UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_______________________________________________________________________________________________________________________________________________________________________________________________________
FORM 10-Q
| (Mark One) | |||||||||||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||
| For the quarterly period ended | |||||||||||
OR
| 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
| (Exact name of registrant as specified in its charter) | ||||||||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||||||||
| (Address of principal executive offices) | (Zip code) | |||||||||||||||||||
| (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 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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act
| Large accelerated filer | ☐ | ☑ | Non-accelerated filer | ☐ | Smaller reporting company | Emerging growth company | |||||||||||||||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No þ
Number of shares of Class A Common Stock outstanding at April 26, 2024: 5,884,740
Number of shares of Class B Common Stock outstanding at April 26, 2024: 1,565,685
NACCO INDUSTRIES, INC.
TABLE OF CONTENTS
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1
Part I
FINANCIAL INFORMATION
Item 1. Financial Statements
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| MARCH 31 2024 | DECEMBER 31 2023 | ||||||||||
| (In thousands, except share data) | |||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Trade accounts receivable | |||||||||||
| Accounts receivable from affiliates | |||||||||||
| Inventories | |||||||||||
| Assets held for sale | |||||||||||
| Federal income tax receivable | |||||||||||
| Prepaid insurance | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Intangibles, net | |||||||||||
| Deferred income taxes | |||||||||||
| Investments in unconsolidated subsidiaries | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accounts payable to affiliates | |||||||||||
| Revolving credit agreements | |||||||||||
| Current maturities of long-term debt | |||||||||||
| Asset retirement obligations | |||||||||||
| Accrued payroll | |||||||||||
| Deferred revenue | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Operating lease liabilities | |||||||||||
| Asset retirement obligations | |||||||||||
| Pension and other postretirement obligations | |||||||||||
| Liability for uncertain tax positions | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Stockholders' equity | |||||||||||
| Common stock: | |||||||||||
Class A, par value $ | |||||||||||
Class B, par value $ | |||||||||||
| Capital in excess of par value | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See notes to Unaudited Condensed Consolidated Financial Statements.
2
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| THREE MONTHS ENDED | |||||||||||
| MARCH 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| (In thousands, except per share data) | |||||||||||
| Revenues | $ | $ | |||||||||
| Cost of sales | |||||||||||
| Gross profit | |||||||||||
| Earnings of unconsolidated operations | |||||||||||
| Operating expenses | |||||||||||
| Selling, general and administrative expenses | |||||||||||
| Amortization of intangible assets | |||||||||||
| Gain on sale of assets | ( | ( | |||||||||
| Operating profit | |||||||||||
| Other (income) expense | |||||||||||
| Interest expense | |||||||||||
| Interest income | ( | ( | |||||||||
| Closed mine obligations | |||||||||||
| Gain on equity securities | ( | ( | |||||||||
| Other, net | ( | ( | |||||||||
| ( | ( | ||||||||||
| Income before income tax provision (benefit) | |||||||||||
| Income tax provision (benefit) | ( | ||||||||||
| Net income | $ | $ | |||||||||
| Earnings per share: | |||||||||||
| Basic earnings per share | $ | $ | |||||||||
| Diluted earnings per share | $ | $ | |||||||||
| Basic weighted average shares outstanding | |||||||||||
| Diluted weighted average shares outstanding | |||||||||||
See notes to Unaudited Condensed Consolidated Financial Statements.
3
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| THREE MONTHS ENDED | |||||||||||
| MARCH 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| (In thousands) | |||||||||||
| Net income | $ | $ | |||||||||
Reclassification of pension and postretirement adjustments into earnings, net of $ | |||||||||||
| Total other comprehensive income | |||||||||||
| Comprehensive income | $ | $ | |||||||||
See notes to Unaudited Condensed Consolidated Financial Statements.
4
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| THREE MONTHS ENDED | |||||||||||
| MARCH 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| (In thousands) | |||||||||||
| Operating activities | |||||||||||
| Net cash (used for) provided by operating activities | $ | ( | $ | ||||||||
| Investing activities | |||||||||||
| Expenditures for property, plant and equipment and acquisition of mineral interests | ( | ( | |||||||||
| Proceeds from the sale of property, plant and equipment | |||||||||||
| Proceeds from the sale of private company equity units | |||||||||||
| Other | ( | ( | |||||||||
| Net cash used for investing activities | ( | ( | |||||||||
| Financing activities | |||||||||||
| Additions to long-term debt | |||||||||||
| Reductions of long-term debt | ( | ( | |||||||||
Net additions to revolving credit agreements | |||||||||||
| Cash dividends paid | ( | ( | |||||||||
| Purchase of treasury shares | ( | ||||||||||
| Net cash provided by (used for) financing activities | ( | ||||||||||
| Cash and cash equivalents | |||||||||||
| Total decrease for the period | ( | ( | |||||||||
| Balance at the beginning of the period | |||||||||||
| Balance at the end of the period | $ | $ | |||||||||
See notes to Unaudited Condensed Consolidated Financial Statements.
5
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | |||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||
Cash dividends on Class A and Class B common stock: $ | — | — | — | ( | — | ( | ||||||||||||||
| Reclassification adjustment to net income, net of tax | — | — | — | — | ||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||
| Purchase of treasury shares | ( | — | — | ( | — | ( | ||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||
Cash dividends on Class A and Class B common stock: $ | — | — | — | ( | — | ( | ||||||||||||||
| Reclassification adjustment to net income, net of tax | — | — | — | — | ||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||
See notes to Unaudited Condensed Consolidated Financial Statements.
6
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(In thousands, except as noted and per share amounts)
NOTE 1—Nature of Operations and Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of NACCO Industries, Inc.® (“NACCO”) and its wholly owned subsidiaries (collectively, the “Company”). NACCO brings natural resources to life by delivering aggregates, minerals, reliable fuels and environmental solutions through its robust portfolio of NACCO Natural Resources® businesses. The Company operates under three business segments: Coal Mining, North American Mining® ("NAMining") and Minerals Management. The Coal Mining segment operates surface coal mines for power generation companies. The NAMining segment is a trusted mining partner for producers of aggregates, activated carbon, lithium and other industrial minerals. The Minerals Management segment, which includes the Catapult Mineral Partners ("Catapult") business, acquires and promotes the development of mineral interests. Mitigation Resources of North America® ("Mitigation Resources") provides stream and wetland mitigation solutions.
The Company has items not directly attributable to a reportable segment that are not included in the reported financial results of the operating segment. These items primarily include administrative costs related to public company reporting requirements, including management and board compensation, and the financial results of Bellaire Corporation ("Bellaire"), Mitigation Resources and other developing businesses. Bellaire manages the Company’s long-term liabilities related to former Eastern U.S. underground mining activities. Intercompany accounts and transactions are eliminated in consolidation. See Note 8 for further discussion of segment reporting.
The Company’s operating segments are further described below:
Coal Mining Segment
The Coal Mining segment operates surface coal mines under long-term contracts with power generation companies pursuant to a service-based business model. Coal is surface mined in North Dakota and Mississippi. Each mine is fully integrated with its customer's operations.
During the three months ended March 31, 2024, the Coal Mining segment's operating coal mines were: The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), The Falkirk Mining Company (“Falkirk”) and Mississippi Lignite Mining Company (“MLMC”). Each of these mines supply lignite coal for power generation and delivers its coal production to an adjacent power plant or synfuels plant under a long-term supply contract. While MLMC’s coal supply contract contains a take or pay provision, the contract contains a force majeure provision that allows for the temporary suspension of the take or pay provision during the duration of certain specified events beyond the control of either party; all other coal supply contracts are requirements contracts. Certain coal supply contracts can be terminated early, which would result in a reduction to future earnings.
The MLMC contract is the only coal supply contract in which the Company is responsible for all operating costs, capital requirements and final mine reclamation; therefore, MLMC is consolidated within NACCO’s financial statements. MLMC sells coal to its customer's Red Hills Power Plant at a contractually agreed-upon price which adjusts monthly, primarily based on changes in the level of established indices which reflect general U.S. inflation rates. Profitability at MLMC is affected by customer demand for coal and changes in the indices that determine sales price and actual costs incurred. As diesel fuel is heavily weighted among the indices used to determine the coal sales price, fluctuations in diesel fuel prices can result in significant fluctuations in earnings at MLMC. The Red Hills Power Plant supplies electricity to the Tennessee Valley Authority (“TVA”) under a long-term power purchase agreement. MLMC’s contract with its customer runs through April 1, 2032. TVA’s power portfolio includes coal, nuclear, hydroelectric, natural gas and renewables. The decision regarding which power plants to dispatch is determined by TVA. Reduction in dispatch of the Red Hills Power Plant will result in reduced earnings at MLMC.
On December 18, 2023, MLMC received notice from its customer related to an issue that began on December 15, 2023 as a result of an issue that impacted one of two boilers at the Red Hills Power Plant. This issue has resulted in a reduction in customer demand which will have a significant impact on the Company's 2024 results of operations. Repairs to the boiler are expected to be completed during the second half of 2024.
The Sabine Mining Company (“Sabine”) operates the Sabine Mine in Texas. All production from Sabine was delivered to Southwestern Electric Power Company's (“SWEPCO”) Henry W. Pirkey Plant (the “Pirkey Plant”). SWEPCO is an American Electric Power (“AEP”) company. As a result of the early retirement of the Pirkey Plant, Sabine ceased deliveries and final
7
reclamation began on April 1, 2023. Funding for mine reclamation is the responsibility of SWEPCO, and Sabine receives compensation for providing mine reclamation services. Sabine will provide mine reclamation services through September 30, 2026. On October 1, 2026, SWEPCO is scheduled to acquire all of the capital stock of Sabine and complete the remaining mine reclamation.
At Coteau, Coyote Creek and Falkirk, the Company is paid a management fee per ton of coal or heating unit (MMBtu) delivered. Each contract specifies the indices and mechanics by which fees change over time, generally in line with broad measures of U.S. inflation. The customers are responsible for funding all mine operating costs, including final mine reclamation, and directly or indirectly providing all of the capital required to build and operate the mine. This contract structure eliminates exposure to spot coal market price fluctuations while providing income and cash flow with minimal capital investment. Other than at Coyote Creek, debt financing provided by or supported by the customers is without recourse to the Company. See Note 6 for further discussion of Coyote Creek's guarantees.
Coteau, Coyote Creek, Falkirk and Sabine each meet the definition of a variable interest entity ("VIE"). In each case, NACCO is not the primary beneficiary of the VIE as it does not exercise financial control; therefore, NACCO does not consolidate the results of these operations within its financial statements. Instead, these contracts are accounted for as equity method investments. The Company regularly evaluates if there are reconsideration events which could change the Company's conclusion as to whether these entities meet the definition of a VIE and the determination of the primary beneficiary. The income before income taxes associated with these VIEs is reported as Earnings of unconsolidated operations on the Unaudited Condensed Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in unconsolidated subsidiaries in the Unaudited Condensed Consolidated Balance Sheets. The mines that meet the definition of a VIE are referred to collectively as the “Unconsolidated Subsidiaries.” For tax purposes, the Unconsolidated Subsidiaries are included within the NACCO consolidated U.S. tax return; therefore, the Income tax (benefit) provision line on the Unaudited Condensed Consolidated Statements of Operations includes income taxes related to these entities. See Note 6 for further information on the Unconsolidated Subsidiaries.
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.
NAMining Segment
The NAMining segment provides value-added contract mining and other services for producers of industrial minerals. The segment is a platform for the Company’s growth and diversification of mining activities outside of the thermal coal industry. NAMining provides contract mining services for independently owned mines and quarries, creating value for its customers by performing the mining aspects of its customers’ operations. This allows customers to focus on their areas of expertise: materials handling and processing, product sales and distribution. As of March 31, 2024, NAMining operates in Florida, Texas, Arkansas, Virginia and Nebraska. In addition, Sawtooth Mining, LLC ("Sawtooth") has exclusive responsibility for mining and mine closure services for the Thacker Pass lithium project in northern Nevada, including mine design, construction, operation and maintenance.
Certain of the entities within the NAMining segment are VIEs and are accounted for under the equity method as Unconsolidated Subsidiaries. See Note 6 for further discussion.
Minerals Management Segment
The Minerals Management segment derives income primarily by leasing its royalty and mineral interests to third-party exploration and production companies, and, to a lesser extent, other mining companies, granting them the rights to explore, develop, mine, produce, market and sell gas, oil, and coal in exchange for royalty payments based on the lessees' sales of those minerals.
The Minerals Management segment owns royalty interests, mineral interests, non-participating royalty interests and overriding royalty interests.
•Royalty Interest. Royalty interests generally result when the owner of a mineral interest leases the underlying minerals to an exploration and production company pursuant to an oil and gas lease. Typically, the resulting royalty interest is a cost-free percentage of production revenues for minerals extracted from the acreage. A holder of royalty interests is generally not responsible for capital expenditures or lease operating expenses, but royalty interests may be calculated
8
net of post-production expenses, and typically have no environmental liability. Royalty interests leased to producers expire upon the expiration of the oil and gas lease and revert to the mineral owner.
•Mineral Interest. Mineral interests are perpetual rights of the owner to explore, develop, exploit, mine and/or produce any or all of the minerals lying below the surface of the property. The holder of a mineral interest has the right to lease the minerals to an exploration and production company. Upon the execution of an oil and gas lease, the lessee (the exploration and production company) becomes the working interest owner and the lessor (the mineral interest owner) has a royalty interest.
•Non-Participating Royalty Interest (“NPRIs”). NPRI is an interest in oil and gas production which is created from the mineral estate. The NPRI is expense-free, bearing no operational costs of production. The term “non-participating” indicates that the interest owner does not share in the bonus, rentals from a lease, nor the right to participate in the execution of oil and gas leases. The NPRI owner does, however, typically receive royalty payments.
•Overriding Royalty Interest (“ORRIs”). ORRIs are created by carving out the right to receive royalties from a working interest. Like royalty interests, ORRIs do not confer an obligation to make capital expenditures or pay for lease operating expenses and have limited environmental liability; however, ORRIs may be calculated net of post-production expenses, depending on how the ORRI is structured. ORRIs that are carved out of working interests are linked to the same underlying oil and gas lease that created the working interest, and therefore, such ORRIs are typically subject to expiration upon the expiration or termination of the oil and gas lease.
The Company may own more than one type of mineral and royalty interest in the same tract of land. For example, where the Company owns an ORRI in a lease on the same tract of land in which it owns a mineral interest, the ORRI in that tract will relate to the same gross acres as the mineral interest in that tract.
The Minerals Management segment will benefit from the continued development of its mineral properties without the need for investment of additional capital once mineral and royalty interests have been acquired. The Minerals Management segment does not currently have any material investments under which it would be required to bear the cost of exploration, production or development.
The Company's acquisition criteria for building a blended portfolio of mineral and royalty interests includes (i) new wells anticipated to come online within one to two years of investment, (ii) areas with forecasted future development within five years after acquisition and (iii) existing producing wells further along the decline curve that will generate stable cash flow. In addition, acquisitions should extend the geographic footprint to diversify across multiple basins with a preliminary focus on the more oil-rich Permian basin and a secondary focus on other diversifying basins to increase regional exposure. While the current focus is on the acquisition of mineral and royalty interests, the Company would also consider investments in ORRIs, NPRIs or non-operating working interests under certain circumstances. The current acquisition strategy does not contemplate any near-term working interest investments in which the Company would act as the operator.
The Company also manages legacy royalty and mineral interests located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Texas (Cotton Valley and Austin Chalk formation natural gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus shale natural gas), Alabama (coal, coalbed methane and natural gas) and North Dakota (coal, oil and natural gas). The majority of the Company’s legacy reserves were acquired as part of its historical coal mining operations.
Other Items: On December 1, 2022, the Company transferred its ownership interest in Midwest AgEnergy Group, LLC (“MAG”), a North Dakota-based ethanol business to HLCP Ethanol Holdco, LLC (“HLCP”). The Company received a payment of $1.2 million in the first quarter of 2023 in connection with a post-closing purchase price adjustment, which is included on the line "Other, net" within the accompanying Unaudited Condensed Consolidated Statements of Operations.
Basis of Presentation: 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 March 31, 2024, the results of its operations, comprehensive income, cash flows and changes in equity for the three months ended March 31, 2024 and 2023 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, 2023.
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The balance sheet at December 31, 2023 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—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, the management service to oversee the operation of the equipment, and delivery of aggregates or other minerals is the performance obligation accounted for as a series. Performance momentarily creates an asset that the customer simultaneously receives and consumes; therefore, control is transferred to the customer over time. Consistent with the conclusion that the customer simultaneously receives and consumes the benefits provided, an input-based measure of progress is appropriate. As each month of service is completed, revenue is recognized for the amount of actual costs incurred, plus the management fee or fixed fee and the general and administrative fee (as applicable). Fluctuations in revenue from period to period result from changes in customer demand primarily due to increases and decreases in activity levels on individual contracts and variances in reimbursable costs. Revenue from part sales is recognized upon transfer of control of the parts to the customer.
The Minerals Management segment enters into contracts which grant the right to explore, develop, produce and sell minerals controlled by the Company. These arrangements result in the transfer of mineral rights for 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 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 Company believes that the pricing provisions of royalty contracts are customary in the industry. Up-front lease bonus payments represent the fixed portion of the transaction price and are recognized over the primary term of the contract, which is generally to five years .
Mitigation Resources generates and sells stream and wetland mitigation credits (known as mitigation banking) and provides services to those engaged in permittee-responsible stream and wetland mitigation. Each mitigation credit sale is considered a separate performance obligation. Revenue is recognized at the point in time that control of each mitigation credit transfers to the customer. Fluctuations in revenue from period to period generally result from changes in customer demand. Under the permittee-responsible stream and wetland mitigation model, the contracts are generally structured as a management fee agreement under which Mitigation Resources is reimbursed for all costs incurred in performing the required mitigation plus an agreed profit percentage or a fixed fee. The mitigation services provided is the performance obligation and is accounted for as a series. Performance momentarily creates an asset that the customer simultaneously receives and consumes; therefore, control is transferred to the customer as work is completed. Consistent with the 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 or fixed fee. Fluctuations in revenue from period to period result from changes in customer demand primarily due to increases and decreases in activity levels of individual contracts and variances in reimbursable costs.
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Significant Judgments
The Company’s contracts with its customers contain different types of variable consideration including, but not limited to, management fees that adjust based on volumes or MMBtu delivered, however, the terms of these variable payments relate specifically to the Company's efforts to satisfy one or more, but not all of, the performance obligations (or to a specific outcome from satisfying the performance obligations) in the contract. Therefore, the Company allocates each variable payment (and subsequent changes to that payment) entirely to the specific performance obligation to which it relates. Management fees, as well as general and administrative fees, are also adjusted based on changes in specified indices (e.g., CPI) to compensate for general inflation changes. Index adjustments, if applicable, are effective prospectively.
Cost Reimbursement
Certain contracts include reimbursement from customers of actual costs incurred for the purchase of supplies, equipment and services in accordance with contractual terms. Such reimbursable revenue is variable and subject to uncertainty, as the amounts received and timing thereof is highly dependent on factors outside of the Company’s control. Accordingly, reimbursable revenue is fully constrained and not recognized until the uncertainty is resolved, which typically occurs when the related costs are incurred on behalf of a customer. The Company is considered a principal in such transactions and records the associated revenue at the gross amount billed to the customer with the related costs recorded as an expense within cost of sales.
At the Thacker Pass lithium project, in addition to management fee income, the customer will reimburse Sawtooth for up to $50 million of capital expenditures. Sawtooth will recognize revenue over the estimated useful life of the asset on a straight-line basis as the performance obligation is satisfied over time. Sawtooth recognized $1.5 million and $0.1 million in revenue for reimbursable costs during the three months ended March 31, 2024 and 2023, respectively. In accordance with the Thacker Pass mining agreement, the customer received a $3.5 million advance from Sawtooth, which is included in the long-term contract asset. The customer will pay a $4.7 million success fee to Sawtooth upon achieving commercial mining milestones or repay the $3.5 million advance if such commercial mining milestones are not met.
Prior Period Performance Obligations
The Company records royalty income in the month production is delivered to the purchaser. As a mineral owner, the Company has limited visibility into when new wells start producing, and production statements may not be received for 30 to 90 days or more after the date production is delivered. As a result, the Company is required to estimate the amount of production delivered to the purchaser of the product and the price that will be received for the sale of the product. The expected sales volumes and prices for these properties are estimated and recorded in "Trade accounts receivable" in the accompanying Unaudited Condensed Consolidated Balance Sheets. The difference between the Company’s estimates and the actual amounts received is recorded in the month that payment is received from the third-party lessee. For the three months ended March 31, 2024 and 2023, royalty income recognized in the reporting period related to performance obligations satisfied in prior reporting periods was immaterial.
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 8 to the Unaudited Condensed Consolidated Financial Statements for further discussion of segment reporting.
The following table disaggregates revenue by major sources as of March 31:
| THREE MONTHS ENDED | |||||||||||
| MARCH 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| Timing of Revenue Recognition | |||||||||||
| Goods transferred at a point in time | $ | $ | |||||||||
| Services transferred over time | |||||||||||
| Total revenues | $ | $ | |||||||||
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Contract Balances
The opening and closing balances of the Company’s current and long-term contract assets and liabilities and receivables are as follows:
| Contract balances | |||||||||||||||||||||||
| Trade accounts receivable | Contract asset (long-term) | Contract liability (current) | Contract liability (long-term) | ||||||||||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | $ | |||||||||||||||||||
| Balance, March 31, 2024 | |||||||||||||||||||||||
| Increase (decrease) | $ | ( | $ | ( | $ | $ | |||||||||||||||||
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 to five years . Therefore, at the time any such up-front payment is received, a contract liability is recorded which represents deferred revenue. The amount of royalty revenue recognized in both of the three months ended March 31, 2024 and 2023 included in the opening contract liability was $0.2 five years .
The Company expects to recognize an additional $0.9 million in the remainder of 2024, $1.2 million in 2025, $0.1 million in 2026, less than $0.1 million in 2027 and $0.8 million in the years after 2027 related to the contract liability remaining at March 31, 2024. The difference between the opening and closing balances of the Company’s contract balances results from the timing difference between the Company’s performance and the customer’s payment.
The Company has no contract assets recognized from the costs to obtain or fulfill a contract with a customer.
NOTE 3—Inventories
Inventories are summarized as follows:
| MARCH 31 2024 | DECEMBER 31 2023 | ||||||||||
| Coal | $ | $ | |||||||||
| Mining supplies | |||||||||||
| Total inventories | $ | $ | |||||||||
During the three months ended March 31, 2024 and 2023, the Company recorded a $2.5 million and a $2.4 million inventory impairment charge, respectively, in the line “Cost of sales” in the accompanying Unaudited Condensed Consolidated Statements of Operations as mining costs exceeded net realizable value at MLMC.
NOTE 4—Stockholders' Equity
Stock Repurchase Program: On November 7, 2023, the Company's Board of Directors approved a stock repurchase program ("2023 Stock Repurchase Program") providing for the purchase of up to $20.0 million of the Company’s outstanding Class A common stock through December 31, 2025. NACCO's previous repurchase program would have expired on December 31, 2023 but was terminated and replaced by the 2023 Stock Repurchase Program. During the three months ended March 31, 2024, the Company repurchased 127,687 shares of Class A Common Stock under the 2023 Stock Repurchase Program for an aggregate purchase price of $4.3 million.
The timing and amount of any repurchases under the 2023 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 2023 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 2023 Stock Repurchase Program may be
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NOTE 5—Fair Value Disclosure
Recurring Fair Value Measurements: The following table presents the Company's assets and liabilities accounted for at fair value on a recurring basis:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||||||||
| Quoted Prices in | Significant | |||||||||||||||||||||||||
| Active Markets for | Significant Other | Unobservable | ||||||||||||||||||||||||
| Identical Assets | Observable Inputs | Inputs | ||||||||||||||||||||||||
| Description | Date | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||
| March 31, 2024 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
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 2023, Bellaire contributed $5.0 million to establish a mine water treatment trust (the "Mine Water Treatment Trust") to assure the long-term treatment of post-mining 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 fair value of the Mine Water Treatment Trust was $11.9 million and $11.2 million at March 31, 2024 and December 31, 2023, respectively, and is included in Other non-current assets in the accompanying Unaudited Consolidated Balance Sheets. The Company recognized a gain of $0.7 million and $0.6 million during the three months ended March 31, 2024 and 2023, respectively, related to the Mine Water Treatment Trust.
Prior to 2023, the Company invested $2.0 million in equity securities of a public company with a diversified portfolio of royalty producing mineral interests. The investment is reported at fair value based upon quoted market prices in active markets for identical assets; therefore, it is classified as Level 1 within the fair value hierarchy. The fair value of this investment was $6.4 million and $6.0 million at March 31, 2024 and December 31, 2023, respectively, and is included in Other non-current assets in the accompanying Unaudited Consolidated Balance Sheets. The Company recognized a gain of $0.4 million and $0.1 million during the three months ended March 31, 2024 and 2023, respectively, related to the investment in these equity securities.
The change in fair value of equity securities is reported on the line Gain on equity securities in the Other (income) expense section of the Unaudited Condensed Consolidated Statements of Operations.
There were no transfers into or out of Levels 1, 2 or 3 during the three months ended March 31, 2024 and 2023.
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NOTE 6—Unconsolidated Subsidiaries
Each of the Company'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 generally without recourse to the Company. Although the Company owns 100 % of the equity and manages the daily operations of the Unconsolidated Subsidiaries, the Company has determined that the equity capital provided by the Company is not sufficient to adequately finance the ongoing activities or absorb any expected losses without additional support from the customers. The customers have a controlling financial interest and have the power to direct the activities that most significantly affect the economic performance of the entities. As a result, the Company is not the primary beneficiary and therefore does not consolidate these entities' financial positions or results of operations. See Note 1 for a discussion of these entities.
The Investment in the unconsolidated subsidiaries and related tax positions totaled $13.8 million and $12.4 million at March 31, 2024 and December 31, 2023, respectively. The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $4.8 million and $5.0 million at March 31, 2024 and December 31, 2023, respectively. Earnings of unconsolidated operations were $13.3 million and $13.8 million during the three months ended March 31, 2024 and 2023, respectively.
NACCO Natural Resources Corporation ("NACCO Natural Resources"), a wholly-owned subsidiary of NACCO, is a party to certain guarantees related to Coyote Creek. Under certain circumstances of default or termination of Coyote Creek’s Lignite Sales Agreement (“LSA”), NACCO Natural Resources would be obligated for payment of a "make-whole" amount to Coyote Creek’s third-party lenders. The “make-whole” amount is based on the excess, if any, of the discounted value of the remaining scheduled debt payments over the principal amount. In addition, in the event Coyote Creek’s LSA is terminated by Coyote Creek’s customers, NACCO Natural Resources is obligated to purchase Coyote Creek’s dragline and rolling stock for the then net book value of those assets. To date, no payments have been required from NACCO Natural Resources since the inception of these guarantees. The Company believes that the likelihood NACCO Natural Resources would be required to perform under the guarantees is remote, and no amounts related to these guarantees have been recorded.
NOTE 7—Contingencies
Various legal and regulatory proceedings and claims have been or may be asserted against NACCO and certain subsidiaries relating to the conduct of their businesses. These proceedings and claims are incidental to the ordinary course of business of the Company. Management believes that it has meritorious defenses and will vigorously defend the Company in these actions. Any costs that management estimates will be paid as a result of these claims are accrued when the liability is considered probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss.
These matters are subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of an adverse impact on the Company’s financial position, results of operations and cash flows of the period in which the ruling occurs, or in future periods.
NOTE 8—Business Segments
The Company’s operating segments are: (i) Coal Mining, (ii) NAMining and (iii) Minerals Management. The Company determines its reportable segments by first identifying its operating segments, and then by assessing whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. The Company’s Chief Operating Decision Maker utilizes operating profit to evaluate segment performance and allocate resources.
The Company has items not directly attributable to a reportable segment that are not included as part of the measurement of segment operating profit. These items primarily include administrative costs related to public company reporting requirements at the parent company and the financial results of Mitigation Resources and Bellaire. Mitigation Resources generates and sells stream and wetland mitigation credits (known as mitigation banking) and provides services to those engaged in permittee-responsible stream and wetland mitigation. Bellaire manages the Company’s long-term liabilities related to former Eastern U.S. underground mining activities.
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All financial statement line items below operating profit (other income including interest expense and interest income, the provision (benefit) for income taxes and net income) are presented and discussed within this Form 10-Q on a consolidated basis.
The following table presents Revenues, Cost of sales, Earnings of unconsolidated operations, Operating expenses, Operating profit (loss), Expenditures for property, plant and equipment and acquisition of mineral interests and Depreciation, depletion and amortization expense:
| THREE MONTHS ENDED | |||||||||||
| MARCH 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenues | |||||||||||
| Coal Mining | $ | $ | |||||||||
| NAMining | |||||||||||
| Minerals Management | |||||||||||
| Unallocated Items | |||||||||||
| Eliminations | ( | ( | |||||||||
| Total | $ | $ | |||||||||
| Cost of sales | |||||||||||
| Coal Mining | $ | $ | |||||||||
| NAMining | |||||||||||
| Minerals Management | |||||||||||
| Unallocated Items | |||||||||||
| Eliminations | ( | ( | |||||||||
| Total | $ | $ | |||||||||
| Earnings of unconsolidated operations | |||||||||||
| Coal Mining | $ | $ | |||||||||
| NAMining | |||||||||||
| Minerals Management | ( | ||||||||||
| Total | $ | $ | |||||||||
| Operating expenses* | |||||||||||
| Coal Mining | $ | $ | |||||||||
| NAMining | |||||||||||
| Minerals Management | |||||||||||
| Unallocated Items | |||||||||||
| Total | $ | $ | |||||||||
Operating profit (loss) | |||||||||||
| Coal Mining | $ | ( | $ | ||||||||
| NAMining | |||||||||||
| Minerals Management | |||||||||||
| Unallocated Items | ( | ( | |||||||||
| Eliminations | ( | ||||||||||
| Total | $ | $ | |||||||||
*Operating expenses consist of Selling, general and administrative expenses, Amortization of intangible assets and (Gain) loss on sale of assets.
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| THREE MONTHS ENDED | |||||||||||
| MARCH 31 | |||||||||||
| 2024 | 2023 | ||||||||||
| Expenditures for property, plant and equipment and acquisition of mineral interests | |||||||||||
| Coal Mining | $ | $ | |||||||||
| NAMining | |||||||||||
| Minerals Management | |||||||||||
| Unallocated Items | |||||||||||
| Total | $ | $ | |||||||||
| Depreciation, depletion and amortization | |||||||||||
| Coal Mining | $ | $ | |||||||||
| NAMining | |||||||||||
| Minerals Management | |||||||||||
| Unallocated Items | |||||||||||
| Total | $ | $ | |||||||||
Asset information by segment is not discretely maintained for internal reporting or used in evaluating performance.
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Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except as noted and per share data)
Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in these forward-looking statements are set forth below under the heading “Forward-Looking Statements."
Management's Discussion and Analysis of Financial Condition and Results of Operations include NACCO Industries, Inc.® (“NACCO”) and its wholly owned subsidiaries (collectively, the “Company”). NACCO brings natural resources to life by delivering aggregates, minerals, reliable fuels and environmental solutions through its robust portfolio of NACCO Natural Resources® businesses. The Company operates under three business segments: Coal Mining, North American Mining® ("NAMining") and Minerals Management. The Coal Mining segment operates surface coal mines for power generation companies. The NAMining segment is a trusted mining partner for producers of aggregates, activated carbon, lithium and other industrial minerals. The Minerals Management segment, which includes the Catapult Mineral Partners ("Catapult") business, acquires and promotes the development of mineral interests. Mitigation Resources of North America® ("Mitigation Resources") provides stream and wetland mitigation solutions.
The Company has items not directly attributable to a reportable segment that are not included in the reported financial results of the operating segment. These items primarily include administrative costs related to public company reporting requirements, including management and board compensation, and the financial results of Bellaire Corporation ("Bellaire"), Mitigation Resources and other developing businesses. Bellaire manages the Company’s long-term liabilities related to former Eastern U.S. underground mining activities.
All financial statement line items below operating profit (other income, including interest expense and interest income, the provision (benefit) for income taxes and net income) are presented and discussed within this Form 10-Q on a consolidated basis.
The Company’s operating segments are further described below:
Coal Mining Segment
The Coal Mining segment operates surface coal mines under long-term contracts with power generation companies pursuant to a service-based business model. Coal is surface mined in North Dakota and Mississippi. Each mine is fully integrated with its customer's operations.
During the three months ended March 31, 2024, the Coal Mining segment's operating coal mines were: The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), The Falkirk Mining Company (“Falkirk”) and Mississippi Lignite Mining Company (“MLMC”). Each of these mines supply lignite coal for power generation and delivers its coal production to an adjacent power plant or synfuels plant under a long-term supply contract. While MLMC’s coal supply contract contains a take or pay provision, the contract contains a force majeure provision that allows for the temporary suspension of the take or pay provision during the duration of certain specified events beyond the control of either party; all other coal supply contracts are requirements contracts. Certain coal supply contracts can be terminated early, which would result in a reduction to future earnings.
The MLMC contract is the only coal supply contract in which the Company is responsible for all operating costs, capital requirements and final mine reclamation; therefore, MLMC is consolidated within NACCO’s financial statements. MLMC sells coal to its customer's Red Hills Power Plant at a contractually agreed-upon price which adjusts monthly, primarily based on changes in the level of established indices which reflect general U.S. inflation rates. Profitability at MLMC is affected by customer demand for coal and changes in the indices that determine sales price and actual costs incurred. As diesel fuel is heavily weighted among the indices used to determine the coal sales price, fluctuations in diesel fuel prices can result in significant fluctuations in earnings at MLMC. The Red Hills Power Plant supplies electricity to the Tennessee Valley Authority (“TVA”) under a long-term power purchase agreement. MLMC’s contract with its customer runs through April 1, 2032. TVA’s power portfolio includes coal, nuclear, hydroelectric, natural gas and renewables. The decision regarding which power plants to dispatch is determined by TVA. Reduction in dispatch of the Red Hills Power Plant will result in reduced earnings at MLMC.
On December 18, 2023, MLMC received notice from its customer related to an issue that began on December 15, 2023 as a result of an issue that impacted one of two boilers at the Red Hills Power Plant. This issue has resulted in a reduction in
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customer demand which will have a significant impact on the Company's 2024 results of operations. Repairs to the boiler are expected to be completed during the second half of 2024.
The Sabine Mining Company (“Sabine”) operates the Sabine Mine in Texas. All production from Sabine was delivered to Southwestern Electric Power Company's (“SWEPCO”) Henry W. Pirkey Plant (the “Pirkey Plant”). SWEPCO is an American Electric Power (“AEP”) company. As a result of the early retirement of the Pirkey Plant, Sabine ceased deliveries and final reclamation began on April 1, 2023. Funding for mine reclamation is the responsibility of SWEPCO, and Sabine receives compensation for providing mine reclamation services. Sabine will provide mine reclamation services through September 30, 2026. On October 1, 2026, SWEPCO is scheduled to acquire all of the capital stock of Sabine and complete the remaining mine reclamation.
At Coteau, Coyote Creek and Falkirk, the Company is paid a management fee per ton of coal or heating unit (MMBtu) delivered. Each contract specifies the indices and mechanics by which fees change over time, generally in line with broad measures of U.S. inflation. The customers are responsible for funding all mine operating costs, including final mine reclamation, and directly or indirectly providing all of the capital required to build and operate the mine. This contract structure eliminates exposure to spot coal market price fluctuations while providing income and cash flow with minimal capital investment. Other than at Coyote Creek, debt financing provided by or supported by the customers is without recourse to the Company. See Note 6 to the Unaudited Condensed Consolidated Financial Statements for further discussion of Coyote Creek's guarantees.
Coteau, Coyote Creek, Falkirk and Sabine each meet the definition of a variable interest entity ("VIE"). In each case, NACCO is not the primary beneficiary of the VIE as it does not exercise financial control; therefore, NACCO does not consolidate the results of these operations within its financial statements. Instead, these contracts are accounted for as equity method investments. The Company regularly evaluates if there are reconsideration events which could change the Company's conclusion as to whether these entities meet the definition of a VIE and the determination of the primary beneficiary. The income before income taxes associated with these VIEs is reported as Earnings of unconsolidated operations on the Unaudited Condensed Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in unconsolidated subsidiaries in the Unaudited Condensed Consolidated Balance Sheets. The mines that meet the definition of a VIE are referred to collectively as the “Unconsolidated Subsidiaries.” For tax purposes, the Unconsolidated Subsidiaries are included within the NACCO consolidated U.S. tax return; therefore, the Income tax provision (benefit) line on the Unaudited Condensed Consolidated Statements of Operations includes income taxes related to these entities. See Note 6 to the Unaudited Condensed Consolidated Financial Statements for further information on the Unconsolidated Subsidiaries.
The Company performs contemporaneous reclamation activities at each mine in the normal course of operations. Under all of the Unconsolidated Subsidiaries’ contracts, the customer has the obligation to fund final mine reclamation activities. Under certain contracts, the Unconsolidated Subsidiary holds the mine permit and is therefore responsible for final mine reclamation activities. To the extent the Unconsolidated Subsidiary performs such final reclamation, it is compensated for providing those services in addition to receiving reimbursement from customers for costs incurred.
NAMining Segment
The NAMining segment provides value-added contract mining and other services for producers of industrial minerals. The segment is a platform for the Company’s growth and diversification of mining activities outside of the thermal coal industry. NAMining provides contract mining services for independently owned 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. As of March 31, 2024, NAMining operates in Florida, Texas, Arkansas, Virginia and Nebraska. In addition, Sawtooth Mining, LLC ("Sawtooth") has exclusive responsibility for mining and mine closure services for the Thacker Pass lithium project in northern Nevada, including mine design, construction, operation and maintenance .
Certain of the entities within the NAMining segment are VIEs and are accounted for under the equity method as Unconsolidated Subsidiaries. See Note 6 to the Unaudited Condensed Consolidated Financial Statements for further discussion.
Minerals Management Segment
The Minerals Management segment derives income primarily by leasing its royalty and mineral interests to third-party exploration and production companies, and, to a lesser extent, other mining companies, granting them the rights to explore, develop, mine, produce, market and sell gas, oil, and coal in exchange for royalty payments based on the lessees' sales of those minerals.
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The Minerals Management segment owns royalty interests, mineral interests, non-participating royalty interests and overriding royalty interests.
•Royalty Interest. Royalty interests generally result when the owner of a mineral interest leases the underlying minerals to an exploration and production company pursuant to an oil and gas lease. Typically, the resulting royalty interest is a cost-free percentage of production revenues for minerals extracted from the acreage. A holder of royalty interests is generally not responsible for capital expenditures or lease operating expenses, but royalty interests may be calculated net of post-production expenses, and typically have no environmental liability. Royalty interests leased to producers expire upon the expiration of the oil and gas lease and revert to the mineral owner.
•Mineral Interest. Mineral interests are perpetual rights of the owner to explore, develop, exploit, mine and/or produce any or all of the minerals lying below the surface of the property. The holder of a mineral interest has the right to lease the minerals to an exploration and production company. Upon the execution of an oil and gas lease, the lessee (the exploration and production company) becomes the working interest owner and the lessor (the mineral interest owner) has a royalty interest.
•Non-Participating Royalty Interest (“NPRIs”). NPRI is an interest in oil and gas production which is created from the mineral estate. The NPRI is expense-free, bearing no operational costs of production. The term “non-participating” indicates that the interest owner does not share in the bonus, rentals from a lease, nor the right to participate in the execution of oil and gas leases. The NPRI owner does, however, typically receive royalty payments.
•Overriding Royalty Interest (“ORRIs”). ORRIs are created by carving out the right to receive royalties from a working interest. Like royalty interests, ORRIs do not confer an obligation to make capital expenditures or pay for lease operating expenses and have limited environmental liability; however, ORRIs may be calculated net of post-production expenses, depending on how the ORRI is structured. ORRIs that are carved out of working interests are linked to the same underlying oil and gas lease that created the working interest, and therefore, such ORRIs are typically subject to expiration upon the expiration or termination of the oil and gas lease.
The Company may own more than one type of mineral and royalty interest in the same tract of land. For example, where the Company owns an ORRI in a lease on the same tract of land in which it owns a mineral interest, the ORRI in that tract will relate to the same gross acres as the mineral interest in that tract.
The Minerals Management segment will benefit from the continued development of its mineral properties without the need for investment of additional capital once mineral and royalty interests have been acquired. The Minerals Management segment does not currently have any material investments under which it would be required to bear the cost of exploration, production or development.
The Company's acquisition criteria for building a blended portfolio of mineral and royalty interests includes (i) new wells anticipated to come online within one to two years of investment, (ii) areas with forecasted future development within five years after acquisition and (iii) existing producing wells further along the decline curve that will generate stable cash flow. In addition, acquisitions should extend the geographic footprint to diversify across multiple basins with a preliminary focus on the more oil-rich Permian basin and a secondary focus on other diversifying basins to increase regional exposure. While the current focus is on the acquisition of mineral and royalty interests, the Company would also consider investments in ORRIs, NPRIs or non-operating working interests under certain circumstances. The current acquisition strategy does not contemplate any near-term working interest investments in which the Company would act as the operator.
The Company also manages legacy royalty and mineral interests located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Texas (Cotton Valley and Austin Chalk formation natural gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus shale natural gas), Alabama (coal, coalbed methane and natural gas) and North Dakota (coal, oil and natural gas). The majority of the Company’s legacy reserves were acquired as part of its historical coal mining operations.
Government Regulation Update
On April 25, 2024, the Environmental Protection Agency (“EPA”) issued a pre-publication version of the final rules for Greenhouse Gas (“GHG”) emissions and Mercury Air Toxics Standards (“MATS”). The final MATS and GHG rules will require compliance as early as 2027 and 2030, respectively. The Company is in the process of determining the implications of these rules. Previous efforts by the EPA were met with extensive litigation and the Company anticipates a similar response to the new GHG and MATS rules.
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Preliminary review of the GHG rules indicate that the compliance deadline for coal-fired plants planning to install carbon capture and sequestration/storage technology has been extended to January 1, 2032. If a coal-fired plant intends to close prior to 2032, no controls will be required and if a plant plans to close between 2032 and 2039, they must begin co-firing with natural gas by January 1, 2030.
Preliminary review of the final MATS rules indicate that the EPA significantly reduced the fine particulate matter emission standard for all existing coal-fired electric generating units and will require continuous monitoring equipment to demonstrate compliance. Furthermore, the EPA elected to remove the lignite subcategory for mercury limits and will require lignite-fired electric generating units to meet the same standard as other types of coal.
Substantially all of the Coal Mining segment's profits are derived from long-term mining contracts. These new rules may raise the cost of fossil fuel generated energy, making coal-fired power plants less competitive, and/or result in early closure which could have an adverse impact on demand for coal and ultimately result in the early closure of the mines servicing these plants, including closure of the Company's coal mines. Any such closure of the Company's mines could have a material adverse effect on the Company’s business, financial condition and results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Refer to the discussion of the Company's Critical Accounting Policies and Estimates as disclosed on pages 52 through 53 in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. The Company's Critical Accounting Policies and Estimates have not materially changed since December 31, 2023.
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CONSOLIDATED FINANCIAL SUMMARY
The results of operations for NACCO were as follows for the three months ended March 31:
| THREE MONTHS | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenues: | |||||||||||
| Coal Mining | $ | 15,545 | $ | 20,653 | |||||||
| NAMining | 24,483 | 20,633 | |||||||||
| Minerals Management | 10,401 | 8,285 | |||||||||
| Unallocated Items | 3,262 | 1,191 | |||||||||
| Eliminations | (402) | (621) | |||||||||
| Total revenue | $ | 53,289 | $ | 50,141 | |||||||
Operating profit (loss): | |||||||||||
| Coal Mining | $ | (417) | $ | 313 | |||||||
| NAMining | 2,355 | 830 | |||||||||
| Minerals Management | 7,930 | 6,044 | |||||||||
| Unallocated Items | (5,128) | (5,353) | |||||||||
| Eliminations | 17 | (20) | |||||||||
Total operating profit | 4,757 | 1,814 | |||||||||
| Interest expense | 1,111 | 545 | |||||||||
| Interest income | (1,127) | (1,155) | |||||||||
| Closed mine obligations | 455 | 409 | |||||||||
Gain on equity securities | (1,041) | (628) | |||||||||
| Other, net | (214) | (1,725) | |||||||||
| Other income, net | (816) | (2,554) | |||||||||
Income before income tax provision (benefit) | 5,573 | 4,368 | |||||||||
Income tax provision (benefit) | 1,003 | (1,324) | |||||||||
Net income | $ | 4,570 | $ | 5,692 | |||||||
| Effective income tax rate | 18.0 | % | (30.3) | % | |||||||
The components of the change in revenues and operating profit are discussed below in "Segment Results."
First Quarter of 2024 Compared with First Quarter of 2023
Other (income) expense, net
Interest expense increased in the first quarter of 2024 compared with the respective 2023 period due to higher average borrowings as well as an increase in interest rates.
Gain on equity securities represents changes in the market price of invested assets reported at fair value. The change in the first quarter of 2024 compared with the respective 2023 period was due to fluctuations in the market prices of the exchange-traded equity securities. See Note 5 to the Unaudited Condensed Consolidated Financial Statements for further discussion of equity securities.
On December 1, 2022, the Company transferred its ownership interest in Midwest AgEnergy Group, LLC (“MAG”), a North Dakota-based ethanol business to HLCP Ethanol Holdco, LLC (“HLCP”). The Company received a payment of $1.2 million in the first quarter of 2023 in connection with a post-closing purchase price adjustment, which is included on the line "Other, net" within the accompanying Unaudited Condensed Consolidated Statements of Operations.
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Income Taxes
The Company evaluates and updates its estimated annual effective income tax rate on a quarterly basis based on current and forecasted operating results and tax laws. Consequently, based upon the mix and timing of actual earnings compared to projections of earnings between entities that benefit from percentage depletion and those that do not, the effective tax rate may vary quarterly and may make quarterly comparisons not meaningful. The benefit of percentage depletion is not directly related to the amount of consolidated pre-tax income recorded in a period. Accordingly, in periods where income before tax is relatively small, the proportional effect of the benefit from percentage depletion on the effective tax rate may be significant. In addition, as a result of the forecasted loss before income tax as of March 31, 2023, the effect of the benefit from percentage depletion resulted in a negative forecasted effective tax rate. Each quarter, the Company updates its estimate of the annual effective tax rate and the cumulative impact of the change in the estimated annual tax rate is recorded, which can additionally make quarterly comparisons not meaningful.
LIQUIDITY AND CAPITAL RESOURCES OF NACCO
Cash Flows
The following tables detail NACCO's changes in cash flow for the three months ended March 31:
| 2024 | 2023 | Change | |||||||||||||||
| Operating activities: | |||||||||||||||||
Net cash (used for) provided by operating activities | $ | (9,758) | $ | 6,254 | $ | (16,012) | |||||||||||
| Investing activities: | |||||||||||||||||
| Expenditures for property, plant and equipment and acquisition of mineral interests | (14,483) | (7,879) | (6,604) | ||||||||||||||
| Other | (152) | 1,415 | (1,567) | ||||||||||||||
| Net cash used for investing activities | (14,635) | (6,464) | (8,171) | ||||||||||||||
| Cash flow before financing activities | $ | (24,393) | $ | (210) | $ | (24,183) | |||||||||||
The $16.0 million change in net cash (used for) provided by operating activities was primarily due to an unfavorable change in working capital, which was mainly the result of increases in Other current assets and Accounts receivable from affiliates during the first quarter of 2024 compared with significant decreases in the first quarter of 2023. The change in Other current assets was primarily due to changes in accrued royalties. The change in Accounts receivable from affiliates is primarily attributable to the amount and timing of payments from unconsolidated subsidiaries.
In addition, the Company entered into an Accounts Receivable Financing Program with a third party banking institution on March 14, 2024 for the sale of certain accounts receivables. Accounts receivable sold under the Accounts Receivable Financing Program for the quarter ended March 31, 2024 were $6.1 million. The net proceeds received were included in Net cash (used for) provided by operating activities in the Unaudited Consolidated Statement of Cash Flows.
| 2024 | 2023 | Change | |||||||||||||||
| Financing activities: | |||||||||||||||||
Net additions to long-term debt and revolving credit agreement | $ | 7,032 | $ | 656 | $ | 6,376 | |||||||||||
| Cash dividends paid | (1,630) | (1,557) | (73) | ||||||||||||||
| Purchase of treasury shares | (4,274) | — | (4,274) | ||||||||||||||
Net cash provided by (used for) financing activities | $ | 1,128 | $ | (901) | $ | 2,029 | |||||||||||
The change in net cash provided by (used for) financing activities was primarily due to an increase in debt borrowings during the first three months of 2024 compared with the first three months of 2023, partially offset by share repurchases during the first quarter of 2024.
Financing Activities
NACCO Natural Resources Corporation (“NACCO Natural Resources”), maintains a secured revolving line of credit of up to $150.0 million (the “Facility”) that expires in November 2025. Borrowings outstanding under the Facility were $17.0 million at
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March 31, 2024. At March 31, 2024, the excess availability under the Facility was $100.4 million, which reflects a reduction for outstanding letters of credit of $32.6 million.
NACCO has not guaranteed any borrowings of NACCO Natural Resources. The Facility allows for the payment to NACCO of dividends and advances under certain circumstances. Dividends (to the extent permitted by the Facility) and management fees are the primary sources of cash for NACCO and enable the Company to pay dividends to stockholders and repurchase shares.
The Facility has performance-based pricing, which sets interest rates based upon NACCO Natural Resources achieving various levels of debt to EBITDA ratios, as defined in the 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 March 31, 2024, for base rate and SOFR loans were 1.23% and 2.23%, respectively. The Facility has a commitment fee which is based upon achieving various levels of debt to EBITDA ratios. The commitment fee was 0.34% on the unused commitment at March 31, 2024.
The Facility contains restrictive covenants, which require, among other things, NACCO Natural Resources to maintain a maximum net debt to EBITDA ratio of 2.75 to 1.00 and an interest coverage ratio of not less than 4.00 to 1.00. The 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 1.50 to 1.00, or if greater than 1.50 to 1.00, a Fixed Charge Coverage Ratio of 1.10 to 1.00, in conjunction with maintaining unused availability thresholds of borrowing capacity, as defined in the Facility, of $15.0 million. At March 31, 2024, NACCO Natural Resources was in compliance with all financial covenants in the Facility.
The obligations under the Facility are guaranteed by certain of NACCO Natural Resource's direct and indirect, existing and future domestic subsidiaries, and is secured by certain assets of NACCO Natural Resources and the guarantors, subject to customary exceptions and limitations.
The Company believes funds available from cash on hand, the 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 Facility in November 2025.
Expenditures for property, plant and equipment and mineral interests
Expenditures for property, plant and equipment and mineral interests were $14.5 million during the first three months of 2024, primarily for the acquisition of land at Mitigation Resources and equipment at NAMining. Planned expenditures for the remainder of 2024 are expected to be approximately $11 million in the Coal Mining segment, $27 million in the NAMining segment, $20 million in the Minerals Management segment and $3 million in Unallocated Items.
Expenditures are expected to be funded from internally generated funds and/or bank borrowings.
Capital Structure
NACCO's consolidated capital structure is presented below:
| MARCH 31 2024 | DECEMBER 31 2023 | Change | |||||||||||||||
| Cash and cash equivalents | $ | 61,844 | $ | 85,109 | $ | (23,265) | |||||||||||
| Other net tangible assets | 386,952 | 349,934 | 37,018 | ||||||||||||||
| Intangible assets, net | 5,880 | 6,006 | (126) | ||||||||||||||
| Net assets | 454,676 | 441,049 | 13,627 | ||||||||||||||
| Total debt | (49,875) | (35,956) | (13,919) | ||||||||||||||
| Bellaire closed mine obligations | (23,188) | (22,753) | (435) | ||||||||||||||
| Total equity | $ | 381,613 | $ | 382,340 | $ | (727) | |||||||||||
| Debt to total capitalization | 12% | 9% | 3% | ||||||||||||||
The increase in other net tangible assets at March 31, 2024 compared with December 31, 2023 was mainly the result of increases in Property, plant and equipment and Prepaid insurance during the first quarter of 2024.
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Contractual Obligations, Contingent Liabilities and Commitments
Since December 31, 2023, 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 58 in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. See Note 6 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 months ended March 31:
| THREE MONTHS | |||||||||||
| 2024 | 2023 | ||||||||||
| Unconsolidated operations | 5,480 | 6,192 | |||||||||
| Consolidated operations | 455 | 711 | |||||||||
| Total tons delivered | 5,935 | 6,903 | |||||||||
The results of operations for the Coal Mining segment were as follows for the three months ended March 31:
| THREE MONTHS | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenues | $ | 15,545 | $ | 20,653 | |||||||
| Cost of sales | 20,943 | 25,878 | |||||||||
| Gross loss | (5,398) | (5,225) | |||||||||
Earnings of unconsolidated operations(a) | 12,007 | 12,466 | |||||||||
| Selling, general and administrative expenses | 6,910 | 6,437 | |||||||||
| Amortization of intangible assets | 126 | 727 | |||||||||
| Gain on sale of assets | (10) | (236) | |||||||||
| Operating (loss) profit | $ | (417) | $ | 313 | |||||||
(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
Revenues decreased 24.7% in the first quarter of 2024 compared with the first quarter of 2023 primarily due to a reduction in customer requirements at MLMC as a result of an ongoing issue that impacts one of two boilers at the Red Hills Power Plant. Repairs to the boiler are expected to be completed during the second half of 2024.
The following table identifies the components of change in Operating (loss) profit for the first quarter of 2024 compared with the first quarter of 2023:
| Operating (Loss) Profit | |||||
| 2023 | $ | 313 | |||
| Increase (decrease) from: | |||||
| Selling, general and administrative expenses | (473) | ||||
| Earnings of unconsolidated operations | (459) | ||||
| Gain on sale of assets | (226) | ||||
| Gross loss | (173) | ||||
| Amortization of intangibles | 601 | ||||
| 2024 | $ | (417) | |||
Operating (loss) profit decreased $0.7 million in the first quarter of 2024 compared with the first quarter of 2023 primarily due to an increase in selling, general and administrative expenses and a decrease in the earnings of unconsolidated operations.
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The increase in selling, general and administrative expenses was primarily due to higher employee-related costs.
The decrease in the earnings of unconsolidated operations was primarily due to a reduction in customer requirements at Coteau.
The reduction in revenues at MLMC was offset by a reduction in cost of goods sold, resulting in a comparable gross loss in both the first quarter of 2024 and 2023. Gross loss in the first quarter of 2024 and the first quarter of 2023 included a $2.5 million and $2.4 million inventory impairment charge, respectively, to write down MLMC's coal inventory to its net realizable value.
NORTH AMERICAN MINING ("NAMining") SEGMENT
FINANCIAL REVIEW
Tons delivered by the NAMining segment were as follows for the three months ended March 31:
| THREE MONTHS | |||||||||||
| 2024 | 2023 | ||||||||||
| Total tons delivered | 15,173 | 14,829 | |||||||||
The results of operations for the NAMining segment were as follows for the three months ended March 31:
| THREE MONTHS | |||||||||||
| 2024 | 2023 | ||||||||||
| Total revenues | $ | 24,483 | $ | 20,633 | |||||||
| Reimbursable costs | 12,855 | 12,092 | |||||||||
| Revenues excluding reimbursable costs | $ | 11,628 | $ | 8,541 | |||||||
| Total revenues | $ | 24,483 | $ | 20,633 | |||||||
| Cost of sales | 21,671 | 19,241 | |||||||||
| Gross profit | 2,812 | 1,392 | |||||||||
Earnings of unconsolidated operations(a) | 1,365 | 1,358 | |||||||||
| Selling, general and administrative expenses | 1,823 | 1,920 | |||||||||
| Gain on sale of assets | (1) | — | |||||||||
| Operating profit | $ | 2,355 | $ | 830 | |||||||
(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.
Total revenues increased 18.7% in the first quarter of 2024 compared with the first quarter of 2023 primarily due to an improvement at the consolidated quarries. An increase in reimbursable costs at Sawtooth, which have an offsetting amount in cost of sales and have no impact on operating profit, also contributed to the improvement in total revenues.
The following table identifies the components of change in Operating profit for the first quarter of 2024 compared with the first quarter of 2023:
| Operating Profit | |||||
| 2023 | $ | 830 | |||
| Increase (decrease) from: | |||||
| Gross profit | 1,420 | ||||
| Selling, general and administrative expenses | 97 | ||||
| Earnings of unconsolidated operations | 7 | ||||
| Gain on sale of assets | 1 | ||||
| 2024 | $ | 2,355 | |||
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Operating profit increased $1.5 million in the first quarter of 2024 compared with the first quarter of 2023 primarily due to an increase in gross profit. This improvement was mainly the result of favorable pricing and delivery mix and improved margins at the limestone quarries resulting from mutually beneficial contract amendments.
MINERALS MANAGEMENT SEGMENT
FINANCIAL REVIEW
As an owner of royalty and mineral interests, the Company’s access to information concerning activity and operations of its royalty and mineral interests is limited. The Company does not have information that would be available to a company with oil and natural gas operations because detailed information is not generally available to owners of royalty and mineral interests. Consequently, the exact number of wells producing from or drilling on the Company’s mineral interests at a given point in time is not determinable. The following table sets forth the Company’s estimate of the number of gross and net productive wells:
| March 31, 2024 | March 31, 2023 | ||||||||||||||||||||||
| Gross | Net | Gross | Net | ||||||||||||||||||||
| Oil | 1,740 | 8.8 | 1,048 | 3.3 | |||||||||||||||||||
| Natural Gas | 261 | 12.9 | 251 | 10.1 | |||||||||||||||||||
| Total | 2,001 | 21.7 | 1,299 | 13.4 | |||||||||||||||||||
Gross wells are the total wells in which an interest is owned. Net wells are calculated based on the Company's net royalty interest, factoring in both ownership percentage of gross wells and royalty rate.
Oil and natural gas prices have been historically volatile and may continue to be volatile in the future. The table below demonstrates such volatility with the average price as reported by the United States Energy Information Administration for the three months ended March 31:
| 2024 | 2023 | ||||||||||
| West Texas Intermediate Average Crude Oil Price | $ | 77.56 | $ | 76.08 | |||||||
| Henry Hub Average Natural Gas Price | $ | 2.13 | $ | 2.65 | |||||||
The following table sets forth the estimated oil and natural gas production data related to the Company’s mineral and royalty interests as well as certain price and cost information for the three months ended March 31:
2024 (4) | 2023 (4) | |||||||||||||
| Production data: | ||||||||||||||
Oil (bbl) (1) | 38,194 | 24,024 | ||||||||||||
NGL (bbl) (1) | 12,542 | 14,375 | ||||||||||||
Residue gas (Mcf) (2) | 2,143,948 | 1,874,900 | ||||||||||||
Total BOE (3) | 408,060 | 350,882 | ||||||||||||
| Average realized prices: | ||||||||||||||
Oil (bbl) (1) | $ | 69.07 | $ | 69.82 | ||||||||||
NGL (bbl) (1) | $ | 23.83 | $ | 23.81 | ||||||||||
Residue gas (Mcf) (2) | $ | 2.84 | $ | 3.12 | ||||||||||
| Average unit cost | ||||||||||||||
BOE (3) | $ | 2.31 | $ | 3.80 | ||||||||||
(1) Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume.
(2) Mcf. One thousand cubic feet of natural gas at the contractual pressure and temperature bases.
(3) BOE. Barrel of Oil Equivalent, a conversion factor of 6 MCF of gas was used for 1 equivalent bbl of oil.
(4) As an owner of mineral and royalty interests, the Company’s access to information concerning activity and operations of its royalty and mineral interests is limited. As a result, the Company estimated February and March 2024 data with volumes projected from prior well production and pricing based on public pricing data adjusted for expense information.
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The results of operations for the Minerals Management segment were as follows for the three months ended March 31:
| 2024 | 2023 | ||||||||||
| Revenues | $ | 10,401 | $ | 8,285 | |||||||
| Cost of sales | 1,364 | 1,052 | |||||||||
| Gross profit | 9,037 | 7,233 | |||||||||
| Loss from unconsolidated operations | (65) | — | |||||||||
| Selling, general and administrative expenses | 1,042 | 1,189 | |||||||||
| Operating profit | $ | 7,930 | $ | 6,044 | |||||||
Revenues and operating profit increased in the first quarter of 2024 compared with the respective 2023 period, primarily due to an increase in production volumes.
UNALLOCATED ITEMS AND ELIMINATIONS
FINANCIAL REVIEW
Unallocated Items and Eliminations were as follows for the three months ended March 31:
| THREE MONTHS | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating loss | $ | (5,111) | $ | (5,373) | |||||||
The operating loss in the first quarter of 2024 decreased compared with the respective 2023 period due to higher earnings at Mitigation Resources.
NACCO Industries, Inc. Outlook
Coal Mining Outlook
In 2024, the Company expects overall coal deliveries to increase modestly from 2023 levels primarily due to anticipated higher deliveries at Coteau and Falkirk. These improvements are expected to be partly offset by reduced deliveries at MLMC, due to an ongoing boiler issue, and the cessation of coal deliveries at the Company's Sabine Mine in April 2023.
Strong operating profit compared with a significant 2023 operating loss, which included a $60.8 million impairment charge, and substantially higher Segment Adjusted EBITDA are expected in 2024. These anticipated increases are primarily due to an expected improvement in results at MLMC and higher earnings at Falkirk and Coteau in the second half of 2024.
MLMC expects to incur a loss in 2024, albeit significantly less than in 2023, mainly as a result of fewer tons delivered. While total production costs at MLMC are anticipated to decrease substantially from 2023 levels, they are expected to remain above historical levels throughout 2024 until deliveries return to normal and a pit extension is completed later this year. In addition, the effect of the impairment charge taken in 2023 will result in lower depreciation and amortization expense and contribute to the lower production costs.
An anticipated increase in 2024 earnings at the unconsolidated coal mining operations is driven primarily by an expectation for increased deliveries at Coteau and Falkirk, as well as a higher per ton management fee at Falkirk beginning in June 2024 when temporary price concessions end.
2024 capital expenditures are expected to total approximately $13 million.
NAMining Outlook
In 2023, NAMining executed a 15-year contract to mine phosphate at a quarry in central Florida. Production is expected to commence in the second quarter of 2024 once commissioning of a dragline is complete. The business also amended and extended existing limestone contracts in late 2023 that contain mutually advantageous contract terms and expanded the scope of work with another customer. As a result of these new and modified contracts, as well as improvements at existing operations, NAMining expects substantial quarterly growth in operating profit and Segment Adjusted EBITDA in each remaining 2024 quarter, leading to significantly improved full-year results over 2023.
Sawtooth has exclusive responsibility for mining and mine closure services at Thacker Pass, including mine design,
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construction, operation and maintenance. Thacker Pass is owned by Lithium Americas Corp. (TSX: LAC) (NYSE: LAC). Thacker Pass will supply all of Lithium Americas' lithium-bearing ore requirements. In March 2023, Lithium Americas commenced construction at Thacker Pass. With construction underway, Sawtooth acquired mining equipment totaling $23.3 million in 2023. These capital expenditures will be reimbursed by Lithium Americas over a five-year period, and Sawtooth will recognize the associated revenue over the estimated useful life of the asset. Sawtooth will be reimbursed for all costs of mining and mine closure and will recognize a contractually agreed upon production fee. The Company expects to continue to recognize moderate income prior to the commencement of Phase 1 lithium production, estimated to begin in 2027/2028.
In 2024, capital expenditures are expected to be approximately $33 million. These expenditures are primarily for the acquisition of draglines and dragline parts, as well as other equipment to support existing contracts and the new and modified contracts previously discussed.
Minerals Management Outlook
The Minerals Management segment derives income primarily from royalty-based leases under which lessees make payments to the Company based on their sale of natural gas, oil, natural gas liquids and coal, extracted primarily by third parties. As an owner of royalty and mineral interests, the Company’s access to information concerning activity and operations with respect to its interests is limited. The Company's expectations are based on the best information currently available. Changing prices of natural gas and oil could have a significant impact on Minerals Management’s operating profit.
In December 2023, Minerals Management completed a significant acquisition of mineral interests within the Midland Basin, the eastern sub-basin of the oil-rich Permian Basin, which included 43.4 thousand gross acres and 2.5 thousand net royalty acres. This acquisition is expected to continue to be accretive to 2024 earnings and provide opportunities for longer-term growth.
In 2024, operating profit and Segment Adjusted EBITDA are expected to decrease moderately compared with the prior year, excluding the 2023 impairment charge of $5.1 million. Lower operating expenses are expected to partially offset the anticipated profit decline. The forecasted reduction in profitability is primarily driven by current market expectations for natural gas and oil market prices, as well as development and production assumptions on currently owned reserves. .
Development of additional wells on existing interests in excess of current expectations, or acquisitions of additional interests, could be accretive to future results.
In 2024, Minerals Management is targeting additional investments of up to $20 million. Future investments are expected to be accretive, but each investment's contribution to near-term earnings is dependent on the details of that investment, including the size and type of interests acquired and the stage and timing of mineral development.
Mitigation Resources Outlook
Mitigation Resources continues to build on the substantial foundation it has established over the past several years. Mitigation Resources currently has ten mitigation banks and four permittee-responsible mitigation projects located in Tennessee, Mississippi, Alabama, Texas, Florida and Pennsylvania. In addition, Mitigation Resources is providing ecological restoration services for abandoned surface mines, as well as pursuing additional environmental restoration projects. It was named a designated provider of abandoned mine land restoration by the State of Texas. Mitigation Resources anticipates expanding its business in 2024, with a focus on generating a modest operating profit by 2025 and achieving sustainable profitability in future years.
Consolidated Outlook
Overall, the Company expects to generate net income in 2024 compared with the substantial 2023 consolidated net loss, which included a $65.9 million impairment charge. Adjusted EBITDA is also expected to increase significantly over 2023. These improvements are primarily due to anticipated increased profitability at the Coal Mining segment from improved results at MLMC, Falkirk and Coteau. The effect of NAMining's growth and profit improvement initiatives are also expected to contribute to improved 2024 results. Additional contracts for NAMining or Mitigation Resources, or the acquisition of additional mineral interests at Minerals Management could be accretive to the current forecast.
The Company is taking steps to terminate its defined benefit pension plan in 2024. In connection with this action, NACCO is anticipating a non-cash settlement charge in the second half of the year, which is expected to partly offset the improved 2024 operating results.
Consolidated capital expenditures are expected to total approximately $76 million in 2024. In 2024, cash flow before financing activities is expected to be a moderate use of cash.
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Long-term Growth and Diversification
Management is focused on transforming NACCO into a broad-based natural resources company and is optimistic about the Company's long-term business outlook. NACCO's businesses provide critical inputs for electricity generation, construction and development, and the production of industrial minerals and chemicals. Increasing demand for electricity, on-shoring and current federal policies are creating favorable macroeconomic trends within these industries. The Company believes its businesses have competitive advantages that provide value to customers and create long-term value for stockholders. The Company is pursuing growth and diversification by strategically leveraging its core mining and natural resources management skills to build a strong portfolio of affiliated businesses. Opportunities for growth remain strong. Acquisitions of additional mineral interests and improvements in the outlook for Coal Mining segment customers, as well as new contracts at Mitigation Resources and NAMining should be accretive to the Company's outlook.
The Minerals Management segment continues to pursue acquisitions of mineral and royalty interests in the United States. Catapult, the Company’s business unit focused on managing and expanding the Company’s portfolio of oil and gas mineral and royalty interests, has developed a strong network to source and secure new acquisitions. The goal is to construct a high-quality diversified portfolio of oil and gas mineral and royalty interests in the United States that delivers near-term cash flow yields and long-term projected growth. The Company believes this business will provide unlevered after-tax returns on invested capital in the mid-teens as it matures. This business model has the potential to deliver higher average operating margins over the life of a reserve than traditional oil and gas companies that bear the cost of exploration, production and/or development as these costs are borne entirely by third-party exploration and development companies that lease the minerals.
NAMining is focused on continuing to evaluate new business opportunities and drive profitable growth in line with refined strategic objectives. After pausing on business development in early 2023, NAMining has better identified how to enhance operational excellence, where to focus and scale, and how to drive profitable growth. New contracts and contract extensions are central to the business' organic growth strategy, and the Company expects NAMining to be a substantial contributor to operating profit over time.
Mitigation Resources continues to expand its business, which creates and sells stream and wetland mitigation credits, provides services to those engaged in permittee-responsible mitigation and provides other environmental restoration services. This business offers an opportunity for growth and diversification in an industry where the Company has substantial knowledge and expertise and a strong reputation. The Company believes that Mitigation Resources can provide solid rates of return on capital employed as this business matures.
NACCO also continues to pursue activities which can strengthen the resiliency of its existing coal mining operations. The Company remains focused on managing coal production costs and maximizing efficiencies and operating capacity at mine locations to help customers with management fee contracts be more competitive. These activities benefit both customers and the Company's Coal Mining segment, as fuel cost is a significant driver for power plant dispatch. Increased power plant dispatch results in increased demand for coal by the Coal Mining segment's customers. Fluctuating natural gas prices, weather and availability of renewable energy sources, such as wind and solar, could affect the amount of electricity dispatched from coal-fired power plants. While the Company realizes the coal mining industry faces political and regulatory challenges and demand for coal is projected to decline over the longer-term, the Company believes coal should be an essential part of the energy mix in the United States for the foreseeable future.
The Company continues to look for ways to create additional value by utilizing its core mining competencies which include reclamation and permitting. The Company is working to utilize these skills through development of utility-scale solar projects on reclaimed mining properties. Reclaimed mining properties offer large tracts of land that could be well-suited for solar and other energy-related projects. These projects could be developed by the Company itself or through joint ventures that include partners with expertise in energy development projects. In 2023, NACCO formed ReGen Resources to pursue such projects, including the development of a solar farm on reclaimed land at MLMC.
NACCO is committed to maintaining a conservative capital structure as it continues to grow and diversify, while avoiding unnecessary risk. The Company believes strategic diversification will generate cash that can be re-invested to strengthen and expand the businesses. The Company also continues to maintain the highest levels of customer service and operational excellence with an unwavering focus on safety and environmental stewardship.
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q that are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are made subject to certain risks and uncertainties, which could cause actual results to differ materially from those
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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 customer or other third-party contracts, or a customer or other third party default under a contract, (2) any customer's premature facility closure or extended project development delay, (3) regulatory actions, including the United States Environmental Protection Agency's 2023 proposed rules relating to mercury and greenhouse gas emissions for coal-fired power plants, changes in mining permit requirements or delays in obtaining mining permits that could affect deliveries to customers, (4) a significant reduction in purchases by the Company's customers, including as a result of changes in coal consumption patterns of U.S. electric power generators, or changes in the power industry that would affect demand for the Company's coal and other mineral reserves, (5) changes in the prices of hydrocarbons, particularly diesel fuel, natural gas, natural gas liquids and oil as result of factors such as OPEC and/or government actions, geopolitical developments, economic conditions and regulatory changes, as well as supply and demand dynamics, (6) changes in development plans by third-party lessees of the Company's mineral interests, (7) failure or delays by the Company's lessees in achieving expected production of natural gas and other hydrocarbons; the availability and cost of transportation and processing services in the areas where the Company's oil and gas reserves are located; federal and state legislative and regulatory initiatives relating to hydraulic fracturing and U.S. export of natural gas; and the ability of lessees to obtain capital or financing needed for well-development operations and leasing and development of oil and gas reserves on federal lands, (8) failure to obtain adequate insurance coverages at reasonable rates, (9) supply chain disruptions, including price increases and shortages of parts and materials, (10) changes in tax laws or regulatory requirements, including the elimination of, or reduction in, the percentage depletion tax deduction, changes in mining or power plant emission regulations and health, safety or environmental legislation, (11) the ability of the Company to access credit in the current economic environment, or obtain financing at reasonable rates, or at all, and to maintain surety bonds for mine reclamation as a result of current market sentiment for fossil fuels, (12) impairment charges, (13) changes in costs related to geological and geotechnical conditions, repairs and maintenance, new equipment and replacement parts, fuel or other similar items, (14) weather conditions, extended power plant outages, liquidity events or other events that would change the level of customers' coal or aggregates requirements, (15) weather or equipment problems that could affect deliveries to customers, (16) changes in the costs to reclaim mining areas, (17) costs to pursue and develop new mining, mitigation, oil and gas and solar development opportunities and other value-added service opportunities, (18) delays or reductions in coal or aggregates deliveries, (19) the ability to successfully evaluate investments and achieve intended financial results in new business and growth initiatives, (20) disruptions from natural or human causes, including severe weather, accidents, fires, earthquakes and terrorist acts, any of which could result in suspension of operations or harm to people or the environment, and (21) the ability to attract, retain, and replace workforce and administrative employees.
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 first quarter of 2024, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1 Legal Proceedings
None.
Item 1A Risk Factors
During the quarter ended March 31, 2024, there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2 Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Issuer Purchases of Equity Securities (1) | |||||||||||||||||||||||
| Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of the Publicly Announced Program | (d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (1) | |||||||||||||||||||
| Month #1 (January 1 to 31, 2024) | 34,616 | $ | 36.49 | 34,616 | $ | 17,222,979 | |||||||||||||||||
| Month #2 (February 1 to 29, 2024) | 37,803 | $ | 35.38 | 37,803 | $ | 15,885,509 | |||||||||||||||||
| Month #3 (March 1 to 31, 2024) | 55,268 | $ | 30.28 | 55,268 | $ | 14,211,994 | |||||||||||||||||
| Total | 127,687 | $ | 33.47 | 127,687 | $ | 14,211,994 | |||||||||||||||||
(1) During 2023, the Company established a stock repurchase program allowing for the purchase of up to $20.0 million of the Company's Class A Common Stock outstanding through December 31, 2025. See Note 4 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Company's stock repurchase program.
Item 3 Defaults Upon Senior Securities
None.
Item 4 Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 filed with this Quarterly Report on Form 10-Q for the period ended March 31, 2024.
Item 5 Other Information
None.
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Item 6 Exhibits
| Exhibit | ||||||||
| Number* | Description of Exhibits | |||||||
| 10.1 | ||||||||
| 31(i)(1) | ||||||||
| 31(i)(2) | ||||||||
| 32 | ||||||||
| 95 | ||||||||
| 101.INS | Inline XBRL Instance Document | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
* Numbered in accordance with Item 601 of Regulation S-K.
** Filed herewith.
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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: | May 1, 2024 | /s/ Elizabeth I. Loveman | |||||||||
| Elizabeth I. Loveman | |||||||||||
| Senior Vice President and Controller (principal financial and accounting officer) | |||||||||||
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