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, 2017 | March 31, 2024 |
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
| | |
| DELAWARE
| | 34-1505819 | |
| (State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) | |
| | | | | | | |
| 5875 Landerbrook Drive | | 5875 LANDERBROOK DRIVE, SUITE 220, CLEVELAND, OHIO
| | 44124-4069 |
| Suite 220 | | | | |
| Cleveland, | Ohio | | | 44124-4069 | |
| (Address of principal executive offices) | | | (Zip code) | |
| | | (440) | 229-5151 | | | |
| | | (440) 229-5151 | |
| | (Registrant's telephone number, including area code) | | |
| | | N/A | | | | |
| | | 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
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
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 filero | ☐ |
| Accelerated filerþFiler | ☑ |
| Non-accelerated filero | ☐ |
| Smaller reporting companyo | ☑ | | Emerging growth companyo |
| | | | (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 oNO Yes ☐No þ
Number of shares of Class A Common Stock outstanding at October 27, 2017: 5,276,050April 26, 2024: 5,884,740
Number of shares of Class B Common Stock outstanding at October 27, 2017: 1,570,148
April 26, 2024: 1,565,685
NACCO INDUSTRIES, INC.
TABLE OF CONTENTS
Part I
FINANCIAL INFORMATION
Item 1. Financial Statements
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| MARCH 31 2024 | | DECEMBER 31 2023 |
| (In thousands, except share data) |
ASSETS | | | |
Cash and cash equivalents | $ | 61,844 | | | $ | 85,109 | |
Trade accounts receivable | 27,958 | | | 37,429 | |
Accounts receivable from affiliates | 8,361 | | | 7,860 | |
Inventories | 75,755 | | | 77,000 | |
Assets held for sale | 7,270 | | | 6,466 | |
Federal income tax receivable | 845 | | | 845 | |
Prepaid insurance | 11,248 | | | 1,790 | |
Other current assets | 19,558 | | | 15,499 | |
Total current assets | 212,839 | | | 231,998 | |
Property, plant and equipment, net | 238,906 | | | 223,902 | |
| | | |
Intangibles, net | 5,880 | | | 6,006 | |
Deferred income taxes | 15,113 | | | 15,081 | |
Investments in unconsolidated subsidiaries | 13,753 | | | 12,371 | |
Operating lease right-of-use assets | 7,876 | | | 8,667 | |
| | | |
Other non-current assets | 43,631 | | | 41,683 | |
Total assets | $ | 537,998 | | | $ | 539,708 | |
LIABILITIES AND EQUITY | | | |
Accounts payable | $ | 12,377 | | | $ | 16,702 | |
Accounts payable to affiliates | 691 | | | 904 | |
Revolving credit agreements | 17,000 | | | 10,000 | |
Current maturities of long-term debt | 4,498 | | | 3,953 | |
Asset retirement obligations | 13,105 | | | 13,114 | |
Accrued payroll | 9,069 | | | 17,317 | |
| | | |
Deferred revenue | 930 | | | 878 | |
| | | |
Other current liabilities | 6,265 | | | 7,118 | |
Total current liabilities | 63,935 | | | 69,986 | |
Long-term debt | 28,377 | | | 22,003 | |
Operating lease liabilities | 7,962 | | | 8,782 | |
Asset retirement obligations | 38,550 | | | 39,499 | |
Pension and other postretirement obligations | 5,059 | | | 5,183 | |
| | | |
Liability for uncertain tax positions | 5,795 | | | 5,795 | |
Other long-term liabilities | 6,707 | | | 6,120 | |
Total liabilities | 156,385 | | | 157,368 | |
Stockholders' equity | | | |
Common stock: | | | |
Class A, par value $1 per share, 5,884,740 shares outstanding (December 31, 2023 - 5,882,845 shares outstanding) | 5,885 | | | 5,883 | |
Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,565,685 shares outstanding (December 31, 2023 - 1,565,819 shares outstanding) | 1,566 | | | 1,566 | |
Capital in excess of par value | 29,073 | | | 28,672 | |
Retained earnings | 354,667 | | | 355,873 | |
Accumulated other comprehensive loss | (9,578) | | | (9,654) | |
Total stockholders' equity | 381,613 | | | 382,340 | |
Total liabilities and equity | $ | 537,998 | | | $ | 539,708 | |
|
| | | | | | | |
| SEPTEMBER 30 2017 | | DECEMBER 31 2016 |
| (In thousands, except share data) |
ASSETS | | | |
Cash and cash equivalents | $ | 93,938 |
| | $ | 69,308 |
|
Accounts receivable, net | 9,070 |
| | 13,389 |
|
Accounts receivable from affiliates | 22,964 |
| | 7,404 |
|
Inventories, net | 30,580 |
| | 28,927 |
|
Assets held for sale | 1,373 |
| | 2,016 |
|
Prepaid expenses and other | 6,323 |
| | 8,273 |
|
Current assets of discontinued operations | — |
| | 252,415 |
|
Total current assets | 164,248 |
| | 381,732 |
|
Property, plant and equipment, net | 116,336 |
| | 115,106 |
|
Intangibles, net | 44,036 |
| | 45,678 |
|
Deferred income taxes | 7,145 |
| | 10,876 |
|
Investments in unconsolidated subsidiaries | 27,281 |
| | 31,054 |
|
Deferred costs | 3,163 |
| | 2,069 |
|
Other non-current assets | 22,740 |
| | 23,089 |
|
Long-term assets of discontinued operations | — |
| | 58,417 |
|
Total assets | $ | 384,949 |
| | $ | 668,021 |
|
LIABILITIES AND EQUITY | |
| | |
|
Accounts payable | $ | 8,466 |
| | $ | 6,995 |
|
Accounts payable to affiliates | 3,228 |
| | 3,565 |
|
Current maturities of long-term debt | 1,168 |
| | 1,744 |
|
Accrued payroll | 12,400 |
| | 15,482 |
|
Asset retirement obligations | 3,555 |
| | 3,843 |
|
Accrued income taxes | 3,442 |
| | — |
|
Other current liabilities | 10,964 |
| | 9,954 |
|
Current liabilities of discontinued operations | — |
| | 180,245 |
|
Total current liabilities | 43,223 |
| | 221,828 |
|
Long-term debt | 57,573 |
| | 94,295 |
|
Asset retirement obligations | 39,482 |
| | 38,262 |
|
Pension and other postretirement obligations | 12,924 |
| | 14,271 |
|
Deferred compensation | 13,571 |
| | 13,578 |
|
Other long-term liabilities | 11,113 |
| | 9,737 |
|
Long-term liabilities of discontinued operations | — |
| | 55,757 |
|
Total liabilities | 177,886 |
| | 447,728 |
|
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 |
|
Capital in excess of par value | 2,219 |
| | — |
|
Retained earnings | 207,447 |
| | 239,441 |
|
Accumulated other comprehensive loss | (9,449 | ) | | (25,927 | ) |
Total stockholders' equity | 207,063 |
| | 220,293 |
|
Total liabilities and equity | $ | 384,949 |
| | $ | 668,021 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | |
| MARCH 31 | | |
| 2024 | | 2023 | | | | |
| (In thousands, except per share data) |
Revenues | $ | 53,289 | | | $ | 50,141 | | | | | |
Cost of sales | 46,271 | | | 46,784 | | | | | |
Gross profit | 7,018 | | | 3,357 | | | | | |
Earnings of unconsolidated operations | 13,307 | | | 13,824 | | | | | |
| | | | | | | |
| | | | | | | |
Operating expenses | | | | | | | |
Selling, general and administrative expenses | 15,453 | | | 14,876 | | | | | |
Amortization of intangible assets | 126 | | | 727 | | | | | |
Gain on sale of assets
| (11) | | | (236) | | | | | |
| | | | | | | |
| 15,568 | | | 15,367 | | | | | |
Operating profit | 4,757 | | | 1,814 | | | | | |
Other (income) expense | | | | | | | |
Interest expense | 1,111 | | | 545 | | | | | |
Interest income | (1,127) | | | (1,155) | | | | | |
Closed mine obligations | 455 | | | 409 | | | | | |
Gain on equity securities | (1,041) | | | (628) | | | | | |
| | | | | | | |
| | | | | | | |
Other, net | (214) | | | (1,725) | | | | | |
| (816) | | | (2,554) | | | | | |
Income before income tax provision (benefit) | 5,573 | | | 4,368 | | | | | |
Income tax provision (benefit) | 1,003 | | | (1,324) | | | | | |
Net income | $ | 4,570 | | | $ | 5,692 | | | | | |
| | | | | | | |
Earnings per share: | | | | | | | |
Basic earnings per share | $ | 0.61 | | | $ | 0.77 | | | | | |
Diluted earnings per share | $ | 0.61 | | | $ | 0.76 | | | | | |
| | | | | | | |
Basic weighted average shares outstanding | 7,452 | | | 7,428 | | | | | |
Diluted weighted average shares outstanding | 7,515 | | | 7,515 | | | | | |
|
| | | | | | | | | | | | | | | |
| 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 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | |
| MARCH 31 | | |
| 2024 | | 2023 | | | | |
| (In thousands) |
Net income | $ | 4,570 | | | $ | 5,692 | | | | | |
| | | | | | | |
Reclassification of pension and postretirement adjustments into earnings, net of $23 and $6 tax benefit in the three months ended March 31, 2024 and March 31, 2023, respectively. | 76 | | | 21 | | | | | |
Total other comprehensive income | 76 | | | 21 | | | | | |
Comprehensive income | $ | 4,646 | | | $ | 5,713 | | | | | |
|
| | | | | | | | | | | | | | | |
| 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 |
|
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 |
| 2024 | | 2023 |
| (In thousands) |
Operating activities | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Net cash (used for) provided by operating activities | $ | (9,758) | | | $ | 6,254 | |
| | | |
Investing activities | | | |
Expenditures for property, plant and equipment and acquisition of mineral interests | (14,483) | | | (7,879) | |
Proceeds from the sale of property, plant and equipment | 11 | | | 272 | |
Proceeds from the sale of private company equity units | — | | | 1,153 | |
| | | |
Other | (163) | | | (10) | |
Net cash used for investing activities | (14,635) | | | (6,464) | |
| | | |
Financing activities | | | |
Additions to long-term debt | 1,327 | | | 2,112 | |
Reductions of long-term debt | (1,295) | | | (1,456) | |
Net additions to revolving credit agreements | 7,000 | | | — | |
Cash dividends paid | (1,630) | | | (1,557) | |
Purchase of treasury shares | (4,274) | | | — | |
| | | |
Net cash provided by (used for) financing activities | 1,128 | | | (901) | |
| | | |
Cash and cash equivalents | | | |
Total decrease for the period | (23,265) | | | (1,111) | |
Balance at the beginning of the period | 85,109 | | | 110,748 | |
Balance at the end of the period | $ | 61,844 | | | $ | 109,637 | |
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | | | Total Stockholders' Equity |
| (In thousands, except per share data) |
Balance, January 1, 2023 | $ | 5,783 | | $ | 1,566 | | $ | 23,706 | | $ | 404,924 | | $ | (9,013) | | | | $ | 426,966 | |
Stock-based compensation | 161 | | — | | 403 | | — | | — | | | | 564 | |
| | | | | | | | |
Net income | — | | — | | — | | 5,692 | | — | | | | 5,692 | |
Cash dividends on Class A and Class B common stock: $0.2075 per share | — | | — | | — | | (1,557) | | — | | | | (1,557) | |
Reclassification adjustment to net income, net of tax | — | | — | | — | | — | | 21 | | | | 21 | |
Balance, March 31, 2023 | $ | 5,944 | | $ | 1,566 | | $ | 24,109 | | $ | 409,059 | | $ | (8,992) | | | | $ | 431,686 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Balance, January 1, 2024 | $ | 5,883 | | $ | 1,566 | | $ | 28,672 | | $ | 355,873 | | $ | (9,654) | | | | $ | 382,340 | |
Stock-based compensation | 130 | | — | | 401 | | — | | — | | | | 531 | |
Purchase of treasury shares | (128) | | — | | — | | (4,146) | | — | | | | (4,274) | |
| | | | | | | | |
Net income | — | | — | | — | | 4,570 | | — | | | | 4,570 | |
Cash dividends on Class A and Class B common stock: $0.2175 per share | — | | — | | — | | (1,630) | | — | | | | (1,630) | |
Reclassification adjustment to net income, net of tax | — | | — | | — | | — | | 76 | | | | 76 | |
Balance, March 31, 2024 | $ | 5,885 | | $ | 1,566 | | $ | 29,073 | | $ | 354,667 | | $ | (9,578) | | | | $ | 381,613 | |
| | | | | | | | |
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| | | | | | | | |
| | | | | | | | |
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|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 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 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 31, 2024
(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”). NACCO brings natural resources to life by delivering aggregates, minerals, reliable fuels and environmental solutions through its robust portfolio of NACCO Natural Resources® businesses. The Company operates under three business segments: Coal Mining, North American Mining® ("NAMining") and Minerals Management. The Coal Mining segment operates surface coal mines for power generation companies. The NAMining segment is a trusted mining partner for producers of aggregates, activated carbon, lithium and other industrial minerals. The Minerals Management segment, which includes the Catapult Mineral Partners ("Catapult") business, acquires and promotes the development of mineral interests. Mitigation Resources of North America® ("Mitigation Resources") provides stream and wetland mitigation solutions.
The Company has items not directly attributable to a reportable segment that are not included in the reported financial results of the operating segment. These items primarily include administrative costs related to public company reporting requirements, including management and board compensation, and the financial results of Bellaire Corporation ("Bellaire"), Mitigation Resources and other developing businesses. Bellaire manages the Company’s long-term liabilities related to former Eastern U.S. underground mining activities. Intercompany accounts and transactions are eliminated in consolidation. See Note 8 for further discussion of segment reporting.
The Company's primaryCompany’s operating subsidiarysegments are further described below:
Coal Mining Segment
The Coal Mining segment operates in the mining industry. The North American Coal Corporation and its affiliated companies (collectively, “NACoal”) minesurface coal primarily for use inmines under long-term contracts with power generation companies pursuant to a service-based business model. Coal is surface mined in North Dakota and provide value-added services for natural resource companies.Mississippi. Each mine is fully integrated with its customer's operations.
On September 29, 2017,During 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"). The financial position, results of operations and cash flows of HBBHC are reflected as discontinued operations for all periods presented throughthree months ended March 31, 2024, the date of the spin-off. See Note 10 to the Unaudited Condensed Consolidated Financial Statements for further details regarding the spin-off.
NACoal has the followingCoal Mining segment's operating coal mining subsidiaries: Bisti Fuels Company, LLC ("Bisti"), Caddo Creek Resources Company, LLC (“Caddo Creek”), Camino Real Fuels, LLC (“Camino Real”),mines were: 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”), and Mississippi Lignite Mining Company (“MLMC”). Each of these mines supply lignite coal for power generation and The Sabine Mining Company (“Sabine”).
Alldelivers its coal production to an adjacent power plant or synfuels plant under a long-term supply contract. While MLMC’s coal supply contract contains a take or pay provision, the contract contains a force majeure provision that allows for the temporary suspension of the operatingtake or pay provision during the duration of certain specified events beyond the control of either party; all other coal mining subsidiaries other thansupply contracts are requirements contracts. Certain coal supply contracts can be terminated early, which would result in a reduction to future earnings.
The MLMC are unconsolidated (collectivelycontract is the "Unconsolidated Mines"). The Unconsolidated Mines were formed to develop, construct and/or operate surfaceonly coal mines under long-term contracts and are capitalized primarily with debt financing provided by or supported by their respective customers, and without recourse to NACCO and NACoal. The contracts with the customers 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 timesupply contract in line with various indices which reflect general U.S. inflation rates.
Although NACoal owns 100% 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 financial interest and have the power to direct the activities that most significantly affect the economic performance of the entities. As a result, NACoal is not the primary beneficiary and therefore does not consolidate these entities' financial position or results of operations. The income taxes resulting from operations of the Unconsolidated Mines are solely the responsibility of the Company. The pre-tax income from the Unconsolidated Mines is reported on the line “Earnings of unconsolidated mines” in the Consolidated Statements of Operations, with related taxes included in the provisionresponsible for income taxes. The Company has included the pre-tax earnings of the Unconsolidated Mines above operating profit as they are an integral component of the Company's business and operating results.
MLMC is a consolidated entity because NACoal pays 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 customercustomer's Red Hills Power Plant 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"), which ceasedProfitability at MLMC is affected by customer demand for coal productionand changes in the fourth quarterindices that determine sales price and actual costs incurred. As diesel fuel is heavily weighted among the indices used to determine the coal sales price, fluctuations in diesel fuel prices can result in significant fluctuations in earnings at MLMC. The Red Hills Power Plant supplies electricity to the Tennessee Valley Authority (“TVA”) under a long-term power purchase agreement. MLMC’s contract with its customer runs through April 1, 2032. TVA’s power portfolio includes coal, nuclear, hydroelectric, natural gas and renewables. The decision regarding which power plants to dispatch is determined by TVA. Reduction in dispatch of 2015,the Red Hills Power Plant will result in reduced earnings at MLMC.
On December 18, 2023, MLMC received notice from its customer related to an issue that began on December 15, 2023 as a result of an issue that impacted one of two boilers at the Red Hills Power Plant. This issue has resulted in a reduction in customer demand which will have a significant impact on the Company's 2024 results of operations. Repairs to the boiler are expected to be completed during the second half of 2024.
The Sabine Mining Company (“Sabine”) operates the Sabine Mine in Texas. All production from Sabine was delivered to Southwestern Electric Power Company's (“SWEPCO”) Henry W. Pirkey Plant (the “Pirkey Plant”). SWEPCO is alsoan American Electric Power (“AEP”) company. As a result of the early retirement of the Pirkey Plant, Sabine ceased deliveries and final
reclamation began on April 1, 2023. Funding for mine reclamation is the responsibility of SWEPCO, and Sabine receives compensation for providing mine reclamation services. Sabine will provide mine reclamation services through September 30, 2026. On October 1, 2026, SWEPCO is scheduled to acquire all of the capital stock of Sabine and complete the remaining mine reclamation.
At Coteau, Coyote Creek and Falkirk, 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 providing all of the capital required to build and operate the mine. This contract structure eliminates exposure to spot coal market price fluctuations while providing 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 the Company. See Note 6 for further discussion of Coyote Creek's guarantees.
Coteau, Coyote Creek, Falkirk and Sabine each 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 Company regularly evaluates if there are reconsideration events which could change the Company's conclusion as to whether these entities meet the definition of a VIE and the determination of the primary beneficiary. The income before income taxes associated with these VIEs is reported as Earnings of unconsolidated operations on the Unaudited Condensed Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in unconsolidated subsidiaries in the Unaudited Condensed 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 entity.U.S. tax return; therefore, the Income tax (benefit) provision line on the Unaudited Condensed Consolidated Statements of Operations includes income taxes related to these entities. See Note 6 for further information on the Unconsolidated Subsidiaries.
NACoalThe 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.
NAMining Segment
The NAMining segment provides value-added contract mining and other services for producers of industrial minerals. The segment is a platform for the Company’s growth and diversification of mining activities outside of the thermal 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 costs plus a management fee. The financial resultstheir areas of expertise: materials handling and processing, product sales and distribution. As of March 31, 2024, NAMining operates in Florida, Texas, Arkansas, Virginia and Nebraska. In addition, Sawtooth Mining, LLC ("Sawtooth") has exclusive responsibility for NAM are included in consolidated mining operations or unconsolidated mining operations based on each NAM entity's structure.
NACoal also provides coal handling, processing and dryingmine closure services for a number of customers. For example, NoDak Energy Services, LLC ("NoDak") operatesthe Thacker Pass lithium project in northern Nevada, including mine design, construction, operation 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" in the "Other (income) expense" sectionmaintenance.
Certain of the Consolidated Statements of Operations, withentities within the related income taxes included in the provision for income taxes. North American Coal Royalty Company, a consolidated entity, provides surfaceNAMining segment are VIEs and mineral acquisition and lease maintenance services related to the Company's operations.
All of the unconsolidated subsidiaries are accounted for under the equity method.method as Unconsolidated Subsidiaries. See Note 6 for further discussion.
Minerals Management Segment
The Minerals Management segment derives income primarily by leasing its royalty and mineral interests to third-party exploration and production companies, and, to a lesser extent, other mining companies, granting them the rights to explore, develop, mine, produce, market and sell gas, oil, and coal in exchange for royalty payments based on the lessees' sales of those minerals.
The Minerals Management segment owns royalty interests, mineral interests, non-participating royalty interests and overriding royalty interests.
•Royalty Interest. Royalty interests generally result when the owner of a mineral interest leases the underlying minerals to an exploration and production company pursuant to an oil and gas lease. Typically, the resulting royalty interest is a cost-free percentage of production revenues for minerals extracted from the acreage. A holder of royalty interests is generally not responsible for capital expenditures or lease operating expenses, but royalty interests may be calculated
net of post-production expenses, and typically have no environmental liability. Royalty interests leased to producers expire upon the expiration of the oil and gas lease and revert to the mineral owner.
•Mineral Interest. Mineral interests are perpetual rights of the owner to explore, develop, exploit, mine and/or produce any or all of the minerals lying below the surface of the property. The holder of a mineral interest has the right to lease the minerals to an exploration and production company. Upon the execution of an oil and gas lease, the lessee (the exploration and production company) becomes the working interest owner and the lessor (the mineral interest owner) has a royalty interest.
•Non-Participating Royalty Interest (“NPRIs”). NPRI is an interest in oil and gas production which is created from the mineral estate. The NPRI is expense-free, bearing no operational costs of production. The term “non-participating” indicates that the interest owner does not share in the bonus, rentals from a lease, nor the right to participate in the execution of oil and gas leases. The NPRI owner does, however, typically receive royalty payments.
•Overriding Royalty Interest (“ORRIs”). ORRIs are created by carving out the right to receive royalties from a working interest. Like royalty interests, ORRIs do not confer an obligation to make capital expenditures or pay for lease operating expenses and have limited environmental liability; however, ORRIs may be calculated net of post-production expenses, depending on how the ORRI is structured. ORRIs that are carved out of working interests are linked to the same underlying oil and gas lease that created the working interest, and therefore, such ORRIs are typically subject to expiration upon the expiration or termination of the oil and gas lease.
The Company may own more than one type of mineral and royalty interest in the same tract of land. For example, where the Company owns an ORRI in a lease on the same tract of land in which it owns a mineral interest, the ORRI in that tract will relate to the same gross acres as the mineral interest in that tract.
The Minerals Management segment will benefit from the continued development of its mineral properties without the need for investment of additional capital once mineral and royalty interests have been acquired. The Minerals Management segment does not currently have any material investments under which it would be required to bear the cost of exploration, production or development.
The Company's acquisition criteria for building a blended portfolio of mineral and royalty interests includes (i) new wells anticipated to come online within one to two years of investment, (ii) areas with forecasted future development within five years after acquisition and (iii) existing producing wells further along the decline curve that will generate stable cash flow. In addition, acquisitions should extend the geographic footprint to diversify across multiple basins with a preliminary focus on the more oil-rich Permian basin and a secondary focus on other diversifying basins to increase regional exposure. While the current focus is on the acquisition of mineral and royalty interests, the Company would also consider investments in ORRIs, NPRIs or non-operating working interests under certain circumstances. The current acquisition strategy does not contemplate any near-term working interest investments in which the Company would act as the operator.
The Company also manages legacy royalty and mineral interests located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Texas (Cotton Valley and Austin Chalk formation natural gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus shale natural gas), Alabama (coal, coalbed methane and natural gas) and North Dakota (coal, oil and natural gas). The majority of the Company’s legacy reserves were acquired as part of its historical coal mining operations.
Other Items: On December 1, 2022, the Company transferred its ownership interest in Midwest AgEnergy Group, LLC (“MAG”), a North Dakota-based ethanol business to HLCP Ethanol Holdco, LLC (“HLCP”). The Company received a payment of $1.2 million in the first quarter of 2023 in connection with a post-closing purchase price adjustment, which is included on the line "Other, net" within the accompanying Unaudited Condensed Consolidated Statements of Operations.
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, 2024, the results of its operations, comprehensive income, (loss), cash flows and changes in equity for the ninethree months endedSeptember 30, 2017 March 31, 2024 and 20162023 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, 2016.2023.
The balance sheet at December 31, 20162023 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.
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, the management service to oversee the operation of the equipment, and provide additional disclosures.delivery of aggregates or other minerals 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,each month of service is completed, revenue is recognized for the effective dateamount of actual costs incurred, plus the management fee or fixed fee and the general and administrative fee (as applicable). Fluctuations in revenue from period to period result from changes in customer demand primarily due to increases and decreases in activity levels on individual contracts and variances in reimbursable costs. Revenue from part sales is recognized upon transfer of control of the parts to the customer.
The Minerals Management segment enters into contracts which grant the right to explore, develop, produce and sell minerals controlled by the Company. These arrangements result in the transfer of mineral rights for public entitiesa 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 contracts, granting exclusive right, title, and interest in and to minerals, if any, is annual reporting periods beginning after December 15, 2017the 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, interim periods therein.
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 Company anticipates adoptingbelieves that the newpricing provisions of royalty contracts are customary in the industry. Up-front lease bonus payments represent the fixed portion of the transaction price and are recognized over the primary term of the contract, which is generally three to five years.
Mitigation Resources 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. Each mitigation credit sale is considered a separate performance obligation. Revenue is recognized at the point in time that control of each mitigation credit transfers to the customer. Fluctuations in revenue guidance effective January 1, 2018 usingfrom period to period generally result from changes in customer demand. Under the modified retrospective methodpermittee-responsible stream and wetland mitigation model, the contracts are generally structured as a management fee agreement under which Mitigation Resources is reimbursed for all costs incurred in performing the required mitigation plus an agreed profit percentage or a fixed fee. The mitigation services provided is the performance obligation and is accounted for as a series. Performance momentarily creates an asset that the customer simultaneously receives and consumes; therefore, control is transferred to the customer as work is completed. Consistent with the cumulative effectconclusion that the customer simultaneously receives and consumes the benefits provided, an input-based measure of initially applyingprogress is appropriate. As each month of service is completed, revenue is recognized for the standard recognized as an adjustmentamount of actual costs incurred, plus the management fee or fixed fee. Fluctuations in revenue from period to equity. The Company has developed a project plan with respectperiod result from changes in customer demand primarily due to its implementationincreases and decreases in activity levels of this standard, including identification of revenue streams and review ofindividual contracts and procedures currentlyvariances in place.reimbursable costs.
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 volumes or MMBtu delivered, 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.
Cost Reimbursement
Certain contracts include reimbursement from customers of actual costs incurred for the purchase of supplies, equipment and services in accordance with contractual terms. Such reimbursable revenue is variable and subject to uncertainty, as the amounts received and timing thereof is highly dependent on factors outside of the Company’s control. Accordingly, reimbursable revenue is fully constrained and not recognized until the uncertainty is resolved, which typically occurs when the related costs are incurred on behalf of a customer. The Company is considered a principal in such transactions and records the associated revenue at the gross amount billed to the customer with the related costs recorded as an expense within cost of sales.
At the Thacker Pass lithium project, in addition to management fee income, the customer will reimburse Sawtooth for up to $50 million of capital expenditures. Sawtooth will recognize revenue over the estimated useful life of the asset on a straight-line basis as the performance obligation is satisfied over time. Sawtooth recognized $1.5 million and $0.1 million in revenue for reimbursable costs during the three months ended March 31, 2024 and 2023, respectively. In accordance with the Thacker Pass mining agreement, the customer received a $3.5 million advance from Sawtooth, which is included in the processlong-term contract asset. The customer will pay a $4.7 million success fee to Sawtooth upon achieving commercial mining milestones or repay the $3.5 million advance if such commercial mining milestones are not met.
Prior Period Performance Obligations
The Company records royalty income in the month production is delivered to the purchaser. As a mineral owner, the Company has limited visibility into when new wells start producing, and production statements may not be received for 30 to 90 days or more after the date production is delivered. As a result, the Company is required to estimate the amount of completing its reviewproduction delivered to the purchaser of customer contracts at its NACoal subsidiary, including the contractsproduct and the price that will be received for the sale of the product. The expected sales volumes and prices for these properties are estimated and recorded in "Trade accounts receivable" in the accompanying Unaudited Condensed Consolidated Balance Sheets. The difference between the Company’s Unconsolidated Mines,estimates and finalizing its conclusions on a variety of specific contractual terms. These include identification of additionalthe actual amounts received is recorded in the month that payment is received from the third-party lessee. For the three months ended March 31, 2024 and 2023, royalty income recognized in the reporting period related to performance obligations specifically duringsatisfied in prior reporting periods was immaterial.
Disaggregation of Revenue
In accordance with ASC 606-10-50, the pre-Company disaggregates revenue from contracts with customers into major goods and post-coal production periods, variable compensation considerationsservice lines and the timing of recognitiontransfer 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.goods and services. The Company is also indetermined that disaggregating revenue into these categories achieves the processdisclosure objective 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 8 to the Unaudited Condensed Consolidated Financial Statements for further discussion of segment reporting.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): RecognitionThe following table disaggregates revenue by major sources as of March 31:
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | |
| MARCH 31 | | |
| 2024 | | 2023 | | | | |
Timing of Revenue Recognition | | | | | | | |
Goods transferred at a point in time | $ | 15,108 | | | $ | 20,146 | | | | | |
Services transferred over time | 38,181 | | | 29,995 | | | | | |
Total revenues | $ | 53,289 | | | $ | 50,141 | | | | | |
Contract Balances
The opening and Measurementclosing balances of Financial Assets and Financial Liabilities," which modifies how entities measure equity investments and present changes in the fair value of financial liabilities; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; changes presentation and disclosure requirements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with 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 fiscal years. The Company is evaluating the impact that this new guidance will have on the Company’s financial position, results of operations, cash flowscurrent and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)," which requires an entity to recognizelong-term contract assets and liabilities forand receivables are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Contract balances |
| Trade accounts receivable | | | | Contract asset (long-term) | | Contract liability (current) | | Contract liability (long-term) |
Balance, January 1, 2024 | $ | 37,429 | | | | | $ | 3,712 | | | $ | 878 | | | $ | 1,470 | |
Balance, March 31, 2024 | 27,958 | | | | | 3,500 | | | 930 | | | 2,117 | |
Increase (decrease) | $ | (9,471) | | | | | $ | (212) | | | $ | 52 | | | $ | 647 | |
As described above, the rightsCompany enters into royalty contracts that grant exclusive right, title, and obligations created by leased assets. ASU 2016-02interest in and to minerals. 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. The timing of the payment of the fixed portion of the transaction price is effective for interimupfront, however, the performance obligation is satisfied over the primary term of the contract, which is generally three to five years. Therefore, at the time any such up-front payment is received, a contract liability is recorded which represents deferred revenue. The amount of royalty revenue recognized in both of the three months ended March 31, 2024 and annual periods beginning after December 15, 2018, and early adoption is permitted. 2023 included in the opening contract liability was $0.2 million. This revenue consists of up-front lease bonus payments received under royalty contracts that are recognized over the primary term of the royalty contracts, which are generally three to five years.
The Company is currently evaluating howexpects to recognize an additional $0.9 million in the remainder of 2024, $1.2 million in 2025, $0.1 million in 2026, less than $0.1 million in 2027 and $0.8 million in the years after 2027 related to what extent ASU 2016-02 will affect the Company's financial position,contract liability remaining at March 31, 2024. The difference between the opening and closing balances of the Company’s contract balances results of operations, cash flowsfrom the timing difference between the Company’s performance and related disclosures. the customer’s payment.
The Company has no contract assets recognized from the costs to obtain or fulfill a contract with a customer.
NOTE 3—Inventories
Inventories are summarized as follows:
| | | | | | | | | | | |
| MARCH 31 2024 | | DECEMBER 31 2023 |
Coal | $ | 19,576 | | | $ | 23,784 | |
Mining supplies | 56,179 | | | 53,216 | |
Total inventories | $ | 75,755 | | | $ | 77,000 | |
During the three months ended March 31, 2024 and 2023, the Company recorded a $2.5 million and a $2.4 million inventory impairment charge, respectively, in the line “Cost of sales” in the accompanying Unaudited Condensed Consolidated Statements of Operations as mining costs exceeded net realizable value at MLMC.
|
| | | | | | | |
| SEPTEMBER 30 2017 | | DECEMBER 31 2016 |
Coal | $ | 14,695 |
| | $ | 13,137 |
|
Mining supplies | 15,885 |
| | 15,790 |
|
Total inventories | $ | 30,580 |
| | $ | 28,927 |
|
NOTE 4—Stockholders' Equity
Stock Repurchase Program:On May 10, 2016,November 7, 2023, the Company's Board of Directors approved a stock repurchase program (the "2016("2023 Stock Repurchase Program") providing for the purchase of up to $50$20.0 million of the Company'sCompany’s outstanding Class A common stock through December 31, 2025. NACCO's previous repurchase program would have expired on December 31, 2023 but was terminated and replaced by the 2023 Stock Repurchase Program. During the three months ended March 31, 2024, the Company repurchased 127,687 shares of Class A Common Stock outstanding through December 31, 2017. The Company’s previous $60 million stock repurchase program, announced in December 2013, was completed in October 2015. under the 2023 Stock Repurchase Program for an aggregate purchase price of $4.3 million.
The timing and amount of any repurchases under the 20162023 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 20162023 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 20162023 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.so under applicable securities laws.
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 repurchased under the 2016 Stock Repurchase Program.
NOTE 5—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) |
| | March 31, 2024 | | | | | | |
Assets: | | | | | | | | |
Equity securities | | $ | 18,284 | | | $ | 18,284 | | | $ | — | | | $ | — | |
| | | | | | | | |
| | $ | 18,284 | | | $ | 18,284 | | | $ | — | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | December 31, 2023 | | | | | | |
Assets: | | | | | | | | |
Equity securities | | $ | 17,208 | | | $ | 17,208 | | | $ | — | | | $ | — | |
| | $ | 17,208 | | | $ | 17,208 | | | $ | — | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | | 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 |
| | $ | — |
|
| | | | | | | | |
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 2023, Bellaire established acontributed $5.0 million to establish a 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.discharge. 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 fair value of the Mine Water Treatment Trust was $11.9 million and $11.2 million at March 31, 2024 and December 31, 2023, respectively, and is included in Other non-current assets in the accompanying Unaudited Consolidated Balance Sheets. The Company uses significant other observable inputsrecognized a gain of $0.7 million and $0.6 million during the three months ended March 31, 2024 and 2023, respectively, related to the Mine Water Treatment Trust.
Prior to 2023, the Company invested $2.0 million in equity securities of a public company with a diversified portfolio of royalty producing mineral interests. The investment is reported at fair value derivative instruments used to hedge interest rate risk;based upon quoted market prices in active markets for identical assets; therefore, they areit is classified as Level 1 within Level 2 of the valuationfair value hierarchy. The fair value forof this investment was $6.4 million and $6.0 million at March 31, 2024 and December 31, 2023, respectively, and is included in Other non-current assets in the accompanying Unaudited Consolidated Balance Sheets. The Company recognized a gain of $0.4 million and $0.1 million during the three months ended March 31, 2024 and 2023, respectively, related to the investment in these contractsequity securities.
The change in fair value of equity securities is determined basedreported on current interest rates.the line Gain on equity securities in the Other (income) expense section of the 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, 2024 and 2016.2023.
NOTE 6—Unconsolidated Subsidiaries
NACoal'sEach of the Company'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 generally without recourse to the Company. Although the Company owns 100% of the equity and manages the daily operations of the Unconsolidated Subsidiaries, the Company has determined that the equity capital provided by the Company 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 investmentInvestment in the unconsolidated subsidiaries and related tax positions totaled $27.3$13.8 million and $31.1$12.4 million at September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively. The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $17.8$4.8 million and $4.6$5.0 million at September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively. Earnings of unconsolidated operations were $13.3 million and $13.8 million during the three months ended March 31, 2024 and 2023, respectively.
NACoalNACCO Natural Resources Corporation ("NACCO Natural Resources"), a wholly-owned subsidiary of NACCO, 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”), NACoalNACCO Natural Resources 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, NACoalNACCO Natural Resources 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 NACoalNACCO Natural Resources since the inception of these guarantees. The Company believes that the likelihood of NACoal’s future performanceNACCO Natural Resources 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 subsidiaries is as follows:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | NINE MONTHS ENDED |
| SEPTEMBER 30 | | SEPTEMBER 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues | $ | 203,134 |
| | $ | 178,009 |
| | $ | 571,862 |
| | $ | 483,360 |
|
Gross profit | $ | 23,126 |
| | $ | 21,367 |
| | $ | 64,981 |
| | $ | 59,788 |
|
Income before income taxes | $ | 16,602 |
| | $ | 14,755 |
| | $ | 45,928 |
| | $ | 41,122 |
|
NOTE 7—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—Business Segments
TwoThe Company’s operating segments are: (i) Coal Mining, (ii) NAMining and (iii) Minerals Management. 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 has items not directly attributable to a reportable segment that are not included as part of the Company’s former segments, HBB and KC, were spun-off on September 29, 2017. See Note 1 for a discussionmeasurement of the Company's industry and the spin-off. There were no changessegment operating profit. These items primarily include administrative costs related to the composition of the remaining segments, NACoal and NACCO and Other. NACCO's non-operating segment, NACCO and Other, includes the accounts ofpublic company reporting requirements at the parent company and Bellaire.
Financial information for eachthe financial results of NACCO's reportable segments is presentedMitigation Resources and Bellaire. Mitigation Resources 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 following table:Company’s long-term liabilities related to former Eastern U.S. underground mining activities.
|
| | | | | | | | | | | | | | | |
| 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 ofAll financial statement line items below operating profit (other income including interest expense and interest income, the income tax provision (benefit) basedfor income taxes and net income) are presented and discussed within this Form 10-Q on the U.S. federal statutory rate of 35% to the effective income tax rate is as follows:a consolidated basis.
|
| | | | | | | | | | | | | | | |
| 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 ratesfollowing table presents Revenues, Cost of sales, Earnings of unconsolidated operations, Operating expenses, Operating profit (loss), Expenditures 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.
NOTE 10—Other Events and Transactions
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 accounted for the spin-off based on the historical carrying value of HBBHC.
On September 28, 2017, prior to the spin-off, HBBHC paid NACCO a one-time $35.0 million cash dividend. This payment was in addition to $3.0 million in dividends HBBHC paid to NACCO from January 1, 2017 to June 30, 2017.
In connection with the spin-off of HBBHC, the Company 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 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 resultand acquisition of various unfavorable conditions, including butmineral interests and Depreciation, depletion and amortization expense:
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | |
| MARCH 31 | | |
| 2024 | | 2023 | | | | |
Revenues | | | | | | | |
Coal Mining | $ | 15,545 | | | $ | 20,653 | | | | | |
NAMining | 24,483 | | | 20,633 | | | | | |
Minerals Management | 10,401 | | | 8,285 | | | | | |
Unallocated Items | 3,262 | | | 1,191 | | | | | |
Eliminations | (402) | | | (621) | | | | | |
Total | $ | 53,289 | | | $ | 50,141 | | | | | |
| | | | | | | |
Cost of sales | | | | | | | |
Coal Mining | $ | 20,943 | | | $ | 25,878 | | | | | |
NAMining | 21,671 | | | 19,241 | | | | | |
Minerals Management | 1,364 | | | 1,052 | | | | | |
Unallocated Items | 2,712 | | | 1,214 | | | | | |
Eliminations | (419) | | | (601) | | | | | |
Total | $ | 46,271 | | | $ | 46,784 | | | | | |
| | | | | | | |
Earnings of unconsolidated operations | | | | | | | |
Coal Mining | $ | 12,007 | | | $ | 12,466 | | | | | |
NAMining | 1,365 | | | 1,358 | | | | | |
Minerals Management | (65) | | | — | | | | | |
| | | | | | | |
| | | | | | | |
Total | $ | 13,307 | | | $ | 13,824 | | | | | |
| | | | | | | |
Operating expenses* | | | | | | | |
Coal Mining | $ | 7,026 | | | $ | 6,928 | | | | | |
NAMining | 1,822 | | | 1,920 | | | | | |
Minerals Management | 1,042 | | | 1,189 | | | | | |
Unallocated Items | 5,678 | | | 5,330 | | | | | |
| | | | | | | |
Total | $ | 15,568 | | | $ | 15,367 | | | | | |
| | | | | | | |
Operating profit (loss) | | | | | | | |
Coal Mining | $ | (417) | | | $ | 313 | | | | | |
NAMining | 2,355 | | | 830 | | | | | |
Minerals Management | 7,930 | | | 6,044 | | | | | |
Unallocated Items | (5,128) | | | (5,353) | | | | | |
Eliminations | 17 | | | (20) | | | | | |
Total | $ | 4,757 | | | $ | 1,814 | | | | | |
*Operating expenses consist of Selling, general and administrative expenses, Amortization of intangible assets and (Gain) loss on sale of assets.
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | |
| MARCH 31 | | |
| 2024 | | 2023 | | | | |
Expenditures for property, plant and equipment and acquisition of mineral interests | | | | | | | |
Coal Mining | $ | 1,794 | | | $ | 2,686 | | | | | |
NAMining | 5,818 | | | 4,423 | | | | | |
Minerals Management | 136 | | | 344 | | | | | |
Unallocated Items | 6,735 | | | 426 | | | | | |
Total | $ | 14,483 | | | $ | 7,879 | | | | | |
| | | | | | | |
Depreciation, depletion and amortization | | | | | | | |
Coal Mining | $ | 2,214 | | | $ | 4,240 | | | | | |
NAMining | 2,256 | | | 1,886 | | | | | |
Minerals Management | 993 | | | 811 | | | | | |
Unallocated Items | 229 | | | 82 | | | | | |
Total | $ | 5,692 | | | $ | 7,019 | | | | | |
Asset information by segment is not limited to weaknessdiscretely maintained for internal reporting or used in the U.S. and global coal markets and certain asset-specific factors, the Company determined the carrying valueevaluating performance.
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
(DollarsAmounts in thousands, except as noted and per share data)
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 Discussion and Analysis of Financial Condition and Results of Operations include NACCO Industries, Inc. (the “parent company” or “NACCO”® (“NACCO”) and its wholly owned subsidiaries (collectively, the “Company”). NACCO brings natural resources to life by delivering aggregates, minerals, reliable fuels and environmental solutions through its robust portfolio of NACCO Natural Resources® businesses. The Company's primary operating subsidiaryCompany operates under three business segments: Coal Mining, North American Mining® ("NAMining") and Minerals Management. The Coal Mining segment operates surface coal mines for power generation companies. The NAMining segment is a trusted mining partner for producers of aggregates, activated carbon, lithium and other industrial minerals. The Minerals Management segment, which includes the Catapult Mineral Partners ("Catapult") business, acquires and promotes the development of mineral interests. Mitigation Resources of North America® ("Mitigation Resources") provides stream and wetland mitigation solutions.
The Company has items not directly attributable to a reportable segment that are not included in the reported financial results of the operating segment. These items primarily include administrative costs related to public company reporting requirements, including management and board compensation, and the financial results of Bellaire Corporation ("Bellaire"), Mitigation Resources and other developing businesses. Bellaire manages the Company’s long-term liabilities related to former Eastern U.S. underground mining industry. activities.
All financial statement line items below operating profit (other income, including interest expense and interest income, the provision (benefit) for income taxes and net income) are presented and discussed within this Form 10-Q on a consolidated basis.
The North American Company’s operating segments are further described below:
Coal Corporation and its affiliatedMining Segment
The Coal Mining segment operates surface coal companies (collectively, “NACoal”) mine coal primarily for use inmines under long-term contracts with power generation and provide value-added mining services for natural resource companies.
companies pursuant to a service-based business model. Coal is surface mined from NACoal's mines in North Dakota Texas, Mississippi, Louisiana and onMississippi. Each mine is fully integrated with its customer's operations.
During the Navajo Nation in New Mexico. NACoal provides value-added services such as maintaining and operating draglines for independently owned limerock quarries through its North Americanthree months ended March 31, 2024, the Coal Mining ("NAM") division and provides ash hauling services for power plants and other facilities.
NACoal has the followingsegment's operating coal mining subsidiaries: Bisti Fuels Company, LLC ("Bisti"), Caddo Creek Resources Company, LLC (“Caddo Creek”), Camino Real Fuels, LLC (“Camino Real”),mines were: 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”), and Mississippi Lignite Mining Company (“MLMC”). Each of these mines supply lignite coal for power generation and delivers its coal production to an adjacent power plant or synfuels plant under a long-term supply contract. While MLMC’s coal supply contract contains a take or pay provision, the contract contains a force majeure provision that allows for the temporary suspension of the take or pay provision during the duration of certain specified events beyond the control of either party; all other coal supply contracts are requirements contracts. Certain coal supply contracts can be terminated early, which would result in a reduction to future earnings.
The MLMC contract is the only coal supply 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's Red Hills Power Plant 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 and 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, fluctuations in diesel fuel prices can result in significant fluctuations in earnings at MLMC. The Red Hills Power Plant supplies electricity to the Tennessee Valley Authority (“TVA”) under a long-term power purchase agreement. MLMC’s contract with its customer runs through April 1, 2032. TVA’s power portfolio includes coal, nuclear, hydroelectric, natural gas and renewables. The decision regarding which power plants to dispatch is determined by TVA. Reduction in dispatch of the Red Hills Power Plant will result in reduced earnings at MLMC.
On December 18, 2023, MLMC received notice from its customer related to an issue that began on December 15, 2023 as a result of an issue that impacted one of two boilers at the Red Hills Power Plant. This issue has resulted in a reduction in
customer demand which will have a significant impact on the Company's 2024 results of operations. Repairs to the boiler are expected to be completed during the second half of 2024.
The Sabine Mining Company (“Sabine”). Centennial Natural Resources, LLC ("Centennial"), which ceased coal operates the Sabine Mine in Texas. All production in the fourth quarter of 2015,from Sabine was also a coal mining subsidiary.
NAM provides value-added services for independently owned limerock quarries and is reimbursed by its customers based on actual costs plus a 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.
NACoal also provides coal handling, processing and drying services for a number of customers. For example, NoDak Energy Services, LLC ("NoDak"delivered to Southwestern Electric Power Company's (“SWEPCO”) operates and maintains a coal processing facility for a customer's power plant. North American Coal Royalty Company provides surface and mineral acquisition and lease maintenance services related to the Company's operations.
NACCO and Other includes the parent company operations and Bellaire Corporation (“Bellaire”Henry W. Pirkey Plant (the “Pirkey Plant”). BellaireSWEPCO 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"an American Electric Power (“AEP”), a former wholly owned subsidiary. company. As a result of the spin-off,early retirement of the Pirkey Plant, Sabine ceased deliveries and final reclamation began on April 1, 2023. Funding for mine reclamation is the responsibility of SWEPCO, and Sabine receives compensation for providing mine reclamation services. Sabine will provide mine reclamation services through September 30, 2026. On October 1, 2026, SWEPCO is scheduled to acquire all of the capital stock of Sabine and complete the remaining mine reclamation.
At Coteau, Coyote Creek and Falkirk, 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 providing all of the capital required to build and operate the mine. This contract structure eliminates exposure to spot coal market price fluctuations while providing 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 the Company. See Note 6 to the Unaudited Condensed Consolidated Financial Statements for further discussion of Coyote Creek's guarantees.
Coteau, Coyote Creek, Falkirk and Sabine each meet the definition of a variable interest entity ("VIE"). In each case, NACCO stockholders received sharesis 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 Company regularly evaluates if there are reconsideration events which could change the Company's conclusion as to whether these entities meet the definition of a VIE and the determination of the primary beneficiary. The income before income taxes associated with these VIEs is reported as Earnings of unconsolidated operations on the Unaudited Condensed Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in HBBHC,unconsolidated subsidiaries in the Unaudited Condensed 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 provision (benefit) line on the Unaudited Condensed Consolidated Statements of Operations includes income taxes related to these entities. See Note 6 to the Unaudited Condensed Consolidated Financial Statements for further information on the Unconsolidated Subsidiaries.
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 retainingreceiving reimbursement from customers for costs incurred.
NAMining Segment
The NAMining segment provides value-added contract mining and other services for producers of industrial minerals. The segment is a platform for the Company’s growth and diversification of mining activities outside of the thermal coal industry. NAMining provides contract mining services for independently owned mines and quarries, creating value for its customers by performing the mining aspects of its customers’ operations. This allows customers to focus on their sharesareas of NACCO common stock. HBBHCexpertise: materials handling and processing, product sales and distribution. As of March 31, 2024, NAMining operates in Florida, Texas, Arkansas, Virginia and Nebraska. In addition, Sawtooth Mining, LLC ("Sawtooth") has two classesexclusive responsibility for mining and mine closure services for the Thacker Pass lithium project in northern Nevada, including mine design, construction, operation and maintenance .
Certain of stock, similarthe entities within the NAMining segment are VIEs and are accounted for under the equity method as Unconsolidated Subsidiaries. See Note 6 to NACCO. In the spin-off, NACCO stockholders received one share of HBBHC Class A common stockUnaudited Condensed Consolidated Financial Statements for further discussion.
Minerals Management Segment
The Minerals Management segment derives income primarily by leasing its royalty and one share of HBBHC Class B common stockmineral interests to third-party exploration and production companies, and, to a lesser extent, other mining companies, granting them the rights to explore, develop, mine, produce, market and sell gas, oil, and coal in exchange for each share of NACCO Class A or Class B common stock ownedroyalty payments based on the record datelessees' sales of those minerals.
The Minerals Management segment owns royalty interests, mineral interests, non-participating royalty interests and overriding royalty interests.
•Royalty Interest. Royalty interests generally result when the owner of a mineral interest leases the underlying minerals to an exploration and production company pursuant to an oil and gas lease. Typically, the resulting royalty interest is a cost-free percentage of production revenues for minerals extracted from the spin-off.acreage. A holder of royalty interests is generally not responsible for capital expenditures or lease operating expenses, but royalty interests may be calculated net of post-production expenses, and typically have no environmental liability. Royalty interests leased to producers expire upon the expiration of the oil and gas lease and revert to the mineral owner.
•Mineral Interest. Mineral interests are perpetual rights of the owner to explore, develop, exploit, mine and/or produce any or all of the minerals lying below the surface of the property. The holder of a mineral interest has the right to lease the minerals to an exploration and production company. Upon the execution of an oil and gas lease, the lessee (the exploration and production company) becomes the working interest owner and the lessor (the mineral interest owner) has a royalty interest.
•Non-Participating Royalty Interest (“NPRIs”). NPRI is an interest in oil and gas production which is created from the mineral estate. The NPRI is expense-free, bearing no operational costs of production. The term “non-participating” indicates that the interest owner does not share in the bonus, rentals from a lease, nor the right to participate in the execution of oil and gas leases. The NPRI owner does, however, typically receive royalty payments.
•Overriding Royalty Interest (“ORRIs”). ORRIs are created by carving out the right to receive royalties from a working interest. Like royalty interests, ORRIs do not confer an obligation to make capital expenditures or pay for lease operating expenses and have limited environmental liability; however, ORRIs may be calculated net of post-production expenses, depending on how the ORRI is structured. ORRIs that are carved out of working interests are linked to the same underlying oil and gas lease that created the working interest, and therefore, such ORRIs are typically subject to expiration upon the expiration or termination of the oil and gas lease.
The Company may own more than one type of mineral and royalty interest in the same tract of land. For example, where the Company owns an ORRI in a lease on the same tract of land in which it owns a mineral interest, the ORRI in that tract will relate to the same gross acres as the mineral interest in that tract.
The Minerals Management segment will benefit from the continued development of its mineral properties without the need for investment of additional capital once mineral and royalty interests have been acquired. The Minerals Management segment does not currently have any material investments under which it would be required to bear the cost of exploration, production or development.
The Company's acquisition criteria for building a blended portfolio of mineral and royalty interests includes (i) new wells anticipated to come online within one to two years of investment, (ii) areas with forecasted future development within five years after acquisition and (iii) existing producing wells further along the decline curve that will generate stable cash flow. In addition, acquisitions should extend the geographic footprint to diversify across multiple basins with a preliminary focus on the more oil-rich Permian basin and a secondary focus on other diversifying basins to increase regional exposure. While the current focus is on the acquisition of mineral and royalty interests, the Company would also consider investments in ORRIs, NPRIs or non-operating working interests under certain circumstances. The current acquisition strategy does not contemplate any near-term working interest investments in which the Company would act as the operator.
The Company also manages legacy royalty and mineral interests located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Texas (Cotton Valley and Austin Chalk formation natural gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus shale natural gas), Alabama (coal, coalbed methane and natural gas) and North Dakota (coal, oil and natural gas). The majority of the Company’s legacy reserves were acquired as part of its historical coal mining operations.
Government Regulation Update
On April 25, 2024, the Environmental Protection Agency (“EPA”) issued a pre-publication version of the final rules for Greenhouse Gas (“GHG”) emissions and Mercury Air Toxics Standards (“MATS”). The final MATS and GHG rules will require compliance as early as 2027 and 2030, respectively. The Company is in the process of determining the implications of these rules. Previous efforts by the EPA were met with extensive litigation and the Company anticipates a similar response to the new GHG and MATS rules.
Preliminary review of the GHG rules indicate that the compliance deadline for coal-fired plants planning to install carbon capture and sequestration/storage technology has been extended to January 1, 2032. If a coal-fired plant intends to close prior to 2032, no controls will be required and if a plant plans to close between 2032 and 2039, they must begin co-firing with natural gas by January 1, 2030.
Preliminary review of the final MATS rules indicate that the EPA significantly reduced the fine particulate matter emission standard for all existing coal-fired electric generating units and will require continuous monitoring equipment to demonstrate compliance. Furthermore, the EPA elected to remove the lignite subcategory for mercury limits and will require lignite-fired electric generating units to meet the same standard as other types of coal.
Substantially all of the Coal Mining segment's profits are derived from long-term mining contracts. These new rules may raise the cost of fossil fuel generated energy, making coal-fired power plants less competitive, and/or result in early closure which could have an adverse impact on demand for coal and ultimately result in the early closure of the mines servicing these plants, including closure of the Company's coal mines. Any such closure of the Company's mines could have a material adverse effect on the Company’s business, financial position,condition and results of operations and cash flows of HBBHC are reflected as discontinued operations for all periods presented through the date of the spin-off. operations.
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 September 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 recognizedpages 52 through 53 in the Company's financial statements or tax returns,Annual Report on Form 10-K for the ultimate resolutionyear ended December 31, 2023. The Company's Critical Accounting Policies and Estimates have not materially changed since December 31, 2023.
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 could have a material impact on the Company's results of operations and financial position.
CONSOLIDATED FINANCIAL SUMMARY
The results of operations for NACCO were as follows for the three and nine months ended September 30:March 31:
| | | | | | | | | | | | | | | |
| THREE MONTHS | | |
| 2024 | | 2023 | | | | |
Revenues: | | | | | | | |
Coal Mining | $ | 15,545 | | | $ | 20,653 | | | | | |
NAMining | 24,483 | | | 20,633 | | | | | |
Minerals Management | 10,401 | | | 8,285 | | | | | |
Unallocated Items | 3,262 | | | 1,191 | | | | | |
Eliminations | (402) | | | (621) | | | | | |
Total revenue | $ | 53,289 | | | $ | 50,141 | | | | | |
Operating profit (loss): | | | | | | | |
Coal Mining | $ | (417) | | | $ | 313 | | | | | |
NAMining | 2,355 | | | 830 | | | | | |
Minerals Management | 7,930 | | | 6,044 | | | | | |
Unallocated Items | (5,128) | | | (5,353) | | | | | |
Eliminations | 17 | | | (20) | | | | | |
Total operating profit | 4,757 | | | 1,814 | | | | | |
Interest expense | 1,111 | | | 545 | | | | | |
Interest income | (1,127) | | | (1,155) | | | | | |
Closed mine obligations | 455 | | | 409 | | | | | |
Gain on equity securities | (1,041) | | | (628) | | | | | |
| | | | | | | |
| | | | | | | |
Other, net | (214) | | | (1,725) | | | | | |
Other income, net | (816) | | | (2,554) | | | | | |
Income before income tax provision (benefit) | 5,573 | | | 4,368 | | | | | |
Income tax provision (benefit) | 1,003 | | | (1,324) | | | | | |
Net income | $ | 4,570 | | | $ | 5,692 | | | | | |
| | | | | | | |
Effective income tax rate | 18.0 | % | | (30.3) | % | | | | |
|
| | | | | | | | | | | | | | | |
| 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 | % |
(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 income (loss) before income tax provision (benefit) are analyzed
First Quarter of 2024 Compared with First Quarter of 2023
Other (income) expense, net
Interest expense increased in the first quarter of 2024 compared with the respective 2023 period due to higher average borrowings as well as an increase in interest rates.
Gain on equity securities represents changes in the market price of invested assets reported at fair value. The change in the first quarter of 2024 compared with the respective 2023 period was due to fluctuations in the market prices of the exchange-traded equity securities. See Note 5 to the Unaudited Condensed Consolidated Financial Statements for further discussion of equity securities.
On December 1, 2022, the Company transferred its ownership interest in Midwest AgEnergy Group, LLC (“MAG”), a consolidated basis.North Dakota-based ethanol business to HLCP Ethanol Holdco, LLC (“HLCP”). The Company received a payment of $1.2 million in the first quarter of 2023 in connection with a post-closing purchase price adjustment, which is included on the line "Other, net" within the accompanying Unaudited Condensed Consolidated Statements of Operations.
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. The quarterly income tax provision is generally comprised of tax expense on income or benefit on loss at the most recent estimated annual effective income tax rate, adjusted for the effect of discrete items.
The effective income tax rates from continuing operations 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 loss for the three and nine months ended September 30, 2016. The change in income taxes was primarily due to a change in the effective income tax rate driven by a 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, 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. 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.
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.
In addition, 2017 and 2016 effective tax rates from continuing operations include the effect of benefits from percentage depletion.The benefit of percentage depletion is not directly related to the amount of consolidated 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. In addition, as a result of the forecasted loss before income tax as of March 31, 2023, the effect of the benefit from percentage depletion resulted in a negative forecasted effective tax rate. Each quarter, the Company updates its estimate of the annual effective tax rate and the cumulative impact of the change in the estimated annual tax rate is recorded, which can additionally make quarterly comparisons not meaningful.
Liquidity and Capital Resources of
LIQUIDITY AND CAPITAL RESOURCES OF NACCO
Cash Flows
The following tables detail NACCO's changes in cash flow for the three months ended March 31:
| | | | | | | | | | | | | | | | | |
| 2024 | | 2023 | | Change |
Operating activities: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net cash (used for) provided by operating activities | $ | (9,758) | | | $ | 6,254 | | | $ | (16,012) | |
| | | | | |
Investing activities: | | | | | |
Expenditures for property, plant and equipment and acquisition of mineral interests | (14,483) | | | (7,879) | | | (6,604) | |
Other | (152) | | | 1,415 | | | (1,567) | |
Net cash used for investing activities | (14,635) | | | (6,464) | | | (8,171) | |
Cash flow before financing activities | $ | (24,393) | | | $ | (210) | | | $ | (24,183) | |
The $16.0 million change in net cash (used for) provided by operating activities was primarily due to an unfavorable change in working capital, which was mainly the result of increases in Other current assets and Accounts receivable from affiliates during the first quarter of 2024 compared with significant decreases in the first quarter of 2023. The change in Other current assets was primarily due to changes in accrued royalties. The change in Accounts receivable from affiliates is primarily attributable to the amount and timing of payments from unconsolidated subsidiaries.
In addition, the Company entered into an Accounts Receivable Financing Program with a third party banking institution on March 14, 2024 for the sale of certain accounts receivables. Accounts receivable sold under the Accounts Receivable Financing Program for the quarter ended March 31, 2024 were $6.1 million. The net proceeds received were included in Net cash (used for) provided by operating activities in the Unaudited Consolidated Statement of Cash Flows.
| | | | | | | | | | | | | | | | | |
| 2024 | | 2023 | | Change |
Financing activities: | | | | | |
Net additions to long-term debt and revolving credit agreement | $ | 7,032 | | | $ | 656 | | | $ | 6,376 | |
Cash dividends paid | (1,630) | | | (1,557) | | | (73) | |
Purchase of treasury shares | (4,274) | | | — | | | (4,274) | |
| | | | | |
Net cash provided by (used for) financing activities | $ | 1,128 | | | $ | (901) | | | $ | 2,029 | |
The change in net cash provided by (used for) financing activities was primarily due to an increase in debt borrowings during the first three months of 2024 compared with the first three months of 2023, partially offset by share repurchases during the first quarter of 2024.
Financing Activities
NACCO Natural Resources Corporation (“NACCO Natural Resources”), maintains a secured revolving line of credit of up to $150.0 million (the “Facility”) that expires in November 2025. Borrowings outstanding under the Facility were $17.0 million at
March 31, 2024. At March 31, 2024, the excess availability under the Facility was $100.4 million, which reflects a reduction for outstanding letters of credit of $32.6 million.
NACCO has not guaranteed NACoal's borrowings.any borrowings of NACCO Natural Resources. The borrowing agreement at NACoalFacility allows for the payment to NACCO of dividends and advances under certain circumstances. Dividends (to the extent permitted by NACoal's borrowing agreement)the Facility) and management fees are the primary sources of cash for NACCO and enable the Company to pay dividends to stockholders.stockholders and repurchase shares.
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 identifies the components of change in revenues for the first nine months of 2017 compared with 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 discussion 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 Activities
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 million at September 30, 2017. At September 30, 2017, the excess availability under the NACoal Facility was $98.6 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 NACCO Natural Resources 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, 2024, for base rate and LIBORSOFR loans were 1.00%1.23% and 2.00%2.23%, 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%0.34% on the unused commitment at September 30, 2017. The floating rate of interest applicable to the NACoal Facility at September 30, 2017 was 3.39% including the floating rate margin and the effect of the interest rate swap agreement.March 31, 2024.
The NACoal Facility contains restrictive covenants, which require, among other things, NACoalNACCO Natural Resources to maintain a maximum net debt to EBITDA ratio of 3.002.75 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 2.001.50 to 1.00, or if greater than 2.001.50 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, NACoalMarch 31, 2024, NACCO Natural Resources was in compliance with all financial covenants in the NACoal Facility.
NACoalThe obligations under the Facility are guaranteed by certain of NACCO Natural Resource's direct and indirect, existing and future domestic subsidiaries, and is secured by certain assets of NACCO Natural Resources and the guarantors, subject to customary exceptions and limitations.
The Company believes funds available from cash on hand, at the Company, the NACoal Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the NACoal Facility.Facility in November 2025.
Expenditures for property, plant and equipment and mineral interests
Expenditures for property, plant and equipment and mineral interests were $14.5 million during the first three months of 2024, primarily for the acquisition of land at Mitigation Resources and equipment at NAMining. Planned expenditures for the remainder of 2024 are expected to be approximately $11 million in the Coal Mining segment, $27 million in the NAMining segment, $20 million in the Minerals Management segment and $3 million in Unallocated Items.
Expenditures are expected to be funded from internally generated funds and/or bank borrowings.
Capital Structure
NACCO's consolidated capital structure is presented below:
| | | | | | | | | | | | | | | | | |
| MARCH 31 2024 | | DECEMBER 31 2023 | | Change |
Cash and cash equivalents | $ | 61,844 | | | $ | 85,109 | | | $ | (23,265) | |
Other net tangible assets | 386,952 | | | 349,934 | | | 37,018 | |
Intangible assets, net | 5,880 | | | 6,006 | | | (126) | |
Net assets | 454,676 | | | 441,049 | | | 13,627 | |
Total debt | (49,875) | | | (35,956) | | | (13,919) | |
Bellaire closed mine obligations | (23,188) | | | (22,753) | | | (435) | |
Total equity | $ | 381,613 | | | $ | 382,340 | | | $ | (727) | |
Debt to total capitalization | 12% | | 9% | | 3% |
The increase in other net tangible assets at March 31, 2024 compared with December 31, 2023 was mainly the result of increases in Property, plant and equipment and Prepaid insurance during the first quarter of 2024.
Contractual Obligations, Contingent Liabilities and Commitments
Since December 31, 2016,2023, 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 4858 in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2023. See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of certain guarantees related to Coyote Creek.
Capital Expenditures
SEGMENT RESULTS
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.
COAL MINING SEGMENT
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 OTHER
FINANCIAL REVIEW
Operating Results
The resultsTons of operations at NACCO and Othercoal delivered by the Coal Mining segment were as follows for the three and nine months ended September 30:March 31:
| | | | | | | | | | | | | | | |
| THREE MONTHS | | |
| 2024 | | 2023 | | | | |
Unconsolidated operations | 5,480 | | | 6,192 | | | | | |
Consolidated operations | 455 | | | 711 | | | | | |
Total tons delivered | 5,935 | | | 6,903 | | | | | |
|
| | | | | | | | | | | | | | | |
| 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 | ) |
Third Quarter of 2017 Compared with Third Quarter of 2016 and First Nine Months of 2017 Compared with First Nine Months of 2016
The increase inresults of operations for the operating lossCoal Mining segment were as follows for the three months ended September 30, 2017March 31:
| | | | | | | | | | | | | | | |
| THREE MONTHS | | |
| 2024 | | 2023 | | | | |
Revenues | $ | 15,545 | | | $ | 20,653 | | | | | |
Cost of sales | 20,943 | | | 25,878 | | | | | |
Gross loss | (5,398) | | | (5,225) | | | | | |
Earnings of unconsolidated operations(a) | 12,007 | | | 12,466 | | | | | |
| | | | | | | |
Selling, general and administrative expenses | 6,910 | | | 6,437 | | | | | |
Amortization of intangible assets | 126 | | | 727 | | | | | |
Gain on sale of assets | (10) | | | (236) | | | | | |
Operating (loss) profit | $ | (417) | | | $ | 313 | | | | | |
(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
Revenues decreased 24.7% in the first quarter of 2024 compared with 2016 wasthe first quarter of 2023 primarily due to higher professionala reduction in customer requirements at MLMC as a result of an ongoing issue that impacts one of two boilers at the Red Hills Power Plant. Repairs to the boiler are expected to be completed during the second half of 2024.
The following table identifies the components of change in Operating (loss) profit for the first quarter of 2024 compared with the first quarter of 2023:
| | | | | |
| Operating (Loss) Profit |
2023 | $ | 313 | |
Increase (decrease) from: | |
Selling, general and administrative expenses | (473) | |
Earnings of unconsolidated operations | (459) | |
Gain on sale of assets | (226) | |
Gross loss | (173) | |
Amortization of intangibles | 601 | |
2024 | $ | (417) | |
Operating (loss) profit decreased $0.7 million in the first quarter of 2024 compared with the first quarter of 2023 primarily due to an increase in selling, general and outside service fees.administrative expenses and a decrease in the earnings of unconsolidated operations.
The increase in the operating loss for the nine months ended September 30, 2017 compared with 2016selling, general and administrative expenses was primarily due to higher employee-related costs and higher professional and outside service fees, partiallycosts.
The decrease in the earnings of unconsolidated operations was primarily due to a reduction in customer requirements at Coteau.
The reduction in revenues at MLMC was offset by an increasea reduction in cost of goods sold, resulting in a comparable gross loss in both the first quarter of 2024 and 2023. Gross loss in the management fees charged to NACoal.
Other expense increased during bothfirst quarter of 2024 and the three and nine monthsfirst quarter of 2017 compared with 2016, primarily as2023 included a result of an increase in the Closed mine obligations due to revisions of estimated cash flows for the Bellaire asset retirement obligation.
Management Fees
The management fee charged to NACoal represents the allocation 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 |
|
In addition, the parent company received management fees from Hamilton Beach Holding of $1.1$2.5 million and $1.0$2.4 million inventory impairment charge, respectively, to write down MLMC's coal inventory to its net realizable value.
NORTH AMERICAN MINING ("NAMining") SEGMENT
FINANCIAL REVIEW
Tons delivered by the NAMining segment were as follows for the three months ended September 30, 2017 and 2016, respectively, and $3.1 millionMarch 31:
| | | | | | | | | | | | | | | |
| THREE MONTHS | | |
| 2024 | | 2023 | | | | |
| | | | | | | |
| | | | | | | |
Total tons delivered | 15,173 | | | 14,829 | | | | | |
The results of operations for both the nineNAMining segment were as follows for the three months ended September 30, 2017March 31:
| | | | | | | | | | | | | | | |
| THREE MONTHS | | |
| 2024 | | 2023 | | | | |
Total revenues | $ | 24,483 | | | $ | 20,633 | | | | | |
Reimbursable costs | 12,855 | | | 12,092 | | | | | |
Revenues excluding reimbursable costs | $ | 11,628 | | | $ | 8,541 | | | | | |
| | | | | | | |
Total revenues | $ | 24,483 | | | $ | 20,633 | | | | | |
Cost of sales | 21,671 | | | 19,241 | | | | | |
Gross profit | 2,812 | | | 1,392 | | | | | |
Earnings of unconsolidated operations(a) | 1,365 | | | 1,358 | | | | | |
Selling, general and administrative expenses | 1,823 | | | 1,920 | | | | | |
Gain on sale of assets | (1) | | | — | | | | | |
Operating profit | $ | 2,355 | | | $ | 830 | | | | | |
(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
Total revenues increased 18.7% in the first quarter of 2024 compared with the first quarter of 2023 primarily due to an improvement at the consolidated quarries. An increase in reimbursable costs at Sawtooth, which have an offsetting amount in cost of sales and 2016.have no impact on operating profit, also contributed to the improvement in total revenues.
The following table identifies the components of change in Operating profit for the first quarter of 2024 compared with the first quarter of 2023:
| | | | | |
| Operating Profit |
2023 | $ | 830 | |
Increase (decrease) from: | |
Gross profit | 1,420 | |
Selling, general and administrative expenses | 97 | |
Earnings of unconsolidated operations | 7 | |
Gain on sale of assets | 1 | |
2024 | $ | 2,355 | |
Operating profit increased $1.5 million in the first quarter of 2024 compared with the first quarter of 2023 primarily due to an increase in gross profit. This improvement was mainly the result of favorable pricing and delivery mix and improved margins at the limestone quarries resulting from mutually beneficial contract amendments.
MINERALS MANAGEMENT SEGMENT
FINANCIAL REVIEW
As an owner of royalty and mineral interests, the Company’s access to information concerning activity and operations of its royalty and mineral interests is limited. The Company does not have information that would be available to a company with oil and natural gas operations because detailed information is not generally available to owners of royalty and mineral interests. Consequently, the exact number of wells producing from or drilling on the Company’s mineral interests at a given point in time is not determinable. The following table sets forth the Company’s estimate of the number of gross and net productive wells:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 | | March 31, 2023 |
| Gross | | Net | | Gross | | Net |
Oil | 1,740 | | 8.8 | | 1,048 | | 3.3 |
Natural Gas | 261 | | 12.9 | | 251 | | 10.1 |
Total | 2,001 | | 21.7 | | 1,299 | | 13.4 |
Gross wells are the total wells in which an interest is owned. Net wells are calculated based on the Company's net royalty interest, factoring in both ownership percentage of gross wells and royalty rate.
Oil and natural gas prices have been historically volatile and may continue to be volatile in the future. The table below demonstrates such volatility with the average price as reported by the United States Energy Information Administration for the three months ended March 31:
| | | | | | | | | | | | | | | |
| | | |
| 2024 | | 2023 | | | | |
West Texas Intermediate Average Crude Oil Price | $ | 77.56 | | | $ | 76.08 | | | | | |
Henry Hub Average Natural Gas Price | $ | 2.13 | | | $ | 2.65 | | | | | |
The following table sets forth the estimated oil and natural gas production data related to the Company’s mineral and royalty interests as well as certain price and cost information for the three months ended March 31:
| | | | | | | | | | | | | | |
| | 2024 (4) | | 2023 (4) |
Production data: | | | | |
Oil (bbl) (1) | | 38,194 | | | 24,024 | |
NGL (bbl) (1) | | 12,542 | | | 14,375 | |
Residue gas (Mcf) (2) | | 2,143,948 | | | 1,874,900 | |
Total BOE (3) | | 408,060 | | | 350,882 | |
Average realized prices: | | | | |
Oil (bbl) (1) | | $ | 69.07 | | | $ | 69.82 | |
NGL (bbl) (1) | | $ | 23.83 | | | $ | 23.81 | |
Residue gas (Mcf) (2) | | $ | 2.84 | | | $ | 3.12 | |
Average unit cost | | | | |
BOE (3) | | $ | 2.31 | | | $ | 3.80 | |
(1) Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume.
(2) Mcf. One thousand cubic feet of natural gas at the contractual pressure and temperature bases.
(3) BOE. Barrel of Oil Equivalent, a conversion factor of 6 MCF of gas was used for 1 equivalent bbl of oil.
(4) As an owner of mineral and royalty interests, the Company’s access to information concerning activity and operations of its royalty and mineral interests is limited. As a result, the Company estimated February and March 2024 data with volumes projected from prior well production and pricing based on public pricing data adjusted for expense information.
The results of operations for the Minerals Management segment were as follows for the three months ended March 31: | | | | | | | | | | | | | | | |
| | | |
| 2024 | | 2023 | | | | |
Revenues | $ | 10,401 | | | $ | 8,285 | | | | | |
Cost of sales | 1,364 | | | 1,052 | | | | | |
Gross profit | 9,037 | | | 7,233 | | | | | |
Loss from unconsolidated operations | (65) | | | — | | | | | |
Selling, general and administrative expenses | 1,042 | | | 1,189 | | | | | |
| | | | | | | |
| | | | | | | |
Operating profit | $ | 7,930 | | | $ | 6,044 | | | | | |
Revenues and operating profit increased in the first quarter of 2024 compared with the respective 2023 period, primarily due to an increase in production volumes.
UNALLOCATED ITEMS AND ELIMINATIONS
FINANCIAL REVIEW
Unallocated Items and Eliminations were as follows for the three months ended March 31:
| | | | | | | | | | | | | | | |
| THREE MONTHS | | |
| 2024 | | 2023 | | | | |
Operating loss | $ | (5,111) | | | $ | (5,373) | | | | | |
| | | | | |
The operating loss in the first quarter of 2024 decreased compared with the respective 2023 period due to higher earnings at Mitigation Resources.
NACCO Industries, Inc. Outlook
Coal Mining Outlook
In connection with the spin-off of HBBHC,2024, the Company expects overall coal deliveries to increase modestly from 2023 levels primarily due to anticipated higher deliveries at Coteau 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 servicesFalkirk. These improvements are expected to exceed one year. NACCObe partly offset by reduced deliveries at MLMC, due to an ongoing boiler issue, and the cessation of coal deliveries at the Company's Sabine Mine in April 2023.
Strong operating profit compared with a significant 2023 operating loss, which included a $60.8 million impairment charge, and substantially higher Segment Adjusted EBITDA are expected in 2024. These anticipated increases are primarily due to an expected improvement in results at MLMC and higher earnings at Falkirk and Coteau in the second half of 2024.
MLMC expects to receive net aggregate feesincur a loss in 2024, albeit significantly less than in 2023, mainly as a result of fewer tons delivered. While total production costs at MLMC are anticipated to decrease substantially from 2023 levels, they are expected to remain above historical levels throughout 2024 until deliveries return to normal and a pit extension is completed later this year. In addition, the effect of the impairment charge taken in 2023 will result in lower depreciation and amortization expense and contribute to the lower production costs.
An anticipated increase in 2024 earnings at the unconsolidated coal mining operations is driven primarily by an expectation for increased deliveries at Coteau and Falkirk, as well as a higher per ton management fee at Falkirk beginning in June 2024 when temporary price concessions end.
2024 capital expenditures are expected to total approximately $1.0$13 million.
NAMining Outlook
In 2023, NAMining executed a 15-year contract to mine phosphate at a quarry in central Florida. Production is expected to commence in the second quarter of 2024 once commissioning of a dragline is complete. The business also amended and extended existing limestone contracts in late 2023 that contain mutually advantageous contract terms and expanded the scope of work with another customer. As a result of these new and modified contracts, as well as improvements at existing operations, NAMining expects substantial quarterly growth in operating profit and Segment Adjusted EBITDA in each remaining 2024 quarter, leading to significantly improved full-year results over 2023.
Sawtooth has exclusive responsibility for mining and mine closure services at Thacker Pass, including mine design,
construction, operation and maintenance. Thacker Pass is owned by Lithium Americas Corp. (TSX: LAC) (NYSE: LAC). Thacker Pass will supply all of Lithium Americas' lithium-bearing ore requirements. In March 2023, Lithium Americas commenced construction at Thacker Pass. With construction underway, Sawtooth acquired mining equipment totaling $23.3 million in 2023. These capital expenditures will be reimbursed by Lithium Americas over a five-year period, and Sawtooth will recognize the associated revenue over the termestimated useful life of the TSAasset. Sawtooth will be reimbursed for all costs of mining and mine closure and will recognize a contractually agreed upon production fee. The Company expects to continue to recognize moderate income prior to the commencement of Phase 1 lithium production, estimated to begin in 2027/2028.
In 2024, capital expenditures are expected to be approximately $33 million. These expenditures are primarily for the acquisition of draglines and dragline parts, as well as other equipment to support existing contracts and the new and modified contracts previously discussed.
Minerals Management Outlook
The Minerals Management segment derives income primarily from HBBHC. Upon expirationroyalty-based leases under which lessees make payments to the Company based on their sale of natural gas, oil, natural gas liquids and coal, extracted primarily by third parties. As an owner of royalty and mineral interests, the Company’s access to information concerning activity and operations with respect to its interests is limited. The Company's expectations are based on the best information currently available. Changing prices of natural gas and oil could have a significant impact on Minerals Management’s operating profit.
In December 2023, Minerals Management completed a significant acquisition of mineral interests within the Midland Basin, the eastern sub-basin of the TSA,oil-rich Permian Basin, which included 43.4 thousand gross acres and 2.5 thousand net royalty acres. This acquisition is expected to continue to be accretive to 2024 earnings and provide opportunities for longer-term growth.
In 2024, operating profit and Segment Adjusted EBITDA are expected to decrease moderately compared with the parent company will no longer receive feesprior year, excluding the 2023 impairment charge of $5.1 million. Lower operating expenses are expected to partially offset the anticipated profit decline. The forecasted reduction in profitability is primarily driven by current market expectations for natural gas and oil market prices, as well as development and production assumptions on currently owned reserves. .
Development of additional wells on existing interests in excess of current expectations, or incur expenses relatedacquisitions of additional interests, could be accretive to future results.
In 2024, Minerals Management is targeting additional investments of up to $20 million. Future investments are expected to be accretive, but each investment's contribution to near-term earnings is dependent on the details of that investment, including the size and type of interests acquired and the stage and timing of mineral development.
Mitigation Resources Outlook
Mitigation Resources continues to build on the substantial foundation it has established over the past several years. Mitigation Resources currently has ten mitigation banks and four permittee-responsible mitigation projects located in Tennessee, Mississippi, Alabama, Texas, Florida and Pennsylvania. In addition, Mitigation Resources is providing centralizedecological restoration services for abandoned surface mines, as well as pursuing additional environmental restoration projects. It was named a designated provider of abandoned mine land restoration by the State of Texas. Mitigation Resources anticipates expanding its business in 2024, with a focus on generating a modest operating profit by 2025 and stewardship activitiesachieving sustainable profitability in future years.
Consolidated Outlook
Overall, the Company expects to HBBHCgenerate net income in 2024 compared with the substantial 2023 consolidated net loss, which included a $65.9 million impairment charge. Adjusted EBITDA is also expected to increase significantly over 2023. These improvements are primarily due to anticipated increased profitability at the spin-off.Coal Mining segment from improved results at MLMC, Falkirk and Coteau. The effect of NAMining's growth and profit improvement initiatives are also expected to contribute to improved 2024 results. Additional contracts for NAMining or Mitigation Resources, or the acquisition of additional mineral interests at Minerals Management could be accretive to the current forecast.
The Company is currently evaluating the mannertaking steps to terminate its defined benefit pension plan in which future management fees will be allocated to NACoal.
Contractual Obligations, Contingent Liabilities and Commitments
Since December 31, 2016, there have been no significant changes2024. In connection with this action, NACCO is anticipating a non-cash settlement charge in the second half of the year, which is expected to partly offset the improved 2024 operating results.
Consolidated capital expenditures are expected to total approximately $76 million in 2024. In 2024, cash flow before financing activities is expected to be a moderate use of cash.
Long-term Growth and Diversification
Management is focused on transforming NACCO into a broad-based natural resources company and is optimistic about the Company's long-term business outlook. NACCO's businesses provide critical inputs for electricity generation, construction and development, and the production of industrial minerals and chemicals. Increasing demand for electricity, on-shoring and current federal policies are creating favorable macroeconomic trends within these industries. The Company believes its businesses have competitive advantages that provide value to customers and create long-term value for stockholders. The Company is pursuing growth and diversification by strategically leveraging its core mining and natural resources management skills to build a strong portfolio of affiliated businesses. Opportunities for growth remain strong. Acquisitions of additional mineral interests and improvements in the outlook for Coal Mining segment customers, as well as new contracts at Mitigation Resources and NAMining should be accretive to the Company's outlook.
The Minerals Management segment continues to pursue acquisitions of mineral and royalty interests in the United States. Catapult, the Company’s business unit focused on managing and expanding the Company’s portfolio of oil and gas mineral and royalty interests, has developed a strong network to source and secure new acquisitions. The goal is to construct a high-quality diversified portfolio of oil and gas mineral and royalty interests in the United States that delivers near-term cash flow yields and long-term projected growth. The Company believes this business will provide unlevered after-tax returns on invested capital in the mid-teens as it matures. This business model has the potential to deliver higher average operating margins over the life of a reserve than traditional oil and gas companies that bear the cost of exploration, production and/or development as these costs are borne entirely by third-party exploration and development companies that lease the minerals.
NAMining is focused on continuing to evaluate new business opportunities and drive profitable growth in line with refined strategic objectives. After pausing on business development in early 2023, NAMining has better identified how to enhance operational excellence, where to focus and scale, and how to drive profitable growth. New contracts and contract extensions are central to the business' organic growth strategy, and the Company expects NAMining to be a substantial contributor to operating profit over time.
Mitigation Resources continues to expand its business, which creates and sells stream and wetland mitigation credits, provides services to those engaged in permittee-responsible mitigation and provides other environmental restoration services. This business offers an opportunity for growth and diversification in an industry where the Company has substantial knowledge and expertise and a strong reputation. The Company believes that Mitigation Resources can provide solid rates of return on capital employed as this business matures.
NACCO also continues to pursue activities which can strengthen the resiliency of its existing coal mining operations. The Company remains focused on managing coal production costs and maximizing efficiencies and operating capacity at mine locations to help customers with management fee contracts be more competitive. These activities benefit both customers and the Company's Coal Mining segment, as fuel cost is a significant driver for power plant dispatch. Increased power plant dispatch results in increased demand for coal by the Coal Mining segment's customers. Fluctuating natural gas prices, weather and availability of renewable energy sources, such as wind and solar, could affect the amount of NACCOelectricity dispatched from coal-fired power plants. While the Company realizes the coal mining industry faces political and Other contractual obligations, contingent liabilities or commercial commitments, orregulatory challenges and demand for coal is projected to decline over the timinglonger-term, the Company believes coal should be an essential part of cash flows in accordance with those obligations as reported on page 65the energy mix in the Company's Annual Report on Form 10-KUnited States for the year ended December 31, 2016.foreseeable future.
The Company continues to look for ways to create additional value by utilizing its core mining competencies which include reclamation and permitting. The Company is working to utilize these skills through development of utility-scale solar projects on reclaimed mining properties. Reclaimed mining properties offer large tracts of land that could be well-suited for solar and other energy-related projects. These projects could be developed by the Company itself or through joint ventures that include partners with expertise in energy development projects. In 2023, NACCO formed ReGen Resources to pursue such projects, including the development of a solar farm on reclaimed land at MLMC.
NACCO is committed to maintaining a conservative capital structure as it continues to grow and diversify, while avoiding unnecessary risk. The Company believes strategic diversification will generate cash that can be re-invested to strengthen 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) the potential closurechanges to or termination of the Liberty Mine in Mississippi, (2) changes in tax laws or regulatory requirements, including changes in mining or power plant emission regulations and health, safety or environmental legislation, (3) changes in costs related to geological conditions, repairs and maintenance, new equipment and replacement parts, fuelcustomer or other similar items, (4)third-party contracts, or a customer or other third party default under a contract, (2) any customer's premature facility closure or extended project development delay, (3) regulatory actions, including the United States Environmental Protection Agency's 2023 proposed rules relating to mercury and greenhouse gas emissions for coal-fired power plants, changes in mining permit requirements or delays in obtaining mining permits that could affect deliveries to customers, (4) a significant reduction in purchases by the Company's customers, including as a result of changes in coal consumption patterns of U.S. electric power generators, or changes in the power industry that would affect demand for the Company's coal and other mineral reserves, (5) changes in the prices of hydrocarbons, particularly diesel fuel, natural gas, natural gas liquids and oil as result of factors such as OPEC and/or government actions, geopolitical developments, economic conditions and regulatory changes, as well as supply and demand dynamics, (6) changes in development plans by third-party lessees of the Company's mineral interests, (7) 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 areas where the Company's oil and gas reserves are located; federal and state legislative and regulatory initiatives relating to hydraulic fracturing and U.S. export of natural gas; and the ability of lessees to obtain capital or financing needed for well-development operations and leasing and development of oil and gas reserves on federal lands, (8) failure to obtain adequate insurance coverages at reasonable rates, (9) supply chain disruptions, including price increases and shortages of parts and materials, (10) changes in tax laws or regulatory requirements, including the elimination of, or reduction in, the percentage depletion tax deduction, changes in mining or power plant emission regulations and health, safety or environmental legislation, (11) the ability of the Company to access credit in the current economic environment, or obtain financing at reasonable rates, or at all, and to maintain surety bonds for mine reclamation as a result of current market sentiment for fossil fuels, (12) impairment charges, (13) changes in costs related to geological and geotechnical conditions, repairs and maintenance, new equipment and replacement parts, fuel or other similar items, (14) weather conditions, extended power plant outages, liquidity events or other events that would change the level of customers' coal or limerockaggregates requirements, (6)(15) weather or equipment problems that could affect deliveries to customers, (7) changes in the power industry that would affect demand for NACoal's reserves, (8)(16) changes in the costs to reclaim NACoal mining areas, (9)(17) costs to pursue and develop new mining, mitigation, oil and gas and solar development opportunities and other 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)(18) delays or reductions in coal or aggregates deliveries, at NACoal's newer mines,(19) the ability to successfully evaluate investments and (13) increased competition,achieve intended financial results in new business and growth initiatives, (20) disruptions from natural or human causes, including consolidation withinsevere weather, accidents, fires, earthquakes and terrorist acts, any of which could result in suspension of operations or harm to people or the industry.environment, and (21) the ability to attract, retain, and replace workforce and administrative employees.
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 2017,2024, 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 1Legal Proceedings
None.
Item 1ARisk Factors
NoDuring the quarter ended March 31, 2024, 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. 2023.
Item 2Unregistered Sales of Equity Securities, and Use of Proceeds and Issuer Purchases of Equity Securities
None. | | | | | | | | | | | | | | | | | | | | | | | |
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, 2024) | 34,616 | | | $ | 36.49 | | | 34,616 | | | $ | 17,222,979 | |
Month #2 (February 1 to 29, 2024) | 37,803 | | | $ | 35.38 | | | 37,803 | | | $ | 15,885,509 | |
Month #3 (March 1 to 31, 2024) | 55,268 | | | $ | 30.28 | | | 55,268 | | | $ | 14,211,994 | |
Total | 127,687 | | | $ | 33.47 | | | 127,687 | | | $ | 14,211,994 | |
(1) During 2023, the Company established a stock repurchase program allowing for the purchase of up to $20.0 million of the Company's Class A Common Stock outstanding through December 31, 2025. See Note 4 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Company's stock repurchase program.
Item 3Defaults Upon Senior Securities
None.
Item 4Mine 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, 2024.
Item 5Other Information
None.
Item 6Exhibits
| | | | | | | | |
Exhibit | | |
Number* | | |
Exhibit | | |
Number* | | Description of Exhibits |
| | |
10.1 | | |
10.231(i)(1) | | |
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 | | Inline XBRL Instance Document |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Numbered in accordance with Item 601 of Regulation S-K.
** Filed herewith.
Signatures
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: | NovemberMay 1, 20172024 | /s/ Elizabeth I. Loveman | |
| | | Elizabeth I. Loveman | |
| | | Senior Vice President and Controller
(principal financial and accounting officer) | |