NACCO INDUSTRIES, INC. 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 includeNACCO Industries , Inc.® ("NACCO" or 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 theCatapult 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 as part of the measurement of segment operating profit, which primarily includes administrative costs related to public company reporting requirements at the parent company and the financial results ofMitigation Resources andBellaire Corporation ("Bellaire"). Bellaire manages the Company's long-term liabilities related to formerEastern U.S. underground mining activities. EffectiveJanuary 1, 2022 , the Company changed the composition of its reportable segments. As a result, the Company retrospectively changed its computation of segment operating profit to reclassify the results ofCaddo Creek Resources Company, LLC ("Caddo Creek") andDemery Resources Company, LLC ("Demery") from the Coal Mining segment into the NAMining segment as these operations provide mining solutions for producers of industrial minerals, rather than for power generation. The Coal Mining segment now includes only mines that deliver coal to power generation companies. This segment reporting change has no impact on consolidated operating results. All prior period segment information has been reclassified to conform to the new presentation.
All financial statement line items below operating profit (other income, including interest expense and interest income, the provision for income taxes and net income) are presented and discussed within this Form 10-K on a consolidated basis.
See "Item 1. Business" beginning on page 1 in this Form 10-K for further discussion of NACCO's subsidiaries. Additional information relating to financial and operating data on a segment basis (including unallocated items) is set forth in Note 15 to the Consolidated Financial Statements contained in this Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities (if any). On an ongoing basis, the Company evaluates its estimates based on historical experience, actuarial valuations and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue recognition: Revenues are recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company accounts for revenue in accordance with Accounting Standards Codification ("ASC") Topic 606, "Revenue from Contracts with Customers." See Note 3 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's revenue recognition. 52
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data) Long-lived assets: The Company periodically evaluates long-lived assets for impairment when changes in circumstances or the occurrence of certain events indicate the carrying amount of an asset may not be recoverable. Upon identification of indicators of impairment, the Company evaluates the carrying value of the asset by comparing the estimated future undiscounted cash flows generated from the use of the asset and its eventual disposition with the asset's net carrying value. If the carrying value of an asset is considered impaired, an impairment charge is recorded for the amount that the carrying value of the long-lived asset exceeds its fair value. Fair value is estimated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company regularly performs reviews of potential future development projects and identified certain legacy coal assets where future development is unlikely. The long-lived assets, which included land, prepaid royalties and capitalized leasehold costs, were written off in 2022 and resulted in non-cash asset impairment charges of$3.9 million . See Note 9 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's fair value measurements. At MLMC, the costs of mining operations are not reimbursed by MLMC's customer. As such, increased costs at MLMC or decreased revenues could materially reduce the Company's profitability. Any reduction in customer demand at MLMC, including reductions related to reduced mechanical availability of the customer's power plant, would adversely affect the Company's operating results and could result in significant impairments. MLMC has approximately$125 million of long-lived assets, including property, plant and equipment and its coal supply agreement intangible asset, which are subject to periodic impairment analysis and review. Identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including assumptions about future power plant dispatch levels, changes in operating costs and other factors that impact anticipated revenue and customer demand, requires significant judgment. Actual future operating results could differ significantly from these estimates, which may result in an impairment charge in a future period, which could have a substantial impact on the Company's results of operations. Income taxes: The Company files income tax returns in theU.S. federal jurisdiction, and in various state and foreign jurisdictions. Tax law requires certain items to be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible for tax purposes, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities using currently enacted tax rates. The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date. Management is required to estimate the timing of the recognition of deferred tax assets and liabilities, make assumptions about the future deductibility of deferred tax assets and assess deferred tax liabilities based on enacted laws and tax rates for the appropriate tax jurisdictions to determine the amount of such deferred tax assets and liabilities. Changes in the calculated deferred tax assets and liabilities may occur in certain circumstances, including statutory income tax rate changes, statutory tax law changes, or changes in the structure or tax status. The Company's tax assets, liabilities, and tax expense are supported by historical earnings and losses and the Company's best estimates and assumptions of future earnings. The Company assesses whether a valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, both positive and negative, using a more likely than not standard. This assessment considers, among other matters, scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates the Company is using to manage the underlying businesses. When the Company determines, based on all available evidence, that it is more likely than not that deferred tax assets will not be realized, a valuation allowance is established. Since significant judgment is required to assess the future tax consequences of events that have been recognized in the Company's financial statements or tax returns, the ultimate resolution of these events could result in adjustments to the Company's financial statements and such adjustments could be material. The Company believes the current assumptions, judgments and other considerations used to estimate the current year accrued and deferred tax positions are appropriate. If the actual outcome of future tax consequences differs from these estimates and assumptions, due to changes or future events, the resulting change to the provision for income taxes could have a material impact on the Company's results of operations and financial position. Since 2021, the Company has participated in a voluntary program with theIRS called Compliance Assurance Process ("CAP"). The objective of CAP is to contemporaneously work with theIRS to achieve federal tax compliance and resolve all or most issues prior to the filing of the tax return. 53
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data) See Note 13 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's income taxes. CONSOLIDATED FINANCIAL SUMMARY The results of operations for NACCO were as follows for the years endedDecember 31 : 2022 2021 Revenues: Coal Mining$ 95,204 $ 82,831 NAMining 85,664 78,944 Minerals Management 60,242 31,003 Unallocated Items 2,952 4,695 Eliminations (2,343) (5,627) Total revenue$ 241,719 $ 191,846 Operating profit (loss): Coal Mining$ 38,309 $ 45,784 NAMining 2,202 3,384 Minerals Management 52,214 26,080 Unallocated Items (23,233) (19,553) Eliminations 494 (285) Total operating profit$ 69,986 $ 55,410 Interest expense 2,034 1,719 Interest income (1,449) (449) Closed mine obligations 1,179 1,297 Loss (gain) on equity securities 283 (3,423) Income from equity method investee (2,194) - Other contract termination settlements (16,882) - Other, net (708) (584) Other income, net (17,737) (1,440) Income before income tax provision 87,723 56,850 Income tax provision 13,565 8,725 Net income$ 74,158 $ 48,125 Effective income tax rate 15.5 % 15.3 %
The components of the change in revenues and operating profit are discussed below in "Segment Results."
Other income, net
During the second quarter of 2022, GRE transferred ownership of an office building with an estimated fair value of$4.1 million and conveyed membership units inMidwest AgEnergy Group, LLC ("MAG"), aNorth Dakota -based ethanol business, with an estimated fair value of$12.8 million , as agreed to under the termination and release of claims agreement between Falkirk and GRE. As a result, the Company recognized$16.9 million on the "Other contract termination settlements" line within the accompanying Consolidated Statements of Operations.
Prior to receiving the membership units from GRE, the Company held a
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data) accounting. During the third quarter of 2022, the Company recorded$2.2 million , which represented its share of MAG's earnings on the "Income from equity method investee" line within the accompanying Consolidated Statements of Operations. OnDecember 1, 2022 ,HLCP Ethanol Holdco, LLC ("HLCP") completed its acquisition of MAG. Upon closing of the transaction, NACCO transferred its ownership interest in MAG to HLCP and received a cash payment of$18.6 million and recognized a$1.3 million loss during the fourth quarter of 2022 on the line "Other, net" within the accompanying Consolidated Statements of Operations.
Interest income increased
Loss (gain) on equity securities represents changes in the market price of invested assets reported at fair value. The change during 2022 compared with 2021 was due to fluctuations in the market prices of the exchange-traded equity securities. See Note 9 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's invested assets reported at fair value.
Income Taxes
Income tax expense of$13.6 million for the year endedDecember 31, 2022 includes$1.5 million of discrete tax benefits, primarily from the reversal of uncertain tax positions as a result of the conclusion of theIRS examination of the Company's 2013, 2014, 2015 and 2016 federal income tax returns. Excluding the$1.5 million of discrete tax benefits, the effective income tax rate in 2022 was 17.1%. Income tax expense of$8.7 million for the year endedDecember 31, 2021 included$1.0 million of discrete tax expense. Excluding the$1.0 million of discrete tax expense, the effective income tax rate in 2021 was 13.5%.
The increase in the effective income tax rate for 2022 compared to 2021, excluding the impact of discrete items, is primarily due to an increase in earnings at entities that do not qualify for percentage depletion. The benefit from percentage depletion is not directly related to the amount of pre-tax income recorded in a period.
See Note 13 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's income taxes.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data) LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following tables detail the change in cash flow for the years ended
2022 2021 Change
Operating activities:
Net income $ 74,158 $ 48,125 $ 26,033
Depreciation, depletion and amortization 26,816 23,085 3,731
Deferred income taxes (8,471) (3,553) (4,918)
Stock-based compensation 7,541 5,561 1,980
Gain on sale of assets (2,463) (60) (2,403)
Other contract termination settlements (15,552) - (15,552)
Asset impairment charges 3,939 - 3,939
Other (345) 1,973 (2,318)
Working capital changes (17,888) (256) (17,632)
Net cash provided by operating activities 67,735 74,875 (7,140)
Investing activities: Expenditures for property, plant and equipment and acquisition of mineral interests
(54,447) (44,561) (9,886)
Proceeds from the sale of assets 2,837 633 2,204
Proceeds from the sale of private company equity units 18,628
- 18,628
Other (170) (219) 49
Net cash used for investing activities (33,152) (44,147) 10,995
Cash flow before financing activities $ 34,583 The$7.1 million decrease in net cash provided by operating activities was primarily due to a decrease in cash provided by working capital partially offset by an increase in cash provided by net income adjusted for non-cash items. The$17.6 million decrease in net cash provided by working capital was primarily due to a decrease in accounts payable during 2022 compared with an increase in accounts payable during 2021 due to timing of purchases and payments. The Company's non-cash items primarily include Depreciation, depletion and amortization, Deferred income taxes, Stock-based compensation, Gain on sale of assets, Other contract termination settlements and Asset impairment charges. 2022 2021 Change Financing activities: Net reductions to long-term debt and revolving credit agreements$ (3,828) $ (25,801) $ 21,973 Cash dividends paid (6,012) (5,617) (395) Other - (1,755) 1,755 Net cash used for financing activities$ (9,840)
The change in net cash used for financing activities was primarily due to fewer repayments as a result of a reduction in borrowings under the Company's revolving line of credit during 2022 compared with 2021.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data) Financing Activities Financing arrangements are obtained and maintained at the subsidiary level. NACoal has a secured revolving line of credit of up to$150.0 million (the "NACoal Facility") that expires inNovember 2025 . There were no borrowings outstanding under the NACoal Facility atDecember 31, 2022 . AtDecember 31, 2022 , the excess availability under the NACoal Facility was$116.3 million , which reflects a reduction for outstanding letters of credit of$33.7 million . NACCO has not guaranteed any borrowings of NACoal. The NACoal Facility allows for the payment to NACCO of dividends and advances under certain circumstances. Dividends (to the extent permitted by the NACoal Facility) and management fees are the primary sources of cash for NACCO and enable the Company to pay dividends to stockholders. The NACoal Facility has performance-based pricing, which sets interest rates based upon NACoal achieving various levels of debt to EBITDA ratios, as defined in the NACoal Facility. Borrowings bear interest at a floating rate plus a margin based on the level of debt to EBITDA ratio achieved. The applicable margins, effectiveDecember 31, 2022 , for base rate and LIBOR loans were 1.23% and 2.23%, respectively. The NACoal Facility has a commitment fee which is based upon achieving various levels of debt to EBITDA ratios. The commitment fee was 0.34% on the unused commitment atDecember 31, 2022 . During the year endedDecember 31, 2022 , the average borrowing under the NACoal Facility was$2.0 million . The weighted-average annual interest rate, including the floating rate margin, was 2.54% and 4.50% atDecember 31, 2022 andDecember 31, 2021 , respectively. The NACoal Facility contains restrictive covenants, which require, among other things, NACoal 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 NACoal Facility provides the ability to make loans, dividends and advances to NACCO, with some restrictions based on maintaining a maximum debt to EBITDA ratio of 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 NACoal Facility, of$15.0 million . AtDecember 31, 2022 , NACoal was in compliance with all financial covenants in the NACoal Facility. The obligations under the NACoal Facility are guaranteed by certain of NACoal's direct and indirect, existing and future domestic subsidiaries, and is secured by certain assets of NACoal and the guarantors, subject to customary exceptions and limitations. The Company believes funds available from cash on hand, the NACoal Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the NACoal Facility inNovember 2025 . See Note 8 and Note 10 to the Consolidated Financial Statements in this Form 10-K for further information on the Company's other financing arrangements and leases, respectively.
Expenditures for property, plant and equipment and mineral interests
Following is a table which summarizes actual and planned expenditures (in
millions):
Planned Actual Actual
2023 2022 2021
NACCO $ 71.5 $ 54.4 $ 44.6 Planned expenditures for 2023 are expected to be approximately
In the NAMining segment, 2023 capital expenditures are primarily related to the acquisition of equipment to be used at theThacker Pass lithium project. Sawtooth is the contract miner for theThacker Pass project. Under the terms of the contract mining agreement, the customer will reimburse Sawtooth for these capital expenditures over a five-year period from the equipment acquisition date. 57
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data) Expenditures are expected to be funded from internally generated funds and/or bank borrowings. Capital Structure
NACCO's consolidated capital structure is presented below:
December 31
2022 2021 Change
Cash and cash equivalents $ 110,748 $ 86,005 $ 24,743
Other net tangible assets 329,045 276,733 52,312
Intangible assets, net 28,055 31,774 (3,719)
Net assets 467,848 394,512 73,336
Total debt (19,668) (20,710) 1,042
Closed mine obligations (21,214) (21,686) 472
Total equity $ 426,966 $ 352,116 $ 74,850
Debt to total capitalization 4 % 6 % (2) %
The $52.3 million increase in other net tangible assets was primarily due to an
increase in Property, plant and equipment including mineral interests and
investments at Mitigation Resources, an increase in Inventories and an increase
in Trade accounts receivable at December 31, 2022 compared with December 31,
2021 . Inventories increased in the Coal Mining segment as MLMC is developing a
new mine area and building inventory and in the NAMining segment due to an
increase in supplies inventory. Trade accounts receivable increased due to
higher customer requirements at MLMC.
Contractual Obligations, Contingent Liabilities and Commitments
Pension and postretirement funding can vary significantly each year due to plan amendments, changes in the market value of plan assets, legislation and the Company's decisions to contribute above the minimum regulatory funding requirements. The Company does not expect to contribute to its pension plan in 2023. NACCO maintains one supplemental retirement plan that pays monthly benefits to participants directly out of corporate funds and expects to pay benefits of approximately$0.4 million per year from 2023 through 2032. Benefit payments beyond that time cannot currently be estimated. NACCO also expects to make payments related to its other postretirement plans of approximately$0.2 million per year from 2023 through 2032. Benefit payments beyond that time cannot currently be estimated. All other pension benefit payments are made from assets of the pension plan.
NACCO has asset retirement obligations. See Note 7 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's asset retirement obligations.
NACCO has unrecognized tax benefits, including interest and penalties. See Note 13 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's income taxes.
NACoal is a party to certain guarantees related toCoyote Creek . The Company believes that the likelihood of NACoal's future performance under the guarantees is remote, and no amounts related to these guarantees have been recorded. See Note 16 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's guarantees.
The Company utilizes letters of credit to support commitments made in the
ordinary course of business. As of
ENVIRONMENTAL MATTERS
The Company is affected by the regulations of numerous agencies, particularly theFederal Office of Surface Mining , theU.S. Environmental Protection Agency , theU.S. Army Corps of Engineers and associated state regulatory authorities. In addition, the Company closely monitors proposed legislation and regulation concerning SMCRA, CAA, ACE, CWA, RCRA, CERCLA and other regulatory actions. 58
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data) Compliance with these increasingly stringent regulations could result in higher expenditures for both capital improvements and operating costs. The Company's policies stress environmental responsibility and compliance with these regulations. Based on current information, management does not expect compliance with these regulations to have a material adverse effect on the Company's financial condition or results of operations. See Item 1 in Part I of this Form 10-K for further discussion of these matters. Certain states have enacted, and others are considering enacting, mandatory clean energy standards requiring utilities to meet certain thresholds of renewable and/or carbon-free energy supply. The current presidential administration has made climate change a focus, including consideration for legislation on clean energy standards and GHG emission, and the Company expects that to continue. The Company believes the move to require utilities to generate a greater portion of energy from renewable energy sources could create imbalances in the existing electric grid if fossil-fuel power plants are retired faster than renewable sources are developed resulting in electrical grid disruptions and outages. The Company will continue to monitor the progress of these initiatives and assess the potential impacts they may have on its financial condition, results of operations and disclosures. SEGMENT RESULTS COAL MINING SEGMENT FINANCIAL REVIEW
See "Item 2. Properties" on page 28 in this Form 10-K for discussion of the Company's mineral resources and mineral reserves.
Tons of coal delivered by the Coal Mining segment were as follows for the years endedDecember 31 : 2022 2021 Unconsolidated mines 25,236 27,759 Consolidated mines 3,215 3,025 Total tons delivered 28,451 30,784 The results of operations for the Coal Mining segment were as follows for the years endedDecember 31 : 2022 2021 Revenues$ 95,204 $ 82,831 Cost of sales 89,670 72,596 Gross profit 5,534 10,235
Earnings of unconsolidated operations(a) 52,535 56,089 Contract termination settlement
14,000 10,333
Selling, general and administrative expenses 30,049 27,363 Amortization of intangible assets
3,719 3,556
Gain on sale of assets (8) (46)
Operating profit $ 38,309 $ 45,784
(a) See Note 16 to the Consolidated Financial Statements in this Form 10-K for a
discussion of the Company's unconsolidated subsidiaries, including summarized
financial information.
2022 Compared with 2021
Revenues increased 14.9% in 2022 compared with 2021 primarily due to a higher per ton sales price and an increase in customer requirements at MLMC.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data) The following table identifies the components of change in operating profit for 2022 compared with 2021: Operating Profit 2021 $ 45,784 Increase (decrease) from: Gross profit (4,701) Earnings of unconsolidated operations (3,554) Selling, general and administrative expenses (2,686) Amortization of intangibles (163) Net change on sale of assets (38) Contract termination settlements in 2022 and 2021, net 3,667 2022 $ 38,309 Operating profit decreased$7.5 million in 2022 compared with 2021. The change in operating profit was primarily due to a decrease in gross profit, a decrease in the earnings of unconsolidated operations and an increase in selling, general and administrative expenses. The decrease in gross profit was primarily due to an increase in the cost per ton delivered at MLMC, due in part to an increase in the cost of diesel fuel. The decrease in earnings of unconsolidated operations was primarily due to a reduction in the per ton management fee at Falkirk as well as a reduction in earnings as a result of the Bisti contract termination as ofSeptember 30, 2021 . These decreases were partially offset by a contractual price escalation and an increase in customer requirements at Coteau. The increase in selling, general and administrative expenses was primarily due to higher employee-related costs and professional service expenses. The decreases in operating profit were partially offset by an increase in contract termination settlements. The$14.0 million contract termination settlement from GRE was recognized during 2022. The$10.3 million payment related to the Bisti contract termination was recognized during 2021.
NORTH AMERICAN MINING ("NAMining") SEGMENT
FINANCIAL REVIEW
Aggregate tons delivered by the NAMining segment were as follows for the years endedDecember 31 : 2022 2021 Total tons delivered 54,223 52,796 60
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data) The results of operations for the NAMining segment were as follows for the years endedDecember 31 : 2022 2021 Total revenues$ 85,664 $ 78,944 Reimbursable costs 52,935 51,028
Revenues excluding reimbursable costs
Revenues$ 85,664 $ 78,944 Cost of sales 79,842 73,649 Gross profit 5,822 5,295
Earnings of unconsolidated operations(a) 4,715 4,754 Selling, general and administrative expenses 8,260 6,610 Loss on sale of assets
75 55
Operating profit $ 2,202 $ 3,384
(a) See Note 16 to the Consolidated Financial Statements in this Form 10-K for a
discussion of the Company's unconsolidated subsidiaries, including summarized
financial information.
2022 Compared with 2021
Total revenues increased 8.5% in 2022 compared with 2021 primarily due to an
increase in customer requirements as well as reimbursable costs, which have an
offsetting amount in cost of sales and have no impact on operating profit. These
improvements were partially offset by a reduction in revenue at Caddo Creek as
the scope of final reclamation activities declined.
The following table identifies the components of change in operating profit for
2022 compared with 2021.
Operating Profit
2021 $ 3,384
Increase (decrease) from:
Selling, general and administrative expenses (1,413)
Voluntary retirement program charge (769)
Earnings of unconsolidated operations (39)
Net change on sale of assets (20)
Gross profit 1,059
2022 $ 2,202
Operating profit decreased $1.2 million in 2022 compared with 2021 primarily due
to an increase in selling, general and administrative expenses and a voluntary
retirement program charge, partially offset by an increase in gross profit.
During 2022, the Company implemented a voluntary retirement program for
employees who met certain age and service requirements to reduce overall
headcount. As a result of this program, operating profit in 2022 includes a
charge of
The increase in gross profit was primarily attributable to water sales at Caddo Creek as well as an increase in earnings at Sawtooth Mining for theThacker Pass lithium project, partially offset by a decrease in gross profit from the active operations mainly due to an increase in employee-related costs. 61
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data) MINERALS MANAGEMENT SEGMENT
FINANCIAL REVIEW
The results of operations for the Minerals Management segment were as follows
for the years ended
2022 2021
Revenues $ 60,242 $ 31,003
Cost of sales 3,935 2,988
Gross profit 56,307 28,015Selling, general and administrative expenses and asset impairment charges
6,623 2,004 Gain on sale of assets (2,530) (69) Operating profit$ 52,214 $ 26,080
During 2022, the oil and natural gas industry experienced continued improvement in commodity prices compared with 2021, primarily due to:
•Higher demand as the impact from COVID-19 abates; •Changes in domestic supply and demand dynamics as well as increased discipline around production and capital investments by oil and gas companies; and •Instability and constraints on global supply, particularly with respect to instability inRussia andUkraine . 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 theUnited States Energy Information Administration for the twelve months endedDecember 31 : 2022 2021 West Texas Intermediate Average Crude Oil Price$ 94.79 $ 67.99 Henry Hub Average Natural Gas Price$ 6.42 $ 3.91 Revenues and operating profit increased in 2022 compared with 2021 primarily due to substantially higher natural gas and oil prices, increased production due in part to income generated from newly developed wells on Company leases during 2022, as well as$2.1 million of settlement income recognized during 2022. The settlement relates to the Company's ownership interest in certain mineral rights. In addition, operating profit includes a$2.4 million gain on the sale of land related to legacy operations during 2022. The Company regularly performs reviews of potential future development projects and identified certain legacy coal assets where future development is unlikely. The long-lived assets, which included land, prepaid royalties and capitalized leasehold costs, were written off during 2022 and resulted in non-cash asset impairment charges of$3.9 million .
UNALLOCATED ITEMS AND ELIMINATIONS
FINANCIAL REVIEW
Unallocated Items and Eliminations were as follows for the years endedDecember 31 : 2022 2021 Operating loss$ (22,739) $ (19,838) 2022 Compared with 2021
The operating loss increased during 2022 compared with 2021 primarily due to higher employee-related costs.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Coal Mining Outlook
In 2023, the Company expects coal deliveries to decrease from 2022 levels. The owner of the power plant served by theCompany's Sabine Mine inTexas plans to retire the Pirkey power plant in 2023. The cessation ofSabine deliveries starting effectiveApril 1, 2023 is the primary driver for the year-over-year decline in deliveries. Coal Mining operating profit and Segment Adjusted EBITDA for the 2023 full year are expected to decrease significantly year-over-year, including and excluding the$14.0 million GRE termination payment received in 2022. The decline is primarily the result of an expected significant reduction in earnings at the consolidated operations, an anticipated moderate decrease in earnings of unconsolidated operations and higher operating expenses due to an increase in insurance and outside services expenses. Results at the consolidated mining operations are projected to decrease significantly in 2023 versus 2022. The decrease is mainly due to an expected substantial decline in earnings at MLMC driven by a reduction in the profit per ton of coal delivered, due in part to increased costs associated with establishing operations in a new mine area, as well as higher depreciation expense related to recent capital expenditures to develop a new mine area. In 2023, capital expenditures are expected to be approximately$10 million , primarily for mine development and equipment replacement. MLMC sells lignite at contractually agreed upon prices which are subject to changes in the level of established indices generally reflecting inflation over time. The increase in production costs will not be offset by an immediate increase in the revenue generated from contractual price escalation as there is a lag in the timing of the effect of inflation on the index-based coal sales price. In addition, certain costs can be passed through to the customer in the year following expense recognition. The anticipated lower earnings at the unconsolidated coal mining operations is expected to be driven primarily by temporary price concessions at Falkirk effectiveMay 2022 throughMay 2024 . This will result in a reduction in the per ton management fee for 12 months in 2023 compared with eight months in 2022. The planned retirement of the Pirkey power plant and commencement of final reclamation of theSabine Mine starting onApril 1, 2023 will also contribute to the reduction in earnings.Sabine will receive compensation for providing final mine reclamation services, but at a lower rate than during active mining. Funding forSabine's mine reclamation is the responsibility of the customer. These decreases are expected to be partly offset by higher earnings at Coteau. The Company's contract structure at each of its coal mining operations eliminates exposure to spot coal market price fluctuations. However, fluctuations in natural gas prices and the availability of renewable power generation, particularly wind, can contribute to changes in power plant dispatch and customer demand for coal. Changes to customer power plant dispatch would affect the Company's outlook for 2023, as well as over the longer term.
NAMining Outlook
Full-year 2023 operating profit at NAMining is expected to decrease significantly primarily because final mine reclamation activities at Caddo Creek were substantially completed in 2022. Segment Adjusted EBITDA, however, is expected to increase over 2022 because of a significant unfavorable impact on operating profit from higher depreciation expense. NAMining's 2022 financial results did not meet expectations. A number of initiatives are underway or in planning stages that are expected to support improved future financial results at NAMining's mining operations. Until profit improves at existing operations, NAMining has narrowed its business development efforts.
In 2023, NAMining capital expenditures are expected to be approximately
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data) 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, oil, natural gas liquids and coal, extracted primarily by third parties. Changing prices of natural gas and oil have a significant impact on Minerals Management's operating profit. In 2023, operating profit and Segment Adjusted EBITDA are expected to decrease significantly compared with 2022. This decrease is primarily driven by current market expectations for natural gas and oil prices, an anticipated reduction in volumes as existing wells follow their natural production decline and modest expectations for development of new wells by third-party exploration and production companies. Based on market expectations, the Company's forecast assumes oil and gas market prices moderate in 2023 to levels in line with 2021 averages; however, commodity prices are inherently volatile. The actions ofOPEC , theRussia -Ukraine conflict, inventory levels of natural gas and oil and the uncertainty associated with demand, as well as other factors, have the potential to impact future oil and gas prices. An increase in natural gas and oil prices above current expectations could result in improvements to the 2023 forecast. 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 and could vary positively or negatively as a result of adjustments made by operators, additional leasing and development and/or changes to commodity prices. Development of additional wells on existing interests in excess of current expectations could be accretive to future results. Minerals Management is targeting additional investments in mineral and royalty interests of up to$20 million in 2023. 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.
Consolidated Outlook
Management continues to view the long-term business outlook for NACCO positively, despite an expected significant decrease in 2023 consolidated net income versus 2022. A substantial portion of the expected reduction in 2023 earnings is because 2022 included$30.9 million of pre-tax contract termination income. Excluding the contract termination settlement income recognized in the 2022 second quarter, net income in the first half of 2023 is still expected to be significantly lower than the first half of 2022. The decrease is primarily driven by an expected significant reduction in earnings at the Coal Mining and Minerals Management segments in the first half of 2023 versus the prior-year period. At the Coal Mining segment, an anticipated reduction in inventory levels during the first half of 2023 will result in a higher cost per ton and lower earnings at MLMC. In addition, a reduction in earnings from the unconsolidated mines, primarily Falkirk, is also contributing to the decrease. At Minerals Management, the decrease in the first half of 2023 is primarily driven by an expected significant reduction in commodity prices from historically high price levels in the first half of 2022. While consolidated net income in the second half of 2023 is expected to increase over the first half of 2023, it is expected to decline significantly versus the prior-year second half. Overall, 2023 consolidated net income is expected to decrease substantially versus 2022. These reductions are expected to be partially offset by lower income tax expense. The Company expects an effective income tax rate between 2% and 5% in 2023. Mitigation Resources of North America® continued to build on the substantial foundation established over the past several years and ended 2022 with eight mitigation banks and four permittee-responsible mitigation projects located inTennessee ,Mississippi ,Alabama andTexas . Mitigation Resources was recently named a designated provider of abandoned mine land restoration by theState of Texas . It plans to provide ecological restoration services for abandoned surface mines as well as pursue additional environmental restoration projects during 2023. In 2023, the Company expects capital expenditures of approximately$50 million , excluding Minerals Management. Minerals Management is targeting investments of up to$20 million . Future investments at Minerals Management are expected to continue to align with the Company's strategy and objectives to establish a blended portfolio of mineral and royalty interests. 64
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data)
As a result of the forecasted capital expenditures and anticipated substantial decrease in net income, cash flow before financing activities in 2023 is expected to be positive but decline significantly from 2022.
Long-Term Growth and Diversification Outlook
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. Management continues to be optimistic about the long-term outlook. In the Minerals Management segment, as well as in the Company's Mitigation Resources business, opportunities for growth remain strong. Acquisitions of additional mineral interests, an improvement in the outlook for the Company's largest Coal Mining segment customers and securing contracts for Mitigation Resources and new NAMining projects could be accretive to the Company's outlook. Additional business development expenditures will be incurred as part of this growth and would provide a partial offset to the additional income. The Minerals Management segment continues to pursue acquisitions of mineral and royalty interests inthe United States . The Minerals Management segment expects to benefit from the continued development of its mineral properties without additional capital investment, as development costs are borne entirely by third-party exploration and development companies who lease the minerals. This business model can 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. 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 inthe United States that deliver 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 this business model matures. The Company remains committed to expanding the NAMining business while improving profitability. NAMining intends to be a substantial contributor to operating profit over time. The pace of achieving that objective will be dependent on the execution and successful implementation of profit improvement initiatives in the aggregates operations, and the mix and scale of new projects. The Sawtooth Mining lithium project is expected to contribute more significantly when production commences atThacker Pass . Sawtooth Mining has a mining services agreement to serve as the exclusive contract miner for theThacker Pass lithium project in northernNevada , owned byLithium Nevada Corp. , a subsidiary of Lithium Americas Corp. (TSX: LAC) (NYSE: LAC). Lithium Americas owns the lithium reserves atThacker Pass . InJanuary 2023 , Lithium Americas and General Motors announced that they will jointly invest to develop theThacker Pass project. According to Lithium Americas, theGM agreement is a major milestone in movingThacker Pass toward production. OnMarch 2, 2023 , Lithium Americas announced that construction has commenced. Phase 1 production is projected to begin in the second half of 2026. Sawtooth Mining plans to begin acquiring equipment for this project in 2023. Under the terms of the contract mining agreement, Lithium Americas will reimburse Sawtooth for these capital expenditures over a five-year period from the equipment acquisition date. Sawtooth will be reimbursed for all costs of mine construction plus a construction fee. The Company expects to recognize moderate income in 2024 and 2025 prior to commencement of production in 2026. Once production commences, Sawtooth will receive a management fee per metric ton of lithium delivered. At maturity, this contract is expected to deliver fee income similar to a mid-sized management fee coal mine. Mitigation Resources continues to expand its business, which creates and sells stream and wetland mitigation credits and provides services to those engaged in permittee-responsible mitigation as well as 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. Mitigation Resources is making strong progress toward its goal of becoming a top ten provider of stream and wetland mitigation services in the southeasternUnited States . The Company believes that Mitigation Resources can provide solid rates of return as this business matures. The Company 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 65
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSNACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Thousands, Except Per Share and Percentage Data) dispatch results in increased demand for coal by the Coal Mining segment's customers. Fluctuating natural gas prices 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 will be an essential part of the energy mix inthe United States for the foreseeable future. Subsequent to 2023, the Coal Mining segment expects increased profitability compared with 2023 expectations due in part to improvements at Falkirk and MLMC. At Falkirk, the temporary price concessions end inJune 2024 . At MLMC, the move to a new mine area will be completed during 2023, and as a result, cost per ton delivered in 2024 is expected to moderate. In addition, certain costs incurred at MLMC in 2023 will be passed through to the customer and included in revenues in 2024. The Company continues to look for ways to create additional value by utilizing its core mining competencies which include reclamation and permitting. One such way the Company may be able to utilize these skills is 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. The Company is committed to maintaining a conservative capital structure as it continues to grow and diversify, while avoiding unnecessary risk. 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2 to the Consolidated Financial Statements in this Form 10-K for a description of recently issued accounting standards, if any, including actual and expected dates of adoption and effects to the Company's Consolidated Financial Statements.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NACCO INDUSTRIES, INC. AND SUBSIDIARIES
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
FORWARD-LOOKING STATEMENTS
The statements contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere throughout this Annual Report
on Form 10-K that are not historical facts are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements are
made subject to certain risks and uncertainties, which could cause actual
results to differ materially from those presented. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Among the factors that could cause plans, actions and results
to differ materially from current expectations are, without limitation: (1)
changes to or termination of customer or other third-party contracts, or a
customer or other third party default under a contract, (2) any customer's
premature facility closure, (3) 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, (4)
changes in the prices of hydrocarbons, particularly diesel fuel, natural gas,
natural gas liquids and oil, (5) failure or delays by the Company's lessees in
achieving expected production of natural gas and other hydrocarbons; the
availability and cost of transportation and processing services in the areas
where the Company's oil and gas reserves are located; federal and state
legislative and regulatory initiatives relating to hydraulic fracturing; and the
ability of lessees to obtain capital or financing needed for well-development
operations and leasing and development of oil and gas reserves on federal lands,
(6) failure to obtain adequate insurance coverages at reasonable rates, (7)
supply chain disruptions, including price increases and shortages of parts and
materials, (8) 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, (9) 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, (10) impairment charges, (11) the effects of
investors' and other stakeholders' increasing attention to environmental, social
and governance matters, (12) changes in costs related to geological and
geotechnical conditions, repairs and maintenance, new equipment and replacement
parts, fuel or other similar items, (13) regulatory actions, changes in mining
permit requirements or delays in obtaining mining permits that could affect
deliveries to customers, (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 and oil and gas 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.
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