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 June 30, 20182019 |
OR
|
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
Commission file number 1-9172
|
| | | | |
| | NACCO INDUSTRIES, INC. | | |
| | (Exact name of registrant as specified in its charter) | | |
| | | | |
| DELAWARE | | 34-1505819 | |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | |
| | | | |
| 5875 LANDERBROOK DRIVE, SUITE 220, CLEVELAND, OHIO | | 44124-4069 | |
| (Address of principal executive offices) | | (Zip code) | |
| | | | |
| | (440) 229-5151 | | |
| | (Registrant's telephone number, including area code) | | |
| | | | |
| | N/A | | |
| | (Former name, former address and former fiscal year, if changed since last report) | | |
Securities registered pursuant to Section 12(b) of the Act |
| | | | |
Title of each class
| | Trading Symbol
| | Name of each exchange on which registered
|
Class A Common Stock, $1 par value per share | | NC | | New York Stock Exchange |
Class B Common Stock is not publicly listed for trade on any exchange or market system; however, Class B Common Stock is convertible into Class A Common Stock on a share-for-share basis.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | |
Large accelerated filer o | | Accelerated filer þ | | Non-accelerated filer o | | Smaller reporting company oþ | | Emerging growth company o |
| | | | (Do not check if a smaller reporting company) | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
Number of shares of Class A Common Stock outstanding at July 27, 2018: 5,374,89426, 2019: 5,421,134
Number of shares of Class B Common Stock outstanding at July 27, 2018: 1,569,25026, 2019: 1,568,780
NACCO INDUSTRIES, INC.
TABLE OF CONTENTS
Part I
FINANCIAL INFORMATION
Item 1. Financial Statements
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| | | JUNE 30 2018 | | DECEMBER 31 2017 | JUNE 30 2019 | | DECEMBER 31 2018 |
| (In thousands, except share data) | (In thousands, except share data) |
ASSETS | | | | | | |
Cash and cash equivalents | $ | 79,952 |
| | $ | 101,600 |
| $ | 98,423 |
| | $ | 85,257 |
|
Accounts receivable, net | 17,908 |
| | 14,611 |
| |
Trade accounts receivable, net | | 19,043 |
| | 20,817 |
|
Accounts receivable from affiliates | 12,664 |
| | 19,919 |
| 7,232 |
| | 7,999 |
|
Inventories, net | 29,159 |
| | 30,015 |
| |
Inventories | | 30,876 |
| | 31,209 |
|
Assets held for sale | | 5,116 |
| | 4,330 |
|
Prepaid expenses and other | 12,703 |
| | 10,843 |
| 14,891 |
| | 14,562 |
|
Total current assets | 152,386 |
| | 176,988 |
| 175,581 |
| | 164,174 |
|
Property, plant and equipment, net | 123,632 |
| | 120,068 |
| 122,327 |
| | 124,554 |
|
Intangibles, net | 42,056 |
| | 43,554 |
| 38,987 |
| | 40,516 |
|
Deferred income taxes | 2,663 |
| | 5,962 |
| |
Investments in unconsolidated subsidiaries | 18,444 |
| | 16,335 |
| 22,373 |
| | 20,091 |
|
Deferred costs | 3,527 |
| | 3,582 |
| 3,185 |
| | 3,244 |
|
Operating lease right-of-use assets | | 12,095 |
| | — |
|
Other non-current assets | 23,310 |
| | 23,063 |
| 24,632 |
| | 24,412 |
|
Total assets | $ | 366,018 |
| | $ | 389,552 |
| $ | 399,180 |
| | $ | 376,991 |
|
LIABILITIES AND EQUITY | |
| | |
| |
| | |
|
Accounts payable | $ | 9,120 |
| | $ | 7,575 |
| $ | 7,703 |
| | $ | 7,746 |
|
Accounts payable to affiliates | 4,609 |
| | 1,925 |
| 344 |
| | 1,653 |
|
Revolving credit agreements | 12,000 |
| | 15,000 |
| 4,000 |
| | 4,000 |
|
Current maturities of long-term debt | 1,037 |
| | 1,125 |
| 499 |
| | 654 |
|
Asset retirement obligations | | 1,826 |
| | 1,826 |
|
Accrued payroll | 9,627 |
| | 17,204 |
| 17,393 |
| | 19,853 |
|
Asset retirement obligations | 3,092 |
| | 3,092 |
| |
Deferred compensation | | 13,465 |
| | — |
|
Other current liabilities | 6,436 |
| | 8,055 |
| 7,937 |
| | 6,516 |
|
Total current liabilities | 45,921 |
| | 53,976 |
| 53,167 |
| | 42,248 |
|
Long-term debt | 14,946 |
| | 42,021 |
| 7,503 |
| | 6,367 |
|
Operating lease liabilities | | 12,990 |
| | — |
|
Asset retirement obligations | 36,348 |
| | 37,005 |
| 30,562 |
| | 35,877 |
|
Pension and other postretirement obligations | 10,917 |
| | 11,827 |
| 9,711 |
| | 10,429 |
|
Deferred income taxes | | 6,241 |
| | 2,846 |
|
Deferred compensation | 12,939 |
| | 12,939 |
| — |
| | 12,939 |
|
Other long-term liabilities | 13,975 |
| | 12,336 |
| 6,856 |
| | 15,581 |
|
Total liabilities | 135,046 |
| | 170,104 |
| 127,030 |
| | 126,287 |
|
Stockholders' equity | |
| | |
| |
| | |
|
Common stock: | |
| | |
| |
| | |
|
Class A, par value $1 per share, 5,374,722 shares outstanding (December 31, 2017 - 5,282,106 shares outstanding) | 5,375 |
| | 5,282 |
| |
Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,569,422 shares outstanding (December 31, 2017 - 1,570,146 shares outstanding) | 1,569 |
| | 1,570 |
| |
Class A, par value $1 per share, 5,421,134 shares outstanding (December 31, 2018 - 5,352,590 shares outstanding) | | 5,421 |
| | 5,352 |
|
Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,568,780 shares outstanding (December 31, 2018 - 1,568,810 shares outstanding) | | 1,569 |
| | 1,569 |
|
Capital in excess of par value | 5,269 |
| | 4,447 |
| 7,734 |
| | 7,042 |
|
Retained earnings | 231,761 |
| | 216,490 |
| 270,865 |
| | 250,352 |
|
Accumulated other comprehensive loss | (13,002 | ) | | (8,341 | ) | (13,439 | ) | | (13,611 | ) |
Total stockholders' equity | 230,972 |
| | 219,448 |
| 272,150 |
| | 250,704 |
|
Total liabilities and equity | $ | 366,018 |
| | $ | 389,552 |
| $ | 399,180 |
| | $ | 376,991 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | THREE MONTHS ENDED | | SIX MONTHS ENDED | THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 | JUNE 30 | | JUNE 30 |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| (In thousands, except per share data) | (In thousands, except per share data) |
Revenues | $ | 33,681 |
| | $ | 28,100 |
| | $ | 64,881 |
| | $ | 56,400 |
| $ | 41,352 |
| | $ | 33,681 |
| | $ | 81,449 |
| | $ | 64,881 |
|
Cost of sales | 28,835 |
| | 23,503 |
| | 54,611 |
| | 47,245 |
| 32,684 |
| | 28,835 |
| | 59,396 |
| | 54,611 |
|
Gross profit | 4,846 |
| | 4,597 |
| | 10,270 |
| | 9,155 |
| 8,668 |
| | 4,846 |
| | 22,053 |
|
| 10,270 |
|
Earnings of unconsolidated operations | 15,423 |
| | 13,475 |
| | 30,978 |
| | 28,430 |
| 14,143 |
| | 15,423 |
| | 30,413 |
| | 30,978 |
|
Operating expenses | | | | | | | | | | | | | | |
Selling, general and administrative expenses | 11,863 |
| | 10,566 |
| | 22,490 |
| | 20,086 |
| 12,788 |
| | 11,863 |
| | 25,441 |
| | 22,490 |
|
Amortization of intangible assets | 814 |
| | 619 |
| | 1,498 |
| | 1,206 |
| 881 |
| | 814 |
| | 1,528 |
| | 1,498 |
|
Gain on sale of assets
| (210 | ) | | (2,625 | ) | | (263 | ) | | (3,025 | ) | (19 | ) | | (210 | ) | | (37 | ) | | (263 | ) |
| 12,467 |
| | 8,560 |
| | 23,725 |
| | 18,267 |
| 13,650 |
| | 12,467 |
| | 26,932 |
| | 23,725 |
|
Operating profit | 7,802 |
| | 9,512 |
| | 17,523 |
| | 19,318 |
| 9,161 |
| | 7,802 |
| | 25,534 |
|
| 17,523 |
|
Other expense (income) | | | | | | | | |
Other (income) expense | | | | | | | | |
Interest expense | 569 |
| | 928 |
| | 1,215 |
| | 1,860 |
| 222 |
| | 569 |
| | 453 |
| | 1,215 |
|
Interest income | | (581 | ) | | (119 | ) | | (1,134 | ) | | (232 | ) |
Income from other unconsolidated affiliates | (318 | ) | | (311 | ) | | (633 | ) | | (619 | ) | (323 | ) | | (318 | ) | | (645 | ) | | (633 | ) |
Closed mine obligations | 343 |
| | 352 |
| | 722 |
| | 735 |
| 330 |
| | 343 |
| | 696 |
| | 722 |
|
Other, net, including interest income | (373 | ) | | (29 | ) | | (342 | ) | | (49 | ) | |
Gain on equity securities | | (261 | ) | | (183 | ) | | (959 | ) | | (85 | ) |
Other, net | | 11 |
| | (71 | ) | | 22 |
| | (25 | ) |
| 221 |
| | 940 |
| | 962 |
| | 1,927 |
| (602 | ) | | 221 |
| | (1,567 | ) |
| 962 |
|
Income from continuing operations before income tax provision | 7,581 |
| | 8,572 |
| | 16,561 |
| | 17,391 |
| |
Income tax provision from continuing operations | 1,188 |
| | 1,340 |
| | 1,992 |
| | 1,939 |
| |
Income from continuing operations | 6,393 |
| | 7,232 |
| | 14,569 |
| | 15,452 |
| |
Discontinued operations, net of tax expense of $2,443 and $3,514 in the three and six months ended June 30, 2017, respectively. | — |
| | (444 | ) | | — |
| | (3,686 | ) | |
Income before income tax provision | | 9,763 |
| | 7,581 |
| | 27,101 |
|
| 16,561 |
|
Income tax provision | | 1,788 |
| | 1,188 |
| | 4,108 |
| | 1,992 |
|
Net income | $ | 6,393 |
| | $ | 6,788 |
| | $ | 14,569 |
| | $ | 11,766 |
| $ | 7,975 |
| | $ | 6,393 |
| | $ | 22,993 |
|
| $ | 14,569 |
|
| |
| | | | | | | |
| | | | | | |
Basic earnings (loss) per share: | | | | | | | | |
Continuing operations | $ | 0.92 |
| | $ | 1.06 |
| | $ | 2.11 |
| | $ | 2.27 |
| |
Discontinued operations | — |
| | (0.07 | ) | | — |
| | (0.54 | ) | |
Earnings per share: | | | | | | | | |
Basic earnings per share | $ | 0.92 |
| | $ | 0.99 |
| | $ | 2.11 |
| | $ | 1.73 |
| $ | 1.14 |
| | $ | 0.92 |
| | $ | 3.30 |
| | $ | 2.11 |
|
| | | | | | | | |
Diluted earnings (loss) per share: | | | | | | | | |
Continuing operations | $ | 0.92 |
| | $ | 1.06 |
| | $ | 2.10 |
| | $ | 2.26 |
| |
Discontinued operations | — |
| | (0.07 | ) | | — |
| | (0.54 | ) | |
Diluted earnings per share | $ | 0.92 |
| | $ | 0.99 |
| | $ | 2.10 |
| | $ | 1.72 |
| $ | 1.14 |
| | $ | 0.92 |
| | $ | 3.29 |
| | $ | 2.10 |
|
| | | | | | | | |
Dividends per share | $ | 0.1650 |
| | $ | 0.2725 |
| | $ | 0.3300 |
| | $ | 0.5400 |
| |
| |
| | | | | | | |
| | | | | | |
Basic weighted average shares outstanding | 6,940 |
| | 6,835 |
| | 6,914 |
| | 6,818 |
| 6,986 |
| | 6,940 |
| | 6,965 |
| | 6,914 |
|
Diluted weighted average shares outstanding | 6,940 |
| | 6,850 |
| | 6,939 |
| | 6,847 |
| 6,986 |
| | 6,940 |
| | 6,993 |
| | 6,939 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 |
| 2018 | | 2017 | | 2018 | | 2017 |
| (In thousands) |
Net income | $ | 6,393 |
| | $ | 6,788 |
| | $ | 14,569 |
| | $ | 11,766 |
|
Foreign currency translation adjustment | — |
| | 672 |
| | — |
| | 1,743 |
|
Deferred gain on equity securities | — |
| | 238 |
| | — |
| | 464 |
|
Current period cash flow hedging activity, net of $283 and $369 tax benefit in the three and six months ended June 30, 2017, respectively. | — |
| | (620 | ) | | — |
| | (859 | ) |
Reclassification of hedging activities into earnings, net of $77 and $89 tax benefit in the three and six months ended June 30, 2017, respectively. | — |
| | 134 |
| | — |
| | 140 |
|
Reclassification of pension and postretirement adjustments into earnings, net of $26 and $61 tax benefit in the three and six months ended June 30, 2018, respectively, net of $140 and $190 tax benefit in the three and six months ended June 30, 2017, respectively. | 105 |
| | 148 |
| | 245 |
| | 324 |
|
Total other comprehensive income | 105 |
| | 572 |
| | 245 |
| | 1,812 |
|
Comprehensive income | $ | 6,498 |
| | $ | 7,360 |
| | $ | 14,814 |
| | $ | 13,578 |
|
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
| (In thousands) |
Net income | $ | 7,975 |
| | $ | 6,393 |
| | $ | 22,993 |
| | $ | 14,569 |
|
Reclassification of pension and postretirement adjustments into earnings, net of $21 and $45 tax benefit in the three and six months ended June 30, 2019, respectively, net of $26 and $61 tax benefit in the three and six months ended June 30, 2018, respectively. | 71 |
| | 105 |
| | 172 |
| | 245 |
|
Total other comprehensive income | 71 |
| | 105 |
| | 172 |
| | 245 |
|
Comprehensive income | $ | 8,046 |
| | $ | 6,498 |
| | $ | 23,165 |
| | $ | 14,814 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | |
| SIX MONTHS ENDED |
| JUNE 30 |
| 2018 | | 2017 |
| (In thousands) |
Operating activities | | | |
Net income | $ | 14,569 |
| | $ | 11,766 |
|
Loss from discontinued operations | — |
| | (3,686 | ) |
Income from continuing operations | 14,569 |
| | 15,452 |
|
Adjustments to reconcile income from continuing operations to net cash provided by (used for) operating activities: | | | |
Depreciation, depletion and amortization | 7,120 |
| | 6,423 |
|
Amortization of deferred financing fees | 167 |
| | 185 |
|
Deferred income taxes | 3,299 |
| | 2,514 |
|
Other | (3,138 | ) | | (1,179 | ) |
Working capital changes: | | | |
Affiliates receivable/payable | 6,420 |
| | 8,685 |
|
Accounts receivable | (1,350 | ) | | (7,351 | ) |
Inventories | 857 |
| | 533 |
|
Other current assets | (2,062 | ) | | (2,850 | ) |
Accounts payable | 4,174 |
| | 388 |
|
Income taxes receivable/payable | (1,481 | ) | | (121 | ) |
Other current liabilities | (9,879 | ) | | (8,165 | ) |
Net cash provided by operating activities of continuing operations | 18,696 |
| | 14,514 |
|
Net cash used for operating activities of discontinued operations | — |
| | (16,261 | ) |
Net cash provided by (used for) operating activities | 18,696 |
| | (1,747 | ) |
| | | |
Investing activities | | | |
Expenditures for property, plant and equipment | (9,182 | ) | | (5,700 | ) |
Proceeds from the sale of property, plant and equipment | 274 |
| | 1,453 |
|
Other | 628 |
| | 617 |
|
Net cash used for investing activities of continuing operations | (8,280 | ) | | (3,630 | ) |
Net cash used for investing activities of discontinued operations | — |
| | (2,378 | ) |
Net cash used for investing activities | (8,280 | ) | | (6,008 | ) |
| | | |
Financing activities | | | |
Additions to long-term debt | 691 |
| | 193 |
|
Reductions of long-term debt | (30,411 | ) | | (24,814 | ) |
Cash dividends paid | (2,289 | ) | | (3,690 | ) |
Cash dividends received from Hamilton Beach Brands Holding Co. (See Note 10) | — |
| | 3,000 |
|
Purchase of treasury shares | (55 | ) | | — |
|
Net cash used for financing activities of continuing operations | (32,064 | ) | | (25,311 | ) |
Net cash provided by financing activities of discontinued operations | — |
| | 12,562 |
|
Net cash used for financing activities | (32,064 | ) | | (12,749 | ) |
| | | |
Effect of exchange rate changes on cash of discontinued operations | — |
| | 65 |
|
| | | |
Cash and cash equivalents | | | |
Total decrease for the period | (21,648 | ) | | (20,439 | ) |
Net change related to discontinued operations | — |
| | 6,012 |
|
Balance at the beginning of the period | 101,600 |
| | 69,308 |
|
Balance at the end of the period | $ | 79,952 |
| | $ | 54,881 |
|
|
| | | | | | | |
| SIX MONTHS ENDED |
| JUNE 30 |
| 2019 | | 2018 |
| (In thousands) |
Operating activities | | | |
Net cash provided by operating activities | $ | 22,088 |
| | $ | 18,696 |
|
| | | |
Investing activities | | | |
Expenditures for property, plant and equipment | (5,967 | ) | | (9,182 | ) |
Proceeds from the sale of property, plant and equipment | 37 |
| | 274 |
|
Other | (22 | ) | | 628 |
|
Net cash used for investing activities | (5,952 | ) | | (8,280 | ) |
| | | |
Financing activities | | | |
Additions to long-term debt | 1,218 |
| | 691 |
|
Reductions of long-term debt | (323 | ) | | (30,411 | ) |
Cash dividends paid | (2,480 | ) | | (2,289 | ) |
Purchase of treasury shares | (1,385 | ) | | (55 | ) |
Net cash used for financing activities | (2,970 | ) | | (32,064 | ) |
| | | |
Cash and cash equivalents | | | |
Total increase (decrease) for the period | 13,166 |
| | (21,648 | ) |
Balance at the beginning of the period | 85,257 |
| | 101,600 |
|
Balance at the end of the period | $ | 98,423 |
| | $ | 79,952 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN EQUITY
| | | | Accumulated Other Comprehensive Income (Loss) | | | | Accumulated Other Comprehensive Income (Loss) | | |
| Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings | Deferred Gain (Loss) on Equity Securities | Pension and Postretirement Plan Adjustment | | Total Stockholders' Equity | Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings | Deferred Gain (Loss) on Equity Securities | Pension and Postretirement Plan Adjustment | | Total Stockholders' Equity |
| (In thousands, except per share data) | (In thousands, except per share data) |
Balance, January 1, 2018 | $ | 5,282 |
| $ | 1,570 |
| $ | 4,447 |
| $ | 216,490 |
| | $ | 2,727 |
| | $ | (11,068 | ) | | $ | 219,448 |
| $ | 5,282 |
| $ | 1,570 |
| $ | 4,447 |
| $ | 216,490 |
| | $ | 2,727 |
| | $ | (11,068 | ) | | $ | 219,448 |
|
ASC 606 adoption (See Note 2) | — |
| — |
| — |
| (2,075 | ) | | — |
| | — |
| | (2,075 | ) | — |
| — |
| — |
| (2,075 | ) | | — |
| | — |
| | (2,075 | ) |
ASU 2016-01 reclassification (See Note 2) | — |
| — |
| — |
| 2,727 |
| | (2,727 | ) | | — |
| | — |
| |
ASU 2018-02 reclassification (See Note 2) | — |
| — |
| — |
| 2,339 |
| | — |
| | (2,179 | ) | | 160 |
| |
ASU 2016-01 adoption | | — |
| — |
| — |
| 2,727 |
| | (2,727 | ) | | — |
| | — |
|
ASU 2018-02 adoption | | — |
| — |
| — |
| 2,339 |
| | — |
| | (2,179 | ) | | 160 |
|
Stock-based compensation | | 87 |
| — |
| 90 |
| — |
| | — |
| | — |
| | 177 |
|
Net income | | — |
| — |
| — |
| 8,176 |
| | — |
| | — |
| | 8,176 |
|
Cash dividends on Class A and Class B common stock: $0.1650 per share | | — |
| — |
| — |
| (1,144 | ) | | — |
| | — |
| | (1,144 | ) |
Reclassification adjustment to net income, net of tax | | — |
| — |
| — |
| — |
| | — |
| | 140 |
| | 140 |
|
Balance, March 31, 2018 | | $ | 5,369 |
| $ | 1,570 |
| $ | 4,537 |
| $ | 226,513 |
|
| $ | — |
|
| $ | (13,107 | ) |
| $ | 224,882 |
|
Stock-based compensation | 94 |
| — |
| 875 |
| — |
| | — |
| | — |
| | 969 |
| 7 |
| — |
| 785 |
| — |
| | — |
| | — |
| | 792 |
|
Purchase of treasury shares | (2 | ) | — |
| (53 | ) | — |
| | — |
| | — |
| | (55 | ) | (2 | ) | — |
| (53 | ) | — |
| | — |
| | — |
| | (55 | ) |
Conversion of Class B to Class A shares | 1 |
| (1 | ) | — |
| — |
| | — |
| | — |
| | — |
| 1 |
| (1 | ) | — |
| — |
| | — |
| | — |
| | — |
|
Net income | — |
| — |
| — |
| 14,569 |
| | — |
| | — |
| | 14,569 |
| — |
| — |
| — |
| 6,393 |
| | — |
| | — |
| | 6,393 |
|
Cash dividends on Class A and Class B common stock: $0.33 per share | — |
| — |
| — |
| (2,289 | ) | | — |
| | — |
| | (2,289 | ) | |
Reclassification adjustment to net income | — |
| — |
| — |
| — |
| | — |
| | 245 |
| | 245 |
| |
Cash dividends on Class A and Class B common stock: $0.1650 per share | | — |
| — |
| — |
| (1,145 | ) | | — |
| | — |
| | (1,145 | ) |
Reclassification adjustment to net income, net of tax | | — |
| — |
| — |
| — |
| | — |
| | 105 |
| | 105 |
|
Balance, June 30, 2018 | $ | 5,375 |
| $ | 1,569 |
| $ | 5,269 |
| $ | 231,761 |
| | $ | — |
| | $ | (13,002 | ) | | $ | 230,972 |
| $ | 5,375 |
| $ | 1,569 |
| $ | 5,269 |
| $ | 231,761 |
| | $ | — |
| | $ | (13,002 | ) | | $ | 230,972 |
|
| | | | | | | | |
Balance, January 1, 2019 | | $ | 5,352 |
| $ | 1,569 |
| $ | 7,042 |
| $ | 250,352 |
| | $ | — |
| | $ | (13,611 | ) | | $ | 250,704 |
|
Stock-based compensation | | 102 |
| — |
| 795 |
| — |
| | — |
| | — |
| | 897 |
|
Purchase of treasury shares | | (36 | ) | — |
| (1,264 | ) | — |
| | — |
| | — |
| | (1,300 | ) |
Net income | | — |
| — |
| — |
| 15,018 |
| | — |
| | — |
| | 15,018 |
|
Cash dividends on Class A and Class B common stock: $0.1650 per share | | — |
| — |
| — |
| (1,153 | ) | | — |
| | — |
| | (1,153 | ) |
Reclassification adjustment to net income, net of tax | | — |
| — |
| — |
| — |
| | — |
| | 101 |
| | 101 |
|
Balance, March 31, 2019 | | $ | 5,418 |
| $ | 1,569 |
| $ | 6,573 |
| $ | 264,217 |
| | $ | — |
| | $ | (13,510 | ) | | $ | 264,267 |
|
Stock-based compensation | | 5 |
| — |
| 1,244 |
| — |
| | — |
| | — |
| | 1,249 |
|
Purchase of treasury shares | | (2 | ) | — |
| (83 | ) | — |
| | — |
| | — |
| | (85 | ) |
Net income | | — |
| — |
| — |
| 7,975 |
| | — |
| | — |
| | 7,975 |
|
Cash dividends on Class A and Class B common stock: $0.1900 per share | | — |
| — |
| — |
| (1,327 | ) | | — |
| | — |
| | (1,327 | ) |
Reclassification adjustment to net income, net of tax | | — |
| — |
| — |
| — |
| | — |
| | 71 |
| | 71 |
|
Balance, June 30, 2019 | | $ | 5,421 |
| $ | 1,569 |
| $ | 7,734 |
| $ | 270,865 |
| | $ | — |
| | $ | (13,439 | ) | | $ | 272,150 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20182019
(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”) and its wholly owned subsidiaries (collectively, “NACCO Industries, Inc. and Subsidiaries” or the “Company”). Intercompany accounts and transactions are eliminated in consolidation. NACCO is the public holding company for The North American Coal Corporation. The North AmericanCorporation ("NACoal"). In the first quarter of 2019, the Company changed its segment reporting to three operating segments: Coal Corporation and its affiliated companies (collectively, “NACoal”) operate surface mines that supply coal primarily to power generation companies under long-term contracts, and provide other value-added services to natural resource companies. In addition, itsMining, North American Mining ("NAM"(“NAMining”) business operates and maintains draglinesMinerals Management. The Company also has unallocated items not directly attributable to a reportable segment. Prior to January 1, 2019, NACoal was the Company’s operating segment. NACCO and other equipment under contracts with sellers of aggregates.
On September 29, 2017, the Company spun-off Hamilton Beach Brands Holding Company ("HBBHC"), a former wholly owned subsidiary. The financial position, results ofOther, which included parent company operations and cash flows of HBBHC are reflected as discontinued operationsBellaire Corporation (“Bellaire”), was the Company’s non-operating segment. Historical financial information for all periods presented through2018 has been recast to conform to the date of the spin-off.current presentation. See Note 109 to the Unaudited Condensed Consolidated Financial Statements for further details regarding the spin-off.discussion of segment reporting.
NACoal has the followingThe Company’s operating segments are further described below:
Coal Mining Segment
The operating coal mining subsidiaries:mines are: Bisti Fuels Company, LLC ("Bisti"(“Bisti”), Caddo Creek Resources Company, LLC (“Caddo Creek”), Camino Real Fuels, LLC (“Camino Real”), The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), Demery Resources Company, LLC (“Demery”), The Falkirk Mining Company (“Falkirk”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”). Liberty Fuels Company, LLC ("Liberty"(“Liberty”) ceased all mining and delivery of lignite in 2017 and commenced final mine reclamation in 2018.
All of the operating coal mining subsidiaries other than MLMC are unconsolidated (collectively, the "Unconsolidated Operations"). The unconsolidated coal mining subsidiaries were formed to develop, construct and/or operate surface 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. Although NACoal owns 100% of the equity and manages the daily operations of the Unconsolidated Operations, 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 positions or results of operations. The income taxes resulting from operations of the Unconsolidated Operations are solely the responsibility of the Company. The pre-tax income from the Unconsolidated Operations is reported on the line “Earnings of unconsolidated operations” in the Consolidated Statements of Operations, with related taxes included in the provision for income taxes. The Company has included the pre-tax earnings of the Unconsolidated Operations above operating profit as they are an integral component of the Company's business and operating results.
The contracts with the customers of the unconsolidated subsidiaries eliminate exposure to spot coal market price fluctuations and are based on a "management fee" approach, whereby compensation includes reimbursement of all operating costs, plus a fee based on the amount of coal or limestone delivered. The fees earned adjust over time in line with various indices which reflect general U.S. inflation rates.
MLMC is a consolidated entity because NACoal pays all operating costs and provides the capital for the mine. MLMC sells coal to its customer at a contractually agreed upon price which adjusts monthly, primarily based on changes in the level of established indices which reflect general U.S. inflation rates. Centennial Natural Resources LLC ("Centennial"(“Centennial”), whichlocated in Alabama, ceased coal production at the end of 2015, is also a consolidated entity.2015.
NAMAt all operating coal mines other than MLMC, the Company operates as a contract miner pursuant to a “management fee” contract. Under these long-term contracts, the customer is responsible for funding all mine operating costs and directly or indirectly provides value-added servicesall of the capital required to build and operate the mine. Debt financing provided by or supported by the customers is without recourse to NACCO and NACoal. As a result, these contracts meet the definition of a variable interest entity (“VIE”). 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 independently owned limestone quarriesas equity method investments. The income before income taxes is reported as Earnings of unconsolidated operations on the Consolidated Statements of Operations and is reimbursed by its customers based on actual costs plus a management fee per unit of limestone delivered. The financial results for NAM are included in the consolidated operations or Unconsolidated Operations based on each entity's structure.
NACoal also provides coal handling, processing and drying services for a number of customers. For example, NoDak Energy Services, LLC ("NoDak") operates and maintains a coal processing facility for a customer's power plant. The pre-tax income from NoDakCompany’s investment is reported on the line "Income from other unconsolidated affiliates"Investments in Unconsolidated Subsidiaries in the "OtherConsolidated Balance Sheets. The mines that meet the definition of a VIE are referred to collectively as the “Unconsolidated Subsidiaries.” For tax purposes, the Unconsolidated Subsidiaries are included within the NACCO consolidated U.S. tax return; therefore, the income tax expense (income)" sectionline on the statements of operations includes taxes related to these entities. All of the Consolidated StatementsUnconsolidated Subsidiaries are accounted for under the equity method. See Note 7 for further discussion. MLMC and Centennial are consolidated operations.
The coal reserves at Coteau, Falkirk, Coyote, MLMC and Centennial are owned or controlled by the Company. The coal reserves at all other mines are owned or controlled by the respective mine’s customer. The Unconsolidated Subsidiaries are paid a management fee per ton of Operations,coal or heating unit (MMBtu) delivered. Each contract specifies the indices and mechanics by which fees change over time, generally in line with the relatedbroad measures of U.S. inflation. This contract structure eliminates exposure to spot coal market price fluctuations.
NAMining Segment
NAMining operates primarily at limestone quarries in Florida, but is focused on expanding outside of Florida and into mining materials other than limestone. NAMining operates under both management fee contracts and contracts that provide for a fixed per ton sales price. Income before income taxes for NAMining locations are consolidated within NACCO’s consolidated financial statements or are unconsolidated and included on the line Earnings of unconsolidated operations, depending on how each contract is structured. All of the Unconsolidated Subsidiaries are accounted for under the equity method. See Note 7 for further discussion.
Minerals Management Segment
The Minerals Management segment promotes the development of the Company’s oil, gas and coal reserves, generating income primarily from royalty-based lease payments from third parties. The majority of the Company’s existing reserves were
acquired as part of its historical coal mining operations. The Minerals Management segment derives income primarily by entering into contracts with third-party operators, granting them the rights to explore, produce and sell natural resources in exchange for royalty payments based on the lessees' sales of natural gas and, to a lesser extent, oil and coal. Specialized employees in the provision for income taxes. North
American Coal Royalty Company, a consolidated entity, providesMinerals Management segment also provide surface and mineral acquisition and lease maintenance services related to the Company'sCompany operations.
All of the unconsolidated subsidiaries are accounted for under the equity method. See Note 6 for further discussion.
Basis of Presentation: 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 June 30, 2018,2019, the results of its operations, comprehensive income, and cash flows and changes in equity for the six months ended June 30, 20182019 and 20172018 and the changes in equity for the six months ended June 30, 2018 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, 20172018.
The balance sheet at December 31, 20172018 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.
Reclassifications: As a result of the reclassification of HBBHC to discontinued operations and the adoption of new accounting standards, certain amounts in the prior period Unaudited Condensed Consolidated Financial Statements have been reclassified to conform to the current period's presentation.
NOTE 2—Recently Issued Accounting Standards
Revenue Recognition:Accounting Standards Adopted in 2019: The Company accounts for revenueNACCO adopted Accounting Standard Update ("ASU") 2016-02, Leases (Topic 842), which is codified in accordance with Accounting Standards Codification ("ASC"842, Leases (“ASC 842”) Topic 606, "Revenue from Contracts with Customers", which NACCO adopted on January 1, 2018,2019, using the modified retrospective method. transition method (the "guidance").
The adoptionmost significant effect to the Unaudited Condensed Consolidated Balance Sheet relates to the recognition of ASC 606 resulted innew right-of-use assets (“ROU assets”) and lease liabilities for operating leases of real estate, mining and other equipment that expire at various dates through 2031. The majority of the establishment of a $2.6 million contract liability and a $2.1 millionCompany's leases are operating leases. See the table below for further information on the Unaudited Condensed Consolidated Balance Sheet. Many leases include renewal and/or fair value or bargain purchase options, which are not recognized on the Unaudited Condensed Consolidated Balance Sheet. There was no cumulative effect adjustment to beginningthe opening balance of retained earnings (netearnings. The adoption of taxthis guidance did not have a material effect on the Company’s results of $0.5 million)operations, cash flows, liquidity or debt-covenant compliance. NACCO did not apply the standard to the comparative periods presented in the year of adoption.
The Company elected many of the available practical expedients permitted under the guidance, which among other items, allow the Company to carry forward its historical lease classification and not reassess leases for the definition of a lease under the new standard. The Company also elected the practical expedient to carry forward the historical accounting treatment for existing land easement agreements. Upon the adoption of ASC 842, NACCO did not record a ROU asset and related lease liability for leases with an initial term of 12 months or less.
Leased assets and liabilities include the following:
|
| | | | |
Description | Location | JUNE 30 2019 |
Assets | | |
Operating | Operating lease right-of-use assets | $ | 12,095 |
|
Finance | Property, plant and equipment, net (a)
| 343 |
|
| | |
Liabilities | | |
Current | | |
Operating | Other current liabilities | $ | 1,440 |
|
Finance | Current maturities of long-term debt | 268 |
|
Noncurrent | | |
Operating | Operating lease liabilities | 12,990 |
|
Finance | Long-term debt | 101 |
|
(a) Finance leased assets are recorded net of accumulated amortization of $2.9 million as of January 1, 2018 to reflect the impact of changing the accounting for lease bonus payments received under certain royalty contracts. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period results are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605.June 30, 2019.
Revenues are recognized when controlThe components of lease expense were as follows:
|
| | | | | | | | |
| | THREE MONTHS ENDED | | SIX MONTHS ENDED |
| | JUNE 30 | | JUNE 30 |
Description | Location | 2019 |
Lease expense | | | | |
Operating lease cost | Selling, general and administrative expenses | $ | 589 |
| | $ | 1,214 |
|
Finance lease cost: | | | | |
Amortization of leased assets | Cost of sales | 100 |
| | 196 |
|
Interest on lease liabilities | Interest expense
| 3 |
| | 6 |
|
| | | | |
Short-term lease expense | Selling, general and administrative expenses | 89 |
| | 163 |
|
Net lease expense | | $ | 781 |
| | $ | 1,579 |
|
Future minimum finance and operating lease payments were as follows at June 30, 2019:
|
| | | | | | | | | | | |
| Finance Leases | | Operating Leases | | Total |
Remainder of 2019 | $ | 237 |
| | $ | 1,196 |
| | $ | 1,433 |
|
2020 | 58 |
| | 2,229 |
| | 2,287 |
|
2021 | 37 |
| | 2,125 |
| | 2,162 |
|
2022 | 37 |
| | 2,150 |
| | 2,187 |
|
2023 | 16 |
| | 1,659 |
| | 1,675 |
|
Subsequent to 2023 | — |
| | 10,951 |
| | 10,951 |
|
Total minimum lease payments | 385 |
| | 20,310 |
| | $ | 20,695 |
|
Amounts representing interest | 16 |
| | 5,880 |
| | |
Present value of net minimum lease payments | $ | 369 |
| | $ | 14,430 |
| | |
As most of the promised goods or services is transferred to the Company’s customers, inCompany's leases do not provide an amount that reflects the considerationimplicit rate, the Company expects to be entitled todetermines the incremental borrowing rate based on the information available at the lease commencement date in exchangedetermining the present value of lease payments. The assumptions used in accounting for those goods or services.ASC 842 were as follows for the three and six months ended June 30, 2019:
|
| | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| June 30 | | June 30 |
Lease term and discount rate | 2019 |
Weighted average remaining lease term (years) | | | |
Operating | 9.89 |
| | 9.89 |
|
Finance | 1.76 |
| | 1.76 |
|
| | | |
Weighted average discount rate | | | |
Operating | 6.97 | % | | 6.97 | % |
Finance | 5.15 | % | | 5.15 | % |
The following table details cash paid for amounts included in the measurement of lease liabilities for the three and six months ended June 30:
|
| | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| June 30 | | June 30 |
Cash paid for amounts included in the measurement of lease liabilities | 2019 |
Operating cash flows from operating leases | $ | 587 |
| | $ | 1,160 |
|
Operating cash flows from finance leases | 3 |
| | 6 |
|
Financing cash flows from finance leases | 110 |
| | 232 |
|
NOTE 3—Revenue Recognition
Nature of Performance Obligations
At contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each promised good or service that is distinct. To identify the performance obligations, the Company 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, NACoal’sthe 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 the customer. Fluctuations in revenue from period to period generally result from changes in customer demand.
At NAMNAMining entities, the management service to oversee the operation of the equipment and delivery of limestone is the performance obligation accounted for as a series. Performance momentarily creates an asset that the customer simultaneously receives and consumes; therefore, control is transferred to the customer over time. Consistent with the conclusion that the customer simultaneously receives and consumes the benefits provided, an input-based measure of progress is appropriate. As each month of service is completed, revenue is recognized for the amount of actual costs incurred, plus the management fee and the general and administrative fee (as applicable). Fluctuations in revenue from period to period result from changes in customer demand and variances in reimbursable costs primarily due to increases and decreases in activity levels on individual contracts.
NACoalThe Company enters into royalty contracts which grant the right to its customers to explore, develop, produce and sell minerals controlled by the Company. These arrangements result in the transfer of mineral rights to a customer for a period of time;
however, no rights to the actual land are granted other than access for purposes of exploration, development, production and production.sales. The mineral rights revert back to NACoalthe Company at the expiration of the contract.
Under these royalty contracts, granting exclusive right, title, and interest in and to minerals, if any, is the performance obligation. The performance obligation under these contracts represents a series of distinct goods or services whereby each day of access that is provided is distinct. The transaction price consists of a variable sales-based royalty and, in certain arrangements, a fixed component in the form of an up-front lease bonus payment. As the amount of consideration the Company will ultimately be entitled to is entirely susceptible to factors outside its control, the entire amount of variable consideration is constrained at contract inception. The fixed portion of the transaction price will be recognized over the primary term of the contract, which is generally five years.
Significant Judgments
The Company’s contracts with its customers contain different types of variable consideration including, but not limited to, management fees that adjust based on limestone yards or coal volumes or MMBtu delivered or limestone yards, however, the terms of these variable payments relate specifically to our 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 charges,fees, are also adjusted based on changes in specified indices (e.g., CPI) to compensate for general inflation changes. Index adjustments, if applicable, are effective prospectively. Certain contracts include reimbursement of actual costs incurred.
Disaggregation of Revenue
In accordance with ASC 606-10-50, the Company disaggregates revenue from contracts with customers into major goods and service lines and timing of transfer of goods and services. The Company determined that disaggregating revenue into these categories achieves the disclosure objective of depicting how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. As noted in the segment information footnote, theThe Company’s business consists of one operatingthe Coal Mining, NAMining and Minerals Management segments as well as Unallocated Items. See Note 9 to the Unaudited Condensed Consolidated Financial Statements for further discussion of segment NACoal.reporting.
The following table disaggregates revenue by major sources (in thousands):sources:
| | | THREE MONTHS ENDED | | SIX MONTHS ENDED | THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 | JUNE 30 | | JUNE 30 |
Major Goods/Service Lines | 2018 | | 2017 (1) | | 2018 | | 2017(1) | 2019 | | 2018 | | 2019 | | 2018 |
Consolidated operations - long-term contracts | $ | 29,960 |
| | $ | 24,878 |
| | $ | 57,983 |
| | $ | 50,079 |
| |
Royalty | 3,721 |
| | 3,222 |
| | 6,898 |
| | 6,321 |
| |
Coal Mining | | $ | 22,570 |
| | $ | 20,860 |
| | $ | 39,320 |
| | $ | 38,457 |
|
NAMining | | 10,728 |
| | 9,067 |
| | 21,503 |
| | 19,280 |
|
Minerals Management | | 8,242 |
| | 3,866 |
| | 20,928 |
| | 7,342 |
|
Unallocated Items | | 131 |
| | — |
| | 674 |
| | — |
|
Eliminations | | (319 | ) | | (112 | ) | | (976 | ) | | (198 | ) |
Total revenues | $ | 33,681 |
| | $ | 28,100 |
| | $ | 64,881 |
| | $ | 56,400 |
| $ | 41,352 |
| | $ | 33,681 |
| | $ | 81,449 |
| | $ | 64,881 |
|
| | | | | | | | | | | | | | |
Timing of Revenue Recognition | | | | | | | | | | | | | | |
Goods transferred at a point in time | $ | 20,174 |
| | $ | 17,492 |
| | $ | 37,195 |
| | $ | 34,407 |
| $ | 21,879 |
| | $ | 20,174 |
| | $ | 37,964 |
| | $ | 37,195 |
|
Services transferred over time | 13,507 |
| | 10,608 |
| | 27,686 |
| | 21,993 |
| 19,473 |
| | 13,507 |
| | 43,485 |
| | 27,686 |
|
Total revenues | $ | 33,681 |
| | $ | 28,100 |
| | $ | 64,881 |
| | $ | 56,400 |
| $ | 41,352 |
| | $ | 33,681 |
| | $ | 81,449 |
| | $ | 64,881 |
|
(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.
Contract Balances
The opening and closing balances of the Company’s current and long-term contract liability,liabilities and receivables are as follows:
|
| | | | | | | | | | | |
| Contract balances |
| Accounts Receivable | | Contract liability (current) | | Contract liability (long-term) |
Balance, January 1, 2018 | $ | 14,611 |
| | $ | 860 |
| | $ | 1,766 |
|
Balance, June 30, 2018 | 17,908 |
| | 685 |
| | 1,356 |
|
Increase (decrease) | $ | 3,297 |
| | $ | (175 | ) | | $ | (410 | ) |
|
| | | | | | | | | | | |
| Contract balances |
| Trade accounts receivable, net | | Contract liability (current) | | Contract liability (long-term) |
Balance, January 1, 2019 | $ | 20,817 |
| | $ | 754 |
| | $ | 2,008 |
|
Balance, June 30, 2019 | 19,043 |
| | 706 |
| | 1,660 |
|
Increase (decrease) | $ | (1,774 | ) | | $ | (48 | ) | | $ | (348 | ) |
As described above, NACoalthe Company enters into royalty contracts that grant exclusive right, title, and interest 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 upfront, however, the performance obligation is satisfied over the primary term of the contract, which is generally five years. Therefore, at the time any such up-front payment is received, a contract liability is recorded which represents deferred revenue. The difference between the opening and closing balance of this contract liability, which is shown above, primarily results from the difference between new lease bonus payments received and amortization of up-front lease bonus payments received in previous periods.
The amount of revenue recognized in the three months ended June 30, 2019 and six month periods ended June 30, 2018 that was included in the opening contract liability was $0.2 million and $0.3 million, respectively. The amount of revenue recognized in the six months ended June 30, 2019 and June 30, 2018 was $0.4 million and $0.6 million, respectively. This revenue consists of up-front lease bonus payments received under royalty contracts that are recognized over the primary term of the royalty agreement,contracts, which isare generally five years. The Company expects to recognize an additional $0.4 million in the remainder of 2018, $0.5 million in 2019, $0.4$0.7 million in both 2020 and 2021, and $0.2$0.5 million in 2022.2022, and $0.1 million in 2023 related to the contract liability remaining at June 30, 2019. The difference between the opening and closing balances of the Company’s accounts receivable and contract liabilities results from the timing difference between the Company’s performance and the customer’s payment. Contracts with payments in arrears are recognized as receivables.
The Company has no contract assets recognized from the costs to obtain or fulfill a contract with a customer.
Practical Expedients & Accounting Policy Elections
Remaining performance obligations - The Company has not disclosed the value of unsatisfied performance obligations for contracts with an original expected length of one year or more as the Company recognized revenue at the amount to which it has the right to invoice for goods delivered or services performed.
ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied. However, the guidance provides certain practical expedients that limit this requirement, including when variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a series.
As discussed above, the Company allocates the variable consideration in its contract entirely to each specific performance obligation to which it relates. Therefore, any remaining variable consideration in the transaction price is allocated entirely to wholly unsatisfied performance obligations. As such, the Company has not disclosed the value of unsatisfied performance obligations pursuant to the practical expedient.
Other Accounting Standards Adopted in 2018: In January 2016, the FASB issued Accounting Standard Update ("ASU") No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which NACCO adopted on January 1, 2018. The adoption of this guidance resulted in a $2.7 million reclassification within the Unaudited Condensed Consolidated Statement of Changes in Equity and did not have a material effect on the Company’s financial position, results of operations, cash flows and related disclosures. See Note 5 for further discussion.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which NACCO adopted on January 1, 2018. The adoption of this guidance resulted in a $2.3 million reclassification within the Unaudited Condensed Consolidated Statement of Changes in Equity and did not have a material effect on the Company’s financial position, results of operations, cash flows and related disclosures.
Accounting Standards Not Yet Adopted: In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)," which requires an entity to recognize assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, or as of January 1, 2019 for NACCO. The new standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company is currently in the process of evaluating its existing lease portfolio, including accumulating all of the information required to properly account for the leases under the new standard and any changes to processes and internal controls to meet the standard's reporting and disclosure requirements. The Company has selected a lease management system to assist with lease accounting. While the Company is still evaluating how and to what extent ASU 2016-02 will affect the Company's financial position, results of operations and related disclosures, it expects the adoption will result in a material increase to the assets and liabilities recorded on the Unaudited Condensed Consolidated Balance Sheet. The ASU is not expected to have a material impact on cash flows, liquidity or debt-covenant compliance.
NOTE 3—4—Inventories
Inventories are summarized as follows:
| | | JUNE 30 2018 | | DECEMBER 31 2017 | JUNE 30 2019 | | DECEMBER 31 2018 |
Coal | $ | 11,434 |
| | $ | 13,416 |
| $ | 7,752 |
| | $ | 11,030 |
|
Mining supplies | 17,725 |
| | 16,599 |
| 23,124 |
| | 20,179 |
|
Total inventories | $ | 29,159 |
| | $ | 30,015 |
| $ | 30,876 |
| | $ | 31,209 |
|
NOTE 4—5—Stockholders' Equity
Stock Repurchase Program: On February 14, 2018, the Company's Board of Directors approved a stock repurchase program ("2018 Stock Repurchase Program") providing for the repurchase of up to $25 million of the Company's outstanding Class A Common Stock through December 31, 2019. During the three and six months ended June 30, 2018,2019, the Company repurchased $0.1 million2,230 and 38,524 shares, respectively, of Class A Common Stock under the 2018 Stock Repurchase Program.Program for an aggregate purchase price of $0.1 million and $1.4 million, respectively. During the three and six months ended June 30, 2018, the Company repurchased 1,668 shares of Class A Common Stock under the 2018 Stock Repurchase Program for an aggregate purchase price of $0.1 million. The timing and amount of any repurchases under the 2018 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, market conditions for the Company's Class A Common Stock and other legal and contractual restrictions. The 2018 Stock Repurchase Program does not require the Company to acquire any specific number of shares and may be modified, suspended, extended or terminated by the Company without prior notice and may be executed through open market purchases, privately negotiated transactions or otherwise. All or part of the repurchases under the 2018 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 restricted from doing so under applicable securities laws.
NOTE 5—6—Fair Value Disclosure
Recurring Fair Value Measurements: The following table presents the Company's assets and liabilities accounted for at fair value on a recurring basis:
| | | | | | Fair Value Measurements at Reporting Date Using | | | | Fair Value Measurements at Reporting Date Using |
| | | | Quoted Prices in | | | | Significant | | | | Quoted Prices in | | | | Significant |
| | | | Active Markets for | | Significant Other | | Unobservable | | | | Active Markets for | | Significant Other | | Unobservable |
| | | | Identical Assets | | Observable Inputs | | Inputs | | | | Identical Assets | | Observable Inputs | | Inputs |
Description | | Date | | (Level 1) | | (Level 2) | | (Level 3) | | Date | | (Level 1) | | (Level 2) | | (Level 3) |
| | June 30, 2018 | | | | | | | | June 30, 2019 | | | | | | |
Assets: | |
| | | | | | | |
| | | | | | |
Equity securities | | $ | 9,285 |
| | $ | 9,285 |
| | $ | — |
| | $ | — |
| | $ | 9,445 |
| | $ | 9,445 |
| | $ | — |
| | $ | — |
|
| | $ | 9,285 |
| | $ | 9,285 |
| | $ | — |
| | $ | — |
| | $ | 9,445 |
| | $ | 9,445 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | |
| | December 31, 2017 | | | | | | | | December 31, 2018 | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Equity securities | | $ | 9,166 |
| | $ | 9,166 |
| | $ | — |
| | $ | — |
| | $ | 8,716 |
| | $ | 8,716 |
| | $ | — |
| | $ | — |
|
Interest rate swap agreements | | 42 |
| | — |
| | 42 |
| | — |
| |
| | $ | 9,208 |
| | $ | 9,166 |
| | $ | 42 |
| | $ | — |
| | $ | 8,716 |
| | $ | 8,716 |
| | $ | — |
| | $ | — |
|
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 2018, Bellaire established a $5.0 million mine water treatment trust (the "Mine Water Treatment Trust") to provide a financial assurance mechanism to assure the long-term treatment of post-mining discharges. Bellaire's Mine Water Treatment Trust invests in equity 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.
On January 1, 2018, the Mine Water Treatment Trust's unrealized gain was reclassified within the Unaudited Condensed Consolidated Statement of Changes in Equity upon adoption of ASU No. 2016-01. See Note 2 for further information. The
Mine Water Treatment Trust realized a gain of $0.3 million and $1.0 million in the three and six months ended June 30, 2019, respectively, and a gain of $0.2 million and $0.1 million in the three and six months ended June 30, 2018, respectively,respectively. These gains/losses are reported on the line "Other, net, including interest income"gain on equity securities in the "OtherOther (income) expense (income)" section of the Unaudited Condensed Consolidated Statements of Operations.
The Company uses significant other observable inputs to value derivative instruments used to hedge interest rate risk; therefore, they are classified within Level 2 of the valuation hierarchy. The fair value for these contracts is determined based on current interest rates.
There were no transfers into or out of Levels 1, 2 or 3 during the six months ended June 30, 20182019 and 2017.2018.
NOTE 6—7—Unconsolidated Subsidiaries
Each of NACoal's wholly owned unconsolidated subsidiariesUnconsolidated Subsidiaries meet the definition of a variableVIE. The Unconsolidated Subsidiaries are capitalized primarily with debt financing provided by or supported by their respective customers, and without recourse to NACCO and NACoal. Although NACoal owns 100% of the equity and manages the daily operations of the Unconsolidated Subsidiaries, the Company has determined that the equity capital provided by NACoal is not sufficient to adequately finance the ongoing activities or absorb any expected losses without additional support from the customers. The customers have a controlling financial interest entity.and have the power to direct the activities that most significantly affect the economic performance of the entities. As a result, NACoal is not the primary beneficiary and therefore does not consolidate these entities' financial positions or results of operations. See Note 1 for a discussion of these entities.
The investment in the unconsolidated subsidiaries and related tax positions totaled $18.4$22.4 million and $16.3$20.1 million at June 30, 20182019 and December 31, 2017,2018, respectively. The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $5.8$5.4 million and $5.2$4.4 million at June 30, 20182019 and December 31, 2017,2018, respectively.
NACoal is a party to certain guarantees related to Coyote Creek. Under certain circumstances of default or termination of Coyote Creek’s Lignite Sales Agreement (“LSA”), NACoal would be obligated for payment of a "make-whole" amount to Coyote Creek’s third-party lenders. The “make-whole” amount is based on the excess, if any, of the discounted value of the remaining scheduled debt payments over the principal amount. In addition, in the event Coyote Creek’s LSA is terminated on or after January 1, 2024 by Coyote Creek’s customers, NACoal is obligated to purchase Coyote Creek’s dragline and rolling stock for the then net book value of those assets. To date, no payments have been required from NACoal since the inception of these guarantees. The Company believes that the likelihood NACoal would be required to perform under the guarantees is remote, and no amounts related to these guarantees have been recorded.
Summarized financial information for the unconsolidated subsidiariesUnconsolidated Subsidiaries is as follows:
| | | THREE MONTHS ENDED | | SIX MONTHS ENDED | THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 | JUNE 30 | | JUNE 30 |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Revenues | $ | 182,018 |
| | $ | 174,554 |
| | $ | 365,064 |
| | $ | 368,728 |
| $ | 177,883 |
| | $ | 182,018 |
| | $ | 365,122 |
| | $ | 365,064 |
|
Gross profit | $ | 20,405 |
| | $ | 19,857 |
| | $ | 41,468 |
| | $ | 41,854 |
| $ | 14,631 |
| | $ | 20,405 |
| | $ | 33,767 |
| | $ | 41,468 |
|
Income before income taxes | $ | 15,456 |
| | $ | 13,616 |
| | $ | 31,578 |
| | $ | 29,326 |
| $ | 14,516 |
| | $ | 15,456 |
| | $ | 31,253 |
| | $ | 31,578 |
|
NOTE 7—8—Contingencies
Various legal and regulatory proceedings and claims have been or may be asserted against NACCO and certain subsidiaries relating to the conduct of their businesses. These proceedings and claims are incidental to the ordinary course of business of the Company. Management believes that it has meritorious defenses and will vigorously defend the Company in these actions. Any costs that management estimates will be paid as a result of these claims are accrued when the liability is considered probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss.
These matters are subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of an adverse impact on the Company’s financial position, results of operations and cash flows of the period in which the ruling occurs, or in future periods.
NOTE 8—9—Business Segments
TwoIn the first quarter of 2019, the Company changed its reportable segments to reflect changes in the business, including growth at NAMining and Minerals Management. The Company modified its internal reporting structure to reflect a change in how its Chief Operating Decision Maker (“CODM”) assesses Company performance and makes decisions about resource allocations.
As of January 1, 2019, the Company’s operating segments are: (i) Coal Mining, (ii) NAMining and (iii) Minerals Management. While the Company continues to pursue opportunities to add new coal mining operations to the Coal Mining segment, the NAMining segment will serve as the platform for pursuing non-coal mining projects and the Minerals Management segment will work to capitalize on the Company’s oil, gas and coal reserves. In response to these changes, the Company determined the historical structure of reporting one operating segment was no longer representative of the way the business is managed. As a result, the Company effected a change in the reporting of its segment information.
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 CODM utilizes operating profit to evaluate segment performance and allocate resources. Operating profit for each segment includes an allocation of shared costs based on a reasonable measure of utilization.
The Company also has unallocated items not directly attributable to a reportable segment which are not included as part of the measurement of segment operating profit, primarily administrative costs related to public company reporting requirements, the financial results of the Company’s mitigation banking business, Mitigation Resources of North America (“MRNA”), and Bellaire. MRNA generates and sells stream and wetland mitigation credits (known as mitigation banking) and provides services to those engaged in permittee-responsible stream and wetland mitigation. Bellaire manages the Company’s long-term liabilities related to former Eastern U.S. underground mining activities. Transactions between segments Hamilton Beach Brandsare accounted for as third-party arrangements for purposes of presenting segment results of operations and Kitchen Collection, were spun-offare eliminated in consolidation.
All financial statement line items below operating profit (other income including interest expense and interest income, the provision for income taxes and net income) are presented and discussed within this Form 10-Q on September 29, 2017. a consolidated basis. Included within other income on the line Income from other unconsolidated affiliates within the Unaudited Condensed Consolidated Statements of Operations is the financial results of NoDak Energy Services, LLC ("NoDak"). NoDak operates and maintains a coal drying system at a customer’s power plant. The NoDak contract expires in the first quarter of 2020.
See Note 1 and Note 10 for aadditional discussion of the Company's industryreportable segments. The following tables present revenue, operating profit, depreciation expense and the spin-off. There were no changes to the composition of the remaining segments, NACoal and NACCO and Other. NACCO's non-operating segment, NACCO and Other, includes the accounts of the parent company and Bellaire.
Financial information for each of NACCO's reportable segments is presented in the following table:capital expenditures:
| | | THREE MONTHS ENDED | | SIX MONTHS ENDED | THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 | JUNE 30 | | JUNE 30 |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Revenues | | | | | | | | | | | | | | |
NACoal | $ | 33,681 |
| | $ | 28,100 |
| | $ | 64,881 |
| | $ | 56,400 |
| |
Coal Mining | | $ | 22,570 |
| | $ | 20,860 |
| | $ | 39,320 |
| | $ | 38,457 |
|
NAMining | | 10,728 |
| | 9,067 |
| | 21,503 |
| | 19,280 |
|
Minerals Management | | 8,242 |
| | 3,866 |
| | 20,928 |
| | 7,342 |
|
Unallocated Items | | 131 |
| | — |
| | 674 |
| | — |
|
Eliminations | | (319 | ) | | (112 | ) | | (976 | ) | | (198 | ) |
Total | $ | 33,681 |
| | $ | 28,100 |
| | $ | 64,881 |
| | $ | 56,400 |
| $ | 41,352 |
| | $ | 33,681 |
| | $ | 81,449 |
| | $ | 64,881 |
|
| | | | | | | | | | | | | | |
Operating profit (loss) | |
| | |
| | | | | |
| | |
| | | | |
NACoal | $ | 9,522 |
| | $ | 10,876 |
| | $ | 20,804 |
| | $ | 22,202 |
| |
NACCO and Other | (1,720 | ) | | (1,364 | ) | | (3,281 | ) | | (2,884 | ) | |
Coal Mining | | $ | 4,693 |
| | $ | 7,898 |
| | $ | 12,298 |
| | $ | 16,595 |
|
NAMining | | (483 | ) | | 157 |
| | (451 | ) | | 791 |
|
Minerals Management | | 6,789 |
| | 3,212 |
| | 18,458 |
| | 6,156 |
|
Unallocated Items | | (2,130 | ) | | (3,465 | ) | | (4,829 | ) | | (6,019 | ) |
Eliminations | | 292 |
| | — |
| | 58 |
| | — |
|
Total | $ | 7,802 |
| | $ | 9,512 |
| | $ | 17,523 |
| | $ | 19,318 |
| $ | 9,161 |
| | $ | 7,802 |
| | $ | 25,534 |
| | $ | 17,523 |
|
NOTE 9—Income Taxes |
| | | | | | | | | | | | | | | |
Expenditures for property, plant and equipment | | | | | | | |
Coal Mining | $ | 1,623 |
| | $ | 3,850 |
| | $ | 5,493 |
| | $ | 4,426 |
|
NAMining | — |
| | 2,557 |
| | — |
| | 3,231 |
|
Minerals Management | 50 |
| | 150 |
| | 291 |
| | 1,182 |
|
Unallocated Items | 42 |
| | 173 |
| | 183 |
| | 343 |
|
Total | $ | 1,715 |
| | $ | 6,730 |
| | $ | 5,967 |
| | $ | 9,182 |
|
| | | | | | | |
Depreciation, depletion and amortization | | | | | | | |
Coal Mining | $ | 3,276 |
| | $ | 3,092 |
| | $ | 6,150 |
| | $ | 5,933 |
|
NAMining | 566 |
| | 427 |
| | 1,111 |
| | 822 |
|
Minerals Management | 367 |
| | 178 |
| | 733 |
| | 312 |
|
Unallocated Items | 29 |
| | 27 |
| | 57 |
| | 53 |
|
Total | $ | 4,238 |
| | $ | 3,724 |
| | $ | 8,051 |
| | $ | 7,120 |
|
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (“TCJA”), which significantly revised U.S. tax law. Subsequent to the enactment of the TCJA, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides a measurement period of up to one year after the enactment date for companies to finalize the recognition of the income tax effects of the TCJA. As a result of the TCJA and pursuant to SAB 118, the Company provisionally recorded a discrete net tax benefit of $3.1 million during the year ended December 31, 2017. The ultimate impact of the TCJA may differ from these provisional amounts due to, among other things, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and the computation of state income taxes as there is uncertainty on conformity to the U.S. federal tax system following the TCJA. During the three and six months ended June 30, 2018, no adjustments were recorded to the provisional amount recognized in 2017. Any adjustment to the provisional amount will be recorded within the one year measurement period provided by SAB 118.
NOTE 10—Other Events and TransactionsAsset Retirement Obligations
HBBHC Spin-Off:The Company's asset retirement obligations are principally for costs to close its surface mines and reclaim the land it has disturbed as a result of its normal mining activities as well as for costs to dismantle certain mining equipment at the end of the life of the mine. A reconciliation of the Company's beginning and ending aggregate carrying amount of the asset retirement obligations are as follows: On September 29, 2017, |
| | | | |
| | Asset Retirement Obligations |
Balance at December 31, 2018 | | $ | 37,703 |
|
Liabilities settled during the period | | (3,587 | ) |
Accretion expense | | 1,258 |
|
Revision of estimated cash flows | | (2,986 | ) |
Balance at June 30, 2019 | | $ | 32,388 |
|
During the second quarter of 2019, the Company spun-off HBBHC, a former wholly owned subsidiary. To completetransferred the spin-off, the Company distributed one share of HBBHC Class A common stock and one share of HBBHC Class B common stockmine permits for certain Centennial mines 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.
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 provides various services to HBBHC on a transitional basis, as needed, for varying periods after the spin-off date. The transition services are materially complete. NACCO received fees of $0.2 million and $0.4 million in the three and six months ended June 30, 2018, recorded as a reduction to selling, general and administrative expenses.
an unrelated third party. As a result of these transfers, the spin-off,Company was relieved of the financial position, resultsassociated mine reclamation obligations and recorded a $5.4 million reduction to Centennial's asset retirement obligation, $2.4 million of operations and cash flows of HBBHC arewhich is reflected as discontinued operations through"Liabilities settled during the datecurrent period" and $3.0 million of which is reflected as "Revisions in estimated cash flows" in the spin-offtable above. As part of these transactions, the Company transferred a $3.4 million escrow account and paid $2.4 million of cash, resulting in a net loss on the transactions of $0.4 million recognized within cost of sales in the Unaudited Condensed Consolidated Financial Statements. Discontinued operations includes the following resultsStatement of HBBHC for the three and six months ended June 30, 2017:
|
| | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30, 2017 | | JUNE 30, 2017 |
HBBHC Operating Statement Data: | | | |
Revenues | $ | 152,976 |
| | $ | 293,258 |
|
Cost of goods sold | 114,145 |
| | 219,850 |
|
Gross profit | 38,831 |
| | 73,408 |
|
Operating expenses | 36,667 |
| | 73,682 |
|
Operating profit (loss) | 2,164 |
| | (274 | ) |
Interest expense | 462 |
| | 877 |
|
Other income, net | (297 | ) | | (979 | ) |
Income (loss) before income taxes | 1,999 |
| | (172 | ) |
Income tax expense (benefit) | 760 |
| | (53 | ) |
HBBHC net income (loss) | $ | 1,239 |
| | $ | (119 | ) |
NACCO discontinued operations income tax expense adjustment | 1,683 |
| | 3,567 |
|
NACCO discontinued operations | $ | (444 | ) | | $ | (3,686 | ) |
Operations.
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except as noted and per share data)
Management's Discussion and Analysis of Financial Condition and Results of Operations 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 includes NACCO Industries, Inc. (the “parent company” or “NACCO”(“NACCO”) and its wholly owned subsidiaries (collectively, the “Company”). NACCO is the public holding company for The North American Coal Corporation.Corporation ("NACoal"). The Company has three operating segments: (i) Coal Mining, (ii) North American Mining ("NAMining") and (iii) Minerals Management. The Company also has unallocated items not directly attributable to a reportable segment which are not included as part of the measurement of segment operating profit, primarily administrative costs related to public company reporting requirements, the financial results of the Company’s mitigation banking business, Mitigation Resources of North America (“MRNA”), and Bellaire Corporation (“Bellaire”). MRNA generates and sells stream and wetland mitigation credits (known as mitigation banking) and provides services to those engaged in permittee-responsible stream and wetland mitigation. Bellaire manages the Company’s long-term liabilities related to former Eastern U.S. underground mining activities.
All financial statement line items below operating profit (other income, including interest expense and interest income, the provision for income taxes and net income) are presented and discussed within this Form 10-Q on a consolidated basis. Included within other income on the line Income from other unconsolidated affiliates is the financial results of NoDak Energy Services, LLC ("NoDak"). NoDak operates and maintains a coal drying system at a customer’s power plant. The NoDak contract expires in the first quarter of 2020.
The Company’s operating segments are further described below:
Coal Corporation and its affiliated companies (collectively, “NACoal”) operateMining Segment
The Coal Mining segment operates surface coal mines that supply coal primarilypursuant to a service-based business model under long-term contracts with power generation companies under long-term contracts, and provide other value-added services to natural resource companies. In addition, its North American Mining ("NAM") business operates and maintains draglines and other equipment under contracts with sellers of aggregates. NACoal’s service-based business model aligns its operating goals with customers’ objectives.
activated carbon producers. Coal is surface mined from NACoal's minessurface-mined in North Dakota, Texas, Mississippi, Louisiana and on the Navajo Nation in New Mexico. NACoal has the followingEach mine is fully integrated with its customer operations.
The operating coal mining subsidiaries:mines are: Bisti Fuels Company, LLC ("Bisti"(“Bisti”), Caddo Creek Resources Company, LLC (“Caddo Creek”), Camino Real Fuels, LLC (“Camino Real”), The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), Demery Resources Company, LLC (“Demery”), The Falkirk Mining Company (“Falkirk”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”). Liberty Fuels Company, LLC ("Liberty"(“Liberty”) ceased all mining and delivery of lignite in 2017 and commenced final mine reclamation in 2018.
NAMCentennial Natural Resources (“Centennial”), located in Alabama, ceased coal production at the end of 2015. Since 2015, the Company has sold or transferred certain Centennial equipment and mineral reserves. The Company continues to evaluate strategies for the remaining mineral reserves and a dragline, although the book value of the remaining mineral reserves and the dragline was reduced to zero in years prior to 2018. Cash expenditures related to mine reclamation at Centennial will continue until mine reclamation is complete, or ownership of, or responsibility for, the remaining mines is transferred.
Coteau, Coyote, Falkirk, MLMC and Sabine supply lignite coal for power generation. Bisti and Camino Real supply sub-bituminous and bituminous coal, respectively, for power generation. Caddo Creek and Demery supply lignite coal for the production of activated carbon. Each of these mines deliver their coal production to adjacent or nearby power plants, synfuels plants or activated carbon processing facilities under long-term supply contracts. With the exception of Camino Real, each mine is the exclusive supplier of coal to its customers' facilities. Camino’s customer takes all coal produced by the mine but also purchases additional coal from other suppliers.
This segment has a strong history of customer retention due to the long-term nature of its contracts and the proximity of the Company’s mines to its customers’ facilities. With the exception of Camino Real, whose contract expires in 2021 but has renewal provisions, other contract expiration dates range from 2022 through 2045. The contract that expires in 2022 may be extended for three additional periods of five years each, or until 2037, at NACoal’s option.
At all operating coal mines other than MLMC, the Company operates as a contract miner pursuant to a management fee contract. Under these long-term contracts, the customer is responsible for funding all mine operating costs and directly or
indirectly provides all of the capital required to build and operate the mine. Debt financing provided by or supported by the customers is without recourse to NACCO and NACoal. As a result, these contracts meet the definition of a variable interest entity (“VIE”). NACCO is not the primary beneficiary of the VIE as it does not exercise financial control; therefore, NACCO does not consolidate the results of these operations within its financial statements. Instead, these contracts are accounted for as equity method investments. The income before income taxes is reported as Earnings of unconsolidated operations on the Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in Unconsolidated Subsidiaries in the Consolidated Balance Sheets. The mines that meet the definition of a VIE are referred to collectively as the “Unconsolidated Subsidiaries.” For tax purposes, the Unconsolidated Subsidiaries are included within the NACCO consolidated U.S. tax return; therefore, the income tax expense line on the statements of operations includes taxes related to these entities. All of the Unconsolidated Subsidiaries are accounted for under the equity method. MLMC and Centennial are consolidated operations.
The coal reserves at Coteau, Falkirk, Coyote, MLMC and Centennial are owned or controlled by the Company. The coal reserves at all other mines are owned or controlled by the respective mine’s customer. The Unconsolidated Subsidiaries are 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. This contract structure eliminates exposure to spot coal market price fluctuations.
The Company performs contemporaneous reclamation activities at each mine in the normal course of operations. Under all of the Unconsolidated Subsidiaries’ contracts, the customer has the obligation to fund final mine reclamation activities. Under certain contracts, the Unconsolidated Subsidiary holds the mine permit and is therefore responsible for final mine reclamation activities. To the extent the Unconsolidated Subsidiary performs such final reclamation, it is compensated for providing those services in addition to receiving reimbursement for costs incurred.
The MLMC contract is the only operating coal contract in which NACoal is responsible for all operating costs, capital requirements and final mine reclamation; therefore, MLMC is consolidated within NACCO’s financial statements. MLMC sells coal to its customer at a contractually agreed-upon price which adjusts monthly, primarily based on changes in the level of established indices which reflect general U.S. inflation rates. Profitability at MLMC is affected by customer demand for coal, changes in the indices that determine sales price and actual costs incurred. As diesel fuel is heavily weighted among the indices used to determine the coal sales price, the persistence of low diesel fuel prices can negatively affect earnings at MLMC.
Centennial is also a consolidated entity within the Coal Mining segment as NACoal is responsible for carrying costs and final mine reclamation.
North American Mining Segment
The NAMining segment provides value-added contract mining services for producers of aggregates and other minerals, primarily by operating and maintaining draglines and other equipment. The segment is the primary platform for the Company’s growth and diversification outside of the coal industry.
NAMining provides contract mining services for independently owned limestone quarries, and is reimbursed bycreating value for its customers basedby performing the mining aspects of its customers’ quarry operations. This allows customers to focus on actual costs plus a management fee per unittheir areas of limestone delivered. The financial results for NAM are included in the consolidated mining operations or unconsolidated mining operations based on each entity's structure.expertise: materials handling and processing, product sales and distribution.
NACoal also provides coal handling, processingNAMining operates primarily at limestone quarries in Florida, but is focused on expanding outside of Florida and drying servicesinto mining materials other than limestone. NAMining operates under both management fee contracts and contracts that provide for a numberfixed per ton sales price. Income before income taxes for NAMining locations are consolidated within NACCO’s consolidated financial statements or are unconsolidated and included on the line Earnings of customers. For example, NoDak Energy Services, LLC ("NoDak") operatesunconsolidated operations, depending on how each contract is structured.
Minerals Management Segment
The Minerals Management segment promotes the development of the Company’s oil, gas and maintainscoal reserves, generating income primarily from royalty-based lease payments from third parties. The Company’s gas, oil and coal reserves are located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Mississippi, Pennsylvania, Alabama and North Dakota (coal). The majority of the Company’s existing reserves were acquired as part of its historical coal mining operations. The Minerals Management segment derives income primarily by entering into contracts with third-party operators, granting them the rights to explore, produce and sell natural resources in exchange for royalty payments based on the lessees' sales of natural gas and, to a coal processing facility for a customer's power plant. North American Coal Royalty Company provideslesser extent, oil and coal. Specialized employees in the Minerals Management segment also provide surface and mineral acquisition and lease maintenance services related to the Company'sCompany operations.
NACCO and Other includes the parent company operations and Bellaire Corporation ("Bellaire"), a non-operating subsidiary of NACCO. Although Bellaire’s operations are immaterial, it has long-term liabilities related to closed mines, primarily from former Eastern U.S. underground coal mining activities.
On September 29, 2017, the Company spun-off Hamilton Beach Brands Holding Company ("HBBHC"), a former wholly owned subsidiary. As a result of the spin-off, NACCO stockholders received one share of HBBHC Class A common stock and one share of HBBHC Class B common stock for each share of NACCO Class A or Class B common stock owned on the record date for the spin-off. The financial position, results of operations and cash flows of HBBHC are reflected as discontinued operations for all periods presented through the date of the spin-off.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
TheAs of January 1, 2019, the Company has updated its revenue recognitionlease accounting policy in connection with the adoption of ASC 606842 as further described in Note 2 to the accompanying Unaudited Condensed Consolidated Financial Statements. Please also refer to the discussion of the Company's Critical Accounting Policies and Estimates as disclosed on pages 2826 through 3128 in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.2018. The Company's remaining Critical Accounting Policies and Estimates have not materially changed since December 31, 2017.2018.
CONSOLIDATED FINANCIAL SUMMARY
The results of operations for NACCO were as follows for the three and six months ended June 30:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2018 | | 2017 | | 2018 | | 2017 |
NACoal operating profit (a) | $ | 9,522 |
| | $ | 10,876 |
| | $ | 20,804 |
| | $ | 22,202 |
|
NACCO and Other operating loss (a) | (1,720 | ) | | (1,364 | ) | | (3,281 | ) | | (2,884 | ) |
Operating profit (a) | 7,802 |
| | 9,512 |
| | 17,523 |
| | 19,318 |
|
Interest expense | 569 |
| | 928 |
| | 1,215 |
| | 1,860 |
|
Income from other unconsolidated affiliates | (318 | ) | | (311 | ) | | (633 | ) | | (619 | ) |
Closed mine obligations | 343 |
| | 352 |
| | 722 |
| | 735 |
|
Other, net, including interest income | (373 | ) | | (29 | ) | | (342 | ) | | (49 | ) |
Other expense, net | 221 |
| | 940 |
| | 962 |
| | 1,927 |
|
Income from continuing operations before income tax provision | 7,581 |
| | 8,572 |
| | 16,561 |
| | 17,391 |
|
Income tax provision | 1,188 |
| | 1,340 |
| | 1,992 |
| | 1,939 |
|
Income from continuing operations, net of tax | $ | 6,393 |
| | $ | 7,232 |
| | $ | 14,569 |
| | $ | 15,452 |
|
Discontinued operations, net of tax | — |
| | (444 | ) | | — |
| | (3,686 | ) |
Net income | $ | 6,393 |
| | $ | 6,788 |
| | $ | 14,569 |
| | $ | 11,766 |
|
| | | | | | | |
Effective income tax rate from continuing operations | 15.7 | % | | 15.6 | % | | 12.0 | % | | 11.1 | % |
|
| | | | | | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenues: | | | | | | | |
Coal Mining | $ | 22,570 |
| | $ | 20,860 |
| | $ | 39,320 |
| | $ | 38,457 |
|
NAMining | 10,728 |
| | 9,067 |
| | 21,503 |
| | 19,280 |
|
Minerals Management | 8,242 |
| | 3,866 |
| | 20,928 |
| | 7,342 |
|
Unallocated Items | 131 |
| | — |
| | 674 |
| | — |
|
Eliminations | (319 | ) | | (112 | ) | | (976 | ) | | (198 | ) |
Total revenue | $ | 41,352 |
| | $ | 33,681 |
| | $ | 81,449 |
| | $ | 64,881 |
|
Operating profit (loss): | | | | | | | |
Coal Mining | $ | 4,693 |
| | $ | 7,898 |
| | $ | 12,298 |
| | $ | 16,595 |
|
NAMining | (483 | ) | | 157 |
| | (451 | ) | | 791 |
|
Minerals Management | 6,789 |
| | 3,212 |
| | 18,458 |
| | 6,156 |
|
Unallocated Items | (2,130 | ) | | (3,465 | ) | | (4,829 | ) | | (6,019 | ) |
Eliminations | 292 |
| | — |
| | 58 |
| | — |
|
Total operating profit | $ | 9,161 |
| | $ | 7,802 |
| | $ | 25,534 |
| | $ | 17,523 |
|
Interest expense | 222 |
| | 569 |
| | 453 |
| | 1,215 |
|
Interest income | (581 | ) | | (119 | ) | | (1,134 | ) | | (232 | ) |
Income from other unconsolidated affiliates | (323 | ) | | (318 | ) | | (645 | ) | | (633 | ) |
Closed mine obligations | 330 |
| | 343 |
| | 696 |
| | 722 |
|
Gain on equity securities | (261 | ) | | (183 | ) | | (959 | ) | | (85 | ) |
Other, net | 11 |
| | (71 | ) | | 22 |
| | (25 | ) |
Other (income) expense, net | (602 | ) | | 221 |
| | (1,567 | ) | | 962 |
|
Income before income tax provision | 9,763 |
| | 7,581 |
| | 27,101 |
| | 16,561 |
|
Income tax provision | 1,788 |
| | 1,188 |
| | 4,108 |
| | 1,992 |
|
Net income | $ | 7,975 |
| | $ | 6,393 |
| | $ | 22,993 |
| | $ | 14,569 |
|
| | | | | | | |
Effective income tax rate | 18.3 | % | | 15.7 | % | | 15.2 | % | | 12.0 | % |
(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 and Other expense, net, for NACoal and NACCO and Other are discussed below in "Segment Results." Amounts below
Second Quarter of 2019 Compared with Second Quarter of 2018 and First Six Months of 2019 Compared with First Six Months of 2018
Other (income) expense, net
Interest expense decreased $0.3 million and $0.8 million, respectively, due to lower average borrowings under NACoal's revolving credit facility during the second quarter and the first six months of 2019 compared with the 2018 periods.
Interest income beforeincreased $0.5 million and $0.9 million, respectively, during the second quarter and the first six months of 2019 compared with the 2018 periods due to increased income tax provision are analyzedearned on a consolidated basis.invested cash.
Gain on equity securities increased due to higher gains on invested assets of Bellaire's Mine Water Treatment Trust in the three and six months ended June 30, 2019 compared with 2018. See Note 6 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Mine Water Treatment Trust.
Income Taxes
The Company evaluates and updates its estimated annual effective income tax rate on a quarterly basis based on current and forecasted operating results and tax laws. Consequently, based upon the mix and timing of actual earnings compared to projections of earnings between entities that benefit from percentage depletion and those that do not, the effective tax rate may vary quarterly. The quarterly income tax provision is generally comprised of tax expense on income or a benefit on a loss at the most recent estimated annual effective income tax rate, adjusted for the effect of discrete items. See Note 9The increase in the effective income tax rate in 2019 compared with 2018 is primarily due to a change in the Unaudited Condensed Consolidated Financial Statements for further discussion mix of earnings, including increased royalty income.
LIQUIDITY AND CAPITAL RESOURCES OF NACCO
Cash Flows
The amount of and dollar values associated with intercompany transactions can be significant since the income taxes resulting from the operations of the Company's income taxes.Unconsolidated Subsidiaries are solely the responsibility of the Company. At a segment level, these intercompany transactions can impact net cash used for operating activities. As a result, the Company analyzes cash flows on a consolidated basis.
LiquidityThe following tables detail NACCO's changes in cash flow for the six months endedJune 30:
|
| | | | | | | | | | | |
| 2019 | | 2018 | | Change |
Operating activities: | | | | | |
Net cash provided by operating activities | $ | 22,088 |
| | $ | 18,696 |
| | $ | 3,392 |
|
| | | | | |
Investing activities: | | | | | |
Expenditures for property, plant and equipment | (5,967 | ) | | (9,182 | ) | | 3,215 |
|
Other | 15 |
| | 902 |
| | (887 | ) |
Net cash used for investing activities | (5,952 | ) | | (8,280 | ) | | 2,328 |
|
Cash flow before financing activities | $ | 16,136 |
| | $ | 10,416 |
| | $ | 5,720 |
|
The $3.4 million increase in net cash provided by operating activities was primarily the result of the increase in net income, partially offset by working capital changes. During the first six months of 2019, NACCO used $8.7 million of cash for working capital compared with $3.3 million during the first six months of 2018. The increase in cash used for working capital was primarily due to a change in timing of accounts payable and Capital Resourcesaccounts payable to affiliates.
The change in net cash used for investing activities was primarily attributable to a decrease in expenditures for property, plant and equipment in the NAMining segment, partially offset by an increase in expenditures in the Coal segment.
|
| | | | | | | | | | | |
| 2019 | | 2018 | | Change |
Financing activities: | | | | | |
Net additions (reductions) to long-term debt and revolving credit agreement | $ | 895 |
| | $ | (29,720 | ) | | $ | 30,615 |
|
Cash dividends paid | (2,480 | ) | | (2,289 | ) | | (191 | ) |
Purchase of treasury shares | (1,385 | ) | | (55 | ) | | (1,330 | ) |
Net cash used for financing activities | $ | (2,970 | ) | | $ | (32,064 | ) | | $ | 29,094 |
|
The change in net cash used for financing activities was primarily due to a repayment of NACCOborrowings during the first six months of 2018.
Financing Activities
Financing arrangements are obtained and maintained at the subsidiaryNACoal level. NACCO has not guaranteed any borrowings of its subsidiaries.NACoal. The credit agreementborrowing agreements at NACoal allowsallow for the payment to NACCO of dividends and advances under certain circumstances as described below under "The North American Coal Corporation - Liquidity and Capital Resources - Financing Activities."circumstances. Dividends (to the extent permitted by NACoal's creditborrowing agreement) and management fees are the primary sources of cash for NACCO and enable the Company to pay dividends to stockholders.
Capital Structure
NACCO's consolidated capital structure is presented below: |
| | | | | | | | | | | |
| JUNE 30 2018 | | DECEMBER 31 2017 | | Change |
Cash and cash equivalents | $ | 79,952 |
| | $ | 101,600 |
| | $ | (21,648 | ) |
Other net tangible assets | 157,784 |
| | 153,791 |
| | 3,993 |
|
Intangible assets, net | 42,056 |
| | 43,554 |
| | (1,498 | ) |
Net assets | 279,792 |
| | 298,945 |
| | (19,153 | ) |
Total debt | (27,983 | ) | | (58,146 | ) | | 30,163 |
|
Bellaire closed mine obligations | (20,837 | ) | | (21,351 | ) | | 514 |
|
Total equity | $ | 230,972 |
| | $ | 219,448 |
| | $ | 11,524 |
|
Debt to total capitalization | 11% | | 21% | | (10)% |
The components of change are discussed below in "Segment Results."
NACCO Industries, Inc. Consolidated Outlook
In the second half of 2018, NACCO expects consolidated income before income tax from continuing operations to increase substantially compared with the second half of 2017, resulting in an overall moderate increase in 2018 full year income before income tax from continuing operations over 2017. The Company expects an overall effective income tax rate inbelieves funds available from cash on hand, the range of 9% - 12% for 2018, compared with an effective income tax rate of 2.2% in 2017. In 2017,NACoal Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the Company appliednext twelve months and until the intraperiod tax allocation rules to allocate the provision for income taxes between continuing operations and discontinued operations, which produced results in 2017 that were neither comparable nor indicative of future expectations. As a resultexpiration of the increase in the effective income tax rate, consolidated income from continuing operations in the second half of 2018 is expected to be comparable to the second half of 2017 and be down modestly for the 2018 full year compared with 2017.
Income before income tax in the second half of 2017 included $2.1 million of gains on sales of assets. Excluding these gains, NACCO expects income before income tax in the second half of 2018 to increase compared with the prior year primarily due to improved income at the consolidated operations, lower operating expenses mainly related to lower employee-related costs and reduced interest expense. These improvements are expected to be partially offset by a decrease in royalty and other income. Royalties on oil, gas and coal extracted by third parties are subject to changes in market forces and the activities of third parties, making it difficult to forecast whether recent high levels of income will continue.
At the consolidated operations, MLMC's pre-tax income in the second half of 2018 is expected to increase substantially over the second half of 2017 and the first half of 2018, primarily as a result of a reduction in the cost per ton of coal delivered during the second half of 2018. In general, cost per ton delivered is lowest when the power plant requires a consistently high level of coal deliveries, primarily because costs are spread over more tons. Historically, periods of reduced or fluctuating deliveries, such as during planned or unplanned power plant outages or periods of fluctuating demand for electricity generated by the plant, have adversely affected MLMC's tons delivered, resulting in an increase in cost per ton delivered and reduced profitability. Customer demand in the second half of 2018 is expected to return to higher levels because fewer plant outage days are expected compared with the prior year. Improved income in the second half of the year, primarily in the third quarter, is expected to offset the lower income in the first half of 2018 resulting in full-year 2018 income at MLMC that is comparable to 2017. If customer demand does not improve as expected at MLMC, it could unfavorably affect NACoal's 2018 earnings significantly.
Centennial's pre-tax loss in the second half of 2018 is expected to be comparable to 2017, excluding a $2.8 million reduction in its mine reclamation liability and a $1.0 million asset impairment charge realized in the prior year fourth quarter. 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.
Earnings from the unconsolidated operations in the second half of 2018 are expected to be comparable to the second half of 2017. An increase in tons delivered at Bisti as a result of the completion of work to install additional environmental controls at the customer's power plant and higher compensation at Liberty for mine closure work is expected to be offset by fewer tons
delivered at other unconsolidated operations. Production at Bisti is anticipated to be 5 million to 6 million tons of coal per year when the plant is operating at expected levels, which is currently anticipated to occur in 2019.
Cash flow before financing activities is expected to decrease substantially in the second half of 2018 compared with the second half of 2017, resulting in an overall decrease in cash flow before financing activities for the 2018 full year. Capital expenditures are expected to be up to approximately $31 million in 2018, of which $9.1 million was expended in the first half of 2018. Planned expenditures at MLMC and NAM include expenditures for new and replacement equipment and land required for future mining. The timing and amount of capital expenditures may vary based on further refinement of capital needs and mine plans.
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 continues to seek opportunities for new 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 value-added services. During the second quarter of 2018, NAM signed two new contracts with limestone customers. Operations under one contract are expected to commence in the fourth quarter of 2018, while operations under the second contract are expected to commence in early 2019.
SEGMENT RESULTS
THE NORTH AMERICAN COAL CORPORATION
FINANCIAL REVIEW
Tons of coal delivered by NACoal's operating mines were as follows for the three and six months ended June 30 (in millions):
|
| | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2018 | | 2017 | | 2018 | | 2017 |
Coteau | 3.0 |
| | 3.5 |
| | 6.8 |
| | 7.3 |
|
Falkirk | 1.9 |
| | 1.3 |
| | 4.0 |
| | 3.0 |
|
Sabine | 0.9 |
| | 0.5 |
| | 2.0 |
| | 1.5 |
|
Bisti | 0.9 |
| | 0.7 |
| | 1.2 |
| | 2.0 |
|
Camino Real | 0.6 |
| | 0.7 |
| | 1.1 |
| | 1.2 |
|
Coyote Creek | 0.6 |
| | 0.5 |
| | 1.2 |
| | 1.0 |
|
Other | 0.1 |
| | 0.3 |
| | 0.2 |
| | 0.7 |
|
Unconsolidated operations | 8.0 |
| | 7.5 |
| | 16.5 |
| | 16.7 |
|
MLMC | 0.8 |
| | 0.7 |
| | 1.5 |
| | 1.4 |
|
Total tons delivered | 8.8 |
| | 8.2 |
| | 18.0 |
| | 18.1 |
|
Cubic yards of limestone delivered by NAM were as follows for the three and six months ended June 30 (in millions): |
| | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2018 | | 2017 | | 2018 | | 2017 |
Unconsolidated operations | 1.2 |
| | 0.5 |
| | 2.7 |
| | 0.7 |
|
Consolidated operations | 7.2 |
| | 7.4 |
| | 15.0 |
| | 15.0 |
|
Total yards delivered | 8.4 |
| | 7.9 |
| | 17.7 |
| | 15.7 |
|
The results of operations for NACoal were as follows for the three and six months ended June 30:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2018 | | 2017 | | 2018 | | 2017 |
Revenue - consolidated operations | $ | 29,960 |
| | $ | 24,878 |
| | $ | 57,983 |
| | $ | 50,079 |
|
Revenue - royalty | 3,721 |
| | 3,222 |
| | 6,898 |
| | 6,321 |
|
Total revenues | 33,681 |
| | 28,100 |
| | 64,881 |
| | 56,400 |
|
Cost of sales - consolidated operations | 28,381 |
| | 22,894 |
| | 53,741 |
| | 46,078 |
|
Cost of sales - royalty | 379 |
| | 562 |
| | 742 |
| | 1,086 |
|
Total cost of sales | 28,760 |
| | 23,456 |
| | 54,483 |
| | 47,164 |
|
Gross profit | 4,921 |
| | 4,644 |
| | 10,398 |
| | 9,236 |
|
Earnings of unconsolidated operations(a) | 15,423 |
| | 13,475 |
| | 30,978 |
| | 28,430 |
|
Selling, general and administrative expenses | 10,219 |
| | 9,249 |
| | 19,337 |
| | 17,283 |
|
Amortization of intangible assets | 814 |
| | 619 |
| | 1,498 |
| | 1,206 |
|
Gain on sale of assets | (211 | ) | | (2,625 | ) | | (263 | ) | | (3,025 | ) |
Operating profit | 9,522 |
| | 10,876 |
| | 20,804 |
| | 22,202 |
|
Interest expense | 569 |
| | 928 |
| | 1,215 |
| | 1,860 |
|
Other (income) expense, including income from other unconsolidated affiliates | (407 | ) | | (307 | ) | | (689 | ) | | (550 | ) |
Income before income tax provision | $ | 9,360 |
| | $ | 10,255 |
| | $ | 20,278 |
| | $ | 20,892 |
|
(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
Second Quarter of 2018 Compared with Second Quarter of 2017
The following table identifies the components of change in revenues for the second quarter of 2018 compared with the second quarter of 2017:
|
| | | |
| Revenues |
2017 | $ | 28,100 |
|
Increase (decrease) from: | |
Consolidated operations | 5,221 |
|
Royalty | 360 |
|
2018 | $ | 33,681 |
|
Revenues increased $5.6 million in the second quarter of 2018 compared with the second quarter of 2017 primarily due to an increase in tons sold at MLMC as a result of increased customer requirements and higher reimbursed costs at NAM's consolidated operations.
The following table identifies the components of change in operating profit for the second quarter of 2018 compared with the second quarter of 2017:
|
| | | |
| Operating Profit |
2017 | $ | 10,876 |
|
Increase (decrease) from: | |
Net gain on sale of assets | (2,415 | ) |
Consolidated operations, excluding Centennial | (1,010 | ) |
Selling, general and administrative expenses | (967 | ) |
Earnings of unconsolidated operations | 1,948 |
|
Centennial, excluding the net gain on sales of assets | 604 |
|
Royalty | 486 |
|
2018 | $ | 9,522 |
|
NACoal's operating profit decreased in the second quarter of 2018 compared with the second quarter of 2017 primarily due to $2.6 million of gains on sales of assets in the second quarter of 2017, a decrease in results at the consolidated mines, principally MLMC, and an increase in Selling, general and administrative expenses due to an increase in professional fees. The decrease in operating profit at MLMC was primarily due to an increase in the cost per ton delivered, principally driven by higher repairs and maintenance. These decreases were partially offset by an increase in earnings of unconsolidated operations mainly due to an increase in tons delivered and higher compensation at Liberty during the mine reclamation period, as well as an improvement in Centennial's operating results and higher royalty income.
Income before income tax provision decreased primarily due to the items impacting operating profit, partially offset by a $0.3 million decrease in interest expense attributable to lower average borrowings under NACoal's revolving credit facility in the second quarter of 2018 compared with 2017.
First Six Months of 2018 Compared with First Six Months of 2017
The following table identifies the components of change in revenues for the first six months of 2018 compared with the first six months of 2017:
|
| | | |
| Revenues |
2017 | $ | 56,400 |
|
Increase (decrease) from: | |
Consolidated operations | 7,735 |
|
Royalty | 746 |
|
2018 | $ | 64,881 |
|
Revenues increased $8.5 million in the first six months of 2018 compared with the first six months of 2017 primarily due to higher reimbursed costs at NAM's consolidated operations and an increase in tons sold at MLMC as a result of increased customer requirements.
The following table identifies the components of change in operating profit for the first six months of 2018 compared with the first six months of 2017:
|
| | | |
| Operating Profit |
2017 | $ | 22,202 |
|
Increase (decrease) from: | |
Net gain on sale of assets | (2,762 | ) |
Consolidated operations, excluding Centennial | (2,107 | ) |
Selling, general and administrative expenses | (2,054 | ) |
Earnings of unconsolidated operations | 2,547 |
|
Centennial, excluding the net gain on sales of assets | 1,982 |
|
Royalty | 996 |
|
2018 | $ | 20,804 |
|
NACoal's operating profit decreased in the first six months of 2018 compared with the first six months of 2017 primarily due to $3.0 million of gains on sales of assets in the first six months of 2017, a decrease in results at the consolidated operations and an increase in Selling, general and administrative expenses. The decrease in the consolidated operations was primarily due to an increase in the cost per ton delivered at MLMC. The increase in selling, general and administrative expenses was due to an increase in professional fees, higher employee-related expenses and additional business development costs. These decreases were partially offset by an increase in earnings of unconsolidated operations mainly due to an increase in tons delivered at certain mines and higher compensation at Liberty during the mine reclamation period. Centennial's results improved primarily due to lower costs and a $1.0 million revision of estimated cash flows for Centennial's asset retirement obligation.
Income before income tax provision decreased due to the items impacting operating profit, partially offset by a $0.6 million decrease in interest expense attributable to lower average borrowings under NACoal's revolving credit facility in the first six months of 2018 compared with 2017.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following tables detail NACoal's changes in cash flow for the six months endedJune 30:
|
| | | | | | | | | | | |
| 2018 | | 2017 | | Change |
Operating activities: | | | | | |
Net cash provided by operating activities | $ | 34,528 |
| | $ | 17,334 |
| | $ | 17,194 |
|
| | | | | |
Investing activities: | | | | | |
Expenditures for property, plant and equipment | (9,052 | ) | | (5,697 | ) | | (3,355 | ) |
Other | 860 |
| | 2,030 |
| | (1,170 | ) |
Net cash used for investing activities | (8,192 | ) | | (3,667 | ) | | (4,525 | ) |
Cash flow before financing activities | $ | 26,336 |
| | $ | 13,667 |
| | $ | 12,669 |
|
The change in net cash provided by operating activities was primarily the result of a favorable working capital change during the first six months of 2018 compared with the first six months of 2017. The change in working capital was mainly the result of a larger increase in accounts receivable due to timing during the first six months of 2017 compared with 2018, and a reduction in intercompany accounts receivable during the first six months of 2018 compared with 2017.
The change in net cash used for investing activities was primarily attributable to an increase in expenditures for property, plant and equipment at MLMC.
|
| | | | | | | | | | | |
| 2018 | | 2017 | | Change |
Financing activities: | | | | | |
Net reductions to long-term debt and revolving credit agreements | $ | (29,720 | ) | | $ | (24,621 | ) | | $ | (5,099 | ) |
Net cash used for financing activities | $ | (29,720 | ) | | $ | (24,621 | ) | | $ | (5,099 | ) |
The change in net cash used for financing activities was primarily from a reduction in borrowings on NACoal's revolving credit facility during the first six months of 2018 when compared with the first six months of 2017.
Financing ActivitiesFacility.
NACoal has an unsecured revolving line of credit of up to $150.0 million (the “NACoal Facility”) that expires in August 2022. Borrowings outstanding under the NACoal Facility were $20.0$4.0 million at June 30, 2018.2019. At June 30, 2018,2019, the excess availability under the NACoal Facility was $128.5$144.6 million, which reflects a reduction for outstanding letters of credit of $1.5$1.4 million.
The NACoal Facility has performance-based pricing, which sets interest rates based upon NACoal achieving various levels of debt to EBITDA ratios, as defined in the NACoal Facility. Borrowings bear interest at a floating rate plus a margin based on the level of debt to EBITDA ratio achieved. The applicable margins, effective June 30, 2018,2019, for base rate and LIBOR loans were 1.00%0.75% and 2.00%1.75%, respectively. The NACoal Facility has a commitment fee which is based upon achieving various levels of debt to EBITDA ratios. The commitment fee was 0.35%0.30% on the unused commitment at June 30, 2018. The floating rate of interest applicable to the NACoal Facility at June 30, 2018 was 4.10%.2019.
The NACoal Facility contains restrictive covenants, which require, among other things, NACoal to maintain a maximum debt to EBITDA ratio of 3.00 to 1.00 and an interest coverage ratio of not less than 4.00 to 1.00. The NACoal Facility provides the ability to make loans, dividends and advances to NACCO, with some restrictions based on maintaining a maximum debt to EBITDA ratio of 2.00 to 1.00, or if greater than 2.00 to 1.00, a Fixed Charge Coverage Ratio of 1.10 to 1.00, in conjunction with maintaining unused availability thresholds of borrowing capacity, as defined in the NACoal Facility, of $15.0 million. At June 30, 2018,2019, NACoal was in compliance with all financial covenants in the NACoal Facility.
NACoal believes funds available from cash on hand at the Company, the NACoal FacilityCapital Expenditures
Expenditures for property, plant and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arisingequipment were $6.0 million during the first six months of 2019. NACCO estimates that its capital expenditures for the remainder of 2019 could be up to $22.2 million primarily for NAMining dragline acquisition and relocation as well as spending at MLMC as its mine plan includes moving into a new mine area which will require increased capital expenditures over the next twelveseveral years. These expenditures are expected to be funded from internally generated funds and/or bank borrowings.
Capital Structure
NACCO's consolidated capital structure is presented below: |
| | | | | | | | | | | |
| JUNE 30 2019 | | DECEMBER 31 2018 | | Change |
Cash and cash equivalents | $ | 98,423 |
| | $ | 85,257 |
| | $ | 13,166 |
|
Net tangible assets | 167,510 |
| | 156,703 |
| | 10,807 |
|
Intangible assets, net | 38,987 |
| | 40,516 |
| | (1,529 | ) |
Net assets | 304,920 |
| | 282,476 |
| | 22,444 |
|
Total debt | (12,002 | ) | | (11,021 | ) | | (981 | ) |
Bellaire closed mine obligations | (20,768 | ) | | (20,751 | ) | | (17 | ) |
Total equity | $ | 272,150 |
| | $ | 250,704 |
| | $ | 21,446 |
|
Debt to total capitalization | 4% | | 4% | | —% |
The increase in net assets was primarily due to the increase in cash and net tangible assets. The increase in net tangible assets was mainly attributable to a decrease in compensation-related liabilities as a result of payments made during the first six months of 2019 and untila decrease in asset retirement obligations during the expirationfirst six months of 2019. See Note 10 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the NACoal Facility.Company's asset retirement obligations.
Contractual Obligations, Contingent Liabilities and Commitments
The Company has updated its lease accounting policy in connection with the adoption of ASC 842 as further described in Note 2 to the accompanying Unaudited Condensed Consolidated Financial Statements. Since December 31, 2017,2018, 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 3932 in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.2018. See Note 67 to the Unaudited Condensed Consolidated Financial Statements for a discussion of certain guarantees related to Coyote Creek.
SEGMENT RESULTS
COAL MINING SEGMENT
FINANCIAL REVIEW
Tons of coal delivered by the Coal Mining segment were as follows for the three and six months ended June 30 (in millions):
|
| | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 |
Unconsolidated operations | 6.9 |
| | 8.0 |
| | 15.5 |
| | 16.5 |
|
Consolidated operations | 0.9 |
| | 0.8 |
| | 1.5 |
| | 1.5 |
|
Total tons delivered | 7.8 |
| | 8.8 |
| | 17.0 |
| | 18.0 |
|
The results of operations for the Coal Mining segment were as follows for the three and six months ended June 30:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenues | $ | 22,570 |
| | $ | 20,860 |
| | $ | 39,320 |
| | $ | 38,457 |
|
Total cost of sales | 21,254 |
| | 20,068 |
| | 37,178 |
| | 36,146 |
|
Gross profit | 1,316 |
| | 792 |
| | 2,142 |
| | 2,311 |
|
Earnings of unconsolidated operations(a) | 13,529 |
| | 15,333 |
| | 29,310 |
| | 30,610 |
|
Selling, general and administrative expenses | 9,283 |
| | 7,623 |
| | 17,656 |
| | 15,051 |
|
Amortization of intangible assets | 881 |
| | 814 |
| | 1,528 |
| | 1,498 |
|
Gain on sale of assets | (12 | ) | | (210 | ) | | (30 | ) | | (223 | ) |
Operating profit | $ | 4,693 |
| | $ | 7,898 |
| | $ | 12,298 |
| | $ | 16,595 |
|
(a) See Note 7 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
Capital ExpendituresSecond Quarter of 2019 Compared with Second Quarter of 2018
ExpendituresRevenues
Revenues increased $1.7 million in the second quarter of 2019 compared with the second quarter of 2018 primarily due to an increase in tons delivered at MLMC as a result of increased customer requirements.
Operating Profit
The following table identifies the components of change in operating profit for property,the second quarter of 2019 compared with the second quarter of 2018:
|
| | | |
| Operating Profit |
2018 | $ | 7,898 |
|
Increase (decrease) from: | |
Earnings of unconsolidated operations | (1,804 | ) |
Selling, general and administrative expenses | (1,660 | ) |
Net gain on sale of assets | (198 | ) |
Amortization of intangibles | (67 | ) |
Gross profit | 524 |
|
2019 | $ | 4,693 |
|
Operating profit decreased $3.2 million in the second quarter of 2019 compared with the second quarter of 2018 primarily due to a decrease in earnings of unconsolidated operations and an increase in selling, general and administrative expenses. The decrease in earnings of unconsolidated operations was primarily due to fewer coal tons delivered as a result of customer plant outages. The increase in selling, general and equipment were $9.1administrative expenses was primarily attributable to an increase in, and the timing of, employee-related costs.
The decrease in operating profit was partially offset by improved results at the consolidated operations, primarily due to an increase in customer requirements and a reduction in cost per ton sold at MLMC, partially offset by a loss on the transfer of certain Centennial mine permits to an unrelated third party. As a result of these transfers, the Company was relieved of the associated mine reclamation obligations and recorded a $5.4 million duringreduction to Centennial's asset retirement obligation. As part of these transactions, the Company transferred a $3.4 million escrow account and paid $2.4 million of cash, resulting in a net loss on the transactions of $0.4 million recognized within cost of sales.
First Six Months of 2019 Compared with First Six Months of 2018
Revenues
Revenues increased $0.9 million in the first six months of 2018. NACoal estimates that its capital expenditures2019 compared with the first six months of 2018 primarily due to an increase in tons delivered at MLMC as a result of increased customer requirements.
Operating Profit
The following table identifies the components of change in operating profit for the remainderfirst six months of 2018 could be up to $22.1 million for new and replacement equipment and land required for future mining. These expenditures are expected to be funded from internally generated funds and/or bank borrowings.
Capital Structure
NACoal's capital structure is presented below:2019 compared with the first six months of 2018:
|
| | | | | | | | | | | |
| JUNE 30 2018 | | DECEMBER 31 2017 | | Change |
Cash and cash equivalents | $ | 3,297 |
| | $ | 6,681 |
| | $ | (3,384 | ) |
Other net tangible assets | 139,610 |
| | 149,085 |
| | (9,475 | ) |
Coal supply agreements, net | 42,056 |
| | 43,554 |
| | (1,498 | ) |
Net assets | 184,963 |
| | 199,320 |
| | (14,357 | ) |
Total debt | (27,983 | ) | | (58,146 | ) | | 30,163 |
|
Total equity | $ | 156,980 |
| | $ | 141,174 |
| | $ | 15,806 |
|
Debt to total capitalization | 15% | | 29% | | (14)% |
|
| | | |
| Operating Profit |
2018 | $ | 16,595 |
|
Increase (decrease) from: | |
Selling, general and administrative expenses | (2,605 | ) |
Earnings of unconsolidated operations | (1,300 | ) |
Centennial asset retirement obligation revision in prior year | (960 | ) |
Net gain on sale of assets | (193 | ) |
Amortization of intangibles | (30 | ) |
Gross profit, excluding asset retirement obligation revision in prior year | 791 |
|
2019 | $ | 12,298 |
|
Operating profit decreased $4.3 million in the first six months of 2019 compared with the first six months of 2018 primarily as a result of an increase in selling, general and administrative expenses, mainly due to higher employee-related expenses, a decrease in earnings of unconsolidated operations and revisions in Centennial's asset retirement obligation in the prior year.
The decrease in net assetsearnings of unconsolidated operations was primarily due to the change in other net tangible assetsfewer coal tons delivered as a result of acustomer plant outages, partially offset by an increase in coal tons delivered at Bisti. Coal deliveries at Bisti were reduced during the prior year while the power plant's owners were installing additional environmental controls.
The change in intercompany accounts receivable and the change in cash and cash equivalentsCentennial's asset retirement obligation is primarily due to the repaymentabsence of borrowingsa $1.0 million favorable revision that occurred during the prior year.
NORTH AMERICAN MINING ("NAMining") SEGMENT
FINANCIAL REVIEW
Tons of limestone delivered by the NAMining segment were as follows for the three and six months ended June 30 (in millions): |
| | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 |
Unconsolidated operations | 2.5 |
| | 1.6 |
| | 4.4 |
| | 3.5 |
|
Consolidated operations | 9.3 |
| | 9.4 |
| | 19.1 |
| | 19.5 |
|
Total tons delivered | 11.8 |
| | 11.0 |
| | 23.5 |
| | 23.0 |
|
The results of operations for the NAMining segment were as follows for the three and six months ended June 30:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenues | $ | 10,728 |
| | $ | 9,067 |
| | $ | 21,503 |
| | $ | 19,280 |
|
Total cost of sales | 10,473 |
| | 8,398 |
| | 20,473 |
| | 17,764 |
|
Gross profit | 255 |
| | 669 |
| | 1,030 |
| | 1,516 |
|
Earnings of unconsolidated operations(a) | 614 |
| | 90 |
| | 1,103 |
| | 368 |
|
Selling, general and administrative expenses | 1,359 |
| | 602 |
| | 2,591 |
| | 1,132 |
|
Gain on sale of assets | (7 | ) | | — |
| | (7 | ) | | (39 | ) |
Operating (loss) profit | $ | (483 | ) | | $ | 157 |
| | $ | (451 | ) | | $ | 791 |
|
(a) See Note 7 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
Second Quarter of 2019 Compared with Second Quarter of 2018
Revenues
Revenues increased in the second quarter of 2019 compared with the second quarter of 2018 due to higher reimbursed costs. Reimbursed costs have an offsetting amount in cost of goods sold and have no impact on NACoal's revolving credit facility duringoperating profit.
Operating (Loss) Profit
The following table identifies the components of change in operating (loss) profit for the second quarter of 2019 compared with the second quarter of 2018:
|
| | | |
| Operating (Loss) Profit |
2018 | $ | 157 |
|
Increase (decrease) from: | |
Selling, general and administrative expenses | (757 | ) |
Gross profit | (414 | ) |
Earnings of unconsolidated operations | 524 |
|
Net gain on sale of assets | 7 |
|
2019 | $ | (483 | ) |
NAMining's operating profit decreased $0.6 million in the second quarter of 2019 compared with the second quarter of 2018 primarily as a result of an increase in selling, general and administrative expenses, which includes higher employee-related and business development costs, and a decrease in gross profit, primarily due to higher employee-related costs and an increase in supplies and repairs and maintenance expenses. These items were partially offset by an improvement in earnings of unconsolidated operations attributable to a new customer contract.
First Six Months of 2019 Compared with First Six Months of 2018
Revenues
Despite the decrease in deliveries at the consolidated operations, revenues increased in the first six months of 2018.2019 compared with the first six months of 2018 due to higher reimbursed costs. Reimbursed costs have an offsetting amount in cost of goods sold and have no impact on operating profit.
Operating Profit
The following table identifies the components of change in operating profit for the first six months of 2019 compared with the first six months of 2018:
|
| | | |
| Operating Profit |
2018 | $ | 791 |
|
Increase (decrease) from: | |
Selling, general and administrative expenses | (1,459 | ) |
Gross profit | (486 | ) |
Net gain on sale of assets | (32 | ) |
Earnings of unconsolidated operations | 735 |
|
2019 | $ | (451 | ) |
NAMining's operating profit decreased $1.2 million in the first six months of 2019 compared with the first six months of 2018 primarily as a result of an increase in selling, general and administrative expenses, which includes additional employee-related and business development costs, and a decrease in gross profit, primarily due to higher employee-related costs and supplies expense. These items were partially offset by an improvement in earnings of unconsolidated operations attributable to a new customer contract.
NACCOMINERALS MANAGEMENT SEGMENT
FINANCIAL REVIEW
The results of operations for the Minerals Management segment were as follows for the three and six months ended June 30:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenues | $ | 8,242 |
| | $ | 3,866 |
| | $ | 20,928 |
| | $ | 7,342 |
|
Total cost of sales | 1,262 |
| | 400 |
| | 2,088 |
| | 760 |
|
Gross profit | 6,980 |
| | 3,466 |
| | 18,840 |
| | 6,582 |
|
Selling, general and administrative expenses | 191 |
| | 254 |
| | 382 |
| | 427 |
|
Gain on sale of assets | — |
| | — |
| | — |
| | (1 | ) |
Operating profit | $ | 6,789 |
| | $ | 3,212 |
| | $ | 18,458 |
| | $ | 6,156 |
|
Second Quarter of 2019 Compared with Second Quarter of 2018 and First Six Months of 2019 Compared with First Six Months of 2018
Revenues and Operating Profit
Revenues and operating profit increased in the second quarter of 2019 and the first six months of 2019 compared with the 2018 periods, primarily due to a higher number of wells operated by third parties to extract natural gas from the Company's mineral reserves in Ohio. The number of producing wells increased as additional pipeline, gas compression, and other transportation
infrastructure came online in southeast Ohio. The increase in operating profit was partially offset by an increase in cost of sales due to higher outside service fees.
UNALLOCATED ITEMS AND OTHERELIMINATIONS
FINANCIAL REVIEW
Operating Results
The results of operations at NACCOUnallocated Items and OtherEliminations were as follows for the three and six months ended June 30:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2018 | | 2017 | | 2018 | | 2017 |
Revenues | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Operating loss | $ | (1,720 | ) | | $ | (1,364 | ) | | $ | (3,281 | ) | | $ | (2,884 | ) |
Other expense | $ | 59 |
| | $ | 319 |
| | $ | 436 |
| | $ | 617 |
|
Loss before income tax provision (benefit) | $ | (1,779 | ) | | $ | (1,683 | ) | | $ | (3,717 | ) | | $ | (3,501 | ) |
|
| | | | | | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 |
Operating loss | $ | (1,838 | ) | | $ | (3,465 | ) | | $ | (4,771 | ) | | $ | (6,019 | ) |
Second Quarter of 20182019 Compared with Second Quarter of 2017 and 2018
Operating Loss
The $1.6 million decrease in operating loss for the three months ended June 30, 2019 compared with 2018 was primarily due to lower professional fees. The second quarter of 2018 included professional fees incurred for arbitration with a former customer.
First Six Months of 20182019 Compared with First Six Months of 20172018
Operating Loss
The increase$1.2 million decrease in NACCO and Other's operating loss for both the three andfirst six months ended June 30, 2018of 2019 compared with 2017 comparable periods2018 was primarily due to lower professional fees, partially offset by increased employee-related expenses.
NACCO Industries, Inc. Outlook
Coal Mining Outlook
In the second half and for the full year of 2019, the Company expects coal deliveries to decrease compared with the respective prior year periods. The expected reduction in coal deliveries is a result of changes in customer requirements, including the timing and duration of power plant outages, as well as comparisons to historically high delivery levels at certain of the unconsolidated operations in the prior year.
Revenues in the second half of 2019 are expected to decrease primarily as a result of the absence of a favorable $3.0 million contractual settlement recognized at MLMC in the fourth quarter of 2018. Excluding the contractual settlement, revenues in the second half and full year of 2019 are expected to decrease modestly compared with the comparable 2018 periods due to the change in customer requirements.
Excluding the $3.0 million contractual settlement, as well as $1.8 million of favorable adjustments recognized in the fourth quarter of 2018 related to a reduction in management fees chargedCentennial's mine reclamation liabilities, operating profit in the second half of 2019 is expected to increase compared with the subsidiaries,second half of 2018 primarily as a result of a reduction in operating expenses and improved results at the consolidated mining operations. These favorable changes are expected to be partially offset by lowerreduced income at the unconsolidated Coal Mining operations as customer requirements are expected to be reduced from the prior year. The reduction in operating expenses is primarily due to a shift in the timing of costs between quarters. Full-year 2019 operating expenses are expected to be comparable to 2018.
Excluding the favorable 2018 items noted above and an additional $1.0 million favorable mine reclamation liability adjustment recognized in the first quarter of 2018, full-year 2019 operating profit is expected to decrease modestly compared with full-year 2018 as reduced income at the unconsolidated Coal Mining operations, due to fewer tons delivered, is expected to be partially offset by improved results at the consolidated mining operations.
NAMining Outlook
NAMining expects operating profit in the second half of 2019 to improve over the first half of the year, and be comparable to the second half of 2018. Operating profit for the remainder of 2019 is expected to benefit from an increase in earnings associated with new contracts, which are anticipated to be partly offset by continued spending on business development activities and increased employee-related expenses. The management fees charged to NACoal represent an allocation of corporate overheadAs a result of the parent company. The three and six months ended June 30, 2017 included $1.0 million and $2.0 millionoperating loss in the first half of management fees related2019, NAMining expects full-year 2019 operating profit to HBBHC, respectively.be significantly lower than 2018.
In connectionNAMining will continue to incur expenses to support business development activities, which will contribute to an increase in operating expenses in 2019 over 2018. Over the longer term, the Company expects operating profit to improve as the business expands and is able to capture economies of scale made available through recent and ongoing investments in people, systems and infrastructure to support continued growth. NAMining entered into two new contracts during the second quarter of 2019. These new contracts, which are expected to commence in the third quarter, will have a modest impact on earnings in the second half of 2019 and will contribute moderately beginning in 2020.
Minerals Management Outlook
The Minerals Management segment derives income from royalty-based leases under which lessees make payments to the Company based on their sale of natural gas and, to a lesser extent, oil and coal, extracted primarily by third parties. The Company continued to experience a significant increase in royalty income in the first half of 2019 compared with the spin-offfirst half of HBBHC,2018, primarily due to an increase in the Company and HBBHC entered intonumber of gas wells operated by third parties to extract natural gas from the Company's Ohio Utica shale mineral reserves. In the second half of 2019, royalty income is currently expected to increase substantially over the second half of 2018 but at a Transition Services Agreement ("TSA"). Undersignificantly lower rate than realized in the termsfirst half of 2019. Importantly, however, royalty income can fluctuate favorably or unfavorably in response to a number of factors outside of the TSA,Company's control, including the Company provides various servicesnumber of wells being operated by third parties, fluctuations in commodity prices (primarily natural gas), fluctuations in production rates, regulatory risks, the Company's lessees' willingness and ability to HBBHC on a transitional basis, as needed, for varying periods after the spin-off date. The transition services are materially complete. NACCO received fees of $0.2 millionincur well-development and $0.4 million in the threeother operating costs, and six months ended June 30, 2018, recorded as a reduction to selling, general and administrative expenses.
Contractual Obligations, Contingent Liabilities and Commitments
Since December 31, 2017, there have been no significant changes in the totalavailability and continuing development of infrastructure. Oil and natural gas production is further impacted by the natural production decline that occurs during the life of a well.
Consolidated Outlook
Overall, NACCO expects a significant increase in full-year 2019 consolidated net income compared with 2018 due to the increase in net income in the first half of 2019 and an anticipated improvement in the second half of the year, including or excluding the favorable prior year items noted previously. The full-year effective income tax rate, excluding discrete items, is expected to be approximately 15% based on current estimates in the mix of earnings between entities that benefit from percentage depletion and those that do not.
Consolidated cash flow before financing activities in 2019 is expected to increase compared with 2018. Capital expenditures are expected to be approximately $28 million in 2019 compared with $20.9 million in 2018 and $15.7 million in 2017. The increase in capital expenditures in 2019 is due to spending at NAMining for dragline acquisition and relocation, as well as spending at MLMC as its mine plan includes moving into a new mine area which will require increased capital expenditures over the next several years. The increase in capital expenditures will result in an increase in depreciation in future years that will affect operating profit at the consolidated operations.
One of the Company’s core strategies is to ensure the resiliency of its existing coal mining operations. The Company works to drive down coal production costs and maximize efficiency and operating capacity at mine locations to help customers with management fee contracts be more competitive. This benefits both customers and the Company's Coal Mining segment, as fuel cost is the major driver for power plant dispatch. Increased power plant dispatch drives increased demand for coal by the Coal Mining segment's customers.
The Company continues to evaluate opportunities to expand its core coal mining business, however opportunities are likely to be limited. Low natural gas prices and growth in renewable energy sources, such as wind and solar, could continue to unfavorably affect the amount of NACCOelectricity attributable to coal-fired power plants. The political and Other contractual obligations, contingent liabilities or commercial commitments, orregulatory environment is not generally receptive to development of new coal-fired power generation projects which would create opportunities to build and operate new coal mines. However, the timingCompany does continue to seek out and pursue opportunities where it can apply its management fee business model to replace legacy operators of cash flows in accordance with those obligations as reported on page 43existing surface coal mining operations in the Company's Annual Report on Form 10-K forUnited States. Outright acquisitions of existing coal mines or mining companies with exposure to fluctuating coal commodity markets, or structures that would create significant leverage, are outside the year ended December 31, 2017.Company’s area of focus.
The Company believes growth and diversification can come from pursuing opportunities to leverage skills honed in the Company’s core mining operations and utilizing the Company’s unique, service-based, management-fee business model, when possible. The Company continues to pursue non-coal mining opportunities principally through its NAMining segment. NAMining has served as a strong growth platform by focusing on the operation and maintenance of draglines for limestone producers. NAMining will continue to pursue growth in dragline operation and maintenance, while expanding the scope of work provided to customers and focusing on mining a broader range of aggregates and other minerals. The Company also continues to focus on developing its Minerals Management segment, principally related to its Ohio mineral reserves, and potentially expanding its asset base. In addition, the Company's newest business, MRNA, creates and sells stream and wetland mitigation credits and provides services to those engaged in permittee-responsible mitigation.
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q that are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are made subject to certain risks and uncertainties, which could cause actual results to differ materially from those presented. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Among the factors that could cause plans, actions and results to differ materially from current expectations are, without limitation: (1) changes in tax laws or regulatory requirements, including changes in mining or power plant emission regulations and health, safety or environmental legislation, (2) changes in costs related to geological and geotechnical conditions, repairs and maintenance, new equipment and replacement parts, fuel or other similar items, (3) regulatory actions, changes in mining permit requirements or delays in obtaining mining permits that could affect deliveries to customers, (4) weather conditions, extended power plant outages, liquidity events or other events that would change the level of customers' coal or limestoneaggregates requirements, (5) weather or equipment problems that could affect deliveries to customers, (6) changes in the power industry that would affect demand for NACoal'sthe Company's mineral reserves, (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 the ability of lessees to obtain capital or financing needed for well development operations, (8) changes in the costs to reclaim NACoal mining areas, (8)(9) costs to pursue and develop new mining and value-added service opportunities, (9)(10) changes to or termination of a long-term mining contract, or a customer default under a contract, (10)(11) delays or reductions in coal or limestoneaggregates deliveries, at NACoal's or NAM's operations, (11)(12) changes in the prices of hydrocarbons, particularly diesel fuel, natural gas and oil, and (13) increased competition, including consolidation within the industry,coal and (12) the possibility that the impact of the U.S. Tax Cuts and Jobs Act could be less favorable than current estimates.
aggregates industries.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK
The Company entered into certain financing arrangements that require interest payments based on floating interest rates. As such,a “smaller reporting company” as defined by Rule 12b-2 of the Company's financial results are subject to changes in the market rateSecurities Exchange Act of interest. There is an inherent rollover risk for borrowings as they mature and are renewed at current market rates. Based on the average interest rate and the borrowings outstanding on these financing arrangements during the three and six months ended June 30, 2018,1934, the Company doesis not believe that a 10% change in the interest rate would have a material effect on the Unaudited Condensed Consolidated Financial Statements.
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 subjectrequired to variability as the market for these commodities changes. The Company monitorsprovide this risk and utilizes forward purchase contracts to manage a portion of NACoal's exposure related to diesel fuel volatility. There were no material changes in the Company's commodity price risk during the second quarter of 2018.information.
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 second quarter of 2018,2019, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
None.
Item 1A Risk Factors
No material changes to the risk factors from the Company's Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
| | Issuer Purchases of Equity Securities (1) | Issuer Purchases of Equity Securities (1) | 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) | (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 (April 1 to 30, 2018) | 1,668 |
| | $ | 32.91 |
| | 1,668 |
| | $ | 24,945,106 |
| |
Month #2 (May 1 to 31, 2018) | — |
| | $ | — |
| | — |
| | $ | 24,945,106 |
| |
Month #3 (June 1 to 30, 2018) | — |
| | $ | — |
| | — |
| | $ | 24,945,106 |
| |
Month #1 (April 1 to 30, 2019) | | 2,230 |
| | $ | 37.78 |
| | 2,230 |
| | $ | 22,321,992 |
|
Month #2 (May 1 to 31, 2019) | | — |
| | $ | — |
| | — |
| | $ | 22,321,992 |
|
Month #3 (June 1 to 30, 2019) | | — |
| | $ | — |
| | — |
| | $ | 22,321,992 |
|
Total | 1,668 |
| | $ | 32.91 |
| | 1,668 |
| | $ | 24,945,106 |
| 2,230 |
| | $ | 37.78 |
| | 2,230 |
| | $ | 22,321,992 |
|
| |
(1) | In February 2018, the Company established a new stock repurchase program allowing for the purchase of up to $25.0 million of the Company's Class A Common Stock outstanding through December 31, 2019. See Note 5 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Company's stock repurchase program. |
Item 3 Defaults Upon Senior Securities
None.
Item 4 Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 filed with this Quarterly Report on Form 10-Q for the period ended June 30, 2018.2019.
Item 5 Other Information
None.
Item 6 Exhibits
|
| | |
Exhibit | | |
Number* | | Description of Exhibits |
| | |
31(i)(1) | | |
31(i)(2) | | |
32 | | |
95 | | |
101.INS | | XBRL Instance Document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
* Numbered in accordance with Item 601 of Regulation S-K.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | NACCO Industries, Inc. (Registrant) | |
Date: | August 1, 2018July 31, 2019 | /s/ Elizabeth I. Loveman | |
| | Elizabeth I. Loveman | |
| | Vice President and Controller (principal financial and accounting officer) | |