NACCO Industries, Inc. Announces Second Quarter 2019 Results
August 1, 2019 - NACCO Industries, Inc. (NYSE: NC) today announced consolidated net income of $8.0 million, or $1.14 per diluted share, and consolidated revenues of $41.4 million for the second quarter of 2019, compared with consolidated net income of $6.4 million, or $0.92 per diluted share, and consolidated revenues of $33.7 million for the second quarter of 2018. The increase in net income was primarily due to an increase in earnings at the Minerals Management segment and a reduction in unallocated expenses from lower professional fees partially offset by a decrease in earnings at the Coal Mining and North American Mining segments.
For the six months ended June 30, 2019, the Company reported consolidated net income of $23.0 million, or $3.29 per diluted share, and consolidated revenues of $81.4 million, compared with consolidated net income of $14.6 million, or $2.10 per diluted share, and consolidated revenues of $64.9 million for the first six months of 2018. NACCO's effective income tax rate was 15.2% for the six months ended June 30, 2019, compared with 12.0% for the six months ended June 30, 2018.
NACCO ended the second quarter of 2019 with consolidated cash on hand of $98.4 million and debt of $12.0 million. At December 31, 2018, NACCO had consolidated cash on hand of $85.3 million and debt of $11.0 million.
In February 2018, NACCO's Board of Directors authorized a stock buyback program to purchase up to $25 million of the Company's outstanding Class A common stock through December 31, 2019. The Company has repurchased approximately 78,000 shares for an aggregate purchase price of $2.7 million since inception of this program, including $0.1 million of stock purchased during the three months ended June 30, 2019.
Coal Mining revenues increased moderately in the second quarter of 2019, primarily due to an increase in tons delivered at Mississippi Lignite Mining Company as a result of higher customer requirements.
Second-quarter 2019 operating profit decreased mainly due to higher operating expenses primarily attributable to an increase in, and the timing of, employee-related costs and a decrease in earnings of unconsolidated operations. Fewer coal tons delivered as a result of customer plant outages contributed to the decrease in earnings of unconsolidated operations. These unfavorable items were partially offset by improved results at the consolidated operations. The improvement at the consolidated operations was primarily due to an increase in customer requirements and a reduction in cost per ton sold at Mississippi Lignite Mining Company. In addition, the transfer of certain Centennial mine permits to third parties resulted in a $0.4 million loss, and allowed for a $5.4 million reduction to Centennial's mine reclamation obligation.
Coal Mining Outlook
In the second half and for the full year of 2019, the Company expects coal deliveries to decrease compared with the respective prior year periods. The expected reduction in coal deliveries is a result of changes in customer requirements, including the timing and duration of power plant outages, as well as comparisons to historically high delivery levels at certain of the unconsolidated operations in the prior year.
Revenues in the second half of 2019 are expected to decrease primarily as a result of the absence of a favorable $3.0 million contractual settlement recognized at Mississippi Lignite Mining Company in the fourth quarter of 2018. Excluding the contractual settlement, revenues in the second half and full year of 2019 are expected to decrease modestly compared with the comparable 2018 periods due to the change in customer requirements.
Excluding the $3.0 million contractual settlement, as well as $1.8 million of favorable adjustments recognized in the fourth quarter of 2018 related to a reduction in Centennial's mine reclamation liabilities, operating profit in the second half of 2019 is expected to increase compared with the second half of 2018 primarily as a result of a reduction in operating expenses and improved results at the consolidated mining operations. These favorable changes are expected to be partially offset by reduced income at the unconsolidated Coal Mining operations as customer requirements are expected to be reduced from the prior year. The reduction in operating expenses is primarily due to a shift in the timing of costs between quarters. Full-year 2019 operating expenses are expected to be comparable to 2018.
Excluding the favorable 2018 items noted above and an additional $1.0 million favorable mine reclamation liability adjustment recognized in the first quarter of 2018, full-year 2019 operating profit is expected to decrease modestly compared with full-year 2018 as reduced income at the unconsolidated Coal Mining operations, due to fewer tons delivered, is expected to be partially offset by improved results at the consolidated mining operations.
Revenues increased in the second quarter of 2019 due to higher reimbursed costs. Reimbursed costs have an offsetting amount in cost of goods sold and have no impact on operating profit.
North American Mining reported an operating loss of $0.5 million during the second quarter of 2019 compared with operating profit of $0.2 million during the second quarter of 2018. The 2019 second quarter loss included higher employee-related and business development costs, as well as an increase in supplies and repairs and maintenance expenses. These additional costs were partially offset by an improvement in earnings attributable to a new customer contract.
North American Mining Outlook
North American Mining expects operating profit in the second half of 2019 to improve over the first half of the year, and be comparable to the second half of 2018. Operating profit for the remainder of 2019 is expected to benefit from an increase in earnings associated with new contracts, which are anticipated to be partly offset by continued spending on business development activities and increased employee-related expenses. As a result of the operating loss in the first half of 2019, North American Mining expects full-year 2019 operating profit to be significantly lower than 2018.
North American Mining will continue to incur expenses to support business development activities, which will contribute to an increase in operating expenses in 2019 over 2018. Over the longer term, the Company expects operating profit to improve as the business expands and is able to capture economies of scale made available through recent and ongoing investments in people, systems and infrastructure to support continued growth. North American Mining entered into two new contracts during the second quarter of 2019. These new contracts, which are expected to commence in the third quarter, will have a modest impact on earnings in the second half of 2019 and will contribute moderately beginning in 2020.
Minerals Management revenues and operating profit increased significantly in the second quarter of 2019 over 2018 primarily due to a higher number of wells operated by third parties to extract natural gas from the Company's mineral reserves in Ohio. The number of producing wells increased as additional pipeline, gas compression, and other transportation infrastructure came online in southeast Ohio.
Minerals Management Outlook
The Minerals Management segment derives income from royalty-based leases under which lessees make payments to the Company based on their sale of natural gas and, to a lesser extent, oil and coal, extracted primarily by third parties. The Company continued to experience a significant increase in royalty income in the first half of 2019 compared with the first half of 2018, primarily due to an increase in the number of gas wells operated by third parties to extract natural gas from the Company's Ohio Utica shale mineral reserves. In the second half of 2019, royalty income is currently expected to increase substantially over the second half of 2018 but at a significantly lower rate than realized in the first half of 2019. Importantly, however, royalty income can fluctuate favorably or unfavorably in response to a number of factors outside of the Company's control, including the number of wells being operated by third parties, fluctuations in commodity prices (primarily natural gas), fluctuations in production rates, regulatory risks, the Company's lessees' willingness and ability to incur well-development and other operating costs, and changes in the availability and continuing development of infrastructure. Oil and natural gas production is further impacted by the natural production decline that occurs during the life of a well.
Overall, NACCO expects a significant increase in full-year 2019 consolidated net income compared with 2018 due to the increase in net income in the first half of 2019 and an anticipated improvement in the second half of the year, including or excluding the favorable prior year items noted previously. The full-year effective income tax rate, excluding discrete items, is expected to be approximately 15% based on current estimates in the mix of earnings between entities that benefit from percentage depletion and those that do not.
Consolidated cash flow before financing activities in 2019 is expected to increase compared with 2018. Capital expenditures are expected to be approximately $28 million in 2019 compared with $20.9 million in 2018 and $15.7 million in 2017. The increase in capital expenditures in 2019 is due to spending at North American Mining for dragline acquisition and relocation, as well as spending at Mississippi Lignite Mining Company as its mine plan includes moving into a new mine area, which will require increased capital expenditures over the next several years. The increase in capital expenditures will result in an increase in depreciation in future years that will affect operating profit at the consolidated operations.
One of the Company's core strategies is to ensure the resiliency of its existing coal mining operations. The Company works to drive down coal production costs and maximize efficiency and operating capacity at mine locations to help customers with management fee contracts be more competitive. This benefits both customers and the Company's Coal Mining segment, as fuel cost is the major driver for power plant dispatch. Increased power plant dispatch drives increased demand for coal by the Coal Mining segment's customers.
The Company continues to evaluate opportunities to expand its core coal mining business, however opportunities are likely to be limited. Low natural gas prices and growth in renewable energy sources, such as wind and solar, could continue to unfavorably affect the amount of electricity attributable to coal-fired power plants. The political and regulatory environment is not generally receptive to development of new coal-fired power generation projects which would create opportunities to build and operate new coal mines. However, the Company does continue to seek out and pursue opportunities where it can apply its management fee business model to replace legacy operators of existing surface coal mining operations in the United States. Outright acquisitions of existing coal mines or mining companies with exposure to fluctuating coal commodity markets, or structures that would create significant leverage, are outside the Company's area of focus.
The Company believes growth and diversification can come from pursuing opportunities to leverage skills honed in the Company's core mining operations and utilizing the Company's unique, service-based, management-fee business model, when possible. The Company continues to pursue non-coal mining opportunities principally through its North American Mining segment. North American Mining has served as a strong growth platform by focusing on the operation and maintenance of draglines for limestone producers. North American Mining will continue to pursue growth in dragline operation and maintenance, while expanding the scope of work provided to customers and focusing on mining a broader range of aggregates and other minerals. The Company also continues to focus on developing its Minerals Management segment, principally related to its Ohio mineral reserves, and potentially expanding its asset base. In addition, the Company's newest business, Mitigation Resources of North America, creates and sells stream and wetland mitigation credits and provides services to those engaged in permittee-responsible mitigation.
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