NACCO Industries, Inc. Announces Fourth Quarter and Full-Year 2019 Results
March 5, 2020 - NACCO Industries, Inc.® (NYSE: NC) has announced consolidated net income of $6.4 million, or $0.91 per diluted share, and consolidated revenues of $26.9 million for the fourth quarter of 2019, compared with consolidated net income of $11.0 million, or $1.57 per diluted share, and consolidated revenues of $39.1 million for the fourth quarter of 2018. The decrease in consolidated net income was primarily due to the absence of a favorable $3.0 million contractual settlement recognized in the fourth quarter of 2018, unfavorable adjustments to Centennial Natural Resources mine reclamation obligations and fewer coal deliveries during the fourth quarter in the Coal Mining segment, as well as lower earnings in the Minerals Management segment.
For the year ended December 31, 2019, the Company reported consolidated net income of $39.6 million, or $5.66 per diluted share, and consolidated revenues of $141.0 million, compared with consolidated net income of $34.8 million, or $5.00 per diluted share, and consolidated revenues of $135.4 million for the year ended December 31, 2018.
NACCO's effective income tax rate was 8.7% for the year ended December 31, 2019, compared with 17.5% for the year ended December 31, 2018. The 2019 effective income tax rate included a $2.5 million tax benefit resulting primarily from changes in prior year estimates and the settlement of certain tax items from on-going examinations. The 2018 effective income tax rate included $1.2 million of tax expense primarily related to an additional valuation allowance provided against deferred tax assets in India. Excluding these items, the effective income tax rates would have been approximately 14.5% and 14.7% for the years ended December 31, 2019 and 2018, respectively.
NACCO ended 2019 with consolidated cash on hand of $122.9 million and debt of $24.9 million. At December 31, 2018, NACCO had consolidated cash on hand of $85.3 million and debt of $11.0 million.
For the 2019 full year, NACCO generated cash flow before financing activities of $32.5 million, comprised of net cash provided by operating activities of $52.8 million less net cash used for investing activities of $20.3 million. For the 2018 full year, NACCO generated cash flow before financing activities of $36.2 million, comprised of net cash provided by operating activities of $54.6 million less net cash used for investing activities from continuing operations of $18.4 million.
In 2019, the Company repurchased approximately 72,600 shares of its outstanding Class A Common Stock under share buyback programs for an aggregate purchase price of $3.0 million, including approximately 33,500 shares during the three months ended December 31, 2019 for an aggregate purchase price of $1.6 million.
In the first quarter of 2019, the Company changed its segment reporting. The 2018 financial information in this release has been recast to reflect the new segments.
Coal Mining revenues and operating profit decreased substantially in the fourth quarter of 2019 from the fourth quarter of 2018 due to a reduction in tons delivered and adjustments to Centennial Natural Resources mine reclamation liabilities. Fewer deliveries at Mississippi Lignite Mining Company as a result of a decrease in the number of days the customer's power plant was dispatched, as well as the absence of a favorable $3.0 million contractual settlement recognized in the fourth quarter of 2018 contributed to the reduction in revenues and operating profit. In addition, an unfavorable adjustment of $2.0 million to the mine reclamation liabilities at Centennial Natural Resources compared with a favorable $1.8 million adjustment in the 2018 fourth quarter also contributed to the reduction in operating profit. The decrease in the earnings of unconsolidated operations was mainly due to fewer coal tons delivered as a result of changes in customer demand primarily due to plant outages and reduced dispatch.
Coal Mining Outlook - 2020
In 2020, the Company expects coal deliveries to increase modestly compared with 2019. The anticipated increase in coal deliveries is a result of an expected increase in customer demand, as the Company's customers are generally forecasting a reduction in power plant outage days and an increase in the number of days dispatched in 2020.
Coal Mining operating profit is expected to increase in 2020 over 2019. This anticipated increase is primarily the result of an expected increase in gross profit at Mississippi Lignite Mining Company, primarily in the first half of the year, and the absence of the $2.0 million unfavorable adjustment to mine reclamation liabilities at Centennial Natural Resources in the fourth quarter of 2019. A modest improvement in earnings at the unconsolidated Coal Mining operations is also expected to contribute to the increase in operating profit, but these improvements are expected to be partly offset by an increase in operating expenses primarily from anticipated higher professional fees and IT expenses.
The increase in gross profit at Mississippi Lignite Mining Company is expected to be driven by higher customer demand due to an anticipated increase in the number of days the customer's power plant is expected to be dispatched in 2020. If customer demand at Mississippi Lignite Mining Company decreases from expected levels, it could unfavorably affect the Company's 2020 earnings, as reduced customer demand affected earnings in 2019.
Capital expenditures are expected to be approximately $24 million in 2020. The Company expects high levels of capital expenditures in 2020 and 2021 primarily related to anticipated spending at Mississippi Lignite Mining Company as it develops a new mine area. These capital expenditures will result in an increase in depreciation that will unfavorably affect operating profit in future periods.
During the first quarter of 2020, Great River Energy, Falkirk Mine's customer, announced that it is evaluating the economics of the Coal Creek Station power plant. The Company has a management fee mining contract to supply coal to this plant that expires in 2045. Any decision by Great River Energy to reduce operations or prematurely close this power plant would have a material adverse effect on the Company's results of operations. The mining contract specifies that Great River Energy is responsible for all mine closure costs.
North American Mining Results
North American Mining revenues increased primarily due to higher reimbursed costs and increased deliveries to customers with fixed-price contract mining agreements. Reimbursed costs have an offsetting amount in cost of goods sold and have no impact on operating profit.
Operating profit decreased to $0.1 million during the fourth quarter of 2019 from $0.8 million during the fourth quarter of 2018 mainly as a result of the absence of a $0.6 million gain on the sale of assets recognized in the 2018 fourth quarter. The benefits from new limestone mining contracts entered into since the 2018 fourth quarter were offset by increased equipment repairs and higher employee and other costs incurred to develop North American Mining's infrastructure to support additional growth.
North American Mining Outlook
In 2020, North American Mining expects limestone deliveries to increase and full-year operating results to improve significantly over 2019. Operating profit is expected to benefit from earnings associated with new limestone mining contracts. The improvement in operating profit is expected to be partly offset by an increase in operating expenses due to higher employee-related costs associated with new mining operations.
Capital expenditures are expected to be $9 million in 2020, primarily for the acquisition, relocation and refurbishment of draglines.
In 2019, North American Mining, through a new subsidiary, Sawtooth Mining, LLC, entered into a mining agreement to serve as the exclusive contract miner for the Thacker Pass lithium project, owned by Lithium Nevada, Corp, in northern Nevada. Sawtooth Mining will provide comprehensive mining services, with responsibility for all aspects of the lithium mine, similar to our typical scope of work in the Coal Mining segment. The mining agreement provides that Lithium Nevada will reimburse Sawtooth for its operating and mine reclamation costs, and pay Sawtooth Mining a management fee per metric ton of lithium delivered during the 20-year contract term. Lithium Nevada is in the process of securing permits and currently expects to commence construction in 2021 and production of lithium products in 2023.
Minerals Management Results
Minerals Management revenues and operating profit decreased significantly in the fourth quarter of 2019 from 2018 primarily due to the natural production decline that occurs during the early stages of newly completed natural gas wells. The fourth quarter of 2018 results included the favorable impact of a significant increase in the number of new wells being operated to extract the Company's natural gas assets in Ohio. These new wells were completed late in 2018, following a significant expansion of natural gas pipeline infrastructure in Ohio and surrounding states.
Minerals Management Outlook
The Minerals Management segment derives income from royalty-based leases under which lessees make payments to the Company based on their sale of natural gas and, to a lesser extent, oil, natural gas liquids and coal, extracted primarily by third parties. The Company experienced a significant increase in royalty income in 2019 compared with 2018, primarily due to a significant increase in the number of gas wells operated by third parties to extract natural gas from the Company's Ohio Utica shale mineral reserves. Because new wells have high initial production rates and follow a natural decline before settling into relatively stable, long-term production, royalty income in 2020 is expected to decrease and be substantially lower than 2019 levels. This decrease is expected to occur primarily in the first half of the year, particularly in the first quarter, as comparisons are made to historically high revenue levels in the first half of 2019 associated with increased production levels in the early stages of production from new wells. The reduction in royalty income is based on natural gas price expectations, fewer expected new wells and the natural production decline that occurs early in the life of a well. Decline rates can vary due to factors like well depth, well length, formation pressure and facility design.
In addition to the natural production decline curve, royalty income can fluctuate favorably or unfavorably in response to a number of factors outside of the Company's control, including the number of wells being operated by third parties, fluctuations in commodity prices (primarily natural gas), fluctuations in production rates associated with operator decisions, regulatory risks, the Company's lessees' willingness and ability to incur well-development and other operating costs, and changes in the availability and continuing development of infrastructure.
Overall, in 2020, NACCO expects a modest decrease in operating profit compared with 2019 mainly due to the substantial decrease in Minerals Management's results and an increase in consolidated operating expenses, partly offset by expected improvements in earnings at both the Coal Mining and North American Mining segments.
Consolidated net income in 2020 is expected to decrease compared with 2019, predominantly in the first half of the year, mainly as a result of the anticipated reduction in Minerals Management operating profit, as well as the absence of $2.7 million pre-tax received in 2019 associated with a prior India venture and the absence of a $2.5 million tax benefit recognized in the fourth quarter of 2019. The 2020 full-year effective income tax rate is expected to be between 10% and 12%, based on the anticipated mix of earnings and excluding discrete items.
In 2020, cash flow before financing activities is expected to decrease significantly from 2019 levels due to a significant increase in capital expenditures and payment of deferred compensation and other payroll liabilities. Consolidated capital expenditures are expected to be approximately $33 million in 2020 compared with $24.7 million in 2019.
One of the Company's core strategies is to pursue activities which can strengthen the resiliency of its existing coal mining operations. The Company works to drive down coal production costs and maximize efficiencies 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, just as lower dispatch reduces demand.
The Company continues to evaluate opportunities to expand its core coal mining business, however opportunities are likely to be very limited. Low natural gas prices and growth in renewable energy sources, such as wind and solar, could continue to unfavorably affect the amount of electricity dispatched from coal-fired power plants. The political and regulatory environment is not generally receptive to development of new coal-fired power generation projects which would create opportunities to build and operate new coal mines. However, the Company does continue to seek out and pursue opportunities where it can apply its management fee business model to replace legacy operators of existing surface coal mining operations in the United States. Outright acquisitions of existing coal mines or mining companies with exposure to fluctuating coal commodity markets, or structures that would create significant leverage, are outside the Company's area of focus.
The Company is focused on building a strong portfolio of affiliated businesses for diversified growth. It continues to expand the scope of its business development activities related to growing North American Mining beyond aggregates, by providing additional mining services where the Company's core mining skills can add value to customers of a broad range of minerals and materials, including by providing comprehensive mining services, and expanding the range of contract mining services. The Company is also considering the acquisition of additional mineral interests or similar investments in the energy industry as part of the growth of Minerals Management, with an initial focus on smaller, diversifying acquisitions with near-term cash flow yields. The Company has recently formed Mitigation Resources of North America® to create and sell stream and wetland mitigation credits and provide services to those engaged in permittee-responsible mitigation. This new business has achieved several early successes and is positioned for additional growth.
The Company is leveraging its core mining skills to develop a strong and diverse portfolio of service-based businesses operating in the mining and natural resources industries. The Company is also committed to maintaining a conservative capital structure while it grows and diversifies without unnecessary risk. Ultimately, diversified strategic growth is the key to increasing free cash flow available to continue to re-invest in and expand the businesses. The Company also continues to maintain the highest levels of customer service and operational excellence, with an unwavering focus on safety and environmental stewardship.
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