts represents a series of distinct goods or services whereby each day of access that is provided is distinct. The transaction price consists of a variable sales-based royalty and, in certain arrangements, a fixed component in the form of an up-front lease bonus payment.As the amount of consideration the Company will ultimately be entitled to is entirely susceptible to factors outside its control, the entire amount of variable consideration is constrained at contract inception. The fixed portion of the transaction price will be recognized over the primary term of the contract, which is generally five years.
Significant Judgments
The Company’s contracts with its customers contain different types of variable consideration including, but not limited to, management fees that adjust based on coal volumes or MMBtu delivered or limestone yards, however, the terms of these variable payments relate specifically to the Company's efforts to satisfy one or more, but not all of, the performance obligations (or to a specific outcome from satisfying the performance obligations), in the contract. Therefore, the Company allocates each variable payment (and subsequent changes to that payment) entirely to the specific performance obligation to which it relates. Management fees, as well as general and administrative fees, are also adjusted based on changes in specified indices (e.g., CPI) to compensate for general inflation changes. Index adjustments, if applicable, are effective prospectively. Certain contracts include reimbursement of actual costs incurred.
Disaggregation of Revenue
In accordance with ASC 606-10-50, the Company disaggregates revenue guidance effective January 1, 2018 using the modified retrospective methodfrom contracts with the cumulative effectcustomers into major goods and service lines and timing of initially applying the standard recognized as an adjustment to equity.transfer of goods and services. The Company has developed a project plan with respect to its implementationdetermined that disaggregating revenue into these categories achieves the disclosure objective of this standard, including identification of revenue streams and review of contracts and procedures currently in place. The Company is in the process of completing its review of customer contracts at its NACoal subsidiary, including the contracts for the Company’s Unconsolidated Mines, and finalizing its conclusions on a variety of specific contractual terms. These include identification of additional performance obligations, specifically during the pre- and post-coal production periods, variable compensation considerations and the timing of recognition of royalty revenue. While the revenue of the Unconsolidated Mines is not consolidated within the Company’s financial statements, any change in the amount or timing of revenue recognition at the Unconsolidated Mines could have an impact on the company’s recognition of earnings from the unconsolidated mines. The Company is also in the process of identifying and implementing any necessary changes to processes and controls to meet the standard's updated reporting and disclosure requirements. The Company continues to assess the potential impact of the standard and has not yet reached a conclusion as todepicting how the adoption of the standard will impact the Company's financial position, results of operations or cash flows. The adoption of this guidance will result in increased disclosures to help users of financial statements understand the nature, amount, timing, and timinguncertainty of revenue and cash flows arising from contracts.are affected by economic factors. The Company’s business consists of the Coal Mining, NAMining and Minerals Management segments as well as Unallocated Items. See Note 9 to the Unaudited Condensed Consolidated Financial Statements for further discussion of segment reporting.
In January 2016,The following table disaggregates revenue by major sources:
|
| | | | | | | |
| THREE MONTHS ENDED |
| MARCH 31 |
Major Goods/Service Lines | 2020 | | 2019 |
Coal Mining | $ | 20,928 |
| | $ | 16,750 |
|
NAMining | 11,624 |
| | 10,775 |
|
Minerals Management | 5,241 |
| | 12,686 |
|
Unallocated Items | 26 |
| | 543 |
|
Eliminations | (175 | ) | | (657 | ) |
Total revenues | $ | 37,644 |
| | $ | 40,097 |
|
| | | |
Timing of Revenue Recognition | | | |
Goods transferred at a point in time | $ | 20,284 |
| | $ | 16,086 |
|
Services transferred over time | 17,360 |
| | 24,011 |
|
Total revenues | $ | 37,644 |
| | $ | 40,097 |
|
Contract Balances
The opening and closing balances of the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): RecognitionCompany’s current and Measurementlong-term contract liabilities and receivables are as follows:
|
| | | | | | | | | | | |
| Contract balances |
| Trade accounts receivable, net | | Contract liability (current) | | Contract liability (long-term) |
Balance, January 1, 2020 | $ | 15,444 |
| | $ | 944 |
| | $ | 2,153 |
|
Balance, March 31, 2020 | 21,122 |
| | 942 |
| | 1,918 |
|
Increase (decrease) | $ | 5,678 |
| | $ | (2 | ) | | $ | (235 | ) |
As described above, the Company enters into royalty contracts that grant exclusive right, title, and interest in and to minerals. The transaction price consists of Financial Assetsa variable sales-based royalty and, Financial Liabilities," which modifies how entities measure equity investments and present changesin certain arrangements, a fixed component in the fair valueform of financial liabilities; simplifiesan up-front lease bonus payment. The timing of the impairment assessmentpayment of equity investments without readily determinable fair values by requiringthe fixed portion of the transaction price is upfront, however, the performance obligation is satisfied over the primary term of the contract, which is generally five years. Therefore, at the time any such up-front payment is received, a qualitative assessment to identify impairment; changes presentationcontract liability is recorded which represents deferred revenue. The difference between the opening and disclosure requirements;closing balance of this contract liability, which is shown above, primarily results from the difference between new lease bonus payments received and clarifiesamortization of up-front lease bonus payments received in previous periods.
The amount of revenue recognized in both the three months ended March 31, 2020 and March 31, 2019 that an entity should evaluatewas included in the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination withopening contract liability was $0.2 million. This revenue consists of up-front lease bonus payments received under royalty contracts that are recognized over the entity’s other deferred tax assets. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscalprimary term of the royalty contracts, which are generally five years. The Company is evaluatingexpects to recognize an additional $0.7 million in the impact that this new guidance will have onremainder of 2020, $0.9 million in 2021, $0.7 million in 2022, $0.3 million in 2023, and $0.1 million in 2024 related to the contract liability remaining at March 31, 2020. The difference between the opening and closing balances of the Company’s financial position,accounts receivable and contract liabilities results of operations, cash flowsfrom the timing difference between the Company’s performance and related disclosures.
the customer’s payment. Contracts with payments in arrears are recognized as receivables.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)," which requires an entity to recognize assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating how andhas no contract assets recognized from the costs to what extent ASU 2016-02 will affect the Company's financial position, results of operations, cash flows and related disclosures. obtain or fulfill a contract with a customer.
NOTE 3—Inventories
Inventories are summarized as follows:
| | | SEPTEMBER 30 2017 | | DECEMBER 31 2016 | MARCH 31 2020 | | DECEMBER 31 2019 |
Coal | $ | 14,695 |
| | $ | 13,137 |
| $ | 10,521 |
| | $ | 15,700 |
|
Mining supplies | 15,885 |
| | 15,790 |
| 25,475 |
| | 24,765 |
|
Total inventories | $ | 30,580 |
| | $ | 28,927 |
| $ | 35,996 |
| | $ | 40,465 |
|
NOTE 4—Leases
NACCO adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019. The most significant effect to the Unaudited Condensed Consolidated Balance Sheets relates to the recognition of new right-of-use assets (“ROU assets”) and lease liabilities for operating leases of real estate, mining and other equipment that expire at various dates through 2031. The majority of the Company's leases are operating leases. See the table below for further information on the balances included in the Unaudited Condensed Consolidated Balance Sheets. Several leases include renewal or fair value purchase options, which are not recognized on the Unaudited Condensed Consolidated Balance Sheets. The Company's lease agreements do not contain lease payments that depend on an index or a rate, as such, minimum lease payments do not include variable lease payments.
Leased assets and liabilities include the following:
|
| | | | | | | |
Description | Location | MARCH 31 2020 | DECEMBER 31 2019 |
Assets | | | |
Operating | Operating lease right-of-use assets | $ | 11,081 |
| $ | 11,398 |
|
Finance | Property, plant and equipment, net (a)
| $ | 107 |
| $ | 544 |
|
| | | |
Liabilities | | | |
Current | | | |
Operating | Other current liabilities | $ | 1,303 |
| $ | 1,318 |
|
Finance | Current maturities of long-term debt | $ | 33 |
| $ | 558 |
|
Noncurrent | | | |
Operating | Operating lease liabilities | $ | 12,117 |
| $ | 12,448 |
|
Finance | Long-term debt | $ | 76 |
| $ | 85 |
|
(a) Finance leased assets are recorded net of accumulated amortization of less than $0.1 million and $1.9 million as of March 31, 2020 and December 31, 2019, respectively.
The components of lease expense were as follows:
|
| | | | | | | |
| | THREE MONTHS ENDED |
| | MARCH 31 |
Description | Location | 2020 | 2019 |
Lease expense | | | |
Operating lease cost | Selling, general and administrative expenses | $ | 510 |
| $ | 625 |
|
Finance lease cost: | | | |
Amortization of leased assets | Cost of sales | 94 |
| 96 |
|
Interest on lease liabilities | Interest expense
| 5 |
| 3 |
|
Variable lease expense | Selling, general and administrative expenses | 150 |
| 101 |
|
Short-term lease expense | Selling, general and administrative expenses | 114 |
| 20 |
|
Total lease expense | | $ | 873 |
| $ | 845 |
|
Future minimum finance and operating lease payments were as follows at March 31, 2020:
|
| | | | | | | | | | | |
| Finance Leases | | Operating Leases | | Total |
Remainder of 2020 | $ | 28 |
| | $ | 1,622 |
| | $ | 1,650 |
|
2021 | 37 |
| | 2,149 |
| | 2,186 |
|
2022 | 37 |
| | 2,175 |
| | 2,212 |
|
2023 | 16 |
| | 1,685 |
| | 1,701 |
|
2024 | — |
| | 1,661 |
| | 1,661 |
|
Subsequent to 2024 | — |
| | 9,330 |
| | 9,330 |
|
Total minimum lease payments | $ | 118 |
| | $ | 18,622 |
| | $ | 18,740 |
|
Amounts representing interest | 9 |
| | 5,202 |
| | |
Present value of net minimum lease payments | $ | 109 |
| | $ | 13,420 |
| | |
As most of the Company's leases do not provide an implicit rate, the Company determines the incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The Company considers its credit rating and the current economic environment in determining this collateralized rate.
The assumptions used in accounting for ASC 842 were as follows:
|
| | | | |
| THREE MONTHS ENDED |
| MARCH 31 |
Lease term and discount rate | 2020 | 2019 |
Weighted average remaining lease term (years) | | |
Operating | 9.48 |
| 10.00 |
|
Finance | 3.17 |
| 0.80 |
|
| | |
Weighted average discount rate | | |
Operating | 7.00 | % | 6.95 | % |
Finance | 5.09 | % | 3.98 | % |
The following table details cash paid for amounts included in the measurement of lease liabilities:
|
| | | | | | |
| THREE MONTHS ENDED |
| MARCH 31 |
Cash paid for amounts included in the measurement of lease liabilities | 2020 | 2019 |
Operating cash flows from operating leases | $ | 571 |
| $ | 573 |
|
Operating cash flows from finance leases | $ | 5 |
| $ | 3 |
|
Financing cash flows from finance leases | $ | 534 |
| $ | 122 |
|
NOTE 5—Stockholders' Equity
Stock Repurchase Program:On May 10, 2016,November 6, 2019, the Company's Board of Directors approved a stock repurchasepurchase program (the "2016("2019 Stock Repurchase Program") providing for the purchase of up to $50$25 million of the Company's outstanding Class A Common Stock outstanding through December 31, 2017. The Company’s2021. NACCO's previous $60 million stock repurchase program announced("2018 Stock Repurchase Program") would have expired on December 31, 2019 but was terminated and replaced by the 2019 Stock Repurchase Program. As a result of the uncertainty surrounding the COVID-19 pandemic, the Company suspended repurchasing shares under the 2019 Stock Repurchase Program in December 2013, was completed in October 2015. March 2020. Prior to the decision to cease share repurchases, the Company repurchased 32,286 shares of Class A Common Stock under the 2019 Stock Repurchase Program for an aggregate purchase price of $1.0 million during the three months ended March 31, 2020. During the three months ended March 31, 2019, the Company repurchased 36,294 shares of Class A Common Stock under the 2018 Stock Repurchase Program for an aggregate purchase price of $1.3 million.
The timing and amount of any repurchases under the 20162019 Stock Repurchase Program are determined at the discretion of the Company's management based on a number of factors, including the availability of capital, other capital allocation alternatives, and market conditions for the Company's Class A Common Stock.Stock and other legal and contractual restrictions. The 20162019 Stock Repurchase Program does not require the Company to acquire any specific number of shares. Itshares and may be modified, suspended, extended or terminated by the Company at any time without prior notice and may be executed through open market purchases, privately negotiated transactions or otherwise. All or part of the repurchases under the 20162019 Stock Repurchase Program may be implemented under a Rule 10b5-1 trading plan, which would allow repurchases under pre-set terms at times when the Company might otherwise be preventedrestricted from doing so.
During the three and nine months ended September 30, 2017, the Company did not repurchase any shares of Class A Common Stock and approximately $44 million is still available to be repurchasedso under the 2016 Stock Repurchase Program.applicable securities laws.
NOTE 5—6—Fair Value Disclosure
Recurring Fair Value Measurements: The following table presents the Company's assets and liabilities accounted for at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
| | | | Quoted Prices in | | | | Significant |
| | | | Active Markets for | | Significant Other | | Unobservable |
| | | | Identical Assets | | Observable Inputs | | Inputs |
Description | | Date | | (Level 1) | | (Level 2) | | (Level 3) |
| | September 30, 2017 | | | | | | |
Assets: | |
| | | | | | |
Available for sale securities | | $ | 8,715 |
| | $ | 8,715 |
| | $ | — |
| | $ | — |
|
| | $ | 8,715 |
| | $ | 8,715 |
| | $ | — |
| | $ | — |
|
Liabilities: | | | | | | | | |
Interest rate swap agreements | | $ | 3 |
| | $ | — |
| | $ | 3 |
| | $ | — |
|
| | $ | 3 |
| | $ | — |
| | $ | 3 |
| | $ | — |
|
| | | | | | | | |
| | December 31, 2016 | | | | | | |
Assets: | | | | | | | | |
Available for sale securities | | $ | 7,882 |
| | $ | 7,882 |
| | $ | — |
| | $ | — |
|
| | $ | 7,882 |
| | $ | 7,882 |
| | $ | — |
| | $ | — |
|
Liabilities: | | | | | | | | |
Interest rate swap agreements | | $ | 339 |
| | $ | — |
| | $ | 339 |
| | $ | — |
|
| | $ | 339 |
| | $ | — |
| | $ | 339 |
| | $ | — |
|
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
| | | | Quoted Prices in | | | | Significant |
| | | | Active Markets for | | Significant Other | | Unobservable |
| | | | Identical Assets | | Observable Inputs | | Inputs |
Description | | Date | | (Level 1) | | (Level 2) | | (Level 3) |
| | March 31, 2020 | | | | | | |
Assets: | |
| | | | | | |
Equity securities | | $ | 8,947 |
| | $ | 8,947 |
| | $ | — |
| | $ | — |
|
| | $ | 8,947 |
| | $ | 8,947 |
| | $ | — |
| | $ | — |
|
| | | | | | | | |
| | December 31, 2019 | | | | | | |
Assets: | | | | | | | | |
Equity securities | | $ | 10,120 |
| | $ | 10,120 |
| | $ | — |
| | $ | — |
|
| | $ | 10,120 |
| | $ | 10,120 |
| | $ | — |
| | $ | — |
|
Bellaire Corporation (“Bellaire”) is a non-operating subsidiary of the Company with legacy liabilities relating to closed mining operations, primarily former Eastern U.S. underground coal mining operations. In connection with Bellaire's normal permit renewal with the Pennsylvania Department of Environmental Protection ("DEP"),Prior to 2019, Bellaire established a $5.0 million mine water treatment trust (the "Mine Water Treatment Trust") to provide a financial assurance mechanism to assure the long-term treatment of post-mining discharges. Bellaire's Mine Water Treatment Trust invests in available for saleequity securities that are reported at fair value based upon quoted market prices in active markets for identical assets; therefore, they are classified as Level 1 within the fair value hierarchy.
The Company uses significant other observable inputs to value derivative instruments used to hedge interest rate risk; therefore, theyMine Water Treatment Trust recognized a loss of $1.2 million in the three months ended March 31, 2020 compared with a gain of $0.7 million in the three months ended March 31, 2019 as a result of changes in returns on invested assets. These amounts are classified within Level 2reported on the line Loss (gain) on equity securities in the Other expense (income) section of the valuation hierarchy. The fair value for these contracts is determined based on current interest rates.Unaudited Condensed Consolidated Statements of Operations.
There were no transfers into or out of Levels 1, 2 or 3 during the three and nine months ended September 30, 2017March 31, 2020 and 2016.2019.
NOTE 6—7—Unconsolidated Subsidiaries
Each of NACoal's wholly owned unconsolidated subsidiaries eachUnconsolidated Subsidiaries, within the Coal Mining and NAMining segments, meet the definition of a variableVIE. The Unconsolidated Subsidiaries are capitalized primarily with debt financing provided by or supported by their respective customers, and other than at Coyote Creek, without recourse to NACCO and NACoal. Although NACoal owns 100% of the equity and manages the daily operations of the Unconsolidated Subsidiaries, the Company has determined that the equity capital provided by NACoal is not sufficient to adequately finance the ongoing activities or absorb any expected losses without additional support from the customers. The customers have a controlling financial interest entity.and have the power to direct the activities that most significantly affect the economic performance of the entities. As a result, the Company is not the primary beneficiary and therefore does not consolidate these entities' financial positions or results of operations. See Note 1 for a discussion of these entities.
The investment in the unconsolidated subsidiaries and related tax positions totaled $27.3$27.4 million and $31.1$24.6 million at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $17.8$5.7 million and $4.6$5.0 million at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively.
NACoal is a party to certain guarantees related to Coyote Creek. Under certain circumstances of default or termination of Coyote Creek’s Lignite Sales Agreement (“LSA”), NACoal would be obligated for payment of a "make-whole" amount to Coyote Creek’s third-party lenders. The “make-whole” amount is based on the excess, if any, of the discounted value of the
remaining scheduled debt payments over the principal amount. In addition, in the event Coyote Creek’s LSA is terminated on or after January 1, 2024 by Coyote Creek’s customers, NACoal is obligated to purchase Coyote Creek’s dragline and rolling stock for the then net book value of those assets. To date, no payments have been required from NACoal since the inception of these guarantees. The Company believes that the likelihood of NACoal’s future performanceNACoal would be required to perform under the guarantees is remote, and no amounts related to these guarantees have been recorded.
Summarized financial information for the unconsolidated subsidiariesUnconsolidated Subsidiaries is as follows:
| | | THREE MONTHS ENDED | | NINE MONTHS ENDED | THREE MONTHS ENDED |
| SEPTEMBER 30 | | SEPTEMBER 30 | MARCH 31 |
| 2017 | | 2016 | | 2017 | | 2016 | 2020 | | 2019 |
Revenues | $ | 203,134 |
| | $ | 178,009 |
| | $ | 571,862 |
| | $ | 483,360 |
| $ | 183,077 |
| | $ | 187,239 |
|
Gross profit | $ | 23,126 |
| | $ | 21,367 |
| | $ | 64,981 |
| | $ | 59,788 |
| $ | 16,570 |
| | $ | 19,136 |
|
Income before income taxes | $ | 16,602 |
| | $ | 14,755 |
| | $ | 45,928 |
| | $ | 41,122 |
| $ | 16,241 |
| | $ | 16,737 |
|
NOTE 7—8—Contingencies
Various legal and regulatory proceedings and claims have been or may be asserted against NACCO and certain subsidiaries relating to the conduct of their businesses, including asbestos-related claims and other claims.businesses. These proceedings and claims are incidental to the ordinary course of business of the Company. Management believes that it has meritorious defenses and will vigorously defend the Company in these actions. Any costs that management estimates will be paid as a result of these claims are accrued when the liability is considered probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss.
These matters are subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of an adverse impact on the Company’s financial position, results of operations and cash flows of the period in which the ruling occurs, or in future periods.
NOTE 8—9—Business Segments
TwoThe Company's operating segments are: (i) Coal Mining, (ii) NAMining and (iii) Minerals Management. While the Company continues to pursue opportunities to add new coal mining operations to the Coal Mining segment, the NAMining segment will serve as the platform for pursuing non-coal mining projects and the Minerals Management segment will work to capitalize on the Company's gas, oil and coal reserves.
The Company determines its reportable segments by first identifying its operating segments, and then by assessing whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. The Company’s Chief Operating Decision Maker utilizes operating profit to evaluate segment performance and allocate resources.
The Company also has unallocated items not directly attributable to a reportable segment which are not included as part of the measurement of segment operating profit, primarily administrative costs related to public company reporting requirements, the financial results of the Company’s mitigation banking business, Mitigation Resources of North America® (“MRNA”), and Bellaire. MRNA generates and sells stream and wetland mitigation credits (known as mitigation banking) and provides services to those engaged in permittee-responsible stream and wetland mitigation. Bellaire manages the Company’s long-term liabilities related to former Eastern U.S. underground mining activities. Transactions between segments HBBare accounted for as third-party arrangements for purposes of presenting segment results of operations and KC, were spun-offare eliminated in consolidation.
As of January 1, 2020, the Company retrospectively changed its computation of segment operating profit to reclassify certain expenses, primarily related to executive and board compensation. These expenses are now included in unallocated items. The change in segment reporting reflected a decision to evaluate the financial performance of the Company’s segments excluding executive and board compensation. All prior period segment information has been reclassified to conform to the new presentation. This segment reporting change has no impact on September 29, 2017. consolidated operating results.
All financial statement line items below operating profit (other income including interest expense and interest income, the provision for income taxes and net income) are presented and discussed within this Form 10-Q on a consolidated basis. Included within other income on the line Income from other unconsolidated affiliates within the Unaudited Condensed Consolidated Statements of Operations is the financial results of NoDak Energy Services, LLC ("NoDak"). NoDak operated and maintained a coal drying system at a customer’s power plant. The NoDak contract expired in the first quarter of 2020.
See Note 1 for aadditional discussion of the Company's industryreportable segments. The following tables present revenue, operating profit, depreciation expense and the spin-off. There were no changes to the composition of the remaining segments, NACoal and NACCO and Other. NACCO's non-operating segment, NACCO and Other, includes the accounts of the parent company and Bellaire.
Financial information for each of NACCO's reportable segments is presented in the following table:capital expenditures:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | NINE MONTHS ENDED |
| SEPTEMBER 30 | | SEPTEMBER 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues | | | | | | | |
NACoal | $ | 21,941 |
| | $ | 32,402 |
| | $ | 78,341 |
| | $ | 85,778 |
|
Total | $ | 21,941 |
| | $ | 32,402 |
| | $ | 78,341 |
| | $ | 85,778 |
|
| | | | | | | |
Operating profit (loss) | |
| | |
| | | | |
NACoal | $ | 8,925 |
| | $ | (10,912 | ) | | $ | 31,127 |
| | $ | 3,653 |
|
NACCO and Other | (1,936 | ) | | (1,867 | ) | | (4,820 | ) | | (4,605 | ) |
Total | $ | 6,989 |
| | $ | (12,779 | ) | | $ | 26,307 |
| | $ | (952 | ) |
NOTE 9—Income Taxes
A reconciliation of the income tax provision (benefit) based on the U.S. federal statutory rate of 35% to the effective income tax rate is as follows: |
| | | | | | | |
| THREE MONTHS ENDED |
| MARCH 31 |
| 2020 | | 2019 |
Revenues | | | |
Coal Mining | $ | 20,928 |
| | $ | 16,750 |
|
NAMining | 11,624 |
| | 10,775 |
|
Minerals Management | 5,241 |
| | 12,686 |
|
Unallocated Items | 26 |
| | 543 |
|
Eliminations | (175 | ) | | (657 | ) |
Total | $ | 37,644 |
| | $ | 40,097 |
|
| | | |
Operating profit (loss) | |
| | |
|
Coal Mining | $ | 7,185 |
| | $ | 10,007 |
|
NAMining | 731 |
| | 65 |
|
Minerals Management | 4,267 |
| | 11,669 |
|
Unallocated Items | (4,560 | ) | | (5,134 | ) |
Eliminations | (43 | ) | | (234 | ) |
Total | $ | 7,580 |
| | $ | 16,373 |
|
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | NINE MONTHS ENDED |
| SEPTEMBER 30 | | SEPTEMBER 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
Income (loss) before income tax provision (benefit) | $ | 5,956 |
| | $ | (13,721 | ) | | $ | 23,347 |
| | $ | (6,398 | ) |
Statutory taxes (benefit) at 35.0% | $ | 2,085 |
| | $ | (4,802 | ) | | $ | 8,171 |
| | $ | (2,239 | ) |
Percentage depletion | (1,033 | ) | | (7,889 | ) | | (5,531 | ) | | (12,034 | ) |
State and local income taxes | 119 |
| | (758 | ) | | 187 |
| | (788 | ) |
Domestic production deduction | (75 | ) | | (628 | ) | | (371 | ) | | (666 | ) |
Non-deductible expenses | (469 | ) | | 991 |
| | 168 |
| | 1,701 |
|
Valuation allowances | 1,923 |
| | 1,673 |
| | 1,692 |
| | 1,690 |
|
Uncertain tax positions | 7 |
| | 190 |
| | 55 |
| | (2,015 | ) |
Other, net | 68 |
| | (366 | ) | | 193 |
| | 381 |
|
Income tax provision (benefit) | $ | 2,625 |
| | $ | (11,589 | ) | | $ | 4,564 |
| | $ | (13,970 | ) |
Effective income tax rate | 44.1 | % | | 84.5 | % | | 19.5 | % | | 218.3 | % |
The effective income tax rates for the three and nine months ended September 30, 2017 include discrete income tax expense of $1.9 million and $1.6 million, respectively, primarily due to the establishment of a valuation allowance on deferred tax assets. The valuation allowance was established because the Company expects to be subject to Alternative Minimum Tax ("AMT") beginning in 2018 due to the change in the mix of earnings as a result of the spin-off of Hamilton Beach Holding. As a result of being subject to AMT beginning in 2018, the Company remeasured its deferred tax assets and liabilities using the AMT rate that is expected to apply to taxable income in future years in which those tax assets and liabilities are expected to be realized or settled. |
| | | | | | | |
Expenditures for property, plant and equipment | | | |
Coal Mining | $ | 823 |
| | $ | 2,740 |
|
NAMining | 4,023 |
| | 1,130 |
|
Minerals Management | 463 |
| | 241 |
|
Unallocated Items | 49 |
| | 141 |
|
Total | $ | 5,358 |
| | $ | 4,252 |
|
| | | |
Depreciation, depletion and amortization | | | |
Coal Mining | $ | 3,543 |
| | $ | 2,874 |
|
NAMining | 646 |
| | 545 |
|
Minerals Management | 327 |
| | 366 |
|
Unallocated Items | 28 |
| | 28 |
|
Total | $ | 4,544 |
| | $ | 3,813 |
|
NOTE 10—Other Events and TransactionsIncome Taxes
HBBHC Spin-Off: On September 29, 2017, the Company spun-off HBBHC, a former wholly owned subsidiary. To complete the spin-off, the Company distributed one share of HBBHC Class A common stock and one share of HBBHC Class B common stock to NACCO stockholders for each share of NACCO Class A common stock or Class B common stock owned. The Company accountedevaluates and updates its estimated annual effective income tax rate on a quarterly basis based on current and forecasted operating results and tax laws. Consequently, based upon the mix and timing of actual earnings compared to projections of earnings between entities that benefit from percentage depletion and those that do not, the effective tax rate may vary quarterly. The quarterly income tax provision is generally comprised of tax expense on income or a benefit on a loss at the most recent estimated annual effective income tax rate, adjusted for the spin-off based on the historical carrying valueeffect of HBBHC.discrete items.
On September 28, 2017, priorMarch 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the spin-off, HBBHC paid NACCOCOVID-19 pandemic. The CARES Act contains numerous income tax provisions, including among other items, temporary changes regarding the prior and future utilization of net operating losses. The 2020 estimated annual effective tax rate includes the benefit of utilizing the current year forecasted tax basis net operating loss that would otherwise be deductible at the current 21% statutory rate to offset taxable income in years that were taxed at a one-time $35.0 million cash dividend. This payment was35% rate. The Company expects to generate a net operating loss in addition2020 primarily due to $3.0 million in dividends HBBHC paid to NACCO from January 1, 2017 to June 30, 2017.
In connection with the spin-offrealization of HBBHC, thecertain deferred tax assets. The Company and HBBHC entered into a Transition Services Agreement ("TSA"). Under the termsis currently assessing additional aspects of the TSA,CARES Act, including the Company will provide various servicesCompany’s ability to HBBHC on a transitional basis,utilize the extended carryback period for net operating losses related to 2019 or 2018, as needed, for varying periods after the spin-off date. Nonewell as utilization of other aspects of the transition services are expected to exceed one year. NACCO expects to receive net aggregate fees of approximately $1.0 million over the term of the TSA from HBBHC.
As a result of the spin-off, the financial position, results of operations and cash flows of HBBHC are reflected as discontinued operations through the date of the spin-off in the Unaudited Condensed Consolidated Financial Statements. In connection with the spin-off of HBBHC, NACCO and Other recognized non-deductible expenses directly attributable to the spin-off of $1.7 million and $2.8 million for the three and nine months ended September 30, 2017, respectively, which are reflected as discontinued operations in the Unaudited Condensed Consolidated Financial Statements.
Discontinued operations includes the following results of HBBHC for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | NINE MONTHS ENDED |
| SEPTEMBER 30 | | SEPTEMBER 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
HBBHC Operating Statement Data: | | | | | | | |
Revenues | $ | 181,713 |
| | $ | 188,390 |
| | $ | 474,971 |
| | $ | 486,442 |
|
Cost of goods sold | 133,586 |
| | 138,329 |
| | 353,436 |
| | 364,052 |
|
Gross profit | 48,127 |
| | 50,061 |
| | 121,535 |
| | 122,390 |
|
Operating expenses (a) | 40,697 |
| | 36,583 |
| | 114,379 |
| | 110,117 |
|
Operating profit | 7,430 |
| | 13,478 |
| | 7,156 |
| | 12,273 |
|
Interest expense | 423 |
| | 286 |
| | 1,300 |
| | 1,115 |
|
Other expense, net | 40 |
| | 457 |
| | (939 | ) | | 288 |
|
Income before income taxes | 6,967 |
| | 12,735 |
| | 6,795 |
| | 10,870 |
|
Income tax expense | 2,708 |
| | 4,003 |
| | 2,655 |
| | 3,323 |
|
HBBHC net income | $ | 4,259 |
| | $ | 8,732 |
| | $ | 4,140 |
| | $ | 7,547 |
|
NACCO expenses related to the spin-off | 1,664 |
| | — |
| | 2,759 |
| | — |
|
NACCO discontinued operations income tax expense (benefit) adjustments | (2,472 | ) | | 7,041 |
| | — |
| | 9,643 |
|
NACCO discontinued operations | $ | 5,067 |
| | $ | 1,691 |
| | $ | 1,381 |
| | $ | (2,096 | ) |
(a) HBBHC's operating profit includes the recognition of $2.5 million of expenses related to the spin-off in the three and nine months ended September 30, 2017.
Centennial asset impairment charge: Centennial ceased coal production in the fourth quarter of 2015 and the Company began actively marketing Centennial's mine machinery and equipment. The Company classified these assets as held for sale during the fourth quarter of 2015 when management approved and committed to a formal plan of sale. The coal land and real estate did not meet the held-for-sale criteria and remained within property, plant and equipment as a long-lived asset. As a result of various unfavorable conditions, including but not limited to weakness in the U.S. and global coal markets and certain asset-specific factors, the Company determined the carrying value of Centennial's coal land and real estate were not recoverable. The Company also conducted a review of the carrying value of Centennial's mine machinery and equipment classified as assets held for sale. The fair values of these assets were calculated using a combination of a market and income approach and reduced the carrying value of coal land and real estate to zero and assets held for sale to approximately $5.0 million. The Company recognized an aggregate impairment charge of $17.4 million during the third quarter of 2016. The asset impairment charge was recorded as "Centennial asset impairment charge" in the Unaudited Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2016.
CARES Act.
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except as noted and per share data)
Management's Discussion and Analysis of Financial Condition and Results of Operations include NACCO Industries, Inc.® (“NACCO”) and its wholly owned subsidiaries (collectively, the “Company”). NACCO is the public holding company for The North American Coal Corporation®. The North American Coal Corporation and its affiliated companies (collectively, “NACoal”) operate in the mining and natural resources industries through three operating segments: Coal Mining, North American Mining ("NAMining") and Minerals Management. The Coal Mining segment operates surface coal mines under long-term contracts with power generation companies and activated carbon producers pursuant to a service-based business model. The NAMining segment provides value-added contract mining and other services for producers of aggregates, lithium and other minerals. The Minerals Management segment promotes the development of the Company’s gas, oil and coal reserves, generating income primarily from royalty-based lease payments from third parties.
The Company also has items not directly attributable to a reportable segment which are not included as part of the measurement of segment operating profit, primarily administrative costs related to public company reporting requirements, the financial results of the Company’s mitigation banking business, Mitigation Resources of North America® (“MRNA”), and Bellaire Corporation (“Bellaire”). MRNA generates and sells stream and wetland mitigation credits (known as mitigation banking) and provides services to those engaged in permittee-responsible stream and wetland mitigation. Bellaire manages the Company’s long-term liabilities related to former Eastern U.S. underground mining activities.
Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in these forward-looking statements are set forth below under the heading “Forward-Looking Statements."
Management's DiscussionAs of January 1, 2020, the Company retrospectively changed its computation of segment operating profit to reclassify certain expenses, primarily related to executive and Analysisboard compensation. These expenses are now included in unallocated items. The change in segment reporting reflected a decision to evaluate the financial performance of Financial Conditionthe Company’s segments excluding executive and Results of Operations include NACCO Industries, Inc. (the “parent company” or “NACCO”)board compensation. All prior period segment information has been reclassified to conform to the new presentation. This segment reporting change has no impact on consolidated operating results.
All financial statement line items below operating profit (other income, including interest expense and its wholly owned subsidiaries (collectively,interest income, the “Company”). provision for income taxes and net income) are presented and discussed within this Form 10-Q on a consolidated basis.
The Company's primaryCompany’s operating subsidiary operates in the mining industry. The North American Coal Corporation and its affiliated coal companies (collectively, “NACoal”) mine coal primarily for use in power generation and provide value-added mining services for natural resource companies.segments are further described below:
Coal Mining Segment
The Coal Mining segment operates surface coal mines under long-term contracts with power generation companies and activated carbon producers pursuant to a service-based business model. Coal is surface mined from NACoal's minessurface-mined in North Dakota, Texas, Mississippi, Louisiana and on the Navajo Nation in New Mexico. NACoal provides value-added services such as maintaining and operating draglines for independently owned limerock quarries throughEach mine is fully integrated with its North American Mining ("NAM") division and provides ash hauling services for power plants and other facilities.customer operations.
NACoal has the followingThe operating coal mining subsidiaries:mines are: Bisti Fuels Company, LLC ("Bisti"), Caddo Creek Resources Company, LLC (“Caddo Creek”), Camino Real Fuels, LLC (“Camino Real”), The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), Demery Resources Company, LLC (“Demery”), The Falkirk Mining Company (“Falkirk”), Liberty Fuels Company, LLC (“Liberty”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”). As of March 31, 2020, all of the Liberty Fuels Company, LLC mine areas have been reclaimed and final mine reclamation activities, primarily monitoring, will continue until final bond release.
Coteau, Coyote, Falkirk, MLMC and Sabine supply lignite coal for power generation. Bisti and Camino Real supply sub-bituminous and bituminous coal, respectively, for power generation. Caddo Creek and Demery supply lignite coal for the production of activated carbon. Each of these mines deliver their coal production to adjacent or nearby power plants, synfuels plants or activated carbon processing facilities under long-term supply contracts. With the exception of Camino Real, each mine is the exclusive supplier of coal to its customers' facilities. Camino Real’s customer takes all coal produced by the mine but also purchases additional coal from other suppliers.
This segment has a strong history of customer retention due to the long-term nature of its contracts and the proximity of the Company’s mines to its customers’ facilities. With the exception of Camino Real, whose contract expires in 2021 but has
renewal provisions, other contract expiration dates range from 2022 through 2045. The contract that expires in 2022 may be extended for three additional periods of five years each, or until 2037, at the Company’s option.
At all operating coal mines other than MLMC, the Company is paid a management fee per ton of coal or heating unit (MMBtu) delivered. Each contract specifies the indices and mechanics by which fees change over time, generally in line with broad measures of U.S. inflation. The customers are responsible for funding all mine operating costs, including final mine reclamation, and directly or indirectly provide all of the capital required to build and operate the mine. This contract structure eliminates exposure to spot coal market price fluctuations while providing steady income and cash flow with minimal capital investment. Other than at Coyote Creek, debt financing provided by or supported by the customers is without recourse to NACCO and NACoal. See Note 7 of the accompanying Unaudited Condensed Consolidated Financial Statements for further discussion of Coyote Creek's guarantees.
All operating coal mines other than MLMC meet the definition of a variable interest entity (“VIE”). In each case, NACCO is not the primary beneficiary of the VIE as it does not exercise financial control; therefore, NACCO does not consolidate the results of these operations within its financial statements. Instead, these contracts are accounted for as equity method investments. The income before income taxes associated with these VIE's is reported as Earnings of unconsolidated operations on the Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in Unconsolidated Subsidiaries in the Consolidated Balance Sheets. The mines that meet the definition of a VIE are referred to collectively as the “Unconsolidated Subsidiaries.” For tax purposes, the Unconsolidated Subsidiaries are included within the NACCO consolidated U.S. tax return; therefore, the income tax expense line on the Consolidated Statements of Operations includes income taxes related to these entities. The contracts for certain of the Company's Unconsolidated Subsidiaries permit or obligate the customer under some conditions to acquire the assets or stock of the subsidiary for an amount roughly equal to book value.
The MLMC contract is the only operating coal contract in which the Company is responsible for all operating costs, capital requirements and final mine reclamation; therefore, MLMC is consolidated within NACCO’s financial statements. MLMC sells coal to its customer at a contractually agreed-upon price which adjusts monthly, primarily based on changes in the level of established indices which reflect general U.S. inflation rates. Profitability at MLMC is affected by customer demand for coal, changes in the indices that determine sales price and actual costs incurred. As diesel fuel is heavily weighted among the indices used to determine the coal sales price, the persistence of low diesel fuel prices can negatively affect earnings at MLMC.
MLMC delivers coal to the Red Hills Power Plant in Ackerman, Mississippi. The Red Hills Power Plant supplies electricity to the Tennessee Valley Authority ("TVA") under a long-term Power Purchase Agreement ("PPA"). MLMC’s contract with its customer runs through 2032. TVA’s power portfolio includes coal, nuclear, hydroelectric, natural gas and renewables. The decision of which power plants to dispatch is determined by TVA.
Centennial Natural Resources LLC ("Centennial"(“Centennial”), whichlocated in Alabama, ceased coal production inat the fourth quarterend of 2015. Since 2015, was alsothe Company has sold or transferred certain Centennial equipment and mineral reserves. The Company continues to evaluate strategies for the remaining mineral reserves and a coal mining subsidiary.dragline, which have no remaining book value. Cash expenditures related to mine reclamation at Centennial will continue until mine reclamation is complete, or ownership of, or responsibility for, the remaining mines is transferred. Centennial is a consolidated entity within the Coal Mining segment as the Company is responsible for carrying costs and final mine reclamation.
NAMThe coal reserves at Coteau, Falkirk, Coyote, MLMC and Centennial are owned or controlled by the Company. The coal reserves at all other mines are owned or controlled by the respective mine’s customer.
The Company performs contemporaneous reclamation activities at each mine in the normal course of operations. Under all of the Unconsolidated Subsidiaries’ contracts, the customer has the obligation to fund final mine reclamation activities. Under certain contracts, the Unconsolidated Subsidiary holds the mine permit and is therefore responsible for final mine reclamation activities. To the extent the Unconsolidated Subsidiary performs such final reclamation, it is compensated for providing those services in addition to receiving reimbursement from customers for costs incurred.
The contracts under which certain of the Unconsolidated Subsidiaries operate provide that, under certain conditions, including default, the customer(s) involved may elect or be obligated to acquire the assets (subject to the liabilities) or the capital stock of the Coal Mining subsidiary for an amount effectively equal to book value. The Company does not know of any conditions of default that currently exist.
NAMining Segment
The NAMining segment provides value-added contract mining and other services for producers of aggregates, lithium and other minerals. The segment is a primary platform for the Company’s growth and diversification outside of the coal industry. NAMining provides contract mining services for independently owned limerockmines and quarries, and is reimbursed bycreating value for its customers basedby performing the mining aspects of its customers’ operations. This allows customers to focus on actual costs plustheir areas of expertise: materials handling and processing, product sales and distribution. NAMining operates primarily at limestone quarries in Florida, but is focused on expanding outside of Florida and into mining materials other than limestone. During 2019, the Company entered into a mining agreement to serve as exclusive contract miner for the Thacker Pass lithium project in northern Nevada. NAMining utilizes both fixed price and management fee. The financial results for NAM are included in the consolidated mining operations or unconsolidated mining operations based on each NAM entity's structure.fee contract structures.
NACoalMinerals Management Segment
The Minerals Management segment promotes the development of the Company’s gas, oil and coal reserves, generating income primarily from royalty-based lease payments from third parties. The Company’s gas, oil and undeveloped coal reserves are located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus shale natural gas), Alabama (coal and coalbed methane and natural gas) and North Dakota (coal).
The majority of the Company’s existing reserves were acquired as part of its historical coal mining operations. The Minerals Management segment derives income primarily by entering into contracts with third-party operators, granting them the rights to explore, produce and sell natural resources in exchange for royalty payments based on the lessees' sales of natural gas and, to a lesser extent, oil and coal. Specialized employees in the Minerals Management segment also provides coal handling, processing and drying services for a number of customers. For example, NoDak Energy Services, LLC ("NoDak") operates and maintains a coal processing facility for a customer's power plant. North American Coal Royalty Company providesprovide surface and mineral acquisition and lease maintenance services related to the Company'sCompany operations.
NACCO and Other includes the parent company operations and Bellaire Corporation (“Bellaire”). Bellaire is a non-operating subsidiary of the Company with legacy liabilities relating to closed mining operations, primarily former Eastern U.S. underground coal mining operations.
On September 29, 2017, the Company spun-off Hamilton Beach Brands Holding Company ("Hamilton Beach Holding" or "HBBHC"), a former wholly owned subsidiary. As a result of the spin-off, NACCO stockholders received shares in HBBHC, in addition to retaining their shares of NACCO common stock. HBBHC has two classes of stock, similar to NACCO. In the spin-off, NACCO stockholders received one share of HBBHC Class A common stock and one share of HBBHC Class B common stock for each share of NACCO Class A or Class B common stock owned on the record date for the spin-off. The financial position, results of operations and cash flows of HBBHC are reflected as discontinued operations for all periods presented through the date of the spin-off.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's
Refer to the discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimatesCritical Accounting Policies and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities (if any). On an ongoing basis, the Company evaluates its estimates basedEstimates as disclosed on historical experience, actuarial valuations and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Revenue recognition: Revenues are generally recognized when title transfers and risk of loss passes to the customer. Under its mining contracts, the Company recognizes revenue as the coal or limerock is delivered or services are performed.
Retirement benefit plans: The Company maintains various defined benefit pension plans that provide benefits based on years of service and average compensation during certain periods. Prior to 2016, the Company amended the Combined Defined Benefit Plan for NACCO Industries, Inc. and its subsidiaries to freeze pension benefits for all employees, including those for certain unconsolidated mines' employees. All eligible employees of the Company, including employees whose pension benefits are frozen, receive retirement benefits under defined contribution retirement plans. The Company's policy is to periodically make contributions to fund the defined benefit pension plans within the range allowed by applicable regulations. The defined benefit pension plan assets consist primarily of publicly traded stocks and government and corporate bonds. There is no guarantee the actual return on the plans’ assets will equal the expected long-term rate of return on plan assets or that the plans will not incur investment losses.
The expected long-term rate of return on defined benefit plan assets reflects management's expectations of long-term rates of return on funds invested to provide for benefits included in the projected benefit obligations. In establishing the expected long-term rate of return assumption for plan assets, the Company considers the historical rates of return over a period of time that is consistent with the long-term nature of the underlying obligations of these plans as well as a forward-looking rate of return. The historical and forward-looking rates of return for each of the asset classes used to determine the Company's estimated rate of return assumption were based upon the rates of return earned or expected to be earned by investments in the equivalent benchmark market indices for each of the asset classes.
Expected returns for pension plans are based on a calculated market-related value for pension plan assets. Under this methodology, asset gains and losses resulting from actual returns that differ from the Company's expected returns are recognized ratably in the market-related value of assets over three years.
The Company also maintains health care plans which provide benefits to eligible retired employees. All health care plans of the Company have a cap on the Company's share of the costs. These plans have no assets. Under the Company's current policy, plan benefits are funded at the time they are due to participants.
The basis for the selection of the discount rate for each plan is determined by matching the timing of the payment of the expected obligations under the defined benefit plans and health care plans against the corresponding yield of high-quality corporate bonds of equivalent maturities.
Changes to the estimate of any of these factors could result in a material change to the Company's pension obligation causing a related increase or decrease in reported net operating results in the period of change in the estimate. Because the 2016 assumptions are used to calculate 2017 pension expense amounts, a one percentage-point change in the expected long-term rate of return on plan assets would result in a change in pension expense for 2017 of approximately $0.4 million for the plans. A one percentage-point change in the discount rate would result in a change in pension expense for 2017 of less than $0.1 million. A one percentage-point increase in the discount rate would have lowered the plans’ projected benefit obligation as of the end of 2016 by approximately $4.7 million; while a one percentage-point decrease in the discount rate would have raised the plans’ projected benefit obligation as of the end of 2016 by approximately $5.7 million.
Self-insurance liabilities: The Company is generally self-insured for medical claims, certain workers’ compensation claims and certain closed mine liabilities. An estimated provision for claims reported and for claims incurred but not yet reported under the self-insurance programs is recorded and revised periodically based on industry trends, historical experience and management judgment. In addition, industry trends are considered within management's judgment for valuing claims. Changes in assumptions for such matters as legal judgments and settlements, inflation rates, medical costs and actual experience could cause estimates to change in the near term. Changes in any of these factors could materially change the Company's estimates for these self-insurance obligations causing a related increase or decrease in reported net operating results in the period of change in the estimate.
Accounting for Asset Retirement Obligations: The Company's asset retirement obligations are principally for costs to dismantle certain mining equipment at the end of the life of the mine as well as for costs to close its surface mines and reclaim the land it has disturbed as a result of its normal mining activities. Under certain federal and state regulations, the Company is required to reclaim land disturbed as a result of mining. The Company determined the amounts of these obligations based on estimates adjusted for inflation, projected to the estimated closure dates, and then discounted using a credit-adjusted risk-free interest rate. Changes in any of these estimates could materially change the Company's estimates for these asset retirement obligations causing a related increase or decrease in reported net operating results in the period of change in the estimate. The accretion of the liability is being recognized over the estimated life of each individual asset retirement obligation. The
Company has capitalized an asset’s retirement cost as part of the cost of the related long-lived asset. These capitalized amounts are subsequently amortized to expense using a systematic and rational method.
Bellaire is a non-operating subsidiary of the Company with legacy liabilities relating to closed mining operations, primarily former Eastern U.S. underground coal mining operations. These legacy liabilities include obligations for water treatment and other environmental remediation that arose as part of the normal course of closing these underground mining operations. The Company determined the amounts of these obligations based on estimates adjusted for inflation and then discounted using a credit-adjusted risk-free interest rate. The accretion of the liability is recognized over the estimated life of the asset retirement obligation. Since Bellaire's properties are no longer active operations, no associated asset has been capitalized. Changes in any of these estimates could materially change the Company's estimates for these asset retirement obligations causing a related increase or decrease in reported net operating income in the period of change in the estimate.
Long-lived assets: The Company periodically evaluates long-lived assets for impairment when changes in circumstances or the occurrence of certain events indicate the carrying amount of an asset may not be recoverable. Upon identification of indicators of impairment, the Company evaluates the carrying value of the asset by comparing the estimated future undiscounted cash flows generated from the use of the asset and its eventual disposition with the asset's net carrying value. If the carrying value of an asset is considered impaired, an impairment charge is recorded for the amount that the carrying value of the long-lived asset exceeds its fair value. Fair value is estimated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Centennial ceased coal production in the fourth quarter of 2015 and the Company began actively marketing Centennial's mine machinery and equipment. The Company classified these assets as held for sale during the fourth quarter of 2015 when management approved and committed to a formal plan of sale. The coal land and real estate did not meet the held-for-sale criteria and remained within property, plant and equipment as a long-lived asset.
As a result of various unfavorable conditions, including but not limited to weakness in the U.S. and global coal markets and certain asset-specific factors, the Company determined the carrying value of Centennial's coal land and real estate were not recoverable during the third quarter of 2016. The Company also conducted a review of the carrying value of Centennial's mine machinery and equipment classified as assets held for sale during the third quarter of 2016. The fair values of these assets were calculated using a combination of a market and income approach and reduced the carrying value of coal land and real estate to zero and assets held for sale to approximately $5.0 million as of Septemberpages 30 2016. The Company recognized an aggregate impairment charge of $17.4 million during the third quarter of 2016. The asset impairment charge was recorded as "Centennial asset impairment charge" in the Unaudited Condensed Consolidated Statement of Operations during the three and nine months ended September 30, 2016.
Income taxes: Tax law requires certain items to be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible for tax purposes, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities using currently enacted tax rates. The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date. Management is required to estimate the timing of the recognition of deferred tax assets and liabilities, make assumptions about the future deductibility of deferred tax assets and assess deferred tax liabilities based on enacted law and tax rates for the appropriate tax jurisdictions to determine the amount of such deferred tax assets and liabilities. Changes in the calculated deferred tax assets and liabilities may occur in certain circumstances, including statutory income tax rate changes, statutory tax law changes, or changes in the structure or tax status of the Company.
The Company's tax assets, liabilities, and tax expense are supported by historical earnings and losses and the Company's best estimates and assumptions of future earnings. The Company assesses whether a valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, both positive and negative, using a more likely than not standard. This assessment considers, among other matters, scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates the Company is using to manage the underlying businesses. When the Company determines, based on all available evidence, that it is more likely than not that deferred tax assets will not be realized, a valuation allowance is established.
Since significant judgment is required to assess the future tax consequences of events that have been recognizedthrough 32 in the Company's financial statements or tax returns,Annual Report on Form 10-K for the ultimate resolution of these events could result in adjustments to theyear ended December 31, 2019. The Company's financial statementsCritical Accounting Policies and such adjustments could be material. The Company believes the current assumptions,
judgments and other considerations used to estimate the current year accrued and deferred tax positions are appropriate. If the actual outcome of future tax consequences differs from these estimates and assumptions, due to changes or future events, the resulting change to the provision for income taxes couldEstimates have a material impact on the Company's results of operations and financial position.not materially changed since December 31, 2019.
CONSOLIDATED FINANCIAL SUMMARY
The results of operations for NACCO were as follows for the three and nine months ended September 30March 31:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS | | NINE MONTHS |
| 2017 | | 2016 | | 2017 | | 2016 |
NACoal operating profit (loss) (a) | $ | 8,925 |
| | $ | (10,912 | ) | | $ | 31,127 |
| | $ | 3,653 |
|
NACCO and Other operating loss (a) | (1,936 | ) | | (1,867 | ) | | (4,820 | ) | | (4,605 | ) |
Operating profit (loss) (a) | 6,989 |
| | (12,779 | ) | | 26,307 |
| | (952 | ) |
Interest expense | 946 |
| | 1,036 |
| | 2,806 |
| | 3,182 |
|
Income from other unconsolidated affiliates | (313 | ) | | (307 | ) | | (932 | ) | | (913 | ) |
Closed mine obligations | 336 |
| | 223 |
| | 1,071 |
| | 948 |
|
Other, net, including interest income | 64 |
| | (10 | ) | | 15 |
| | 2,229 |
|
Other expense, net | 1,033 |
| | 942 |
| | 2,960 |
| | 5,446 |
|
Income (loss) before income tax provision (benefit) | 5,956 |
| | (13,721 | ) | | 23,347 |
| | (6,398 | ) |
Income tax provision (benefit) | 2,625 |
| | (11,589 | ) | | 4,564 |
| | (13,970 | ) |
Income (loss) from continuing operations | $ | 3,331 |
| | $ | (2,132 | ) | | $ | 18,783 |
| | $ | 7,572 |
|
Discontinued operations | 5,067 |
| | 1,691 |
| | 1,381 |
| | (2,096 | ) |
Net income (loss) | $ | 8,398 |
| | $ | (441 | ) | | $ | 20,164 |
| | $ | 5,476 |
|
| | | | | | | |
Effective income tax rate from continuing operations | 44.1 | % | | 84.5 | % | | 19.5 | % | | 218.3 | % |
|
| | | | | | | |
| 2020 | | 2019 |
Revenues: | | | |
Coal Mining | $ | 20,928 |
| | $ | 16,750 |
|
NAMining | 11,624 |
| | 10,775 |
|
Minerals Management | 5,241 |
| | 12,686 |
|
Unallocated Items | 26 |
| | 543 |
|
Eliminations | (175 | ) | | (657 | ) |
Total revenue | $ | 37,644 |
| | $ | 40,097 |
|
Operating profit (loss): | | | |
Coal Mining | $ | 7,185 |
| | $ | 10,007 |
|
NAMining | 731 |
| | 65 |
|
Minerals Management | 4,267 |
| | 11,669 |
|
Unallocated Items | (4,560 | ) | | (5,134 | ) |
Eliminations | (43 | ) | | (234 | ) |
Total operating profit | $ | 7,580 |
| | $ | 16,373 |
|
Interest expense | 403 |
| | 231 |
|
Interest income | (401 | ) | | (553 | ) |
Income from other unconsolidated affiliates | (133 | ) | | (322 | ) |
Closed mine obligations | 434 |
| | 366 |
|
Loss (gain) on equity securities | 1,196 |
| | (698 | ) |
Other, net | (15 | ) | | 11 |
|
Other expense (income), net | 1,484 |
| | (965 | ) |
Income before income tax (benefit) provision | 6,096 |
| | 17,338 |
|
Income tax (benefit) provision | (70 | ) | | 2,320 |
|
Net income | $ | 6,166 |
| | $ | 15,018 |
|
| | | |
Effective income tax rate | (1.1 | )% | | 13.4 | % |
(a) AllThe components of NACCO's Revenues are attributable to NACoal. As a result, the Company's results of operations, including Revenues, Operatingchange in revenues and operating profit (loss) and Other expense, net, for NACoal and NACCO and Other are discussed below in "Segment Results." Amounts below
Other expense (income), net
Interest expense increased $0.2 million in the first three months of 2020 compared with the 2019 period due to higher average borrowings under NACoal's revolving credit facility.
Interest income (loss) before income tax provision (benefit) are analyzedfor the first three months of 2020 decreased $0.2 million compared with the 2019 period primarily due to lower interest rates despite a higher invested cash balance.
Income from other unconsolidated affiliates represents the financial results of NoDak. NoDak operated and maintained a coal drying system at a customer’s power plant. The NoDak contract expired on a consolidated basis.January 31, 2020, resulting in the $0.2 million decrease in Income from other unconsolidated affiliates in the first quarter of 2020 compared with the first quarter of 2019. Income from NoDak was $1.3 million for the year ended December 31, 2019.
Loss (gain) on equity securities represents changes in the market price of invested assets of Bellaire's Mine Water Treatment Trust. The loss in the first three months of 2020 compared with the (gain) during the 2019 period was due to lower returns on invested assets in the first quarter of 2020. See Note 6 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Mine Water Treatment Trust.
Income Taxes
The Company evaluates and updates its estimated annual effective income tax rate on a quarterly basis based on current and forecasted operating results and tax laws. Consequently, based upon the mix and timing of actual earnings compared to projections of earnings between entities that benefit from percentage depletion and those that do not, the effective tax rate may vary quarterly and may make quarterly comparisons not meaningful.quarterly. The quarterly income tax provision is generally comprised of tax expense on income or a benefit on a loss at the most recent estimated annual effective income tax rate, adjusted for the effect of discrete items.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic. The effectiveCARES Act contains numerous income tax rates from continuing operationsprovisions, including among other items, temporary changes regarding the prior and future utilization of net operating losses. The 2020 estimated annual effective tax rate includes the benefit of utilizing the current year forecasted tax basis net operating loss that would otherwise be deductible at the current 21% statutory rate to offset taxable income in years that were taxed at a 35% rate. The Company expects to generate a net operating loss in 2020 primarily due to the realization of certain deferred tax assets. The Company is currently assessing additional aspects of the CARES Act, including the Company’s ability to utilize the extended carryback period for net operating losses related to 2019 or 2018, as well as utilization of other aspects of the CARES Act.
LIQUIDITY AND CAPITAL RESOURCES OF NACCO
Cash Flows
The following tables detail NACCO's changes in cash flow for the three and nine months ended September 30, 2017 was a 44.1% and 19.5% expense on income, respectively, compared to an 84.5% and 218.3% benefit on lossMarch 31:
|
| | | | | | | | | | | |
| 2020 | | 2019 | | Change |
Operating activities: | | | | | |
Net cash used for operating activities | $ | (31,122 | ) | | $ | (544 | ) | | $ | (30,578 | ) |
| | | | | |
Investing activities: | | | | | |
Expenditures for property, plant and equipment | (5,358 | ) | | (4,252 | ) | | (1,106 | ) |
Other | 16 |
| | 5 |
| | 11 |
|
Net cash used for investing activities | (5,342 | ) | | (4,247 | ) | | (1,095 | ) |
Cash flow before financing activities | $ | (36,464 | ) | | $ | (4,791 | ) | | $ | (31,673 | ) |
The $30.6 million increase in net cash used for the three and nine months ended September 30, 2016. The change in income taxesoperating activities was primarily due to payments made for deferred compensation and long-term incentive compensation plans and lower net income during the first quarter of 2020. In addition, an increase in accounts receivable was partially offset by a reduction in inventory due to an increase in tons delivered.
The change in the effective income tax rate driven by anet cash used for investing activities was primarily attributable to an increase in expenditures for property, plant and equipment at NAMining.
|
| | | | | | | | | | | |
| 2020 | | 2019 | | Change |
Financing activities: | | | | | |
Net additions to long-term debt and revolving credit agreement | $ | 9,639 |
| | $ | 1,045 |
| | $ | 8,594 |
|
Cash dividends paid | (1,339 | ) | | (1,153 | ) | | (186 | ) |
Purchase of treasury shares | (1,002 | ) | | (1,300 | ) | | 298 |
|
Net cash provided by (used for) financing activities | $ | 7,298 |
| | $ | (1,408 | ) | | $ | 8,706 |
|
The change in the mix of earnings, primarily the impact in three and nine months ended September 30, 2016 of the $17.4 million asset impairment charge, and the impact of discrete items. The effective income tax rates from continuing operations for the three and nine months ended September 30, 2017 include discrete income tax expense of $1.9 million and $1.6 million, respectively,net cash provided by (used for) financing activities was primarily due to increased borrowings during the establishmentfirst three months of a valuation allowance on deferred tax assets. The valuation allowance was established because2020 compared with the Company expects to be subject to Alternative Minimum Tax ("AMT") beginning in 2018 due to the change in the mixfirst three months of earnings as a result of the spin-off of Hamilton Beach Holding. As a result of being subject to AMT beginning in 2018, the Company remeasured its deferred tax assets and liabilities using the AMT rate that is expected to apply to taxable income in future years in which those tax assets and liabilities are expected to be realized or settled. In addition, intraperiod tax allocation rules require the Company to allocate the income tax provision between continuing operations and other categories of earnings, such as discontinued operations. The income tax provision in the third quarter of 2017 reflects a change in estimate attributed to higher pretax income within continuing operations at companies that do not benefit from percentage depletion. According to the ordering rules of intraperiod tax allocation, the residual amount of change after determining the effective rate for continuing operations is allocated to discontinued operations.2019.
The effective income tax rates from continuing operations for the three and nine months ended September 30, 2016 include discrete income tax expense of $0.7 million and discrete income tax benefit of $1.3 million, respectively. The income tax benefit for the three and nine months ended September 30, 2016, includes the effect of Centennial's asset impairment. See Note 10 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the 2016 Centennial asset impairment charge.Financing Activities
In addition, 2017Financing arrangements are obtained and 2016 effective tax rates from continuing operations includemaintained at the effect of benefits from percentage depletion.The benefit of percentage depletion is not directly related to the amount of pre-tax income recorded in a period. Accordingly, in periods where income before tax is relatively small, the proportional effect of the benefit from percentage depletion on the effective tax rate may be significant.
Liquidity and Capital Resources of NACCO
NACoal level. NACCO has not guaranteed NACoal's borrowings.any borrowings of NACoal. The borrowing agreementagreements at NACoal allowsallow for the payment to NACCO of dividends and advances under certain circumstances. Dividends (to the extent permitted by NACoal's borrowing agreement) and management fees are the primary sources of cash for NACCO and enable the Company to pay dividends to stockholders.
Capital Structure
NACCO's consolidated capital structure is presented below:
|
| | | | | | | | | | | |
| SEPTEMBER 30 2017 | | DECEMBER 31 2016 | | Change |
Cash and cash equivalents | $ | 93,938 |
| | $ | 69,308 |
| | $ | 24,630 |
|
Other net tangible assets | 149,181 |
| | 222,983 |
| | (73,802 | ) |
Goodwill and intangible assets, net | 44,036 |
| | 45,678 |
| | (1,642 | ) |
Net assets | 287,155 |
| | 337,969 |
| | (50,814 | ) |
Total debt | (58,741 | ) | | (96,039 | ) | | 37,298 |
|
Bellaire closed mine obligations | (21,351 | ) | | (21,637 | ) | | 286 |
|
Total equity | $ | 207,063 |
| | $ | 220,293 |
| | $ | (13,230 | ) |
Debt to total capitalization | 22% | | 30% | | (8)% |
The components of change are discussed below in "Segment Results."
NACCO Industries, Inc. Outlook - Fourth Quarter 2017
Overall, in the fourth quarter of 2017, NACCO expects a substantial increase in consolidated income before income taxes from continuing operations compared with 2016 primarily driven by improvements at NACoal. The fourth quarter effective income tax rate related to continuing operations, excluding discrete items, is expected to be approximately 15%. Including discrete items recognized in the first nine months of 2017, NACCO expects the full year effective income tax rate related to continuing operations to be between 20 and 25%.
NACoal expects a modest increase in tons sold in the fourth quarter of 2017 compared with the fourth quarter of 2016. Income before income tax is also expected to increase in the fourth quarter of 2017 compared with the fourth quarter of 2016, resulting in a substantial increase in full-year 2017 income before income tax, including and excluding the effect of Centennial's 2016 third quarter asset impairment and $3.3 million of legal resolution charges in the fourth quarter of 2016. However, fourth quarter 2017 income before income tax is expected to be lower than the 2017 third quarter due to a decrease in earnings from unconsolidated mines as a result of reduced customer requirements and a reduction in royalty and other income.
Income before income tax at NACoal's consolidated operations in the fourth quarter of 2017 is expected to improve over the prior year due to lower operating expenses, including a reduction in lease expense. These improvements are expected to be partially offset by a substantial decrease in MLMC's fourth-quarter 2017 results primarily as a result of an increase in cost of sales attributable to the recognition of production costs capitalized into inventory during the outage at the customer's power plant in the third quarter. In the fourth quarter of 2017, Centennial's operating loss is expected to be modestly higher than in 2016, excluding Centennial's legal resolution charges and mine reclamation adjustment. Centennial will continue to evaluate strategies to optimize cash flow, including the continued assessment of a range of strategies for its remaining Alabama mineral reserves, including holding reserves with substantial unmined coal tons for sale or contract mining when conditions permit. Cash expenditures related to mine reclamation will continue until reclamation is complete, or ownership of, or responsibility for, the remaining mines is transferred.
Income before income tax in the fourth quarter of 2017 is also expected to benefit from an increase in earnings from the unconsolidated mining operations due to the start of production at Bisti on January 1, 2017. In addition, at NAM's
unconsolidated operations, an increase in the number of draglines being operated for customers is expected to contribute to the increase in earnings from the unconsolidated mining operations.
Cash flow before financing activities at NACoal is expected to be positive but decrease substantially in the fourth quarter of 2017 compared with the prior year quarter. However, full-year cash flow before financing is expected to increase moderately compared with 2016. Capital expenditures are estimated to be $8.5 million in the fourth quarter of 2017 and approximately $18 million for the full year.
On June 28, 2017, Southern Company and its subsidiary, Mississippi Power, issued a press release announcing they were immediately suspending start-up and operations activities involving the coal gasifier portion of the Kemper County energy facility. Liberty is the sole supplier of coal to fuel the gasifier. At this time, the future of the Kemper County coal gasification facility remains uncertain, and therefore the future of the Liberty Mine is uncertain. The terms of the contract specify that Mississippi Power is responsible for all mine closure costs, should that be required, with the Liberty Mine specified as the contractor to complete final mine closure. Should the decision to suspend operations of the gasifier and mine become permanent, it will unfavorably affect NACoal's long-term earnings under its contract with Mississippi Power.
NACCO Industries, Inc. Outlook - 2018
In 2018, NACCO expects consolidated income before income taxes from continuing operations to decrease moderately compared with 2017 and expects an effective income tax rate of approximately 25%.
In 2018, NACoal expects income before income taxes to decrease compared with 2017, primarily because of a substantial anticipated decrease in royalty and other income. Royalties on oil, gas and coal extracted by others are subject to changes in market forces and the activities of others, making it difficult to forecast whether recent high levels of income will continue. The absence of $3.5 million of gains on sales of assets, primarily realized at Centennial, during the first nine months of 2017 and higher NACoal operating expenses, which are expected to be partially offset by lower NACCO parent operating expenses, are also expected to contribute to the decrease in income before income taxes. These decreases are expected to be partially offset by improved results at MLMC due to an anticipated increase in customer demand. MLMC believes customer demand will be higher in the first half of 2018 compared with the second half of 2018 because MLMC's customer anticipates taking a planned outage at its power plant in the second half of the year. An increase in income from unconsolidated mines is also expected to partially offset the decline in income before income taxes.
Cash flow before financing activities is expected to decrease in 2018 compared with 2017, and capital expenditures are expected to be approximately $21 million in 2018.
While the current regulatory environment for development of new coal projects has improved, continued low natural gas prices and growth in renewable energy sources, such as solar and wind, could unfavorably affect the amount of electricity generation attributable to coal-fired power plants over the longer term. NACoal expects to continue efforts to develop opportunities for new or expanded coal mining projects, although future opportunities are likely to be very limited. In addition, NACoal continues to pursue additional non-coal mining opportunities, principally related to its NAM business and elsewhere where it might provide other value-added services.
SEGMENT RESULTS
THE NORTH AMERICAN COAL CORPORATION
FINANCIAL REVIEW
Tons of coal sold by NACoal's operating mines were as follows for the three and nine months ended September 30:
|
| | | | | | | | | | | |
| THREE MONTHS | | NINE MONTHS |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In millions) |
Coteau | 3.8 |
| | 3.3 |
| | 11.1 |
| | 10.3 |
|
Falkirk | 2.1 |
| | 2.1 |
| | 5.1 |
| | 5.3 |
|
Sabine | 1.1 |
| | 1.1 |
| | 2.6 |
| | 3.3 |
|
Bisti | 1.1 |
| | — |
| | 3.1 |
| | — |
|
Camino Real | 0.5 |
| | 0.4 |
| | 1.7 |
| | 1.3 |
|
Coyote Creek | 0.6 |
| | 0.7 |
| | 1.6 |
| | 0.9 |
|
Other | 0.2 |
| | 0.2 |
| | 0.9 |
| | 0.4 |
|
Unconsolidated mines | 9.4 |
| | 7.8 |
| | 26.1 |
| | 21.5 |
|
MLMC | 0.5 |
| | 1.0 |
| | 1.9 |
| | 2.3 |
|
Total tons sold | 9.9 |
| | 8.8 |
| | 28.0 |
| | 23.8 |
|
NAM sold 6.4 million and 22.1 million cubic yards of limerock in the three and nine months ended September 30, 2017, respectively. This compares with 6.4 million and 20.3 million cubic yards of limerock in the three and nine months ended September 30, 2016, respectively.
The results of operations for NACoal were as follows for the three and nine months ended September 30:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS | | NINE MONTHS |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue - consolidated mines | $ | 19,318 |
| | $ | 30,628 |
| | $ | 69,397 |
| | $ | 79,780 |
|
Revenue - royalty and other | 2,623 |
| | 1,774 |
| | 8,944 |
| | 5,998 |
|
Total revenues | 21,941 |
| | 32,402 |
| | 78,341 |
| | 85,778 |
|
Cost of sales - consolidated mines | 18,798 |
| | 29,873 |
| | 64,877 |
| | 73,845 |
|
Cost of sales - royalty and other | 613 |
| | 821 |
| | 1,698 |
| | 1,908 |
|
Total cost of sales | 19,411 |
| | 30,694 |
| | 66,575 |
| | 75,753 |
|
Gross profit | 2,530 |
| | 1,708 |
| | 11,766 |
| | 10,025 |
|
Earnings of unconsolidated mines (a) | 16,197 |
| | 15,102 |
| | 44,627 |
| | 40,785 |
|
Selling, general and administrative expenses | 9,842 |
| | 8,959 |
| | 27,125 |
| | 26,354 |
|
Centennial asset impairment charge | — |
| | 17,443 |
| | — |
| | 17,443 |
|
Amortization of intangible assets | 435 |
| | 818 |
| | 1,641 |
| | 1,936 |
|
(Gain) loss on sale of assets | (475 | ) | | 502 |
| | (3,500 | ) | | 1,424 |
|
Operating profit | 8,925 |
| | (10,912 | ) | | 31,127 |
| | 3,653 |
|
Interest expense | 946 |
| | 1,036 |
| | 2,806 |
| | 3,182 |
|
Other (income) expense, including income from other unconsolidated affiliates | (183 | ) | | (252 | ) | | (733 | ) | | 1,522 |
|
Income before income tax provision (benefit) | $ | 8,162 |
| | $ | (11,696 | ) | | $ | 29,054 |
| | $ | (1,051 | ) |
(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
Third Quarter of 2017 Compared with Third Quarter of 2016
The following table identifies the components of change in revenues for the third quarter of 2017 compared with the third quarter of 2016:
|
| | | |
| Revenues |
2016 | $ | 32,402 |
|
Increase (decrease) from: | |
Consolidated mines, excluding Centennial | (11,931 | ) |
Royalty and other | 1,466 |
|
Centennial | 4 |
|
2017 | $ | 21,941 |
|
Revenues decreased $10.5 million in the third quarter of 2017 compared with the third quarter of 2016 due to the consolidated mine, MLMC, selling fewer tons because of reduced customer requirements due to an outage during the third quarter of 2017. The decrease was partially offset by higher royalty and other revenues.
The following table identifies the components of change in operating profit (loss) for the third quarter of 2017 compared with the third quarter of 2016:
|
| | | |
| Operating Profit (Loss) |
2016 | $ | (10,912 | ) |
Increase (decrease) from: | |
Centennial asset impairment charge in 2016 | 17,443 |
|
Royalty and other | 1,707 |
|
Centennial, excluding the net gain on sales of assets | 1,159 |
|
Earnings of unconsolidated mines | 1,095 |
|
Net gain on sale of assets, primarily Centennial | 977 |
|
Consolidated mines, excluding Centennial | (1,661 | ) |
Selling, general and administrative expenses | (883 | ) |
2017 | $ | 8,925 |
|
NACoal reported operating profit of $8.9 million in the third quarter of 2017 compared with an operating loss of $10.9 million in the third quarter of 2016. The operating loss in the third quarter of 2016 was primarily due to Centennial's $17.4 million asset impairment charge. See Note 10 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the 2016 Centennial asset impairment charge.
Other changes in operating profit include increased royalty and other income, improved results at Centennial, and an increase in earnings of unconsolidated mines, as newer mines increased production. These items were partially offset by a decrease in results at the consolidated mines, principally MLMC. The decrease at MLMC was primarily due to fewer tons sold as a result of reduced customer requirements.
Interest expense decreased $0.1 million in the third quarter of 2017 compared with 2016 due to lower average borrowings under NACoal's revolving credit facility.
First Nine Months of 2017 Compared with First Nine Months of 2016
The following table identifiesCompany believes funds available from cash on hand, the components of change in revenues forNACoal Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the first ninenext twelve months of 2017 compared withand until the first nine months of 2016:
|
| | | |
| Revenues |
2016 | $ | 85,778 |
|
Increase (decrease) from: | |
Consolidated mines, excluding Centennial | (10,603 | ) |
Centennial | (650 | ) |
Royalty and other | 3,816 |
|
2017 | $ | 78,341 |
|
Revenues decreased $7.4 million in the first nine months of 2017 compared with the first nine months of 2016 primarily due to the consolidated mine, MLMC, selling fewer tons as a result of decreased customer requirements. The decrease was partially offset by higher royalty and other revenues.
The following table identifies the components of change in operating profit for the first nine months of 2017 compared with the first nine months of 2016:
|
| | | |
| Operating Profit |
2016 | $ | 3,653 |
|
Increase (decrease) from: | |
Centennial asset impairment charge in 2016 | 17,443 |
|
Net gain on sale of assets, primarily Centennial | 4,924 |
|
Royalty and other | 4,141 |
|
Earnings of unconsolidated mines | 3,842 |
|
Centennial, excluding the net gain on sales of assets | 2,660 |
|
Consolidated mines, excluding Centennial | (4,619 | ) |
Selling, general and administrative expenses | (917 | ) |
2017 | $ | 31,127 |
|
Operating profit increased $27.5 million in the first nine months of 2017 compared with the first nine months of 2016 primarily due to the absence of Centennial's $17.4 million asset impairment charge in the current year period. See Note 10 to the Unaudited Condensed Consolidated Financial Statements for further discussionexpiration of the 2016 Centennial asset impairment charge.
Other increases in operating profit include an increase in the net gain on sale of assets due primarily to a $2.3 million gain on the sale of a dragline at Centennial, improved results in royalty and other income and an increase in earnings of unconsolidated mines, as new mines began or increased production. These increases were partially offset by a decrease in results at the consolidated mines, principally MLMC. The decrease at MLMC was primarily due to fewer tons sold as a result of decreased customer requirements.
Interest expense decreased $0.4 million due to lower average borrowings under NACoal's revolving credit facility during the first nine months of 2017 compared with 2016. Other (income) expense, including income from other unconsolidated affiliates, had $0.7 million of income during the nine months ended September 30, 2017, compared with a $1.5 million loss in 2016. During the nine months ended September 30, 2016, NACoal reversed an indemnification receivable related to an uncertain tax position initially recorded as part of the Centennial acquisition that resulted in $2.2 million of other expense. The Company recorded an income tax benefit of $2.3 million as a result of the reversal of the corresponding uncertain tax position.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following tables detail NACoal's changes in cash flow for the nine months endedSeptember 30:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | Change |
Operating activities: | | | | | |
Net income (loss) | $ | 27,675 |
| | $ | (1,100 | ) | | $ | 28,775 |
|
Depreciation, depletion and amortization | 9,305 |
| | 9,594 |
| | (289 | ) |
Centennial asset impairment charge | — |
| | 17,443 |
| | (17,443 | ) |
Other | (3,054 | ) | | 19,891 |
| | (22,945 | ) |
Working capital changes | 1,946 |
| | (29,339 | ) | | 31,285 |
|
Net cash provided by operating activities | 35,872 |
| | 16,489 |
| | 19,383 |
|
| | | | | |
Investing activities: | | | | | |
Expenditures for property, plant and equipment | (9,199 | ) | | (7,280 | ) | | (1,919 | ) |
Other | 2,847 |
| | 1,634 |
| | 1,213 |
|
Net cash used for investing activities | (6,352 | ) | | (5,646 | ) | | (706 | ) |
| | | | | |
Cash flow before financing activities | $ | 29,520 |
| | $ | 10,843 |
| | $ | 18,677 |
|
The change in net cash provided by operating activities was primarily the result of favorable working capital and net income changes, partially offset by the change in other during the first nine months of 2017 compared with the first nine months of 2016. A significant decrease in accrued payroll as a result of payments made during the first nine months of 2016, as well as the change in net intercompany accounts receivable/payable, contributed to the change in working capital in the first nine months of 2016. The change in other was primarily due to the change in deferred taxes.
The change in net cash used for investing activities was primarily attributable to an increase in expenditures for property, plant and equipment at MLMC, partially offset by proceeds from the sale of equipment at Centennial in the first nine months of 2017 compared with 2016.
|
| | | | | | | | | | | |
| 2017 | | 2016 | | Change |
Financing activities: | | | | | |
Net reductions to long-term debt and revolving credit agreements | $ | (35,008 | ) | | $ | (1,389 | ) | | $ | (33,619 | ) |
Cash dividends paid to NACCO | (4,000 | ) | | (4,300 | ) | | 300 |
|
Other | (1,324 | ) | | — |
| | (1,324 | ) |
Net cash used for financing activities | $ | (40,332 | ) | | $ | (5,689 | ) | | $ | (34,643 | ) |
The change in net cash used for financing activities was primarily from a significant reduction in borrowings on NACoal's revolving credit facility during the first nine months of 2017 when compared with the first nine months of 2016.
Financing ActivitiesFacility.
NACoal has an unsecured revolving line of credit of up to $150.0 million (the “NACoal Facility”) that expires in August 2022. Borrowings outstanding under the NACoal Facility were $50.0$20 million at September 30, 2017.March 31, 2020. At September 30, 2017,March 31, 2020, the excess availability under the NACoal Facility was $98.6$128.6 million, which reflects a reduction for outstanding letters of credit of $1.4 million.
The NACoal Facility has performance-based pricing, which sets interest rates based upon NACoal achieving various levels of debt to EBITDA ratios, as defined in the NACoal Facility. Borrowings bear interest at a floating rate plus a margin based on the level of debt to EBITDA ratio achieved. The applicable margins, effective September 30, 2017,March 31, 2020, for base rate and LIBOR loans were 1.00%0.75% and 2.00%1.75%, respectively. The NACoal Facility has a commitment fee which is based upon achieving various levels of debt to EBITDA ratios. The commitment fee was 0.35%0.30% on the unused commitment at September 30, 2017.March 31, 2020. The floatingweighted average interest rate of interest applicable to the NACoal Facilityfacility at September 30, 2017March 31, 2020 was 3.39%3.66% including the floating rate margin and the effect of the interest rate swap agreement.margin.
The NACoal Facility contains restrictive covenants, which require, among other things, NACoal to maintain a maximum debt to EBITDA ratio of 3.00 to 1.00 and an interest coverage ratio of not less than 4.00 to 1.00. The NACoal Facility provides the ability to make loans, dividends and advances to NACCO, with some restrictions based on maintaining a maximum debt to EBITDA ratio of 2.00 to 1.00, or if greater than 2.00 to 1.00, a Fixed Charge Coverage Ratio of 1.10 to 1.00, in conjunction with maintaining unused availability thresholds of borrowing capacity, as defined in the NACoal Facility, of $15.0 million. At September 30, 2017,March 31, 2020, NACoal was in compliance with all financial covenants in the NACoal Facility.
NACoal believes funds available from cash on hand at the Company, the NACoal FacilityCapital Expenditures
Expenditures for property, plant and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arisingequipment were $5.4 million during the next twelvefirst three months of 2020. Planned expenditures for the remainder of 2020 are expected to be approximately $28 million, primarily consisting of $24 million in the Coal Mining segment and until$4 million in the expirationNAMining segment. Capital expenditures are expected to be funded from internally generated funds and/or bank borrowings.
In the Coal Mining segment, elevated levels of expected capital expenditures through 2021 are primarily related to spending at MLMC as it develops a new mine area. In the NACoal Facility.NAMining segment, capital expenditures in 2020 are primarily for the acquisition, relocation and refurbishment of draglines.
Capital Structure
NACCO's consolidated capital structure is presented below: |
| | | | | | | | | | | |
| MARCH 31 2020 | | DECEMBER 31 2019 | | Change |
Cash and cash equivalents | $ | 93,726 |
| | $ | 122,892 |
| | $ | (29,166 | ) |
Other net tangible assets | 218,315 |
| | 174,465 |
| | 43,850 |
|
Intangible assets, net | 37,125 |
| | 37,902 |
| | (777 | ) |
Net assets | 349,166 |
| | 335,259 |
| | 13,907 |
|
Total debt | (34,582 | ) | | (24,943 | ) | | (9,639 | ) |
Bellaire closed mine obligations | (20,747 | ) | | (20,924 | ) | | 177 |
|
Total equity | $ | 293,837 |
| | $ | 289,392 |
| | $ | 4,445 |
|
Debt to total capitalization | 11% | | 8% | | 3% |
The increase in other net tangible assets was primarily due to payments made for deferred compensation and accrued incentive compensation in the first quarter of 2020, as well as an increase in accounts receivable as a result of an increase in tons delivered. The increase in other net tangible assets was partially offset by the decrease in cash and cash equivalents.
Contractual Obligations, Contingent Liabilities and Commitments
Since December 31, 2016,2019, there have been no significant changes in the total amount of NACoal'sNACCO's contractual obligations, contingent liabilities or commercial commitments, or the timing of cash flows in accordance with those obligations as reported on page 4836 in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2019. See Note 67 to the Unaudited Condensed Consolidated Financial Statements for a discussion of certain guarantees related to Coyote Creek.
Capital Expenditures
Expenditures for property, plant and equipment were $9.2 million during the first nine months of 2017. NACoal estimates that its capital expenditures for the remainder of 2017 will be an additional $8.5 million, primarily for dragline purchases, as well as land and machinery and equipment at MLMC. These expenditures are expected to be funded from internally generated funds and bank borrowings.
Capital Structure
NACoal's capital structure is presented below:
|
| | | | | | | | | | | |
| SEPTEMBER 30 2017 | | DECEMBER 31 2016 | | Change |
Cash and cash equivalents | $ | 166 |
| | $ | 10,978 |
| | $ | (10,812 | ) |
Other net tangible assets | 144,354 |
| | 145,028 |
| | (674 | ) |
Coal supply agreements, net | 44,036 |
| | 45,678 |
| | (1,642 | ) |
Net assets | 188,556 |
| | 201,684 |
| | (13,128 | ) |
Total debt | (58,741 | ) | | (96,039 | ) | | 37,298 |
|
Total equity | $ | 129,815 |
| | $ | 105,645 |
| | $ | 24,170 |
|
Debt to total capitalization | 31% | | 48% | | (17)% |
The decrease in net assets was primarily due to the change in cash and cash equivalents from a significant reduction in borrowings on NACoal's revolving credit facility during the first nine months of 2017.
NACCO AND OTHERSEGMENT RESULTS
COAL MINING SEGMENT
FINANCIAL REVIEW
Operating ResultsTons of coal delivered by the Coal Mining segment were as follows for the three months ended March 31 (in millions):
|
| | | | | |
| 2020 | | 2019 |
Unconsolidated operations | 7.6 |
| | 8.6 |
|
Consolidated operations | 0.8 |
| | 0.6 |
|
Total tons delivered | 8.4 |
| | 9.2 |
|
The results of operations at NACCO and Otherfor the Coal Mining segment were as follows for the three and nine months ended September 30March 31:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS | | NINE MONTHS |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Operating loss | $ | (1,936 | ) | | $ | (1,867 | ) | | $ | (4,820 | ) | | $ | (4,605 | ) |
Other expense | $ | 270 |
| | $ | 158 |
| | $ | 887 |
| | $ | 742 |
|
Loss before income tax provision (benefit) | $ | (2,206 | ) | | $ | (2,025 | ) | | $ | (5,707 | ) | | $ | (5,347 | ) |
|
| | | | | | | |
| 2020 | | 2019 |
Revenues | $ | 20,928 |
| | $ | 16,750 |
|
Total cost of sales | 21,274 |
| | 15,924 |
|
Gross (loss) profit | (346 | ) | | 826 |
|
Earnings of unconsolidated operations(a) | 15,027 |
| | 15,781 |
|
Selling, general and administrative expenses | 6,719 |
| | 5,971 |
|
Amortization of intangible assets | 777 |
| | 647 |
|
Gain on sale of assets | — |
| | (18 | ) |
Operating profit | $ | 7,185 |
| | $ | 10,007 |
|
Third Quarter(a) See Note 7 to the Unaudited Condensed Consolidated Financial Statements for a discussion of 2017 Comparedthe Company's unconsolidated subsidiaries, including summarized financial information.
Revenues increased 24.9% in the first quarter of 2020 compared with Third Quarterthe first quarter of 20162019 due to an increase in tons delivered at MLMC as well as an increase in pass-through costs. MLMC delivers coal to the Red Hills Power Plant, which supplies electricity to TVA under a long-term Power Purchase Agreement. The decision of which power plants to dispatch is determined by TVA. The Red Hills power plant experienced an increase in dispatch during the first quarter of 2020 compared with the first quarter of 2019. As a result of this improvement in customer demand, tons delivered increased in the first quarter of 2020 compared with the first quarter of 2019.
The following table identifies the components of change in operating profit for the first quarter of 2020 compared with the first quarter of 2019:
|
| | | |
| Operating Profit |
2019 | $ | 10,007 |
|
Increase (decrease) from: | |
Gross profit | (1,172 | ) |
Earnings of unconsolidated operations | (754 | ) |
Selling, general and administrative expenses | (748 | ) |
Amortization of intangibles | (130 | ) |
Net gain on sale of assets | (18 | ) |
2020 | $ | 7,185 |
|
Operating profit decreased $2.8 million in the first quarter of 2020 compared with the first quarter of 2019 primarily due to a decrease in gross profit, a decrease in earnings of unconsolidated operations and First Nine Monthsan increase in selling, general and administrative expenses. The decrease in gross profit was due to an increase in the cost per ton delivered at MLMC, including
the recognition of 2017 Compareda portion of costs previously capitalized into inventory. The increase in cost per ton delivered at MLMC is primarily due to a reduction in the number of tons severed due to adverse mining conditions caused by the amount of rain during the first quarter of 2020. A reduction in tons severed caused an increase in the cost per ton, and a decrease in inventory since more tons were sold than produced during the first quarter of 2020. The decrease in earnings of unconsolidated operations was mainly due to fewer coal tons delivered as a result of changes in customer demand. The increase in selling, general and administrative expenses was primarily attributable to higher outside service and professional fees.
NORTH AMERICAN MINING ("NAMining") SEGMENT
FINANCIAL REVIEW
Tons of limestone delivered by the NAMining segment were as follows for the three months ended March 31 (in millions): |
| | | | | |
| 2020 | | 2019 |
Unconsolidated operations | 2.2 |
| | 1.9 |
|
Consolidated operations | 10.3 |
| | 9.8 |
|
Total tons delivered | 12.5 |
| | 11.7 |
|
The results of operations for the NAMining segment were as follows for the three months ended March 31:
|
| | | | | | | |
| 2020 | | 2019 |
Revenues | $ | 11,624 |
| | $ | 10,775 |
|
Total cost of sales | 10,581 |
| | 10,000 |
|
Gross profit | 1,043 |
| | 775 |
|
Earnings of unconsolidated operations(a) | 976 |
| | 489 |
|
Selling, general and administrative expenses | 1,288 |
| | 1,199 |
|
Operating profit | $ | 731 |
| | $ | 65 |
|
(a) See Note 7 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
Revenues increased 7.9% in the first quarter of 2020 compared with First Nine Monthsthe first quarter of 20162019 primarily due to new mining contracts entered into since March 31, 2019 and an increase in tons delivered to existing customers.
The increasefollowing table identifies the components of change in operating profit for the first quarter of 2020 compared with the first quarter of 2019:
|
| | | |
| Operating Profit |
2019 | $ | 65 |
|
Increase (decrease) from: | |
Earnings of unconsolidated operations | 487 |
|
Gross profit | 268 |
|
Selling, general and administrative expenses | (89 | ) |
2020 | $ | 731 |
|
Operating profit increased $0.7 million in the first quarter of 2020 compared with the first quarter of 2019 primarily due to increases in earnings of unconsolidated operations and gross profit. The improvement in earnings of unconsolidated operations was due to increased deliveries as a result of increased customer requirements. Gross profit benefited from new mining contracts entered into since March 31, 2019.
MINERALS MANAGEMENT SEGMENT
FINANCIAL REVIEW
The results of operations for the Minerals Management segment were as follows for the three months ended March 31:
|
| | | | | | | |
| 2020 | | 2019 |
Revenues | $ | 5,241 |
| | $ | 12,686 |
|
Total cost of sales | 698 |
| | 826 |
|
Gross profit | 4,543 |
| | 11,860 |
|
Selling, general and administrative expenses | 276 |
| | 191 |
|
Operating profit | $ | 4,267 |
| | $ | 11,669 |
|
Revenues and operating profit decreased in the first three months of 2020 compared with the 2019 period. The first quarter of 2019 included significant royalty income generated by a large number of new gas wells put into commission during 2018 and early 2019. These wells are operated by third parties to extract natural gas from the Company's Ohio Utica shale mineral reserves. Since new wells have high initial production rates and follow a natural decline before settling into relatively stable, long-term production, royalty income in 2020 decreased substantially from 2019 levels.
UNALLOCATED ITEMS AND ELIMINATIONS
FINANCIAL REVIEW
Unallocated Items and Eliminations were as follows for the three months ended March 31:
|
| | | | | | | |
| 2020 | | 2019 |
Operating loss | $ | (4,603 | ) | | $ | (5,368 | ) |
The $0.8 million decrease in the operating loss for the three months ended September 30, 2017March 31, 2020 compared with 2016March 31, 2019 was primarily due to higher professional and outside service fees.lower employee-related expenses.
NACCO Industries, Inc. Outlook
Coal Mining Outlook - 2020
In 2020, the Company expects coal deliveries and Coal Mining operating profit to be comparable to 2019. In the prior year, the Company recorded a $2.5 million unfavorable adjustment to mine reclamation liabilities at Centennial. Excluding the impact of this item, 2020 operating profit is expected to decrease from 2019 as a result of lower first quarter results and an expected increase in the operating loss for the nine months ended September 30, 2017 compared with 2016 was primarilyexpenses mainly due to higher employee-related costsprofessional fees and higher professionalincreased spending on enhanced information systems and outside service fees,platforms. The decrease in operating profit is expected to be partially offset by an anticipated improvement in MLMC results.
The improvement in MLMC results is expected to be driven by higher customer demand due to an anticipated increase in the management fees charged to NACoal.dispatch of the customer's power plant in 2020. If customer demand at MLMC decreases from expected levels, it could unfavorably affect the Company's 2020 earnings outlook. MLMC received a notice of force majeure from its customer indicating potential COVID-19-related reductions in demand for electricity by its customer, TVA, and therefore potential reductions in demand for coal; however, no reduction in demand has occurred as of this time.
Other expense increased during bothThe evolving COVID-19 pandemic, historically low natural gas prices and the threecontinued increase in renewable generation, particularly wind, could reduce customer demand which would unfavorably affect the Company’s 2020 outlook.
Capital expenditures are expected to be approximately $24 million in 2020. The Company expects high levels of capital expenditures in 2020 and nine months of 2017 compared with 2016,2021 primarily related to anticipated spending at MLMC as it develops a new mine area. These capital expenditures will result ofin an increase in depreciation that will unfavorably affect operating profit in future periods.
On May 7, 2020, Great River Energy ("GRE"), Falkirk Mine's customer, and the Closedsecond largest customer of the Company, issued a press release announcing its intent to retire the Coal Creek Station power plant in the second half of 2022 and modify the Spiritwood Station power plant to be fueled by natural gas.
As noted in its press release, GRE is willing to consider opportunities to sell Coal Creek Station. NACCO is actively engaged in the exploration of options that could, if successful, allow for transfer of ownership of the power plant to one or more third parties, which would preserve jobs at both Coal Creek Station and the Falkirk Mine. The Company believes Coal Creek Station is an efficient, economic and attractive generation and capacity asset, and its continued long-term operation is in the best interests of the employees and the local community. Further, the Company believes Coal Creek Station, as a continuous generation asset with reliable onsite fuel supply, is critical to the long-term reliability of the electricity grid on which its power is transmitted.
Falkirk Mine is the sole supplier of lignite coal to Coal Creek Station pursuant to a long-term contract under which Falkirk also supplies approximately 0.3 million tons of lignite coal per year to Spiritwood Station. Falkirk has approximately 480 employees, and, in 2019, delivered a total of 7.4 million tons of lignite coal and contributed approximately $16 million to NACCO’s Earnings from Unconsolidated Operations. The closure of Coal Creek Station would have a material adverse effect on the long-term earnings of NACCO Industries. The terms of the contract between the Company and GRE specify that GRE is responsible for all costs related to mine obligations dueclosure, including but not limited to, revisions of estimated cash flowsfinal mine reclamation costs, post-retirement medical benefits and pension costs with respect to Falkirk employees.
NAMining Outlook
In 2020, NAMining expects limestone deliveries to increase and full-year operating results to improve significantly over 2019. Operating profit is expected to benefit from earnings associated with new limestone mining contracts.
Capital expenditures are expected to total $8 million in 2020, primarily for the Bellaire asset retirement obligation.
Management Fees
The management fee charged to NACoal represents the allocationacquisition, relocation and refurbishment of corporate overhead of the parent company. Following are the parent company management fees included in NACoal's selling, general and administrative expenses for the three and nine months ended September 30:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS | | NINE MONTHS |
| 2017 | | 2016 | | 2017 | | 2016 |
NACoal | $ | 1,686 |
| | $ | 1,786 |
| | $ | 4,830 |
| | $ | 4,419 |
|
draglines.
In addition,2019, NAMining's subsidiary, Sawtooth Mining, LLC, entered into a mining agreement to serve as the parent company received management fees from Hamilton Beach Holding of $1.1 million and $1.0 millionexclusive contract miner for the three months ended September 30, 2017Thacker Pass lithium project in northern Nevada, owned by Lithium Nevada, Corp., a subsidiary of Lithium Americas Corp. (TSX: LAC) (NYSE: LAC). Lithium Nevada is in the process of securing permits and 2016, respectively,currently expects to commence construction in 2021 and $3.1production of lithium products in 2023.
Minerals Management Outlook
The Minerals Management segment derives income from royalty-based leases under which lessees make payments to the Company based on their sale of natural gas and, to a lesser extent, oil, natural gas liquids and coal, extracted primarily by third parties. The 2019 results included significant royalty income generated by a large number of new gas wells put into commission during 2018 and early in 2019. Because new wells have high initial production rates and follow a natural decline before settling into relatively stable, long-term production, royalty income in 2020 is expected to decrease and be substantially lower than 2019 levels. The Company expects that a significant portion of this decrease in earnings will occur in the first half of 2020 as comparisons are made to historically high income levels in the first half of 2019. The reduction in royalty income is based on expected lower natural gas prices, fewer expected new wells and the natural production decline that occurs early in the life of a well. Natural gas pricing declines and reduced business activity due to the COVID-19 pandemic have resulted in higher-than-average natural gas inventory market levels. A sustained decline in natural gas pricing could unfavorably affect the Company’s outlook.
Decline rates for individual wells can vary due to factors like well depth, well length, formation pressure and facility design. In addition, royalty income can fluctuate favorably or unfavorably in response to a number of factors outside of the Company's control, including the number of wells being operated by third parties, fluctuations in commodity prices (primarily natural gas), fluctuations in production rates associated with operator decisions, regulatory risks, the Company's lessees' willingness and ability to incur well-development and other operating costs, and changes in the availability and continuing development of infrastructure.
Consolidated Outlook
Consolidated net income in 2020 is expected to decrease significantly compared with 2019, predominantly due to the substantial decrease in Minerals Management's results, the absence of income of $2.7 million for bothpre-tax associated with a prior India venture recorded in 2019 and an anticipated mark-to-market loss on invested assets of Bellaire's Mine Water Treatment Trust compared with a gain in 2019. These items are expected to be partially offset by a favorable change in taxes, an improvement in earnings at the nine months ended September 30, 2017NAMining segment and 2016.a reduction in Unallocated costs primarily due to lower employee-related costs.
For the first quarter of 2020, NACCO had a negative effective income tax rate of -1.1%, which resulted in a tax benefit on income, compared with an effective income tax rate of 13.4% and tax expense in the first quarter of 2019. For the full year, NACCO anticipates that its effective tax rate will approximate zero. On March 27, 2020, the Coronavirus Aid, Relief, and
Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, including among other items, temporary changes regarding the prior and future utilization of net operating losses. The estimated annual effective income tax rate includes the benefit of utilizing provisions of the CARES Act on the treatment of the 2020 forecasted net tax operating loss.
In connection with2020, cash flow before financing activities is expected to be a use of cash due to a significant increase in capital expenditures and payments made in the spin-off of HBBHC, the Companyfirst quarter related to deferred compensation and HBBHC entered into a Transition Services Agreement ("TSA"). Under the terms of the TSA, the Company will provide various services to HBBHC on a transitional basis, as needed, for varying periods after the spin-off date. None of the transition servicesother payroll liabilities. Consolidated capital expenditures are expected to exceed one year. NACCO expectsbe approximately $33 million in 2020 compared with $24.7 million in 2019.
In light of COVID-19, the global economic outlook has deteriorated significantly and rapidly. While the Company's operations to receive net aggregate feesdate have not been materially affected by the pandemic, future developments, which are highly uncertain and unpredictable, and could include any additional preventive or protective actions taken by governmental authorities, such as extended shelter-in-place orders, business shutdowns or other disruptions, could change the Company's status significantly and rapidly, and could have a material adverse effect on the Company’s operations, supply chain and customers. The extent to which COVID-19 may adversely impact the Company depends on many factors, including but not limited to the severity and duration of approximately $1.0 millionthe outbreak and the effectiveness of actions taken to contain or mitigate its effects. Any resulting financial impact cannot reasonably be estimated at this time, but could have a material adverse effect on the Company’s financial condition, cash flows and results of operations. Even after the COVID-19 pandemic has subsided, the Company may experience material adverse effects due to any resulting economic recession or depression. Additionally, concerns over the termeconomic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has and may continue to adversely impact NACCO's stock price.
One of the TSACompany’s core strategies is to pursue activities which can strengthen the resiliency of its existing coal mining operations. The Company works to drive down coal production costs and maximize efficiencies and operating capacity at mine locations to help customers with management fee contracts be more competitive. This benefits both customers and the Company's Coal Mining segment, as fuel cost is the major driver for power plant dispatch. Increased power plant dispatch drives increased demand for coal by the Coal Mining segment's customers, just as lower dispatch reduces demand.
The Company continues to evaluate opportunities to expand its core coal mining business, however opportunities are likely to be very limited. Low natural gas prices and growth in renewable energy sources, such as wind and solar, could continue to unfavorably affect the amount of electricity dispatched from HBBHC. Upon expirationcoal-fired power plants. The political and regulatory environment is not generally receptive to development of new coal-fired power generation projects which would create opportunities to build and operate new coal mines. However, the TSA,Company does continue to seek out and pursue opportunities where it can apply its management fee business model to replace legacy operators of existing surface coal mining operations in the parent company will no longer receive feesUnited States. Outright acquisitions of existing coal mines or incur expenses relatedmining companies with exposure to providing centralized services and stewardship activities to HBBHC due tofluctuating coal commodity markets, or structures that would create significant leverage, are outside the spin-off.Company’s area of focus.
The Company is currentlyfocused on building a strong portfolio of affiliated businesses for diversification. NAMining continues to expand the scope of its business development activities to grow and diversify by targeting potential customers who require a broad range of minerals and materials. NAMining also continues to leverage the Company’s core mining skills to expand the range of contract mining services provided, in addition to providing comprehensive mining services to operate entire mines when appropriate, as is the case at the new lithium project in Nevada.
The Company’s efforts to grow and diversify the Minerals Management segment includes evaluating acquisitions of additional mineral interests or similar investments in the manner in which future management feesenergy industry. The Company's primary initial focus will be allocatedon smaller, diversifying acquisitions of mineral interests with a balance of near-term cash flow yields and upside potential from future development. During the second quarter of 2020, the Company’s newly formed subsidiary, Catapult Mineral Partners, acquired shares in a public company with a diversified portfolio of royalty producing mineral interests as part of this growth and diversification strategy. The recent dramatic downturn in petroleum prices provided an opportunity to NACoal.make this investment at an attractive market multiple for a company with a conservative financial position, strong earnings potential and attractive historical dividend yield.
Contractual Obligations, Contingent LiabilitiesThe Company previously formed Mitigation Resources of North America® to create and Commitmentssell stream and wetland mitigation credits and provide services to those engaged in permittee-responsible mitigation. This business has achieved several early successes and is positioned for additional growth.
Since December 31, 2016, there have been no significant changesThe Company is leveraging its core mining skills to develop a strong and diverse portfolio of service-based businesses operating in the total amount of NACCOmining and Other contractual obligations, contingent liabilities or commercial commitments, ornatural resources industries. The Company is also committed to maintaining a conservative capital structure while it grows and diversifies without unnecessary risk. Ultimately, diversified strategic growth is the timing of cash flows in accordance with those obligations as reported on page 65 in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.key to
increasing free cash flow available to continue to re-invest in and expand the businesses. The Company also continues to maintain the highest levels of customer service and operational excellence, with an unwavering focus on safety and environmental stewardship.
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q that are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are made subject to certain risks and uncertainties, which could cause actual results to differ materially from those presented. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Among the factors that could cause plans, actions and results to differ materially from current expectations are, without limitation: (1) changes to or termination of a long-term mining contract, or a customer default under a contract, including any actions taken related to Great River Energy’s Coal Creek Station power plant, (2) the potential closureduration, depth and severity of the Liberty MineCOVID-19 pandemic, any preventive or protective actions taken by governmental authorities, the effectiveness of actions taken globally to contain or mitigate its effects and any unfavorable effects of the COVID-19 pandemic on the Company's suppliers' ability to provide products or replacement parts if the virus continues to spread or quarantines are extended, as well as other disruptions from natural or human causes, including severe weather, accidents, fires, earthquakes, terrorist acts, any of which could result in Mississippi, (2)suspension of operations or harm to people or the environment, (3) changes in coal consumption patterns of U.S. electric power generators or the power industry that would affect demand for the Company's mineral reserves, (4) changes in tax laws or regulatory requirements, including changes in mining or power plant emission regulations and health, safety or environmental legislation, (3)(5) changes in costs related to geological and geotechnical conditions, repairs and maintenance, new equipment and replacement parts, fuel or other similar items, (4)(6) regulatory actions, changes in mining permit requirements or delays in obtaining mining permits that could affect deliveries to customers, (5)(7) weather conditions, extended power plant outages, liquidity events or other events that would change the level of customers' coal or limerockaggregates requirements, (6)(8) weather or equipment problems that could affect deliveries to customers, (7) changes(9) failure or delays by the Company's lessees in achieving expected production of natural gas and other hydrocarbons; the availability and cost of transportation and processing services in the power industry that would affect demandareas where the Company's oil and gas reserves are located; federal and state legislative and regulatory initiatives relating to hydraulic fracturing; and the ability of lessees to obtain capital or financing needed for NACoal's reserves, (8)well development operations, (10) changes in the costs to reclaim NACoal mining areas, (9)(11) costs to pursue and develop new mining and value-added service opportunities, (10) changes to or termination of a long-term mining contract, or a customer default under a contract, (11) the timing and pricing of transactions to dispose of assets at the Centennial operations, (12) delays or reductions in coal or aggregates deliveries, at NACoal's newer mines,(13) changes in the prices of hydrocarbons, particularly diesel fuel, natural gas and (13)oil, and (14) increased competition, including consolidation within the industry.coal and aggregates industries.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK
TheAs a “smaller reporting company” as defined by Rule 12b-2 of the Securities Exchange Act of 1934, the Company entered into certain financing arrangements that require interest payments based on floating interest rates. As such, the Company's financial results are subject to changes in the market rate of interest. There is an inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. To reduce the exposurerequired to changes in the market rate of interest, NACoal has entered into interest rate swap agreements for a portion of their floating rate financing arrangements. The Company does not enter into interest rate swap agreements for trading purposes. Terms of the interest rate swap agreements provide for the subsidiaries to receive a variable interest rate and pay a fixed interest rate.this information.
The fair value of the Company's interest rate swap agreements was a net payable of less than $0.1 million at September 30, 2017. A hypothetical 10% change in interest rates would not cause a material change in the fair value of the interest rate swap agreements at September 30, 2017 and, assuming no changes in the Company's financial structure as it stands, would not have a material effect on annual interest expense.
COMMODITY PRICE RISK
The Company uses certain commodities, including steel and diesel fuel, in the normal course of its operations. As such, the cost of operations is subject to variability as the market for these commodities changes. The Company monitors this risk and utilizes forward purchase contracts to manage a portion of NACoal's exposure related to diesel fuel volatility. There have been no material changes in the Company's commodity price risk during the third quarter of 2017.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures: An evaluation was carried out under the supervision and with the participation of the Company's management, including the principal executive officer and the principal financial officer, of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, these officers have concluded that the Company's disclosure controls and procedures are effective.
Changes in internal control over financial reporting: During the thirdfirst quarter of 2017,2020, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
None.
Item 1A Risk Factors
NoDuring the quarter ended March 31, 2020, there have been no material changes to the risk factors for NACoal or General frompreviously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. 2019, except as follows:
The Company’s results of operations, financial condition, cash flows and stock price could be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19.
The Company’s results of operations, financial condition, cash flows and stock price could be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19 which has spread globally. In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak has resulted in the implementation of increasingly stringent measures to help control the spread of the virus, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments, school closures, and other measures.
The Company has continued to operate as an essential business because it supports critical infrastructure industries, as defined by the U.S. Department of Homeland Security. Although the Company has continued to operate facilities consistent with federal guidelines and state and local orders, the outbreak of COVID-19 and any preventive or protective actions taken by governmental authorities may have a material adverse effect on the Company’s operations, work force, supply chain or customers, including business shutdowns or disruptions. The extent to which COVID-19 may adversely impact the Company's businesses depends on future developments, which are highly uncertain and unpredictable, depending upon the severity and duration of the outbreak and the actions taken to contain or mitigate its effects and the effectiveness of such actions. Any resulting financial impact cannot reasonably be estimated at this time, but could have a material adverse effect on the Company’s financial condition, cash flows and results of operations.
Even after the COVID-19 pandemic has subsided, the Company may experience material adverse effects due to any resulting economic recession or depression. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has and may continue to adversely impact NACCO's stock price.
Termination of or default under long-term mining contracts could materially reduce the Company's profitability.
Substantially all of the Coal Mining segment's profits are derived from long-term mining contracts. Although the Company has long-term contracts, numerous political and regulatory authorities, along with well-funded environmental activist groups, are devoting substantial resources to anti-coal activities to minimize or eliminate the use of coal as a source of electricity generation. As a result of such activities, the Coal Mining segment's customers could prematurely retire certain coal-fired generating units. Any customers' premature plant closure could have a material adverse effect on the Company’s business, financial condition and results of operations.
On May 7, 2020, Great River Energy ("GRE"), Falkirk Mine's customer, and the second largest customer of the Company, issued a press release announcing its intent to retire the Coal Creek Station power plant in the second half of 2022 and modify the Spiritwood Station power plant to be fueled by natural gas.
Falkirk Mine is the sole supplier of lignite coal to Coal Creek Station pursuant to a long-term contract under which Falkirk also supplies approximately 0.3 million tons of lignite coal per year to Spiritwood Station. Falkirk has approximately 480 employees, and, in 2019, delivered a total of 7.4 million tons of lignite coal and contributed approximately $16 million to NACCO’s Earnings from Unconsolidated Operations. The closure of Coal Creek Station would have a material adverse effect on the long-term earnings of NACCO Industries. The terms of the contract between the Company and GRE specify that GRE is responsible for all costs related to mine closure, including but not limited to final mine reclamation costs, post-retirement medical benefits and pension costs with respect to Falkirk employees.
Also noted in GRE’s press release is their plan to negotiate an agreement to terminate their steam and water supply contract with Blue Flint, an ethanol biorefinery fueled by process steam from Coal Creek Station. Blue Flint’s owner, Midwest AgEnergy, is considering using the contract termination payment from Great River Energy to reinvest in an economical alternate source for its process heat. NACCO has a $5.0 million investment in Midwest AgEnergy. If Midwest AgEnergy to is unable to find an economical alternate source for its process heat, the Company’s investment could become impaired.
State implementation of the EPA’s Regional Haze Rule (“RHR”) could require Coyote Creek’s customers to incur significant new costs at the Coyote Station power plant, which could, dependent on determinations by state regulatory commissions on approval to recover such costs from Coyote Creek’s customer’s customers, negatively impact Coyote Creek’s customers’ net income, financial position and cash flows. The Company understands that the North Dakota Department of Environmental Quality (“NDDEQ”) intends to require sources subject to RHR Round 2 reasonable progress determinations, including Coyote Station, to undertake emissions control measures. If NDDEQ requires significant emissions controls at Coyote Station by December 31, 2028, it may not be economically feasible for Coyote Creek's customers to invest in such equipment and an early retirement of Coyote Station and the Coyote Creek mine could be necessary. NDDEQ’s state implementation plan is due to be submitted to the EPA by July 2021. The Company expects the NDDEQ to begin drafting preliminary control scenarios for regional visibility modeling in the first half of 2020 and a state implementation plan later in 2020.
Under certain circumstances of default or termination of Coyote Creek’s Lignite Sales Agreement (“LSA”), the Company would be obligated for payment of a "make-whole" amount to Coyote Creek’s third-party lenders. The “make-whole” amount is based on the excess, if any, of the discounted value of the remaining scheduled debt payments over the principal amount. In addition, in the event Coyote Creek’s LSA is terminated on or after January 1, 2024 by Coyote Creek’s customers, the Company is obligated to purchase Coyote Creek’s dragline and rolling stock for the then net book value of those assets. Any decision by Coyote Creek’s customers to reduce operations or prematurely close the Coyote mine would have a material adverse effect on the Company’s results of operations, financial position and cash flows.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|
| | | | | | | | | | | | | |
Issuer Purchases of Equity Securities (1) |
Period | (a) Total Number of Shares Purchased | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of the Publicly Announced Program | | (d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (1) |
Month #1 (January 1 to 31, 2020) | — |
| | $ | — |
| | — |
| | $ | 23,662,079 |
|
Month #2 (February 1 to 29, 2020) | 534 |
| | $ | 44.88 |
| | 534 |
| | $ | 23,638,113 |
|
Month #3 (March 1 to 31, 2020) | 31,752 |
| | $ | 30.82 |
| | 31,752 |
| | $ | 22,659,516 |
|
Total | 32,286 |
| | $ | 31.05 |
| | 32,286 |
| | $ | 22,659,516 |
|
| |
(1) | In November 2019, the Company established a stock repurchase program allowing for the purchase of up to $25.0 million of the Company's Class A Common Stock outstanding through December 31, 2021. See Note 5 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Company's stock repurchase program. |
Item 3 Defaults Upon Senior Securities
None.
Item 4 Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 filed with this Quarterly Report on Form 10-Q for the period ended September 30, 2017.March 31, 2020.
Item 5 Other Information
None.
Item 6 Exhibits
|
| | |
Exhibit | | |
Number* | | Description of Exhibits |
| | |
10.1 | | |
10.2 | | |
10.3 | | |
10.4 | | Amended and Restated Stockholders' Agreement, dated as of September 29, 2017, among NACCO Industries, Inc., the other signatories thereto and NACCO Industries, Inc., as depository, is incorporated by reference to Exhibit 10.4 of NACCO Industries, Inc.'s Current Report on Form 8-K, filed on October 5, 2017. |
10.5 | |
|
10.6 | |
|
31(i)(1) | | |
31(i)(2) | | |
32 | | |
95 | | |
101.INS | | XBRL Instance Document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
* Numbered in accordance with Item 601 of Regulation S-K.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | NACCO Industries, Inc. (Registrant) | |
Date: | November 1, 2017May 7, 2020 | /s/ Elizabeth I. Loveman | |
| | Elizabeth I. Loveman | |
| | Vice President and Controller (principal financial and accounting officer) | |