NACCO Industries, Inc. Announces Fourth Quarter And Full-Year 2017 Results

 

 

March 8, 2018 - NACCO Industries, Inc. (NYSE: NC) today announced fourth quarter and full-year results for 2017.  As a result of NACCO's spin-off of its housewares-related business in September 2017, the attached financial statements and related 2017 and 2016 financial information in this news release have been reclassified to reflect the housewares business' operating results as discontinued operations.

For the fourth quarter of 2017, NACCO reported consolidated revenues of $26.4 million and consolidated income from continuing operations of $9.7 million, or $1.40 per diluted share, which includes a provisional discrete tax benefit of $4.5 million, or $0.65 per diluted share, related to U.S. tax reform.  For the fourth quarter of 2016, NACCO reported revenues of $25.3 million and a consolidated loss from continuing operations of $4.6 million, or $0.68 per diluted share.

For the year ended December 31, 2017, consolidated revenues were $104.8 million and consolidated income from continuing operations was $28.5 million, or $4.14 per diluted share, compared with consolidated revenues of $111.1 million and consolidated income from continuing operations of $3.0 million, or $0.43 per diluted share, for the year ended December 31, 2016.  Full-year 2017 consolidated income from continuing operations includes a tax benefit of $3.1 million, or $0.45 per diluted share, related to U.S. tax reform.  This full-year benefit differs from the $4.5 million fourth quarter benefit due to the fourth quarter reversal of a valuation allowance established in the third quarter of 2017 prior to the repeal of the corporate alternative minimum tax under U.S. tax reform enacted in December 2017.  Full-year 2016 consolidated income from continuing operations includes a $17.4 million impairment charge, or $12.5 million after a tax benefit of $4.9 million, related to North American Coal's Centennial mining operation, which is no longer active.

NACCO's consolidated Adjusted EBITDA from continuing operations for the fourth quarter and year ended December 31, 2017 was $10.5 million and $46.1 million, respectively.  Adjusted EBITDA in this press release is provided solely as a supplemental non-GAAP disclosure of operating results as defined in the reconciliation of GAAP results to Adjusted EBITDA, on page 8.

Consolidated Cash Flow from Continuing Operations and Liquidity Discussion

For the 2017 full year, NACCO generated consolidated cash flow before financing activities from continuing operations of $38.3 million, which was comprised of net cash provided by operating activities of $49.0 million less net cash used for investing activities of $10.7 million. For the 2016 full year, NACCO generated consolidated cash flow before financing activities from continuing operations of $27.5 million, which was comprised of net cash provided by operating activities of $31.4 million less net cash used for investing activities of $3.9 million.

NACCO ended 2017 with consolidated cash on hand of $101.6 million, debt of $58.1 million and net cash of $43.5 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's previously authorized share repurchase program expired on December 31, 2017.  Under that program, NACCO repurchased approximately 109,300 shares for an aggregate purchase price of $6.0 million.  The Company did not repurchase any shares during 2017.

North American Coal reported income before income tax of $8.2 million and revenues of $26.4 million in the fourth quarter of 2017, compared with income before income tax of $1.1 million and revenues of $25.3 million in the fourth quarter of 2016.

Revenues increased moderately primarily as a result of higher royalty and other income, mostly offset by a substantial decrease in revenues at Mississippi Lignite Mining Company due to a decrease in tons delivered.  Tons delivered declined because an increase in outage days at the customer's power plant in the fourth quarter of 2017 reduced customer requirements for coal.

Centennial had income before tax of $0.6 million in the fourth quarter of 2017 compared with a pre-tax loss of $2.9 million in the fourth quarter of 2016.  Centennial's 2016 loss included a $3.3 million pre-tax charge related to the resolution of a legal matter.

Excluding Centennial, North American Coal's income before income tax improved substantially primarily as a result of higher royalty and other income, an increase in earnings at the unconsolidated mining operations and a reduction in lease expense.  The increase in earnings at the unconsolidated mining operations was mainly due to an increase in deliveries to customers, as well as contractual escalation.  An increase in North American Coal's operating expenses, primarily higher employee-related costs, as well as substantially lower results at Mississippi Lignite Mining Company due to fewer tons delivered and an increase in the cost per ton delivered, partially offset the improvement in income before income tax.      

North American Coal - Full Year Results

North American Coal reported income before income tax of $37.2 million and revenues of $104.8 million for the year ended December 31, 2017, compared with income before income tax of under $0.1 million and revenues of $111.1 million for the year ended December 31, 2016.  Results in 2016 include a non-cash asset impairment charge of $17.4 million at Centennial.

For the 2017 full year, Centennial generated operating profit of $0.5 million primarily as a result of a $3.1 million gain on sale of assets, a $2.8 million reduction in its mine reclamation liability and lower ongoing operating costs.  These benefits were partially offset by a $1.0 million asset impairment charge.

North American Coal - Cash Flow Discussion

In 2017, North American Coal generated cash flow before financing activities of $37.1 million, comprised of net cash provided by operating activities of $48.6 million less net cash used for investing activities of $11.5 million. In 2016, North American Coal generated cash flow before financing activities of $31.0 million, comprised of net cash provided by operating activities of $34.9 million less net cash used for investing activities of $3.9 million.

NACCO & Other - Fourth Quarter and Full-Year 2017 Results

NACCO and Other, which includes the parent company operations and Bellaire Corporation, reported a loss from continuing operations before income tax of $2.4 million in the fourth quarter of 2017 compared with a loss from continuing operations before income tax of $1.4 million in the fourth quarter of 2016.

For the year ended December 31, 2017, NACCO and Other reported a loss from continuing operations before income tax of $8.1 million compared with a loss from continuing operations before income tax of $6.7 million for the year ended December 31, 2016.

The increase in both the fourth quarter and full year losses was primarily attributable to revisions of estimated long-term Bellaire mine reclamation expenses, partially offset by lower employee-related costs.

NACCO Consolidated Income Tax - Fourth Quarter and Full Year 2017

For the fourth quarter of 2017, NACCO reported consolidated income before income tax from continuing operations of $5.8 million and an income tax benefit from continuing operations of $3.9 million.  For the fourth quarter of 2016, NACCO reported a consolidated loss before income tax from continuing operations of $0.3 million and an income tax provision from continuing operations of $4.3 million.

For the year ended December 31, 2017, NACCO reported consolidated income before income tax from continuing operations of $29.1 million and an income tax provision on continuing operations of $0.6 million.  For the year ended December 31, 2016, NACCO reported a consolidated loss before income tax from continuing operations of $6.6 million and an income tax benefit from continuing operations of $9.6 million.

Income tax for the 2017 fourth quarter and full year includes a provisional discrete tax benefit of $4.5 million and $3.1 million respectively, related to U.S. tax reform.  NACCO applied the intraperiod tax allocation rules to all periods shown to allocate the tax provision for income tax between continuing and discontinued operations.  As a result of this intraperiod tax allocation, a comparison of the change in the income tax provision (benefit) between periods is not meaningful and the 2017 effective income tax rate is not indicative of future expectations.

Consolidated Outlook

In 2018, NACCO expects consolidated income before income tax from continuing operations to decrease compared with 2017 and expects an effective income tax rate in the range of 9% - 12%.  The effective income tax rate is affected by items such as percentage depletion and the mix of earnings, including losses at entities with higher effective income tax rates.

Income before income tax in 2017 included $4.6 million of gains on sales of assets, mostly realized at Centennial, and $2.8 million of favorable adjustments to Centennial mine reclamation liabilities.  Excluding these favorable 2017 items, NACCO expects 2018 income before income tax to increase compared with the prior year primarily as a result of lower operating expenses, improved income at both the consolidated and unconsolidated mining operations and reduced interest expense.  These improvements are expected to be partially offset by an anticipated substantial decrease in royalty and other income.  Royalties on oil, gas and coal extracted by third parties are subject to changes in market forces and the activities of third parties, making it difficult to forecast whether recent high levels of income will continue.

At the consolidated mining operations, Mississippi Lignite Mining Company's 2018 full-year results are expected to improve over 2017 because customer demand is expected to return to historical levels due to an anticipated reduction in outage days at the customer's power plant.  While the total number of power plant outage days for the full year is expected to decline, a majority of the outage days are expected to occur in the second half of 2018.  As a result, pre-tax income in the first half of 2018 at Mississippi Lignite Mining Company is expected to be comparable to the first half of 2017.  Pre-tax income in the second half of 2018 is expected to increase compared with the low income generated in the second-half of 2017.  However, if customer demand remains low at Mississippi Lignite Mining Company, it could unfavorably affect North American Coal's 2018 and future earnings significantly.

Centennial's pre-tax loss in 2018 is expected to be modestly lower than its 2017 pre-tax loss excluding gains on sales of assets of $3.1 million and mine reclamation adjustments.  Centennial will continue to evaluate strategies to optimize cash flow, including the continued assessment of a range of strategies for its remaining Alabama mineral reserves, including holding reserves with substantial unmined coal tons for sale or contract mining when conditions permit.  Cash expenditures related to mine reclamation will continue until reclamation is complete, or ownership of, or responsibility for, the remaining mines is transferred.

Income from the unconsolidated mining operations is expected to be modestly higher in 2018 due in part to higher fees at Liberty Fuels and increases at North American Mining's unconsolidated limerock mining operations.  North American Mining entered into a contract with a new customer in South Florida during the fourth quarter of 2017 that includes operation of a dragline and an electric rope shovel.  North American Mining added two new contracts in 2017 that are expected to contribute to increases in earnings from the unconsolidated mining operations in 2018.

Bisti Fuels, one of North American Coal's unconsolidated mining operations, began operation at the Navajo mine on January 1, 2017.  The customer's ability to take coal deliveries during the fourth quarter of 2017 was limited as the power plant's owners were installing additional environmental controls.  Bisti Fuels expects the installation of this equipment to continue to limit the power plant's ability to take coal deliveries in the first half of 2018 as well, resulting in a significant reduction in coal deliveries and income in the first half of 2018 compared with 2017.  However, Bisti's full-year 2018 income is expected to be comparable to 2017.  Once installation is complete, this plant should enjoy the benefits of an improved environmental profile.  Production at Bisti Fuels is anticipated to be 5 million to 6 million tons of coal per year when the plant is operating at expected levels, which is currently anticipated to occur in 2019.

On June 28, 2017, Southern Company and its subsidiary, Mississippi Power, suspended operations involving the coal gasifier portion of the Kemper County energy facility.  Liberty Fuels, an unconsolidated mining operation, was the sole supplier of coal to fuel the gasifier under its contract with Mississippi Power.  On February 8, 2018, Mississippi Power instructed Liberty Fuels to permanently cease all mining and delivery of lignite and to commence mine reclamation.  The terms of the contract specify that Mississippi Power is responsible for all mine closure costs.  Under the contract, Liberty Fuels is specified as the contractor to complete final mine closure and will receive compensation for these services.  The customer's decision to close the mine does not negatively impact NACCO's earnings outlook for Liberty Fuels during 2018, but it does unfavorably affect North American Coal's long-term earnings potential from this mine.

Cash flow before financing activities is expected to decrease substantially in 2018 compared with 2017.  Capital expenditures are expected to be approximately $33 million in 2018 due to planned expenditures at both Mississippi Lignite Mining Company and North American Mining, which includes expenditures for new and replacement equipment and land required for future mining.  Capital expenditures can vary significantly in any given year based on the type of asset needed and its relative cost.

 

While the current regulatory environment for development of new coal projects has improved, continued low natural gas prices and growth in renewable energy sources, such as solar and wind, could unfavorably affect the amount of electricity generation attributable to coal-fired power plants over the longer term.  North American Coal continues to seek opportunities for new coal mining projects, although future opportunities are likely to be very limited.  In addition, North American Coal continues to pursue additional non-coal mining opportunities, principally related to its North American Mining business and elsewhere where it might provide value-added services. 

 

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