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, 20192020 |
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 Delaware | | | 34-1505819
| |
| (State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) | |
| | | | | | |
| 5875 LANDERBROOK DRIVE, SUITELanderbrook Drive | | | | |
| Suite 220 CLEVELAND, OHIO | | | | |
| 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 Yesþ NO No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
YES Yesþ NO No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act |
| | | | | | | | | | | | | |
Large accelerated filero | ☐ | | Accelerated filerþ Filer | ☑ | | Non-accelerated filero | ☐ | | Smaller reporting companyþ | ☑ | | Emerging growth companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES oNO Yes ☐No þ
Number of shares of Class A Common Stock outstanding at July 26, 2019: 5,421,13431, 2020: 5,463,961
Number of shares of Class B Common Stock outstanding at July 26, 2019: 1,568,78031, 2020: 1,568,350
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 2019 | | DECEMBER 31 2018 | JUNE 30 2020 | | DECEMBER 31 2019 |
| (In thousands, except share data) | (In thousands, except share data) |
ASSETS | | | | | | |
Cash and cash equivalents | $ | 98,423 |
| | $ | 85,257 |
| $ | 95,546 |
| | $ | 122,892 |
|
Trade accounts receivable, net | 19,043 |
| | 20,817 |
| 20,335 |
| | 15,444 |
|
Accounts receivable from affiliates | 7,232 |
| | 7,999 |
| 4,715 |
| | 6,411 |
|
Inventories | 30,876 |
| | 31,209 |
| 35,732 |
| | 40,465 |
|
Assets held for sale | 5,116 |
| | 4,330 |
| |
Prepaid expenses and other | 14,891 |
| | 14,562 |
| |
Refundable federal income taxes | | 15,286 |
| | 8,928 |
|
Other current assets | | 19,089 |
| | 6,528 |
|
Total current assets | 175,581 |
| | 164,174 |
| 190,703 |
| | 200,668 |
|
Property, plant and equipment, net | 122,327 |
| | 124,554 |
| 143,208 |
| | 138,061 |
|
Intangibles, net | 38,987 |
| | 40,516 |
| 36,333 |
| | 37,902 |
|
Investments in unconsolidated subsidiaries | 22,373 |
| | 20,091 |
| 25,337 |
| | 24,611 |
|
Deferred costs | 3,185 |
| | 3,244 |
| |
Operating lease right-of-use assets | 12,095 |
| | — |
| 10,748 |
| | 11,398 |
|
Other non-current assets | 24,632 |
| | 24,412 |
| 36,625 |
| | 32,133 |
|
Total assets | $ | 399,180 |
| | $ | 376,991 |
| $ | 442,954 |
| | $ | 444,773 |
|
LIABILITIES AND EQUITY | |
| | |
| |
| | |
|
Accounts payable | $ | 7,703 |
| | $ | 7,746 |
| $ | 9,822 |
| | $ | 9,374 |
|
Accounts payable to affiliates | 344 |
| | 1,653 |
| 1,907 |
| | 577 |
|
Revolving credit agreements | 4,000 |
| | 4,000 |
| 5,000 |
| | 7,000 |
|
Current maturities of long-term debt | 499 |
| | 654 |
| 941 |
| | 795 |
|
Asset retirement obligations | 1,826 |
| | 1,826 |
| 2,285 |
| | 2,285 |
|
Accrued payroll | 17,393 |
| | 19,853 |
| 11,405 |
| | 19,583 |
|
Deferred compensation | 13,465 |
| | — |
| — |
| | 13,465 |
|
Deferred revenue | | 1,226 |
| | 1,908 |
|
Other current liabilities | 7,937 |
| | 6,516 |
| 6,675 |
| | 6,979 |
|
Total current liabilities | 53,167 |
| | 42,248 |
| 39,261 |
| | 61,966 |
|
Long-term debt | 7,503 |
| | 6,367 |
| 22,482 |
| | 17,148 |
|
Operating lease liabilities | 12,990 |
| | — |
| 11,782 |
| | 12,448 |
|
Asset retirement obligations | 30,562 |
| | 35,877 |
| 35,421 |
| | 34,574 |
|
Pension and other postretirement obligations | 9,711 |
| | 10,429 |
| 7,883 |
| | 8,807 |
|
Deferred income taxes | 6,241 |
| | 2,846 |
| 18,345 |
| | 12,338 |
|
Deferred compensation | — |
| | 12,939 |
| |
Other long-term liabilities | 6,856 |
| | 15,581 |
| 8,509 |
| | 8,100 |
|
Total liabilities | 127,030 |
| | 126,287 |
| 143,683 |
| | 155,381 |
|
Stockholders' equity | |
| | |
| |
| | |
|
Common stock: | |
| | |
| |
| | |
|
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 |
| |
Class A, par value $1 per share, 5,463,761 shares outstanding (December 31, 2019 - 5,397,458 shares outstanding) | | 5,463 |
| | 5,397 |
|
Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,568,550 shares outstanding (December 31, 2019 - 1,568,670 shares outstanding) | | 1,569 |
| | 1,569 |
|
Capital in excess of par value | 7,734 |
| | 7,042 |
| 8,942 |
| | 8,911 |
|
Retained earnings | 270,865 |
| | 250,352 |
| 294,378 |
| | 284,852 |
|
Accumulated other comprehensive loss | (13,439 | ) | | (13,611 | ) | (11,081 | ) | | (11,337 | ) |
Total stockholders' equity | 272,150 |
| | 250,704 |
| 299,271 |
| | 289,392 |
|
Total liabilities and equity | $ | 399,180 |
| | $ | 376,991 |
| $ | 442,954 |
| | $ | 444,773 |
|
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 |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
| (In thousands, except per share data) | (In thousands, except per share data) |
Revenues | $ | 41,352 |
| | $ | 33,681 |
| | $ | 81,449 |
| | $ | 64,881 |
| $ | 35,355 |
| | $ | 41,352 |
| | $ | 72,999 |
| | $ | 81,449 |
|
Cost of sales | 32,684 |
| | 28,835 |
| | 59,396 |
| | 54,611 |
| 31,515 |
| | 32,684 |
| | 64,078 |
| | 59,396 |
|
Gross profit | 8,668 |
| | 4,846 |
| | 22,053 |
|
| 10,270 |
| 3,840 |
| | 8,668 |
| | 8,921 |
| | 22,053 |
|
Earnings of unconsolidated operations | 14,143 |
| | 15,423 |
| | 30,413 |
| | 30,978 |
| 13,778 |
| | 14,143 |
| | 29,781 |
| | 30,413 |
|
Operating expenses | | | | | | | | | | | | | | |
Selling, general and administrative expenses | 12,788 |
| | 11,863 |
| | 25,441 |
| | 22,490 |
| 12,591 |
| | 12,788 |
| | 25,318 |
| | 25,441 |
|
Amortization of intangible assets | 881 |
| | 814 |
| | 1,528 |
| | 1,498 |
| 792 |
| | 881 |
| | 1,569 |
| | 1,528 |
|
Gain on sale of assets
| (19 | ) | | (210 | ) | | (37 | ) | | (263 | ) | (247 | ) | | (19 | ) | | (247 | ) | | (37 | ) |
| 13,650 |
| | 12,467 |
| | 26,932 |
| | 23,725 |
| 13,136 |
| | 13,650 |
| | 26,640 |
| | 26,932 |
|
Operating profit | 9,161 |
| | 7,802 |
| | 25,534 |
|
| 17,523 |
| 4,482 |
| | 9,161 |
| | 12,062 |
| | 25,534 |
|
Other (income) expense | | | | | | | | | | | | | | |
Interest expense | 222 |
| | 569 |
| | 453 |
| | 1,215 |
| 330 |
| | 222 |
| | 733 |
| | 453 |
|
Interest income | (581 | ) | | (119 | ) | | (1,134 | ) | | (232 | ) | (129 | ) | | (581 | ) | | (530 | ) | | (1,134 | ) |
Income from other unconsolidated affiliates | (323 | ) | | (318 | ) | | (645 | ) | | (633 | ) | (79 | ) | | (323 | ) | | (212 | ) | | (645 | ) |
Closed mine obligations | 330 |
| | 343 |
| | 696 |
| | 722 |
| 390 |
| | 330 |
| | 824 |
| | 696 |
|
Gain on equity securities | (261 | ) | | (183 | ) | | (959 | ) | | (85 | ) | (1,512 | ) | | (261 | ) | | (316 | ) | | (959 | ) |
Other, net | 11 |
| | (71 | ) | | 22 |
| | (25 | ) | (102 | ) | | 11 |
| | (117 | ) | | 22 |
|
| (602 | ) | | 221 |
| | (1,567 | ) |
| 962 |
| (1,102 | ) | | (602 | ) | | 382 |
| | (1,567 | ) |
Income before income tax provision | 9,763 |
| | 7,581 |
| | 27,101 |
|
| 16,561 |
| |
Income tax provision | 1,788 |
| | 1,188 |
| | 4,108 |
| | 1,992 |
| |
Income before income tax (benefit) provision | | 5,584 |
| | 9,763 |
| | 11,680 |
| | 27,101 |
|
Income tax (benefit) provision | | (466 | ) | | 1,788 |
| | (536 | ) | | 4,108 |
|
Net income | $ | 7,975 |
| | $ | 6,393 |
| | $ | 22,993 |
|
| $ | 14,569 |
| $ | 6,050 |
| | $ | 7,975 |
| | $ | 12,216 |
| | $ | 22,993 |
|
| |
| | | | | | | |
| | | | | | |
Earnings per share: | | | | | | | | | | | | | | |
Basic earnings per share | $ | 1.14 |
| | $ | 0.92 |
| | $ | 3.30 |
| | $ | 2.11 |
| $ | 0.86 |
| | $ | 1.14 |
| | $ | 1.74 |
| | $ | 3.30 |
|
Diluted earnings per share | $ | 1.14 |
| | $ | 0.92 |
| | $ | 3.29 |
| | $ | 2.10 |
| $ | 0.86 |
| | $ | 1.14 |
| | $ | 1.74 |
| | $ | 3.29 |
|
| |
| | | | | | | |
| | | | | | |
Basic weighted average shares outstanding | 6,986 |
| | 6,940 |
| | 6,965 |
| | 6,914 |
| 7,024 |
| | 6,986 |
| | 7,010 |
| | 6,965 |
|
Diluted weighted average shares outstanding | 6,986 |
| | 6,940 |
| | 6,993 |
| | 6,939 |
| 7,024 |
| | 6,986 |
| | 7,034 |
| | 6,993 |
|
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 | THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 | JUNE 30 | | JUNE 30 |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
| (In thousands) | (In thousands) |
Net income | $ | 7,975 |
| | $ | 6,393 |
| | $ | 22,993 |
| | $ | 14,569 |
| $ | 6,050 |
| | $ | 7,975 |
| | $ | 12,216 |
| | $ | 22,993 |
|
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 |
| |
Reclassification of pension and postretirement adjustments into earnings, net of $28 and $73 tax benefit in the three months and six months ended June 30, 2020, respectively, net of $21 and $45 tax benefit in the three and six months ended June 30, 2019, respectively. | | 101 |
| | 71 |
| | 256 |
| | 172 |
|
Total other comprehensive income | 71 |
| | 105 |
| | 172 |
| | 245 |
| 101 |
| | 71 |
| | 256 |
| | 172 |
|
Comprehensive income | $ | 8,046 |
| | $ | 6,498 |
| | $ | 23,165 |
| | $ | 14,814 |
| $ | 6,151 |
| | $ | 8,046 |
| | $ | 12,472 |
| | $ | 23,165 |
|
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 |
| 2020 | | 2019 |
| (In thousands) |
Operating activities | | | |
Net cash (used for) provided by operating activities | $ | (12,489 | ) | | $ | 22,088 |
|
| | | |
Investing activities | | | |
Expenditures for property, plant and equipment | (12,799 | ) | | (5,967 | ) |
Proceeds from the sale of property, plant and equipment | 550 |
| | 37 |
|
Purchase of equity securities | (2,000 | ) | | — |
|
Other | (395 | ) | | (22 | ) |
Net cash used for investing activities | (14,644 | ) | | (5,952 | ) |
| | | |
Financing activities | | | |
Additions to long-term debt | 6,302 |
| | 1,218 |
|
Reductions of long-term debt | (823 | ) | | (323 | ) |
Net reduction to revolving credit agreements | (2,000 | ) | | — |
|
Cash dividends paid | (2,690 | ) | | (2,480 | ) |
Purchase of treasury shares | (1,002 | ) | | (1,385 | ) |
Net cash used for financing activities | (213 | ) | | (2,970 | ) |
| | | |
Cash and cash equivalents | | | |
Total (decrease) increase for the period | (27,346 | ) | | 13,166 |
|
Balance at the beginning of the period | 122,892 |
| | 85,257 |
|
Balance at the end of the period | $ | 95,546 |
| | $ | 98,423 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN EQUITY
|
| | | | | | | |
| 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 |
|
|
| | | | | | | | | | | | | | | | | | |
| Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity |
| (In thousands, except per share data) |
Balance, January 1, 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 |
|
| | | | | | |
Balance, January 1, 2020 | $ | 5,397 |
| $ | 1,569 |
| $ | 8,911 |
| $ | 284,852 |
| $ | (11,337 | ) | $ | 289,392 |
|
Stock-based compensation | 88 |
| — |
| 377 |
| — |
| — |
| 465 |
|
Purchase of treasury shares | (32 | ) | — |
| (970 | ) | — |
| — |
| (1,002 | ) |
Net income | — |
| — |
| — |
| 6,166 |
| — |
| 6,166 |
|
Cash dividends on Class A and Class B common stock: $0.1900 per share | — |
| — |
| — |
| (1,339 | ) | — |
| (1,339 | ) |
Reclassification adjustment to net income, net of tax | — |
| — |
| — |
| — |
| 155 |
| 155 |
|
Balance, March 31, 2020 | $ | 5,453 |
| $ | 1,569 |
| $ | 8,318 |
| $ | 289,679 |
| $ | (11,182 | ) | $ | 293,837 |
|
Stock-based compensation | 10 |
| — |
| 624 |
| — |
| — |
| 634 |
|
Net income | — |
| — |
| — |
| 6,050 |
| — |
| 6,050 |
|
Cash dividends on Class A and Class B common stock: $0.1925 per share | — |
| — |
| — |
| (1,351 | ) | — |
| (1,351 | ) |
Reclassification adjustment to net income, net of tax | — |
| — |
| — |
| — |
| 101 |
| 101 |
|
Balance, June 30, 2020 | $ | 5,463 |
| $ | 1,569 |
| $ | 8,942 |
| $ | 294,378 |
| $ | (11,081 | ) | $ | 299,271 |
|
See notes to Unaudited Condensed Consolidated Financial Statements.
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Accumulated Other Comprehensive Income (Loss) | | |
| Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings | Deferred Gain (Loss) on Equity Securities | Pension and Postretirement Plan Adjustment | | Total Stockholders' Equity |
| (In thousands, except per share data) |
Balance, January 1, 2018 | $ | 5,282 |
| $ | 1,570 |
| $ | 4,447 |
| $ | 216,490 |
| | $ | 2,727 |
| | $ | (11,068 | ) | | $ | 219,448 |
|
ASC 606 adoption (See Note 2) | — |
| — |
| — |
| (2,075 | ) | | — |
| | — |
| | (2,075 | ) |
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 | 7 |
| — |
| 785 |
| — |
| | — |
| | — |
| | 792 |
|
Purchase of treasury shares | (2 | ) | — |
| (53 | ) | — |
| | — |
| | — |
| | (55 | ) |
Conversion of Class B to Class A shares | 1 |
| (1 | ) | — |
| — |
| | — |
| | — |
| | — |
|
Net income | — |
| — |
| — |
| 6,393 |
| | — |
| | — |
| | 6,393 |
|
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 |
|
| | | | | | | | | | |
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, 20192020
(In thousands, except as noted and per share amounts)
NOTE 1—Nature of Operations and Basis of Presentation
Nature of Operations: The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of NACCO Industries, Inc. (the “parent company” or “NACCO”® (“NACCO”) and its wholly owned subsidiaries (collectively, “NACCO Industries, Inc. and Subsidiaries” or the “Company”). Intercompany accounts and transactions are eliminated in consolidation. NACCO is the public holding company for The North American Coal Corporation® ("NACoal"). In the first quarter of 2019, theThe Company changed its segment reporting to threehas 3 operating segments: Coal Mining, North American Mining (“NAMining”) and Minerals 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, which included parent company operations and Bellaire Corporation (“Bellaire”), was the Company’s non-operating segment. Historical financial information for 2018 has been recast to conform to the current presentation. See Note 9 to the Unaudited Condensed Consolidated Financial Statements for further discussion of segment reporting.
The Company’s operating segments are further described below:
Coal Mining Segment
TheDuring the six months ended June 30, 2020, the operating coal mines are: Bisti Fuels LLC (“Bisti”), Caddo Creek Resources Company, LLC (“Caddo Creek”), Camino Real Fuels, LLC (“Camino Real”), The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), Demery Resources Company, LLC (“Demery”), The Falkirk Mining Company (“Falkirk”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”).
The contract mining agreement between Camino Real and its customer, Dos Republicas Coal Partnership (“DRCP”), terminated effective July 1, 2020 as a result of the unexpected termination by Comisión Federal de Electricidad (“CFE”) of its coal supply contract with an affiliate of DRCP. The termination of the contract between CFE and DRCP eliminated DRCP’s need for coal from Camino Real's Eagle Pass Mine, and will result in mine closure.
Camino Real issued a Notice of Payment Default on June 17, 2020. During the third quarter of 2020, the Company received certain inventory as well as a securitized note in settlement of the outstanding receivable balance as of June 30, 2020 and additional costs incurred through the July 9, 2020 mine closure date. Mine reclamation is the responsibility of DRCP. Camino Real has no legal obligation to perform mine reclamation but is in negotiations with DRCP to potentially perform mine reclamation activities under a new contractual arrangement. Closure of the mine does not materially impact NACCO’s outlook for 2020. The contract mining agreement between Camino Real and DRCP was previously expected to terminate in 2021.
As of June 30, 2020, all of the Liberty Fuels Company, LLC (“Liberty”) ceased all miningmine areas have been reclaimed and delivery of lignite in 2017 and commenced final mine reclamation in 2018. Centennial Natural Resources (“Centennial”), located in Alabama, ceased coal production at the end of 2015.activities, primarily monitoring, will continue until final bond release.
At all operating coal mines other than MLMC, the Company operates asis paid a management fee per ton of coal or heating unit (MMBtu) delivered. Each contract miner pursuant to a “management fee” contract. Under these long-term contracts,specifies the customer isindices and mechanics by which fees change over time, generally in line with broad measures of U.S. inflation. The customers are responsible for funding all mine operating costs, including final mine reclamation, and directly or indirectly providesproviding all of the capital required to build and operate the mine. DebtThis contract structure eliminates exposure to spot coal market price fluctuations while providing steady income and cash flow with minimal capital investment. Other than at Coyote Creek, debt financing provided by or supported by the customers is without recourse to NACCO and NACoal. As a result, these contractsSee Note 7 for further discussion of Coyote Creek's guarantees.
All operating coal mines other than MLMC meet the definition of a variable interest entity (“VIE”). In each case, NACCO is not the primary beneficiary of the VIE as it does not exercise financial control; therefore, NACCO does not consolidate the results of these operations within its financial statements. Instead, these contracts are accounted for as equity method investments. The income before income taxes associated with these VIE's is reported as Earnings of unconsolidated operations on the Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in Unconsolidated Subsidiariesunconsolidated 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 statementsConsolidated Statements of operationsOperations includes income taxes related to these entities. All of the Unconsolidated Subsidiaries are accounted for under the equity method. See Note 7 for further discussion. MLMC
Camino Real previously met the definition of a variable interest entity of which the Company was not the primary beneficiary and Centennial are consolidated operations.therefore NACCO did not consolidate Camino Real’s results of operations within its financial statements.
The Notice of Payment Default and subsequent termination of the contract mining agreement resulted in a reconsideration event, which required reassessment of the Company’s VIE conclusion. As a result of this reconsideration, Camino Real is no longer a VIE and its financial position is consolidated within NACCO’s financial statements as of June 30, 2020. The consolidation of Camino Real did not materially change the Company’s balance sheet. The results of operations for the six months ended June 30, 2020 are reported under the equity method with income before income taxes reported as Earnings of unconsolidated operations on the Consolidated Statements of Operations.
The MLMC contract is the only operating coal contract in which the Company is responsible for all operating costs, capital requirements and final mine reclamation; therefore, MLMC is consolidated within NACCO’s financial statements. MLMC sells coal to its customer at a contractually agreed-upon price which adjusts monthly, primarily based on changes in the level of established indices which reflect general U.S. inflation rates.
Centennial 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, which have no remaining book value. Cash expenditures related to mine reclamation at Coteau, Falkirk, Coyote, MLMCCentennial will continue until mine reclamation is complete, or ownership of, or responsibility for, the remaining mines is transferred. Centennial is a consolidated entity within the Coal Mining segment as the Company is responsible for carrying costs and 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.final mine reclamation.
NAMining Segment
The NAMining segment provides value-added contract mining and other services for producers of aggregates, lithium and other minerals. The segment is a primary platform for the Company’s growth and diversification outside of the coal industry. NAMining provides contract mining services for independently owned mines and quarries, creating value for its customers by performing the mining aspects of its customers’ operations. This allows customers to focus on their areas of expertise: materials handling and processing, product sales and distribution. NAMining operates primarily at limestone quarries in Florida, but is focused on expanding outside of Florida and into mining materials other than limestone. During 2019, the Company entered into a mining agreement to serve as exclusive contract miner for the Thacker Pass lithium project in northern Nevada. NAMining operates underutilizes both fixed price and cost plus 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. Allstructures. Certain of the Unconsolidated Subsidiariesentities within NAMining segment are VIEs and are accounted for under the equity method.method as Unconsolidated Subsidiaries. See Note 7 for further discussion.
Minerals Management Segment
The Minerals Management segment promotes the development of the Company’s gas, oil gas and coal reserves, generating income primarily from royalty-based lease payments from third parties. The Company’s gas, oil and undeveloped coal reserves are located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus shale natural gas), Alabama (coal and coalbed methane and natural gas) and North Dakota (coal).
The majority of the Company’s existing reserves were
acquired as part of its historical coal mining operations. The Minerals Management segment derives income primarily by entering into contracts with third-party operators, granting them the rights to explore, produce and sell natural resources in exchange for royalty payments based on the lessees' sales of natural gas and, to a lesser extent, oil and coal. Specialized employees in the Minerals Management segment also provide surface and mineral acquisition and lease maintenance services related to Company operations.
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, 2019,2020, the results of its operations, comprehensive income, cash flows and changes in equity for the six months endedJune 30, 20192020 and 20182019 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, 2018.2019.
The balance sheet at December 31, 20182019 has been derived from the audited financial statements at that date but does not include all of the information or notes required by U.S. GAAP for complete financial statements.
NOTE 2—Recently Issued Accounting Standards
Accounting Standards AdoptedCertain amounts in 2019: NACCO adopted Accounting Standard Update ("ASU") 2016-02, Leases (Topic 842), which is codified in Accounting Standards Codification 842, Leases (“ASC 842”), on January 1, 2019, using the modified retrospective transition method (the "guidance").
The most significant effect to theprior period Unaudited Condensed Consolidated Balance Sheet relatesFinancial Statements have been reclassified to conform to the recognition of new right-of-use assets (“ROU assets”) and lease liabilities for operating leases of real estate, mining and other equipment that expire at various dates through 2031. The majority of the Company's leases are operating leases. See the table below for further information on the 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 the opening balance of retained earnings. The adoption of this guidance did not have a material effect on the Company’s results of operations, cash flows, liquidity or debt-covenant compliance. NACCO did not apply the standard to the comparative periods presented in the year of adoption.current period's presentation.
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 June 30, 2019.
The 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 Company's leases do not provide an implicit rate, the Company determines the incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The assumptions used in accounting for 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—2—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, the Company’s performance obligations vary by contract and consist of the following:
At MLMC, each MMBtu delivered during the production period is considered a separate performance obligation. Revenue is recognized at the point in time that control of each MMBtu of lignite transfers to the customer. Fluctuations in revenue from period to period generally result from changes in customer demand.
At NAMining entities, the management service to oversee the operation of the equipment and 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.
The Company enters into royalty contracts which grant the right to explore, develop, produce and sell minerals controlled by the Company. These arrangements result in the transfer of mineral rights for a period of time; however, no rights to the actual land are granted other than access for purposes of exploration, development, production and sales. The mineral rights revert back to the Company at the expiration of the contract.
Under these royalty contracts, granting exclusive right, title, and interest in and to minerals, if any, is the performance obligation. The performance obligation under these contracts represents a series of distinct goods or services whereby each day of access that is provided is distinct. The transaction price consists of a variable sales-based royalty and, in certain arrangements, a fixed component in the form of an up-front lease bonus payment.As the amount of consideration the Company will ultimately be entitled to is entirely susceptible to factors outside its control, the entire amount of variable consideration is constrained at contract inception. The fixed portion of the transaction price will be recognized over the primary term of the contract, which is generally five years.
Significant Judgments
The Company’s contracts with its customers contain different types of variable consideration including, but not limited to, management fees that adjust based on coal volumes or MMBtu delivered or limestone yards, however, the terms of these variable payments relate specifically to ourthe Company's efforts to satisfy one or more, but not all of, the performance obligations (or to a specific outcome from satisfying the performance obligations), in the contract. Therefore, the Company allocates each variable payment (and subsequent changes to that payment) entirely to the specific performance obligation to which it relates. Management fees, as well as general and administrative fees, are also adjusted based on changes in specified indices (e.g., CPI) to compensate for general inflation changes. Index adjustments, if applicable, are effective prospectively. Certain contracts include reimbursement of actual costs incurred.
Disaggregation of Revenue
In accordance with ASC 606-10-50, the Company disaggregates revenue 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. The Company’s business consists of the Coal Mining, NAMining and Minerals Management segments as well as Unallocated Items. See Note 9 to the Unaudited Condensed Consolidated Financial Statements for further discussion of segment reporting.
The following table disaggregates revenue by major sources:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 |
Major Goods/Service Lines | 2020 | | 2019 | | 2020 | | 2019 |
Coal Mining | $ | 21,573 |
| | $ | 22,570 |
| | $ | 42,501 |
| | $ | 39,320 |
|
NAMining | 12,048 |
| | 10,728 |
| | 23,672 |
| | 21,503 |
|
Minerals Management | 1,987 |
| | 8,242 |
| | 7,228 |
| | 20,928 |
|
Unallocated Items | 327 |
| | 131 |
| | 353 |
| | 674 |
|
Eliminations | (580 | ) | | (319 | ) | | (755 | ) | | (976 | ) |
Total revenues | $ | 35,355 |
| | $ | 41,352 |
| | $ | 72,999 |
| | $ | 81,449 |
|
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Goods transferred at a point in time | $ | 20,976 |
| | $ | 21,879 |
| | $ | 41,260 |
| | $ | 37,964 |
|
Services transferred over time | 14,379 |
| | 19,473 |
| | 31,739 |
| | 43,485 |
|
Total revenues | $ | 35,355 |
| | $ | 41,352 |
| | $ | 72,999 |
| | $ | 81,449 |
|
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 |
Major Goods/Service Lines | 2019 | | 2018 | | 2019 | | 2018 |
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 | $ | 41,352 |
| | $ | 33,681 |
| | $ | 81,449 |
| | $ | 64,881 |
|
| | | | | | | |
Timing of Revenue Recognition | | | | | | | |
Goods transferred at a point in time | $ | 21,879 |
| | $ | 20,174 |
| | $ | 37,964 |
| | $ | 37,195 |
|
Services transferred over time | 19,473 |
| | 13,507 |
| | 43,485 |
| | 27,686 |
|
Total revenues | $ | 41,352 |
| | $ | 33,681 |
| | $ | 81,449 |
| | $ | 64,881 |
|
Contract Balances
The opening and closing balances of the Company’s current and long-term contract liabilities and receivables are as follows:
|
| | | | | | | | | | | |
| Contract balances |
| Trade accounts receivable, net | | Contract liability (current) | | Contract liability (long-term) |
Balance, January 1, 2020 | $ | 15,444 |
| | $ | 944 |
| | $ | 2,153 |
|
Balance, June 30, 2020 | 20,335 |
| | 941 |
| | 1,683 |
|
Increase (decrease) | $ | 4,891 |
| | $ | (3 | ) | | $ | (470 | ) |
|
| | | | | | | | | | | |
| 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, the 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, 20192020 and June 30, 20182019 that was included in the opening contract liability was $0.2$0.3 million and $0.3$0.2 million, respectively. The amount of revenue recognized in the six months ended June 30, 20192020 and June 30, 20182019 that was $0.4included in the opening contract liability was $0.5 million and $0.6$0.4 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 contracts, which are generally five years. The Company expects to recognize an additional $0.4$0.5 million in the remainder of 2019,2020, $0.9 million in 2021, $0.7 million in both 2020 and 2021, $0.52022, $0.3 million in 2022,2023, and $0.1 million in 20232024 related to the contract liability remaining at June 30, 2019.2020. 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.
NOTE 4—3—Inventories
Inventories are summarized as follows:
|
| | | | | | | |
| JUNE 30 2020 | | DECEMBER 31 2019 |
Coal | $ | 8,929 |
| | $ | 15,700 |
|
Mining supplies | 26,803 |
| | 24,765 |
|
Total inventories | $ | 35,732 |
| | $ | 40,465 |
|
|
| | | | | | | |
| JUNE 30 2019 | | DECEMBER 31 2018 |
Coal | $ | 7,752 |
| | $ | 11,030 |
|
Mining supplies | 23,124 |
| | 20,179 |
|
Total inventories | $ | 30,876 |
| | $ | 31,209 |
|
NOTE 4—Leases
NACCO adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019. The most significant effect to the Unaudited Condensed Consolidated Balance Sheets relates to the recognition of new right-of-use assets and lease liabilities for operating leases of real estate, mining and other equipment that expire at various dates through 2031. The majority of the Company's leases are operating leases. See the table below for further information on the balances included in the Unaudited Condensed Consolidated Balance Sheets. Several leases include renewal or fair value purchase options, which are not recognized on the Unaudited Condensed Consolidated Balance Sheets. The Company's lease agreements do not contain lease payments that depend on an index or a rate, as such, minimum lease payments do not include variable lease payments.
Leased assets and liabilities include the following: |
| | | | | | | |
Description | Location | JUNE 30 2020 | DECEMBER 31 2019 |
Assets | | | |
Operating | Operating lease right-of-use assets | $ | 10,748 |
| $ | 11,398 |
|
Finance | Property, plant and equipment, net (a) | $ | 98 |
| $ | 544 |
|
| | | |
Liabilities | | | |
Current | | | |
Operating | Other current liabilities | $ | 1,308 |
| $ | 1,318 |
|
Finance | Current maturities of long-term debt | $ | 33 |
| $ | 558 |
|
Noncurrent | | | |
Operating | Operating lease liabilities | $ | 11,782 |
| $ | 12,448 |
|
Finance | Long-term debt | $ | 68 |
| $ | 85 |
|
(a) Finance leased assets are recorded net of accumulated amortization of less than $0.1 million and $1.9 million as of June 30, 2020 and December 31, 2019, respectively.
The components of lease expense were as follows: |
| | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | | SIX MONTHS ENDED |
| | JUNE 30 | | JUNE 30 |
Description | Location | 2020 | 2019 | | 2020 | 2019 |
Lease expense | | | | | | |
Operating lease cost | Selling, general and administrative expenses | $ | 504 |
| $ | 589 |
| | $ | 1,014 |
| $ | 1,214 |
|
Finance lease cost: | | | | | | |
Amortization of leased assets | Cost of sales | 9 |
| 100 |
| | 103 |
| 196 |
|
Interest on lease liabilities | Interest expense
| 1 |
| 3 |
| | 6 |
| 6 |
|
Variable lease expense | Selling, general and administrative expenses | 137 |
| 175 |
| | 287 |
| 276 |
|
Short-term lease expense | Selling, general and administrative expenses | 45 |
| 89 |
| | 159 |
| 163 |
|
Total lease expense | | $ | 696 |
| $ | 956 |
| | $ | 1,569 |
| $ | 1,855 |
|
Future minimum finance and operating lease payments were as follows at June 30, 2020: |
| | | | | | | | | | | |
| Finance Leases | | Operating Leases | | Total |
Remainder of 2020 | $ | 19 |
| | $ | 1,077 |
| | $ | 1,096 |
|
2021 | 37 |
| | 2,135 |
| | 2,172 |
|
2022 | 37 |
| | 2,174 |
| | 2,211 |
|
2023 | 16 |
| | 1,693 |
| | 1,709 |
|
2024 | — |
| | 1,663 |
| | 1,663 |
|
Subsequent to 2024 | — |
| | 9,330 |
| | 9,330 |
|
Total minimum lease payments | $ | 109 |
| | $ | 18,072 |
| | $ | 18,181 |
|
Amounts representing interest | 8 |
| | 4,982 |
| | |
Present value of net minimum lease payments | $ | 101 |
| | $ | 13,090 |
| | |
As most of the Company's leases do not provide an implicit rate, the Company determines the incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The Company considers its credit rating and the current economic environment in determining this collateralized rate.
The assumptions used in accounting for ASC 842 were as follows: |
| | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 |
Lease term and discount rate | 2020 | 2019 | | 2020 | 2019 |
Weighted average remaining lease term (years) | | | | | |
Operating | 9.32 |
| 9.89 |
| | 9.32 |
| 9.89 |
|
Finance | 2.92 |
| 1.76 |
| | 2.92 |
| 1.76 |
|
| | | | | |
Weighted average discount rate | | | | | |
Operating | 7.01 | % | 6.97 | % | | 7.01 | % | 6.97 | % |
Finance | 5.09 | % | 5.15 | % | | 5.09 | % | 5.15 | % |
The following table details cash paid for amounts included in the measurement of lease liabilities:
|
| | | | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 |
Cash paid for amounts included in the measurement of lease liabilities | 2020 | 2019 | | 2020 | 2019 |
Operating cash flows from operating leases | $ | 543 |
| $ | 587 |
| | $ | 1,114 |
| $ | 1,160 |
|
Operating cash flows from finance leases | $ | 1 |
| $ | 3 |
| | $ | 6 |
| $ | 6 |
|
Financing cash flows from finance leases | $ | 8 |
| $ | 110 |
| | $ | 542 |
| $ | 232 |
|
NOTE 5—Stockholders' Equity
Stock Repurchase Program:On February 14, 2018,November 6, 2019, the Company's Board of Directors approved a stock repurchasepurchase program ("20182019 Stock Repurchase Program") providing for the repurchasepurchase of up to $25 million of the Company's outstanding Class A Common Stock through December 31, 2019.2021. NACCO's previous repurchase program ("2018 Stock Repurchase Program") would have expired on December 31, 2019 but was terminated and replaced by the 2019 Stock Repurchase Program. As a result of the uncertainty surrounding the COVID-19 pandemic, the Company suspended repurchasing shares under the 2019 Stock Repurchase Program in March 2020. Prior to the decision to cease share repurchases, the Company repurchased 32,286 shares of Class A Common Stock under the 2019 Stock Repurchase Program for an aggregate purchase price of $1.0 million during the six months ended June 30, 2020. During the three and six months ended June 30, 2019, the Company repurchased 2,230 and 38,524 shares, respectively, of Class A Common Stock under the 2018 Stock Repurchase 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 20182019 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 20182019 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 20182019 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 6—Fair Value Disclosure
Recurring Fair Value Measurements: The following table presents the Company's assets and liabilities accounted for at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
| | | | Quoted Prices in | | | | Significant |
| | | | Active Markets for | | Significant Other | | Unobservable |
| | | | Identical Assets | | Observable Inputs | | Inputs |
Description | | Date | | (Level 1) | | (Level 2) | | (Level 3) |
| | June 30, 2020 | | | | | | |
Assets: | |
| | | | | | |
Equity securities | | $ | 12,486 |
| | $ | 12,486 |
| | $ | — |
| | $ | — |
|
| | $ | 12,486 |
| | $ | 12,486 |
| | $ | — |
| | $ | — |
|
| | | | | | | | |
| | December 31, 2019 | | | | | | |
Assets: | | | | | | | | |
Equity securities | | $ | 10,120 |
| | $ | 10,120 |
| | $ | — |
| | $ | — |
|
| | $ | 10,120 |
| | $ | 10,120 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
| | | | Quoted Prices in | | | | Significant |
| | | | Active Markets for | | Significant Other | | Unobservable |
| | | | Identical Assets | | Observable Inputs | | Inputs |
Description | | Date | | (Level 1) | | (Level 2) | | (Level 3) |
| | June 30, 2019 | | | | | | |
Assets: | |
| | | | | | |
Equity securities | | $ | 9,445 |
| | $ | 9,445 |
| | $ | — |
| | $ | — |
|
| | $ | 9,445 |
| | $ | 9,445 |
| | $ | — |
| | $ | — |
|
| | | | | | | | |
| | December 31, 2018 | | | | | | |
Assets: | | | | | | | | |
Equity securities | | $ | 8,716 |
| | $ | 8,716 |
| | $ | — |
| | $ | — |
|
| | $ | 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. Prior to 2018,2019, Bellaire established a $5.0 million mine water treatment trust (the "Mine Water Treatment Trust") to provide a financial assurance mechanism to assure the long-term treatment of post-mining discharges.discharge. 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. The Mine Water Treatment Trust realizedCompany recognized a gain of $1.1 million and a loss of $0.1 million in the three and six months ended June 30, 2020, respectively, and a gain of $0.3 million and $1.0 million in the three and six months ended June 30, 2019, respectively, andrelated to the Mine Water Treatment Trust.
During the second quarter of 2020, the Company invested $2.0 million in equity securities of a public company with a diversified portfolio of royalty producing mineral interests. The investment is reported at fair value based upon quoted market prices in active markets for identical assets; therefore, it is classified as Level 1 within the fair value hierarchy. The Company recognized a gain of $0.2$0.4 million and $0.1 million in both the three and six months ended June 30, 2018, respectively. These gains/2020 related to the investment in these equity securities.
The gains and losses related to equity securities are reported on the line gainGain on equity securities in the Other (income) expense section of the Unaudited Condensed Consolidated Statements of Operations.
There were no transfers into or out of Levels 1, 2 or 3 during the three and six months ended June 30, 20192020 and 2018.2019.
NOTE 7—Unconsolidated Subsidiaries
Each of NACoal's wholly owned Unconsolidated Subsidiaries, within the Coal Mining and NAMining segments, meet the definition of a VIE. The Unconsolidated Subsidiaries are capitalized primarily with debt financing provided by or supported by their respective customers, and other than at Coyote Creek, without recourse to NACCO and NACoal. Although NACoal owns 100% of the equity and manages the daily operations of the Unconsolidated Subsidiaries, the Company has determined that the equity capital provided by NACoal is not sufficient to adequately finance the ongoing activities or absorb any expected losses without additional support from the customers. The customers have a controlling financial interest and have the power to direct the activities that most significantly affect the economic performance of the entities. As a result, NACoalthe Company is not the primary beneficiary and therefore does not consolidate these entities' financial positions or results of operations. See Note 1 for a discussion of these entities.
The investmentInvestment in the unconsolidated subsidiaries and related tax positions totaled $22.4$25.3 million and $20.1$24.6 million at June 30, 20192020 and December 31, 2018,2019, respectively. The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $5.4$5.3 million and $4.4$5.0 million at June 30, 20192020 and December 31, 2018,2019, respectively.
NACoal is a party to certain guarantees related to Coyote Creek. Under certain circumstances of default or termination of Coyote Creek’s Lignite Sales Agreement (“LSA”), NACoal would be obligated for payment of a "make-whole" amount to Coyote Creek’s third-party lenders. The “make-whole” amount is based on the excess, if any, of the discounted value of the remaining scheduled debt payments over the principal amount. In addition, in the event Coyote Creek’s LSA is terminated on or after January 1, 2024 by Coyote Creek’s customers, NACoal is obligated to purchase Coyote Creek’s dragline and rolling stock for the then net book value of those assets. To date, no payments have been required from NACoal since the inception of these guarantees. The Company believes that the likelihood 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 Subsidiaries is as follows:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 |
| 2020 | | 2019 | | 2020 | | 2019 |
Gross profit | $ | 15,176 |
| | $ | 14,631 |
| | $ | 31,746 |
| | $ | 33,767 |
|
Income before income taxes | $ | 13,803 |
| | $ | 14,516 |
| | $ | 30,044 |
| | $ | 31,253 |
|
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenues | $ | 177,883 |
| | $ | 182,018 |
| | $ | 365,122 |
| | $ | 365,064 |
|
Gross profit | $ | 14,631 |
| | $ | 20,405 |
| | $ | 33,767 |
| | $ | 41,468 |
|
Income before income taxes | $ | 14,516 |
| | $ | 15,456 |
| | $ | 31,253 |
| | $ | 31,578 |
|
NOTE 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 9—Business Segments
In 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’sCompany'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 serveserves as the platform for pursuing non-coal mining projects and the Minerals Management segment will work to capitalize onpromotes the Company’sdevelopment of the Company's gas, 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 CODMChief Operating Decision Maker 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 are accounted for as third-party arrangements for purposes of presenting segment results of operations and are eliminated in consolidation.
As of January 1, 2020, the Company retrospectively changed its computation of segment operating profit to reclassify certain expenses, primarily related to executive and board compensation. These expenses are now included in unallocated items. The change in segment reporting reflected a decision to evaluate the financial performance of the Company’s segments excluding executive and board compensation. All prior period segment information has been reclassified to conform to the new presentation. This segment reporting change has no impact on consolidated operating results.
All financial statement line items below operating profit (other income including interest expense and interest income, the provision for income taxes and net income) are presented and discussed within this Form 10-Q on a consolidated basis. Included within other income on the line Income from other unconsolidated affiliates within the Unaudited Condensed Consolidated Statements of Operations is the financial results of NoDak Energy Services, LLC ("NoDak"). NoDak operatesoperated and maintainsmaintained a coal drying system at a customer’s power plant. The NoDak contract expiresexpired in the first quarter of 2020.
See Note 1 for additional discussion of the Company's reportable segments. The following tables present revenue, operating profit, depreciation expense and capital expenditures:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 |
| 2020 | | 2019 | | 2020 | | 2019 |
Revenues | | | | | | | |
Coal Mining | $ | 21,573 |
| | $ | 22,570 |
| | $ | 42,501 |
| | $ | 39,320 |
|
NAMining | 12,048 |
| | 10,728 |
| | 23,672 |
| | 21,503 |
|
Minerals Management | 1,987 |
| | 8,242 |
| | 7,228 |
| | 20,928 |
|
Unallocated Items | 327 |
| | 131 |
| | 353 |
| | 674 |
|
Eliminations | (580 | ) | | (319 | ) | | (755 | ) | | (976 | ) |
Total | $ | 35,355 |
| | $ | 41,352 |
| | $ | 72,999 |
| | $ | 81,449 |
|
| | | | | | | |
Operating profit (loss) | |
| | |
| | | | |
Coal Mining | $ | 7,498 |
| | $ | 7,262 |
| | $ | 14,683 |
| | $ | 17,269 |
|
NAMining | 544 |
| | (450 | ) | | 1,275 |
| | (385 | ) |
Minerals Management | 510 |
| | 6,789 |
| | 4,777 |
| | 18,458 |
|
Unallocated Items | (4,158 | ) | | (4,732 | ) | | (8,718 | ) | | (9,866 | ) |
Eliminations | 88 |
| | 292 |
| | 45 |
| | 58 |
|
Total | $ | 4,482 |
| | $ | 9,161 |
| | $ | 12,062 |
| | $ | 25,534 |
|
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30 | | JUNE 30 |
| 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 | $ | 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 | $ | 9,161 |
| | $ | 7,802 |
| | $ | 25,534 |
| | $ | 17,523 |
|
|
| | | | | | | | | | | | | | | |
Expenditures for property, plant and equipment | | | | | | | |
Coal Mining | $ | 3,844 |
| | $ | 1,511 |
| | $ | 4,667 |
| | $ | 4,251 |
|
NAMining | 3,163 |
| | 112 |
| | 7,186 |
| | 1,242 |
|
Minerals Management | 276 |
| | 50 |
| | 739 |
| | 291 |
|
Unallocated Items | 158 |
| | 42 |
| | 207 |
| | 183 |
|
Total | $ | 7,441 |
| | $ | 1,715 |
| | $ | 12,799 |
| | $ | 5,967 |
|
| | | | | | | |
Depreciation, depletion and amortization | | | | | | | |
Coal Mining | $ | 3,615 |
| | $ | 3,276 |
| | $ | 7,158 |
| | $ | 6,150 |
|
NAMining | 652 |
| | 566 |
| | 1,298 |
| | 1,111 |
|
Minerals Management | 327 |
| | 367 |
| | 654 |
| | 733 |
|
Unallocated Items | 30 |
| | 29 |
| | 58 |
| | 57 |
|
Total | $ | 4,624 |
| | $ | 4,238 |
| | $ | 9,168 |
| | $ | 8,051 |
|
|
| | | | | | | | | | | | | | | |
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 |
|
NOTE 10—Asset Retirement ObligationsIncome 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 Company's asset retirement obligations are principally for costs to close its surface mines and reclaim the land it has disturbed asquarterly income tax provision is generally comprised of tax expense on income or a result of its normal mining activities as well as for costs to dismantle certain mining equipmentbenefit on a loss at the endmost recent estimated annual effective income tax rate, adjusted for the effect of discrete items.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, including among other items, temporary changes regarding the prior and future utilization of net operating losses. The CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the
lifefive preceding taxable years to generate a refund of previously paid income taxes. The 2020 estimated annual effective tax rate includes the benefit of utilizing the current year forecasted tax basis net operating loss that would otherwise be deductible at the current 21% statutory rate to offset taxable income in years that were taxed at a 35% rate. The Company expects to generate a net operating loss in 2020 primarily due to the realization of certain deferred tax assets. The Company is currently assessing aspects of the
mine. A reconciliation ofCARES Act, including the
Company's beginning and ending aggregate carrying amount ofCompany’s ability to utilize the
asset retirement obligations are as follows:extended carryback provisions. |
| | | | |
| | 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 transferred the mine permits for certain Centennial mines 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 reduction to Centennial's asset retirement obligation, $2.4 million of which is reflected as "Liabilities settled during the current period" and $3.0 million of which is reflected as "Revisions in estimated cash flows" in the table 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 Statement of 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 includesinclude NACCO Industries, Inc.® (“NACCO”) and its wholly owned subsidiaries (collectively, the “Company”). NACCO is the public holding company for The North American Coal Corporation ("NACoal")®. The Company hasNorth American Coal Corporation and its affiliated companies (collectively, “NACoal”) operate in the mining and natural resources industries through three operating segments: (i) Coal Mining, (ii) North American Mining ("NAMining") and (iii) Minerals Management. The Coal Mining segment operates surface coal mines under long-term contracts with power generation companies and activated carbon producers pursuant to a service-based business model. The NAMining segment provides value-added contract mining and other services for producers of aggregates, lithium and other minerals. The Minerals Management segment promotes the development of the Company’s gas, oil and coal reserves, generating income primarily from royalty-based lease payments from third parties.
The Company also has 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.
As of January 1, 2020, the Company retrospectively changed its computation of segment operating profit to reclassify certain expenses, primarily related to executive and board compensation. These expenses are now included in unallocated items. The change in segment reporting reflected a decision to evaluate the financial performance of the Company’s segments excluding executive and board compensation. All prior period segment information has been reclassified to conform to the new presentation. This segment reporting change has no impact on consolidated operating results.
All financial statement line items below operating profit (other income, including interest expense and interest income, the provision for income taxes and net income) are presented and discussed within this Form 10-Q on a consolidated basis. Included within other income
The Company has continued to operate as an essential business during the COVID-19 pandemic because it supports critical infrastructure industries. The Company has procedures to limit the exposure of employees to the spread of COVID-19. The extent to which COVID-19 impacts the Company going forward will depend on the line Income from other unconsolidated affiliates is the financial results of NoDak Energy Services, LLC ("NoDak"). NoDak operatesnumerous factors and maintains a coal drying system at a customer’s power plant. The NoDak contract expires in the first quarter of 2020.future developments that remain uncertain.
The Company’s operating segments are further described below:
Coal Mining Segment
The Coal Mining segment operates surface coal mines pursuant to a service-based business model under long-term contracts with power generation companies and activated carbon producers.producers pursuant to a service-based business model. Coal is surface-mined in North Dakota, Texas, Mississippi, Louisiana and on the Navajo Nation in New Mexico. Each mine is fully integrated with its customer operations.
TheDuring the six months ended June 30, 2020, the operating coal mines are:were: Bisti Fuels 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”).
The contract mining agreement between Camino Real and its customer, Dos Republicas Coal Partnership (“DRCP”), terminated effective July 1, 2020 as a result of the unexpected termination by Comisión Federal de Electricidad (“CFE”) of its coal supply contract with an affiliate of DRCP. The termination of the contract between CFE and DRCP eliminated DRCP’s need for coal from Camino Real's Eagle Pass Mine, and will result in mine closure.
Camino Real issued a Notice of Payment Default on June 17, 2020. During the third quarter of 2020, the Company received certain inventory as well as a securitized note in settlement of the outstanding receivable balance as of June 30, 2020 and
additional costs incurred through the July 9, 2020 mine closure date. Mine reclamation is the responsibility of DRCP. Camino Real has no legal obligation to perform mine reclamation but is in negotiations with DRCP to potentially perform mine reclamation activities under a new contractual arrangement. Closure of the mine does not materially impact NACCO’s outlook for 2020. The contract mining agreement between Camino Real and DRCP was previously expected to terminate in 2021.
As of June 30, 2020, all of the Liberty Fuels Company, LLC (“Liberty”) ceased all miningmine areas have been reclaimed and delivery of lignite in 2017 and commenced final mine reclamation in 2018.
Centennial 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 Centennialactivities, primarily monitoring, will continue until mine reclamation is complete, or ownership of, or responsibility for, the remaining mines is transferred.final bond release.
Coteau, Coyote, Falkirk, MLMC and Sabine supply lignite coal for power generation. Bisti and Camino Real supplysupplies 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, eachEach operating 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, otherThe operating mines' 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’sthe Company’s option.
On May 7, 2020, Great River Energy ("GRE"), Falkirk Mine's customer, and the Company's second largest customer, announced its intent to retire the Coal Creek Station power plant in the second half of 2022 and modify the Spiritwood Station power plant to be fueled by natural gas.
As noted in the announcement, GRE is willing to consider opportunities to sell Coal Creek Station. NACCO is actively engaged in the exploration of options that could, if successful, allow for transfer of ownership of the power plant to one or more third parties, which would preserve jobs at both Coal Creek Station and the Falkirk Mine. The Company believes Coal Creek Station is an efficient, economic and attractive generation and capacity asset, and its continued long-term operation is in the best interests of the employees and the local community.
Falkirk Mine is the sole supplier of lignite coal to Coal Creek Station pursuant to a long-term contract under which Falkirk also supplies approximately 0.3 million tons of lignite coal per year to Spiritwood Station. Falkirk has approximately 480 employees, and, in 2019, delivered a total of 7.4 million tons of lignite coal and contributed approximately $16 million to NACCO’s Earnings from Unconsolidated Operations. The closure of Coal Creek Station would have a material adverse effect on the long-term earnings of NACCO. The terms of the contract between the Company and GRE specify that GRE is responsible for all costs related to mine closure, including but not limited to, final mine reclamation costs, post-retirement medical benefits and pension costs with respect to Falkirk employees.
At all operating coal mines other than MLMC, the Company operates as a contract miner pursuant tois paid a management fee contract. Under these long-term contracts,per ton of coal or heating unit (MMBtu) delivered. Each contract specifies the customer isindices and mechanics by which fees change over time, generally in line with broad measures of U.S. inflation. The customers are responsible for funding all mine operating costs, including final mine reclamation, and directly or
indirectly providesproviding all of the capital required to build and operate the mine. DebtThis contract structure eliminates exposure to spot coal market price fluctuations while providing steady income and cash flow with minimal capital investment. Other than at Coyote Creek, debt financing provided by or supported by the customers is without recourse to NACCO and NACoal. As a result, these contractsSee Note 7 of the accompanying Unaudited Condensed Consolidated Financial Statements for further discussion of Coyote Creek's guarantees.
All operating coal mines other than MLMC meet the definition of a variable interest entity (“VIE”). In each case, NACCO is not the primary beneficiary of the VIE as it does not exercise financial control; therefore, NACCO does not consolidate the results of these operations within its financial statements. Instead, these contracts are accounted for as equity method investments. The income before income taxes associated with these VIE's is reported as Earnings of unconsolidated operations on the Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in Unconsolidated Subsidiaries in the Consolidated Balance Sheets. The mines that meet the definition of a VIE are referred to collectively as the “Unconsolidated Subsidiaries.” For tax purposes, the Unconsolidated Subsidiaries are included within the NACCO consolidated U.S. tax return; therefore, the income tax expense line on the statementsConsolidated Statements of operationsOperations includes income taxes related to these entities. AllThe contracts for certain of the Company's Unconsolidated Subsidiaries permit or obligate the customer under some conditions to acquire the assets or stock of the subsidiary for an amount roughly equal to book value.
Camino Real previously met the definition of a variable interest entity of which the Company was not the primary beneficiary and therefore NACCO did not consolidate Camino Real’s results of operations within its financial statements.
The Notice of Payment Default and subsequent termination of the contract mining agreement resulted in a reconsideration event, which required reassessment of the Company’s VIE conclusion. As a result of this reconsideration, Camino Real is no longer a VIE and its financial position is consolidated within NACCO’s financial statements as of June 30, 2020. The consolidation of Camino Real did not materially change the Company’s balance sheet. The results of operations for the six months ended June 30, 2020 are accounted forreported under the equity method. MLMC and Centennial are consolidated operations.method with income before income taxes reported as Earnings of unconsolidated operations on the Consolidated Statements of 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 NACoalthe Company is responsible for all operating costs, capital requirements and final mine reclamation; therefore, MLMC is consolidated within NACCO’s financial statements. MLMC sells coal to its customer at a contractually agreed-upon price which adjusts monthly, primarily based on changes in the level of established indices which reflect general U.S. inflation rates. Profitability at MLMC is affected by customer demand for coal, changes in the indices that determine sales price and actual costs incurred. As diesel fuel is heavily weighted among the indices used to determine the coal sales price, the persistence of low diesel fuel prices can negatively affect earnings at MLMC.
MLMC delivers coal to the Red Hills Power Plant in Ackerman, Mississippi. The Red Hills Power Plant supplies electricity to the Tennessee Valley Authority ("TVA") under a long-term Power Purchase Agreement. MLMC’s contract with its customer runs through 2032. TVA’s power portfolio includes coal, nuclear, hydroelectric, natural gas and renewables. The decision of which power plants to dispatch is determined by TVA.
Centennial Natural Resources (“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, which have no remaining book value. Cash expenditures related to mine reclamation at Centennial will continue until mine reclamation is alsocomplete, or ownership of, or responsibility for, the remaining mines is transferred. Centennial is a consolidated entity within the Coal Mining segment as NACoalthe Company is responsible for carrying costs and final mine reclamation.
North AmericanThe coal reserves at Coteau, Falkirk, Coyote, MLMC and Centennial are owned or controlled by the Company. The coal reserves at all other mines are owned or controlled by the respective mine’s customer.
The Company performs contemporaneous reclamation activities at each mine in the normal course of operations. Under all of the Unconsolidated Subsidiaries’ contracts, the customer has the obligation to fund final mine reclamation activities. Under certain contracts, the Unconsolidated Subsidiary holds the mine permit and is therefore responsible for final mine reclamation activities. To the extent the Unconsolidated Subsidiary performs such final reclamation, it is compensated for providing those services in addition to receiving reimbursement from customers for costs incurred.
The contracts under which certain of the Unconsolidated Subsidiaries operate provide that, under certain conditions, including default, the customer(s) involved may elect or be obligated to acquire the assets (subject to the liabilities) or the capital stock of the Coal Mining subsidiary for an amount effectively equal to book value. The Company does not know of any conditions of default that currently exist.
NAMining Segment
The NAMining segment provides value-added contract mining and other services for producers of aggregates, lithium and other minerals, primarily by operating and maintaining draglines and other equipment.minerals. The segment is thea primary platform for the Company’s growth and diversification outside of the coal industry.
NAMining provides contract mining services for independently owned mines and quarries, creating value for its customers by performing the mining aspects of its customers’ quarry operations. This allows customers to focus on their areas of expertise: materials handling and processing, product sales and distribution.
NAMining operates primarily at limestone quarries in Florida, but is focused on expanding outside of Florida and into mining materials other than limestone. During 2019, the Company entered into a mining agreement to serve as exclusive contract miner for the Thacker Pass lithium project in northern Nevada. NAMining operates underutilizes both fixed price and 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.structures.
Minerals Management Segment
The Minerals Management segment promotes the development of the Company’s gas, oil gas and coal reserves, generating income primarily from royalty-based lease payments from third parties. The Company’s gas, oil and undeveloped coal reserves are located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus shale natural gas), Alabama (coal and coalbed methane and natural gas) and North Dakota (coal).
The majority of the Company’s existing reserves were acquired as part of its historical coal mining operations. The Minerals Management segment derives income primarily by entering into contracts with third-party operators, granting them the rights to
explore, produce and sell natural resources in exchange for royalty payments based on the lessees' sales of natural gas and, to a lesser extent, oil and coal. Specialized employees in the Minerals Management segment also provide surface and mineral acquisition and lease maintenance services related to Company operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As of January 1, 2019, 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. Please also referRefer to the discussion of the Company's Critical Accounting Policies and Estimates as disclosed on pages 2630 through 2832 in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.2019. The Company's remaining Critical Accounting Policies and Estimates have not materially changed since December 31, 2018.2019.
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 | THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
Revenues: | | | | | | | | | | | | | | |
Coal Mining | $ | 22,570 |
| | $ | 20,860 |
| | $ | 39,320 |
| | $ | 38,457 |
| $ | 21,573 |
| | $ | 22,570 |
| | $ | 42,501 |
| | $ | 39,320 |
|
NAMining | 10,728 |
| | 9,067 |
| | 21,503 |
| | 19,280 |
| 12,048 |
| | 10,728 |
| | 23,672 |
| | 21,503 |
|
Minerals Management | 8,242 |
| | 3,866 |
| | 20,928 |
| | 7,342 |
| 1,987 |
| | 8,242 |
| | 7,228 |
| | 20,928 |
|
Unallocated Items | 131 |
| | — |
| | 674 |
| | — |
| 327 |
| | 131 |
| | 353 |
| | 674 |
|
Eliminations | (319 | ) | | (112 | ) | | (976 | ) | | (198 | ) | (580 | ) | | (319 | ) | | (755 | ) | | (976 | ) |
Total revenue | $ | 41,352 |
| | $ | 33,681 |
| | $ | 81,449 |
| | $ | 64,881 |
| $ | 35,355 |
| | $ | 41,352 |
| | $ | 72,999 |
| | $ | 81,449 |
|
Operating profit (loss): | | | | | | | | | | | | | | |
Coal Mining | $ | 4,693 |
| | $ | 7,898 |
| | $ | 12,298 |
| | $ | 16,595 |
| $ | 7,498 |
| | $ | 7,262 |
| | $ | 14,683 |
| | $ | 17,269 |
|
NAMining | (483 | ) | | 157 |
| | (451 | ) | | 791 |
| 544 |
| | (450 | ) | | 1,275 |
| | (385 | ) |
Minerals Management | 6,789 |
| | 3,212 |
| | 18,458 |
| | 6,156 |
| 510 |
| | 6,789 |
| | 4,777 |
| | 18,458 |
|
Unallocated Items | (2,130 | ) | | (3,465 | ) | | (4,829 | ) | | (6,019 | ) | (4,158 | ) | | (4,732 | ) | | (8,718 | ) | | (9,866 | ) |
Eliminations | 292 |
| | — |
| | 58 |
| | — |
| 88 |
| | 292 |
| | 45 |
| | 58 |
|
Total operating profit | $ | 9,161 |
| | $ | 7,802 |
| | $ | 25,534 |
| | $ | 17,523 |
| $ | 4,482 |
| | $ | 9,161 |
| | $ | 12,062 |
| | $ | 25,534 |
|
Interest expense | 222 |
| | 569 |
| | 453 |
| | 1,215 |
| 330 |
| | 222 |
| | 733 |
| | 453 |
|
Interest income | (581 | ) | | (119 | ) | | (1,134 | ) | | (232 | ) | (129 | ) | | (581 | ) | | (530 | ) | | (1,134 | ) |
Income from other unconsolidated affiliates | (323 | ) | | (318 | ) | | (645 | ) | | (633 | ) | (79 | ) | | (323 | ) | | (212 | ) | | (645 | ) |
Closed mine obligations | 330 |
| | 343 |
| | 696 |
| | 722 |
| 390 |
| | 330 |
| | 824 |
| | 696 |
|
Gain on equity securities | (261 | ) | | (183 | ) | | (959 | ) | | (85 | ) | (1,512 | ) | | (261 | ) | | (316 | ) | | (959 | ) |
Other, net | 11 |
| | (71 | ) | | 22 |
| | (25 | ) | (102 | ) | | 11 |
| | (117 | ) | | 22 |
|
Other (income) expense, net | (602 | ) | | 221 |
| | (1,567 | ) | | 962 |
| (1,102 | ) | | (602 | ) | | 382 |
| | (1,567 | ) |
Income before income tax provision | 9,763 |
| | 7,581 |
| | 27,101 |
| | 16,561 |
| |
Income tax provision | 1,788 |
| | 1,188 |
| | 4,108 |
| | 1,992 |
| |
Income before income tax (benefit) provision | | 5,584 |
| | 9,763 |
| | 11,680 |
| | 27,101 |
|
Income tax (benefit) provision | | (466 | ) | | 1,788 |
| | (536 | ) | | 4,108 |
|
Net income | $ | 7,975 |
| | $ | 6,393 |
| | $ | 22,993 |
| | $ | 14,569 |
| $ | 6,050 |
| | $ | 7,975 |
| | $ | 12,216 |
| | $ | 22,993 |
|
| | | | | | | | | | | | | | |
Effective income tax rate | 18.3 | % | | 15.7 | % | | 15.2 | % | | 12.0 | % | (8.3 | )% | | 18.3 | % | | (4.6 | )% | | 15.2 | % |
The components of the change in revenues and operating profit are discussed below in "Segment Results."
Second Quarter of 20192020 Compared with Second Quarter of 20182019 and First Six Months of 20192020 Compared with First Six Months of 20182019
Other expense (income) expense,, net
Interest expense decreased $0.3increased in the second quarter and the first six months of 2020 compared with the 2019 periods by $0.1 million and $0.8$0.3 million, respectively, due to lowerhigher average borrowings under NACoal's revolving credit facilityfacility.
Interest income decreased in the second quarter and the first six months of 2020 compared with the 2019 periods by $0.5 million and $0.6 million, respectively, primarily due to lower interest rates despite a higher invested cash balance.
Income from other unconsolidated affiliates represents the financial results of NoDak. NoDak operated and maintained a coal drying system at a customer’s power plant. The NoDak contract expired on January 31, 2020, resulting in decreases of $0.2 million and $0.4 million, respectively, in Income from other unconsolidated affiliates during the second quarter and the first six months of 20192020 compared with the 20182019 periods. Income from NoDak was $1.3 million for the year ended December 31, 2019.
Interest income increased $0.5 million and $0.9 million, respectively,Gain on equity securities represents changes in the market price of invested assets reported at fair value. The change in the gains during the second quarter of 2020 and the first six months of 20192020 compared with the 2018gains during the 2019 periods due to increased income earned on invested cash.
Gain on equity securities increasedwas due to higher gainsreturns on invested assets during the second quarter of Bellaire's Mine Water Treatment Trust2020 but lower returns on invested assets in the three and six months ended June 30, 2019 compared with 2018.first quarter of 2020. See Note 6 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Mine Water Treatment Trust.equity securities.
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.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic. The increase in the effectiveCARES Act contains numerous income tax provisions, including among other items, temporary changes regarding the prior and future utilization of net operating losses. The CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The 2020 estimated annual effective tax rate includes the benefit of utilizing the current year forecasted tax basis net operating loss that would otherwise be deductible at the current 21% statutory rate to offset taxable income in 2019 compared with 2018 isyears that were taxed at a 35% rate. The Company expects to generate a net operating loss in 2020 primarily due to a change in the mixrealization of earnings,certain deferred tax assets. The Company is currently assessing aspects of the CARES Act, including increased royalty income.the Company’s ability to utilize the extended carryback provisions.
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 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.
The following tables detail NACCO's changes in cash flow for the six months endedJune 30:
| | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Operating activities: | | | | | | | | | | |
Net cash provided by operating activities | $ | 22,088 |
| | $ | 18,696 |
| | $ | 3,392 |
| |
Net cash (used for) provided by operating activities | | $ | (12,489 | ) | | $ | 22,088 |
| | $ | (34,577 | ) |
| | | | | | | | | | |
Investing activities: | | | | | | | | | | |
Expenditures for property, plant and equipment | (5,967 | ) | | (9,182 | ) | | 3,215 |
| (12,799 | ) | | (5,967 | ) | | (6,832 | ) |
Other | 15 |
| | 902 |
| | (887 | ) | (1,845 | ) | | 15 |
| | (1,860 | ) |
Net cash used for investing activities | (5,952 | ) | | (8,280 | ) | | 2,328 |
| (14,644 | ) | | (5,952 | ) | | (8,692 | ) |
Cash flow before financing activities | $ | 16,136 |
| | $ | 10,416 |
| | $ | 5,720 |
| $ | (27,133 | ) | | $ | 16,136 |
| | $ | (43,269 | ) |
The $3.4$34.6 million increasechange in net cash (used for) provided by operating activities was primarily due to payments made for deferred compensation and long-term incentive compensation plans and lower net income during the resultfirst six months of the2020. In addition, an increase in net income, partially offset by working capital changes. Duringaccounts receivable in the first six months of 2020 compared to a decrease in the first six months of 2019 NACCO used $8.7 millionwas partially offset by a reduction in inventory in the first six months of cash for working capital2020 compared with $3.3 millionthe 2019 period, both primarily due to higher sales at Coal Mining and NAMining 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 accounts payable to affiliates.2020.
The change in net cash used for investing activities was primarily attributable to a decreasean increase in expenditures for property, plant and equipment inat the NAMining segment, partially offset by an increase in expenditures in theand Coal segment.Mining segments.
| | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Financing activities: | | | | | | | | | | |
Net additions (reductions) to long-term debt and revolving credit agreement | $ | 895 |
| | $ | (29,720 | ) | | $ | 30,615 |
| |
Net additions to long-term debt and revolving credit agreement | | $ | 3,479 |
| | $ | 895 |
| | $ | 2,584 |
|
Cash dividends paid | (2,480 | ) | | (2,289 | ) | | (191 | ) | (2,690 | ) | | (2,480 | ) | | (210 | ) |
Purchase of treasury shares | (1,385 | ) | | (55 | ) | | (1,330 | ) | (1,002 | ) | | (1,385 | ) | | 383 |
|
Net cash used for financing activities | $ | (2,970 | ) | | $ | (32,064 | ) | | $ | 29,094 |
| $ | (213 | ) | | $ | (2,970 | ) | | $ | 2,757 |
|
The change in net cash used for financing activities was primarily due to a repayment ofincreased borrowings during the first six months of 2018.2020 compared with the first six months of 2019.
Financing Activities
Financing arrangements are obtained and maintained at the NACoal level. NACCO has not guaranteed any borrowings of NACoal. The borrowing agreements at NACoal allow for the payment to NACCO of dividends and advances under certain circumstances. Dividends (to the extent permitted by NACoal's borrowing agreement) and management fees are the primary sources of cash for NACCO and enable the Company to pay dividends to stockholders.
The Company believes funds available from cash on hand, the NACoal Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the NACoal Facility.
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 $4.0$14 million at June 30, 2019.2020. At June 30, 2019,2020, the excess availability under the NACoal Facility was $144.6$133.0 million, which reflects a reduction for outstanding letters of credit of $1.4$3.1 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, 2019,2020, for base rate and LIBOR loans were 0.75% and 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 0.30% on the unused commitment at June 30, 2019.2020. The weighted average interest rate applicable to the NACoal facility at June 30, 2020 was 1.93% including the floating rate margin.
The NACoal Facility contains restrictive covenants, which require, among other things, NACoal to maintain a maximum debt to EBITDA ratio of 3.00 to 1.00 and an interest coverage ratio of not less than 4.00 to 1.00. The NACoal Facility provides the ability to make loans, dividends and advances to NACCO, with some restrictions based on maintaining a maximum debt to EBITDA ratio of 2.00 to 1.00, or if greater than 2.00 to 1.00, a Fixed Charge Coverage Ratio of 1.10 to 1.00, in conjunction with maintaining unused availability thresholds of borrowing capacity, as defined in the NACoal Facility, of $15.0 million. At June 30, 2019,2020, NACoal was in compliance with all financial covenants in the NACoal Facility.
Capital Expenditures
Expenditures for property, plant and equipment were $6.0$12.8 million during the first six months of 2019. NACCO estimates that its capital2020. Planned expenditures for the remainder of 2019 could2020 are expected to be up to $22.2approximately $34 million, primarily forconsisting of $18 million in the Coal Mining segment, $10 million in the Minerals Management Segment and $6 million in the 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 several years. Thesesegment. Capital expenditures are expected to be funded from internally generated funds and/or bank borrowings.
In the Coal Mining segment, elevated levels of expected capital expenditures through 2021 are primarily related to spending at MLMC as it develops a new mine area. In the Minerals Management segment, capital expenditures in 2020 are primarily for the acquisition of mineral interests and other purchases. In the NAMining segment, capital expenditures in 2020 are primarily for the acquisition, relocation and refurbishment of draglines.
Capital Structure
NACCO's consolidated capital structure is presented below: | | | JUNE 30 2019 | | DECEMBER 31 2018 | | Change | JUNE 30 2020 | | DECEMBER 31 2019 | | Change |
Cash and cash equivalents | $ | 98,423 |
| | $ | 85,257 |
| | $ | 13,166 |
| $ | 95,546 |
| | $ | 122,892 |
| | $ | (27,346 | ) |
Net tangible assets | 167,510 |
| | 156,703 |
| | 10,807 |
| |
Other net tangible assets | | 216,637 |
| | 174,465 |
| | 42,172 |
|
Intangible assets, net | 38,987 |
| | 40,516 |
| | (1,529 | ) | 36,333 |
| | 37,902 |
| | (1,569 | ) |
Net assets | 304,920 |
| | 282,476 |
| | 22,444 |
| 348,516 |
| | 335,259 |
| | 13,257 |
|
Total debt | (12,002 | ) | | (11,021 | ) | | (981 | ) | (28,423 | ) | | (24,943 | ) | | (3,480 | ) |
Bellaire closed mine obligations | (20,768 | ) | | (20,751 | ) | | (17 | ) | (20,822 | ) | | (20,924 | ) | | 102 |
|
Total equity | $ | 272,150 |
| | $ | 250,704 |
| | $ | 21,446 |
| $ | 299,271 |
| | $ | 289,392 |
| | $ | 9,879 |
|
Debt to total capitalization | 4% | | 4% | | —% | 9% | | 8% | | 1% |
The increase in other net tangible assets was primarily due to thepayments made for deferred compensation and accrued incentive compensation as well as an increase in cash and net tangible assets.accounts receivable at June 30, 2020 compared with December 31, 2019. The increase in other net tangible assets was mainly attributable to apartially offset by the decrease in compensation-related liabilities as a result of payments made during the first six months of 2019cash and a decrease in asset retirement obligations during the first six months of 2019. See Note 10 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's asset retirement obligations.cash equivalents.
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, 2018,2019, there have been no significant changes in the total amount of NACCO's contractual obligations, contingent liabilities or commercial commitments, or the timing of cash flows in accordance with those obligations as reported on page 3236 in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.2019. See Note 7 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 | THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
Unconsolidated operations | 6.9 |
| | 8.0 |
| | 15.5 |
| | 16.5 |
| 6.0 |
| | 6.9 |
| | 13.6 |
| | 15.5 |
|
Consolidated operations | 0.9 |
| | 0.8 |
| | 1.5 |
| | 1.5 |
| 0.8 |
| | 0.9 |
| | 1.6 |
| | 1.5 |
|
Total tons delivered | 7.8 |
| | 8.8 |
| | 17.0 |
| | 18.0 |
| 6.8 |
| | 7.8 |
| | 15.2 |
| | 17.0 |
|
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 | THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
Revenues | $ | 22,570 |
| | $ | 20,860 |
| | $ | 39,320 |
| | $ | 38,457 |
| $ | 21,573 |
| | $ | 22,570 |
| | $ | 42,501 |
| | $ | 39,320 |
|
Total cost of sales | 21,254 |
| | 20,068 |
| | 37,178 |
| | 36,146 |
| |
Cost of sales | | 19,861 |
| | 21,254 |
| | 41,135 |
| | 37,178 |
|
Gross profit | 1,316 |
| | 792 |
| | 2,142 |
| | 2,311 |
| 1,712 |
| | 1,316 |
| | 1,366 |
| | 2,142 |
|
Earnings of unconsolidated operations(a) | 13,529 |
| | 15,333 |
| | 29,310 |
| | 30,610 |
| 12,800 |
| | 13,529 |
| | 27,827 |
| | 29,310 |
|
Selling, general and administrative expenses | 9,283 |
| | 7,623 |
| | 17,656 |
| | 15,051 |
| 6,222 |
| | 6,714 |
| | 12,941 |
| | 12,685 |
|
Amortization of intangible assets | 881 |
| | 814 |
| | 1,528 |
| | 1,498 |
| 792 |
| | 881 |
| | 1,569 |
| | 1,528 |
|
Gain on sale of assets | (12 | ) | | (210 | ) | | (30 | ) | | (223 | ) | — |
| | (12 | ) | | — |
| | (30 | ) |
Operating profit | $ | 4,693 |
| | $ | 7,898 |
| | $ | 12,298 |
| | $ | 16,595 |
| $ | 7,498 |
| | $ | 7,262 |
| | $ | 14,683 |
| | $ | 17,269 |
|
(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 20192020 Compared with Second Quarter of 20182019
Revenues
Revenues increased $1.7 milliondecreased 4.4% in the second quarter of 20192020 compared with the second quarter of 2018 primarily2019 due to a reduction in tons delivered. This was partially offset by an increase in tons deliveredthe per ton sales price at MLMC. The sales price at MLMC as a result of increased customer requirements.is index-based and includes adjustments for coal quality and reimbursable costs.
Operating Profit
The following table identifies the components of change in operating profit for the second quarter of 20192020 compared with the second quarter of 20182019:
| | | Operating Profit | Operating Profit |
2018 | $ | 7,898 |
| |
2019 | | $ | 7,262 |
|
Increase (decrease) from: | | |
Selling, general and administrative expenses | | 492 |
|
Gross profit | | 396 |
|
Amortization of intangibles | | 89 |
|
Earnings of unconsolidated operations | (1,804 | ) | (729 | ) |
Selling, general and administrative expenses | (1,660 | ) | |
Net gain on sale of assets | (198 | ) | (12 | ) |
Amortization of intangibles | (67 | ) | |
Gross profit | 524 |
| |
2019 | $ | 4,693 |
| |
2020 | | $ | 7,498 |
|
Operating profit decreased $3.2increased $0.2 million in the second quarter of 20192020 compared with the second quarter of 20182019 primarily due to a decrease in earnings of unconsolidated operationsselling, general and administrative expenses and an increase in selling, general and administrative expenses. Thegross profit, partially offset by a decrease in earnings of unconsolidated operations was primarily due to fewer coal tons delivered as a result of customer plant outages.operations. The increasedecrease in selling, general and administrative expenses was primarily attributable to lower employee-related expenses partially offset by an increase in and the timing of, employee-related costs.
outside service fees. The decreaseimprovement in operatinggross profit was partially offset by improved results at the consolidated operations, primarily due to an increase in customer requirements and a reductionthe profit per ton delivered at MLMC. The increase in profit per ton delivered was primarily due to the increase in the per ton sales price partially offset by an increase in the cost per ton solddelivered.
The decrease in earnings of unconsolidated operations was mainly due to lower customer demand at MLMC,Sabine, Bisti and Camino, partially offset by an increase in customer demand at Coyote Creek and Falkirk. Sabine delivers coal to Southwestern Electric Power Company's Henry W. Pirkey Plant. The Pirkey power plant was dispatched at a loss onlower rate during the transfersecond quarter of certain Centennial mine permits2020 compared with the second quarter of 2019. The reduction in coal tons delivered at Bisti was due to an unrelated third party. Asextended plant outage during the second quarter of 2020. The reduction in tons delivered at Camino was primarily due to a result of these transfers, the Company was relieved of the associated mine reclamation obligations and recorded a $5.4 million reduction 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, resultingdecrease in a net loss on the transactions of $0.4 million recognized within cost of sales.customer demand.
First Six Months of 20192020 Compared with First Six Months of 20182019
Revenues
Revenues increased $0.9 million8.1% in the first six months of 20192020 compared with the first six months of 2018 primarily2019 due to an increase in MLMC's sales price and tons delivereddelivered. The sales price at MLMC asis index-based and includes adjustments for coal quality and reimbursable costs. MLMC delivers coal to the Red Hills Power Plant, which supplies electricity to TVA under a resultlong-term Power Purchase Agreement. The decision of increased customer requirements.which power plants to dispatch is determined by TVA. The Red Hills power plant experienced an increase in dispatch during the first six months of 2020 compared with the first six months of 2019, resulting in the increase in tons delivered.
Operating Profit
The following table identifies the components of change in operating profit for the first six months of 20192020 compared with the first six months of 2018:2019:
| | | Operating Profit | Operating Profit |
2018 | $ | 16,595 |
| |
2019 | | $ | 17,269 |
|
Increase (decrease) from: | | |
Earnings of unconsolidated operations | | (1,483 | ) |
Gross profit | | (776 | ) |
Selling, general and administrative expenses | (2,605 | ) | (256 | ) |
Earnings of unconsolidated operations | (1,300 | ) | |
Centennial asset retirement obligation revision in prior year | (960 | ) | |
Amortization of intangibles | | (41 | ) |
Net gain on sale of assets | (193 | ) | (30 | ) |
Amortization of intangibles | (30 | ) | |
Gross profit, excluding asset retirement obligation revision in prior year | 791 |
| |
2019 | $ | 12,298 |
| |
2020 | | $ | 14,683 |
|
Operating profit decreased $4.3$2.6 million in the first six months of 20192020 compared with the first six months of 20182019 primarily asdue to a resultdecrease in earnings of unconsolidated operations, a decrease in gross profit and 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.expenses.
The decrease in earnings of unconsolidated operations was primarilymainly due to fewer coal tons delivered as a result oflower customer plant outages,demand, primarily at Sabine, Camino and Bisti, partially offset by an increase in coal tons deliveredcustomer demand at Bisti. Coal deliveries at Bisti were reduced duringCoyote Creek and Falkirk. For more information about the prior year whileunconsolidated operations, see the power plant's owners were installing additional environmental controls.Second Quarter discussion above.
The changedecrease in Centennial's asset retirement obligation isgross profit was primarily due to an increase in the absencecost per ton delivered at MLMC, including the recognition of a $1.0 million favorable revision that occurred during the prior year.portion of costs previously capitalized into inventory. The increase in selling, general and administrative expenses was primarily attributable to higher outside service fees partially offset by lower employee-related expenses.
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 | THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
Unconsolidated operations | 2.5 |
| | 1.6 |
| | 4.4 |
| | 3.5 |
| 2.2 |
| | 2.5 |
| | 4.4 |
| | 4.4 |
|
Consolidated operations | 9.3 |
| | 9.4 |
| | 19.1 |
| | 19.5 |
| 8.6 |
| | 9.3 |
| | 18.9 |
| | 19.1 |
|
Total tons delivered | 11.8 |
| | 11.0 |
| | 23.5 |
| | 23.0 |
| 10.8 |
| | 11.8 |
| | 23.3 |
| | 23.5 |
|
The results of operations for the NAMining segment were as follows for the three and six months ended June 30:
| | | THREE MONTHS | | SIX MONTHS | THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
Revenues | $ | 10,728 |
| | $ | 9,067 |
| | $ | 21,503 |
| | $ | 19,280 |
| $ | 12,048 |
| | $ | 10,728 |
| | $ | 23,672 |
| | $ | 21,503 |
|
Total cost of sales | 10,473 |
| | 8,398 |
| | 20,473 |
| | 17,764 |
| |
Cost of sales | | 11,408 |
| | 10,473 |
| | 21,989 |
| | 20,473 |
|
Gross profit | 255 |
| | 669 |
| | 1,030 |
| | 1,516 |
| 640 |
| | 255 |
| | 1,683 |
| | 1,030 |
|
Earnings of unconsolidated operations(a) | 614 |
| | 90 |
| | 1,103 |
| | 368 |
| 978 |
| | 614 |
| | 1,954 |
| | 1,103 |
|
Selling, general and administrative expenses | 1,359 |
| | 602 |
| | 2,591 |
| | 1,132 |
| 1,321 |
| | 1,326 |
| | 2,609 |
| | 2,525 |
|
Gain on sale of assets | (7 | ) | | — |
| | (7 | ) | | (39 | ) | (247 | ) | | (7 | ) | | (247 | ) | | (7 | ) |
Operating (loss) profit | $ | (483 | ) | | $ | 157 |
| | $ | (451 | ) | | $ | 791 |
| |
Operating profit (loss) | | $ | 544 |
| | $ | (450 | ) | | $ | 1,275 |
| | $ | (385 | ) |
(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 20192020 Compared with Second Quarter of 20182019
Revenues
RevenuesDespite a reduction in tons delivered, revenues increased 12.3% in the second quarter of 20192020 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 operating 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 costsnew operations added since June 30, 2019, including work related to the Thacker Pass lithium project, 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 increasedfavorable changes in the first six monthsmix of 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.customer requirements.
Operating Profit
The following table identifies the components of change in operating profit (loss) for the second quarter of 2020 compared with the second quarter of 2019:
|
| | | |
| Operating Profit (Loss) |
2019 | $ | (450 | ) |
Increase (decrease) from: | |
Gross profit | 385 |
|
Earnings of unconsolidated operations | 364 |
|
Net gain on sale of assets | 240 |
|
Selling, general and administrative expenses | 5 |
|
2020 | $ | 544 |
|
Operating profit increased $1.0 million in the second quarter of 2020 compared with the second quarter of 2019 primarily due to increases in gross profit and earnings of unconsolidated operations from new operations added since June 30, 2019 and favorable changes in the mix of customer requirements.
First Six Months of 2020 Compared with First Six Months of 2019
Despite a reduction in tons delivered, revenues increased 10.1% in the first six months of 20192020 compared with the first six months of 2018:2019 primarily due to new operations added since June 30, 2019, including work related to the Thacker Pass lithium project, and favorable changes in the mix of customer requirements.
The following table identifies the components of change in operating profit (loss) for the first six months of 2020 compared with the first six months of 2019:
| | | Operating Profit | Operating Profit (Loss) |
2018 | $ | 791 |
| |
2019 | | $ | (385 | ) |
Increase (decrease) from: | | |
Selling, general and administrative expenses | (1,459 | ) | |
Earnings of unconsolidated operations | | 851 |
|
Gross profit | (486 | ) | 653 |
|
Net gain on sale of assets | (32 | ) | 240 |
|
Earnings of unconsolidated operations | 735 |
| |
2019 | $ | (451 | ) | |
Selling, general and administrative expenses | | (84 | ) |
2020 | | $ | 1,275 |
|
NAMining's operatingOperating profit decreased $1.2increased $1.7 million in the first six months of 20192020 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,2019 primarily due to higher employee-related costs and supplies expense. These items were partially offset by an improvementincreases in earnings of unconsolidated operations attributable to aand gross profit from new operations added since June 30, 2019 and favorable changes in the mix of customer contract.requirements.
MINERALS 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 | THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
Revenues | $ | 8,242 |
| | $ | 3,866 |
| | $ | 20,928 |
| | $ | 7,342 |
| $ | 1,987 |
| | $ | 8,242 |
| | $ | 7,228 |
| | $ | 20,928 |
|
Total cost of sales | 1,262 |
| | 400 |
| | 2,088 |
| | 760 |
| |
Cost of sales | | 558 |
| | 1,262 |
| | 1,256 |
| | 2,088 |
|
Gross profit | 6,980 |
| | 3,466 |
| | 18,840 |
| | 6,582 |
| 1,429 |
| | 6,980 |
| | 5,972 |
| | 18,840 |
|
Selling, general and administrative expenses | 191 |
| | 254 |
| | 382 |
| | 427 |
| 919 |
| | 191 |
| | 1,195 |
| | 382 |
|
Gain on sale of assets | — |
| | — |
| | — |
| | (1 | ) | |
Operating profit | $ | 6,789 |
| | $ | 3,212 |
| | $ | 18,458 |
| | $ | 6,156 |
| $ | 510 |
| | $ | 6,789 |
| | $ | 4,777 |
| | $ | 18,458 |
|
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 increaseddecreased in the second quarter of 2019three and the first six months of 2019ended June 30, 2020 compared with the 2018 periods, primarily due to2019 periods. The first half of 2019 included significant royalty income generated by a higherlarge number of new gas wells put into commission during 2018 and early 2019. These wells are operated by third parties to extract natural gas from the Company's Ohio Utica shale mineral reservesreserves. Since new wells have high initial production rates and follow a natural decline before settling into relatively stable, long-term production, royalty income in Ohio. The number of producing wells increased as additional pipeline, gas compression, and other transportation
infrastructure came online in southeast Ohio.2020 decreased substantially from 2019 levels. The increase in operating profit was partially offset by an increase in cost of salesselling, general and administrative expenses is due to higher outside service fees.a $0.5 million charge in the second quarter of 2020 to write-off certain leasehold interests.
UNALLOCATED ITEMS AND ELIMINATIONS
FINANCIAL REVIEW
Operating Results
Unallocated Items and Eliminations were as follows for the three and six months ended June 30:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2019 | | 2018 | | 2019 | | 2018 |
Operating loss | $ | (1,838 | ) | | $ | (3,465 | ) | | $ | (4,771 | ) | | $ | (6,019 | ) |
|
| | | | | | | | | | | | | | |
| THREE MONTHS | | SIX MONTHS |
| 2020 | | 2019 | | 2020 | | 2019 |
Operating loss | $ | (4,070 | ) | | $ | (4,440 | ) | | $ | (8,673 | ) | | (9,808 | ) |
Second Quarter of 2019 Compared with Second Quarter of 2018
Operating Loss
The $1.6 million decreaseloss decreased in operating loss for the three and six months ended June 30, 20192020 compared with 2018 wasthe 2019 periods 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 2019 Compared with First Six Months of 2018
Operating Loss
The $1.2 million decrease in operating loss for the first six months of 2019 compared with 2018 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 2019,2020, the Company expects coal deliveries and Coal Mining operating profit to decrease compared withfrom 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
In the prior year.
Revenuesyear fourth quarter, the Company recorded a $2.0 million unfavorable adjustment to mine reclamation liabilities at Centennial. Excluding the impact of this item, operating profit in the second half of 20192020 is expected to decrease substantially from the second half of 2019. This decrease is a result of an anticipated decrease in earnings at the unconsolidated mining operations due to reduced customer requirements and an expected increase in operating expenses, mainly due to higher professional fees.
In the second half of 2020, earnings at MLMC are expected to decrease primarily as a resultbe comparable to the second half of 2019. An anticipated improvement in customer demand resulting from an expected increase in the dispatch of the absencecustomer's power plant is expected to be offset by an increase in the cost per ton delivered. If customer demand at MLMC decreases from expected levels, it could unfavorably affect the Company's 2020 earnings outlook.
Excluding the unfavorable 2019 mine reclamation adjustment, 2020 full-year operating profit is expected to decrease from 2019 due to a reduction in earnings at the unconsolidated mining operations and the expected increase in operating expenses. Operating expenses are expected to increase moderately for the full year.
Changes in dispatch, including changes due to historically low natural gas prices and the continued increase in renewable generation, particularly wind, could reduce customer demand below anticipated levels which would unfavorably affect the Company’s second half and full-year 2020 outlook.
Capital expenditures are expected to be approximately $23 million in 2020. The Company expects high levels of capital expenditures in 2020 and 2021 primarily related to MLMC's development of a favorable $3.0 million contractual settlement recognized at MLMCnew mine area. These capital expenditures will result in an increase in depreciation that will unfavorably affect operating profit in future periods.
On May 7, 2020, Great River Energy ("GRE"), Falkirk Mine's customer and the Company's second largest customer, announced its intent to retire the Coal Creek Station power plant in the fourth quartersecond half of 2018. Excluding2022 and modify the contractual settlement, revenuesSpiritwood Station power plant to be fueled by natural gas. GRE is willing to consider opportunities to sell Coal Creek Station, and NACCO is actively engaged in the exploration of options that could, if successful, allow for transfer of ownership of the power plant to one or more third parties, which would preserve jobs at both Coal Creek Station and the Falkirk Mine.
Falkirk Mine is the sole supplier of lignite coal to Coal Creek Station pursuant to a long-term contract under which Falkirk also supplies a moderate amount of lignite coal annually to Spiritwood Station. In 2019, Falkirk contributed approximately $16 million to NACCO’s Earnings from Unconsolidated Operations. The closure of Coal Creek Station will have a material adverse effect on the long-term earnings of NACCO Industries. The terms of the contract between the Company and GRE specify that GRE is responsible for all costs related to mine closure, including but not limited to, final mine reclamation costs, post-retirement medical benefits and pension costs with respect to Falkirk employees.
As mentioned above, the contract between Camino Real and DRCP was unexpectedly terminated effective July 1, 2020. Camino Real delivered 1.5 million tons of coal during 2019. Closure of the mine does not materially impact NACCO’s outlook for 2020. The contract mining agreement between Camino Real and DRCP was previously expected to terminate in 2021.
NAMining Outlook
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 Centennial's mine reclamation liabilities, operating profit in the second half of 2019 is expected2020, NAMining expects limestone deliveries to increase compared with the 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 reduced income at the unconsolidated Coal Mining operations as customer requirements are expected to be reducedmodestly from the respective 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.year periods.
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 20192020 to improve over the second half of 2019, but decrease significantly from the first half of the year, and be comparable to the second half of 2018.2020. Operating profit for the remainder of 2019 is expected to benefit from an increase in earnings associated with new limestone mining contracts which are anticipated to be partly offset by continued spending on business development activities and increased employee-related expenses. As a result of the operating lossfavorable changes in the first halfmix of 2019, NAMining expects full-year 2019customer requirements. Full-year 2020 operating profit is expected to beincrease significantly lower than 2018.over 2019.
NAMining 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, whichCapital expenditures are expected to commencebe approximately $13 million in 2020, primarily for the acquisition, relocation and refurbishment of draglines.
In 2019, NAMining's subsidiary, Sawtooth Mining, LLC, entered into a mining agreement to serve as the exclusive contract miner for the Thacker Pass lithium project in northern Nevada, owned by Lithium Nevada, Corp., a subsidiary of Lithium Americas Corp. (TSX: LAC) (NYSE: LAC). Lithium Nevada is in the third quarter, will have a modest impact on earningsprocess of securing permits and currently expects to commence construction in the second half2021 and production of 2019 and will contribute moderately beginninglithium products in 2020.2023.
Minerals Management Outlook
The Minerals Management segment derives income from royalty-based leases under which lessees make payments to the Company based on their sale of natural gas and, to a lesser extent, oil, natural gas liquids and coal, extracted primarily by third parties. The Company continued to experience2019 results included a significantsubstantial increase in royalty income, particularly in the first half of 2019, compared withgenerated by a large number of new gas wells put into commission during 2018 and early 2019. Given expected lower natural gas prices, fewer expected new wells and the firstnatural production decline that occurs early in the life of a well, full-year 2020 royalty income is expected to decrease and be substantially lower than 2019 levels. While royalty income is expected to decrease in the second half of 2018, primarily due to an increase in the number of gas wells operated by third parties to extract natural gas from the Company's Ohio Utica shale mineral reserves. In2020 compared with the second half of 2019, royalty incomethe rate of decrease is currently expected to increasebe substantially overlower than the second half of 2018 but at a significantly lower rate than realizeddecrease in the first half of 2019. Importantly, however,2020 because prior year income significantly decreased between the first and the second halves of the year. Natural gas pricing declines and reduced business activity due to the COVID-19 pandemic have resulted in higher-than-average natural gas inventory market levels. A sustained decline in natural gas prices could unfavorably affect the Company’s outlook.
Decline rates for individual wells can vary due to factors like well depth, well length, formation pressure and facility design. In addition, royalty income can fluctuate favorably or unfavorably in response to a number of factors outside of the Company's control, including the number of wells being operated by third parties, fluctuations in commodity prices (primarily natural gas), fluctuations in production rates associated with operator decisions, regulatory risks, the Company's lessees' willingness and
ability to incur well-development and other operating costs, and changes in the availability and continuing development of infrastructure. Oil
Minerals Management capital expenditures are expected to total approximately $11 million in 2020 primarily for the acquisition of mineral interests and natural gas production is further impacted by the natural production decline that occurs during the life of a well.other investments.
Consolidated Outlook
Overall, NACCO expects a significant increasedecrease in full-year 20192020 consolidated net income compared with 20182019, primarily due to the increasesubstantial decrease in net incomeoperating profit at Minerals Management in the first half of 20192020, the anticipated reduction in earnings at the Coal Mining segment and an anticipated improvementthe absence of $2.7 million pre-tax income associated with a prior India venture recorded in the second halfthird quarter of the year, including or excluding the favorable prior year2019. These items noted previously. The full-year effective income tax rate, excluding discrete items, isare expected to be approximately 15% based on current estimatespartially offset by the recognition of a 2020 tax benefit as a result of the CARES Act and an improvement in earnings at the mix of earnings between entities that benefit from percentage depletion and those that do not.NAMining segment.
ConsolidatedIn 2020, cash flow before financing activities in 2019 is expected to increase compared with 2018. Capitalbe a use of cash due to significant capital expenditures and payments made in the first half of the year related to deferred compensation and other payroll liabilities. Consolidated capital expenditures are expected to be approximately $28$47 million in 2019 compared with $20.92020. Capital expenditures were approximately $13 million in 2018the first half of 2020.
Significant uncertainties exist regarding the COVID-19 pandemic, including the extent of economic disruption it may cause in the future. While the Company's operations to date have not been materially affected by the pandemic, future developments, which are highly uncertain and $15.7 million in 2017.unpredictable, could change the Company's status significantly and rapidly, and could have a material adverse effect on the Company’s operations, supply chain and customers. The increase in capital expenditures in 2019 isextent to which COVID-19 may adversely impact the Company depends on many factors, including but not limited to the extent of new outbreaks as communities reopen, the extent to which additional lockdowns may be needed, the nature of the government public health guidelines and the public's adherence to those guidelines, the success of businesses reopening, and the timing for proven treatments and vaccines for COVID-19. Even after the COVID-19 pandemic has subsided, the Company may experience material adverse effects 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 expendituresresulting decline in economic activity. Additionally, concerns over the next several years. The increaseeconomic impact of COVID-19 have caused extreme volatility in financial and other capital expenditures will result in an increase in depreciation in future years that will affect operating profit at the consolidated operations.markets and may continue to adversely impact NACCO's stock price.
One of the Company’s core strategies is to ensurepursue activities which can strengthen the resiliency of its existing coal mining operations. The Company works to drive down coal production costs and maximize efficiencyefficiencies 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.customers, just as lower dispatch reduces demand.
The Company continues to evaluate opportunities to expand its core coal mining business, however opportunities are likely to be very limited. Low natural gas prices and growth in renewable energy sources, such as wind and solar, could continue to unfavorably affect the amount of electricity attributable todispatched from coal-fired power plants. The political and regulatory environment is not generally receptive to development of new coal-fired power generation projects which would create opportunities to build and operate new coal mines. However, the Company does continue to seek out and pursue opportunities where it can apply its management fee business model to replace legacy operators of existing surface coal mining operations in the United 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 Company’s area of focus.
The Company believes growthis focused on building a strong portfolio of affiliated businesses for diversification. NAMining continues to expand the scope of its business development activities to grow and diversification can come from pursuing opportunitiesdiversify by targeting potential customers who require a broad range of minerals and materials. NAMining also continues to leverage skills honed in the Company’s core mining operations and utilizingskills to expand 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 aggregatescontract mining services provided, in addition to providing comprehensive mining services to operate entire mines when appropriate, as is the case at the new lithium project in Nevada.
The Company’s efforts to grow and other minerals. The Company also continues to focus on developing itsdiversify the Minerals Management segment principally relatedincludes evaluating acquisitions of additional mineral interests or similar investments in the energy industry. The Company's primary initial focus will be on diversifying acquisitions of mineral interests with a balance of near-term cash flow yields and upside potential from future development. During the second quarter of 2020, the Company’s subsidiary, Catapult Mineral Partners, invested $2.0 million to its Ohioacquire shares of a public company with a diversified portfolio of royalty producing mineral reserves,interests as part of this growth and potentially expanding its asset base. In addition, the Company's newest business, MRNA, createsdiversification strategy. The recent dramatic downturn in petroleum prices provided an opportunity to make this investment at an attractive market multiple for a company with a conservative financial position, strong earnings potential and sellsattractive historical dividend yield.
Mitigation Resources of North America® was formed to create and sell stream and wetland mitigation credits and providesprovide services to those engaged in permittee-responsible mitigation. This business has achieved several early successes and is positioned for additional growth.
The Company is leveraging its core mining skills to develop a strong and diverse portfolio of service-based businesses operating in the mining and natural resources industries. The Company is also committed to maintaining a conservative capital structure while it grows and diversifies without unnecessary risk. Ultimately, diversified strategic growth is the key to increasing free cash flow available to continue to re-invest in and expand the businesses. The Company also continues to maintain the highest levels of customer service and operational excellence, with an unwavering focus on safety and environmental stewardship.
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q that are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are made subject to certain risks and uncertainties, which could cause actual results to differ materially from those presented. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Among the factors that could cause plans, actions and results to differ materially from current expectations are, without limitation: (1) changes to or termination of a long-term mining contract, or a customer default under a contract, including any actions taken related to Great River Energy's Coal Creek Station power plant, (2) the duration and severity of the COVID-19 pandemic, any preventive or protective actions taken by governmental authorities, the effectiveness of actions taken globally to contain or mitigate its effects and any unfavorable effects of the COVID-19 pandemic on the Company's suppliers' ability to provide products or replacement parts if the virus continues to spread or quarantines are reinstated, as well as other disruptions from natural or human causes, including severe weather, accidents, fires, earthquakes, terrorist acts, any of which could result in suspension of operations or harm to people or the environment, (3) changes in coal consumption patterns of U.S. electric power generators or the power industry that would affect demand for the Company's mineral reserves, (4) changes in tax laws or regulatory requirements, including changes in mining or power plant emission regulations and health, safety or environmental legislation, (2)(5) changes in costs related to geological and geotechnical conditions, repairs and maintenance, new equipment and replacement parts, fuel or other similar items, (3)(6) regulatory actions,
changes in mining permit requirements or delays in obtaining mining permits that could affect deliveries to customers, (4)(7) weather conditions, extended power plant outages, liquidity events or other events that would change the level of customers' coal or aggregates requirements, (5)(8) weather or equipment problems that could affect deliveries to customers, (6) changes in the power industry that would affect demand for the Company's mineral reserves, (7)(9) failure or delays by the Company's lessees in achieving expected production of natural gas and other hydrocarbons; the availability and cost of transportation and processing services in the 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)(10) changes in the costs to reclaim mining areas, (9)(11) costs to pursue and develop new mining and value-added service opportunities, (10) changes to or termination of a long-term mining contract, or a customer default under a contract, (11)(12) delays or reductions in coal or aggregates deliveries, (12)(13) changes in the prices of hydrocarbons, particularly diesel fuel, natural gas and oil, and (13)(14) increased competition, including consolidation within the coal and aggregates industries.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company” as defined by Rule 12b-2 of the Securities Exchange Act of 1934, the Company is not required to provide this 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 2019,2020, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1Legal Proceedings
None.
Item 1ARisk Factors
NoDuring the quarter ended June 30, 2020, there have been no material changes to the risk factors frompreviously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. 2019, except as follows:
The Company’s results of operations, financial condition, cash flows and stock price could be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19.
The Company’s results of operations, financial condition, cash flows and stock price could be adversely affected by pandemics, epidemics or other public health emergencies, such as the global outbreak of COVID-19. The COVID-19 pandemic resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments, school closures, and other measures.
The Company has continued to operate as an essential business because it supports critical infrastructure industries, as defined by the U.S. Department of Homeland Security. Although the Company has continued to operate facilities consistent with federal guidelines and state and local orders, the ongoing COVID-19 pandemic and the preventive or protective actions taken by governmental authorities may have a material adverse effect on the Company’s operations, work force, supply chain or customers, including business shutdowns or disruptions. The extent to which COVID-19 may adversely impact the Company's businesses depends on future developments, which are highly uncertain and unpredictable, including the extent of new outbreaks as communities reopen, the extent to which additional lockdowns may be needed, the nature of the government public health guidelines and the public's adherence to those guidelines, the success of businesses reopening, and the timing for proven treatments and vaccines for COVID-19. Any resulting financial impact cannot reasonably be estimated at this time, but could have a material adverse effect on the Company’s financial condition, cash flows and results of operations.
Even after the COVID-19 pandemic has subsided, the Company may experience material adverse effects due to a decline in economic activity. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has and may continue to adversely impact NACCO's stock price.
Termination of or default under long-term mining contracts could materially reduce the Company's profitability.
Substantially all of the Coal Mining segment's profits are derived from long-term mining contracts. Although the Company has long-term contracts, numerous political and regulatory authorities, along with well-funded environmental activist groups, are devoting substantial resources to anti-coal activities to minimize or eliminate the use of coal as a source of electricity generation. As a result of such activities, the Coal Mining segment's customers could prematurely retire certain coal-fired generating units. Any customers' premature plant closure could have a material adverse effect on the Company’s business, financial condition and results of operations.
On May 7, 2020, Great River Energy ("GRE"), Falkirk Mine's customer, and the Company's second largest customer, announced its intent to retire the Coal Creek Station power plant in the second half of 2022 and modify the Spiritwood Station power plant to be fueled by natural gas.
Falkirk Mine is the sole supplier of lignite coal to Coal Creek Station pursuant to a long-term contract under which Falkirk also supplies approximately 0.3 million tons of lignite coal per year to Spiritwood Station. Falkirk has approximately 480 employees, and, in 2019, delivered a total of 7.4 million tons of lignite coal and contributed approximately $16 million to NACCO’s Earnings from Unconsolidated Operations. The closure of Coal Creek Station would have a material adverse effect on the long-term earnings of NACCO. The terms of the contract between the Company and GRE specify that GRE is responsible for all costs related to mine closure, including but not limited to final mine reclamation costs, post-retirement medical benefits and pension costs with respect to Falkirk employees.
Also noted in GRE’s announcement is their plan to negotiate an agreement to terminate their steam and water supply contract with Blue Flint, an ethanol biorefinery fueled by process steam from Coal Creek Station. Blue Flint’s owner,
Midwest AgEnergy, is considering using the contract termination payment from Great River Energy to reinvest in an economical alternate source for its process heat. NACCO has a $5.0 million investment in Midwest AgEnergy. If Midwest AgEnergy is unable to find an economical alternate source for its process heat, the Company’s investment could become impaired.
State implementation of the EPA’s Regional Haze Rule (“RHR”) could require Coyote Creek’s customers to incur significant new costs at the Coyote Station power plant, which could, dependent on determinations by state regulatory commissions on approval to recover such costs from Coyote Creek’s customer’s customers, negatively impact Coyote Creek’s customers’ net income, financial position and cash flows. The Company understands that the North Dakota Department of Environmental Quality (“NDDEQ”) intends to require sources subject to RHR Round 2 reasonable progress determinations, including Coyote Station, to undertake emissions control measures. If NDDEQ requires significant emissions controls at Coyote Station by December 31, 2028, it may not be economically feasible for Coyote Creek's customers to invest in such equipment and an early retirement of Coyote Station and the Coyote Creek mine could be necessary. NDDEQ’s state implementation plan is due to be submitted to the EPA by July 2021. The Company expects the NDDEQ to begin drafting preliminary control scenarios for regional visibility modeling in the first half of 2020 and a state implementation plan later in 2020.
Under certain circumstances of default or termination of Coyote Creek’s Lignite Sales Agreement (“LSA”), the Company would be obligated for payment of a "make-whole" amount to Coyote Creek’s third-party lenders. The “make-whole” amount is based on the excess, if any, of the discounted value of the remaining scheduled debt payments over the principal amount. In addition, in the event Coyote Creek’s LSA is terminated on or after January 1, 2024 by Coyote Creek’s customers, the Company is obligated to purchase Coyote Creek’s dragline and rolling stock for the then net book value of those assets. Any decision by Coyote Creek’s customers to reduce operations or prematurely close the Coyote mine would have a material adverse effect on the Company’s results of operations, financial position and cash flows.
Mississippi Lignite Mining Company ("MLMC") is subject to risks associated with its capital investment, operating and equipment costs, growing use of alternative power generation that competes with coal-fired power generation, changes in customer demand and inflationary adjustments.
The profitability of MLMC is subject to the risk of loss of investment in this operation, increases in the cost of mining, changes in customer demand, growing competition from alternative power generation that competes with coal-fired generation and the emergence of adverse mining conditions. At MLMC, the costs of mining operations are not reimbursed by MLMC's customer. As such, increased costs at MLMC or decreased revenues could materially reduce the Company's profitability. Any reduction in customer demand at MLMC, including reductions related to reduced mechanical availability of the customer’s power plant, would adversely affect the Company's operating results and could result in significant impairments. In addition, MLMC sells lignite at contractually agreed upon prices which are subject to changes in the level of established indices over time. The price of diesel fuel is heavily-weighted among these indices. As such, a substantial decline in diesel prices could materially reduce MLMC's profitability, as the decline in revenue will only be partially offset by the effect of lower diesel prices on production costs.
MLMC delivers coal to the Red Hills Power Plant in Ackerman, Mississippi. The Red Hills Power Plant supplies electricity to TVA under a long-term PPA. MLMC’s contract with its customer runs through 2032. TVA’s power portfolio includes coal, nuclear, hydroelectric, natural gas and renewables. In 2019, TVA published its updated Integrated Resource Plan ("IRP"). The IRP indicates TVA plans to increase its reliance on solar power. A decrease in the number of days TVA dispatches the Red Hills Power Plant would reduce MLMC's customer's demand for coal. The decision of which power plants to dispatch is determined by TVA. TVA has dispatched Red Hills Power Plant at a lower rate in the last two years than in prior years.
Choctaw Generation Limited Partnership ("CGLP") leases the Red Hills Power Plant from a Southern Company subsidiary pursuant to a leveraged lease arrangement. The ability of the lessee to make required payments to the Southern Company subsidiary is dependent on the operational performance of the Red Hills Power Plant. Southern Company recently publicly disclosed that while all CGLP lease payments have been paid in full through June 30, 2020, operational and other risks have resulted in cash liquidity challenges at the Red Hills Power Plant, and based on current forecasts of energy prices in the years following the expiration of the PPA in 2032, concerns exist regarding the lessee's ability to make the remaining semi-annual lease payments through the end of the lease term in 2047. During the fourth quarter of 2019, Southern Company concluded that it was no longer probable that all of the payments would be received over the term of the lease and therefore recognized an impairment charge to reduce the value of the lease investment. During the second quarter 2020, Southern Company revised the estimated cash flows to be received under the leveraged lease which resulted in a full impairment of the lease investment. If any future lease payment is not paid
in full, the Southern Company subsidiary may be unable to make its corresponding payment to the holders of the underlying non-recourse debt related to the Red Hills Power Plant. Failure to make the required payment to the debtholders could represent an event of default that would give the debtholders the right to foreclose on, and take ownership of, the Red Hills Power Plant from the Southern Company subsidiary. A foreclosure of the Red Hills Power Plant could have a material adverse effect on MLMC's financial condition, results of operations and cash flows.
Similar to the Company's unconsolidated mines, all production costs at MLMC are capitalized into inventory and recognized in cost of sales as tons are delivered. In periods of limited or no deliveries, MLMC may be required to reduce its inventory carrying value using the lower of cost or net realizable value approach, which could adversely affect MLMC’s results of operations.
Changes in customer demand for any reason, including, but not limited to, reduced mechanical availability of the customer’s power plant, dispatch of power generated by other energy sources ahead of coal, fluctuations in demand due to unanticipated weather conditions, regulations or comparable policies which may promote planned and unplanned outages at the Red Hills Power Plant, economic conditions, including an economic slowdown and a corresponding decline in the use of electricity, governmental regulations and inflationary adjustments could have a material adverse effect on MLMC's financial condition, results of operations and cash flows.
Item 2Unregistered 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, 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 |
| |
Month #1 (April 1 to 30, 2020) | | — |
| | $ | — |
| | — |
| | $ | 22,659,516 |
|
Month #2 (May 1 to 31, 2020) | | — |
| | $ | — |
| | — |
| | $ | 22,659,516 |
|
Month #3 (June 1 to 30, 2020) | | — |
| | $ | — |
| | — |
| | $ | 22,659,516 |
|
Total | 2,230 |
| | $ | 37.78 |
| | 2,230 |
| | $ | 22,321,992 |
| — |
| | $ | — |
| | — |
| | $ | 22,659,516 |
|
| |
(1) | In February 2018,November 2019, the Company established a stock repurchase program allowing for the purchase of up to $25.0 million of the Company's Class A Common Stock outstanding through December 31, 2019.2021. See Note 5 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Company's stock repurchase program. |
Item 3Defaults Upon Senior Securities
None.
Item 4Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 filed with this Quarterly Report on Form 10-Q for the period ended June 30, 2019.2020.
Item 5Other Information
None.
Item 6Exhibits
|
| | |
Exhibit | | |
Number* | | Description of Exhibits |
| | |
31(i)(1) | | |
31(i)(2) | | |
32 | | |
95 | | |
101.INS | | Inline XBRL Instance Document |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Numbered in accordance with Item 601 of Regulation S-K.
Signatures
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | NACCO Industries, Inc. (Registrant) | |
Date: | July 31, 2019August 5, 2020 | /s/ Elizabeth I. Loveman | |
| | Elizabeth I. Loveman | |
| | Vice President and Controller
(principal financial and accounting officer) | |