10-Q 1 nc930201910-q.htm 10-Q Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 _______________________________________________________________________________________________________________________________________________________________________________________________________
FORM 10-Q
(Mark One)
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 2019
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from                      to                     
Commission file number 1-9172
 
 
NACCO INDUSTRIES, INC.
 
 
 
 
(Exact name of registrant as specified in its charter)
 
 
 
DELAWARE 
 
34-1505819
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
5875 LANDERBROOK DRIVE, SUITE 220, CLEVELAND, OHIO 
 
44124-4069
 
 
(Address of principal executive offices)
 
(Zip code)
 
 
 
(440) 229-5151
 
 
 
 
(Registrant's telephone number, including area code)
 
 
 
 
N/A
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 

Securities registered pursuant to Section 12(b) of the Act
Title of each class

 
Trading Symbol

 
Name of each exchange on which registered

Class A Common Stock, $1 par value per share
 
NC
 
New York Stock Exchange
Class B Common Stock is not publicly listed for trade on any exchange or market system; however, Class B Common Stock is convertible into Class A Common Stock on a share-for-share basis.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act
Large accelerated filer o
 
Accelerated filer þ 
 
Non-accelerated filer o
 
Smaller reporting company þ 
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
Number of shares of Class A Common Stock outstanding at October 25, 2019: 5,425,640
Number of shares of Class B Common Stock outstanding at October 25, 2019: 1,568,680
 
 
 
 
 



NACCO INDUSTRIES, INC.
TABLE OF CONTENTS

 
 
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1

Part I
FINANCIAL INFORMATION
Item 1. Financial Statements

NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
SEPTEMBER 30
2019
 
DECEMBER 31
2018
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and cash equivalents
$
115,061

 
$
85,257

Trade accounts receivable, net
13,540

 
20,817

Accounts receivable from affiliates
6,107

 
7,999

Inventories
33,087

 
31,209

Assets held for sale
—

 
4,330

Prepaid expenses and other
12,515

 
14,562

Total current assets
180,310

 
164,174

Property, plant and equipment, net
129,585

 
124,554

Intangibles, net
38,273

 
40,516

Investments in unconsolidated subsidiaries
23,100

 
20,091

Operating lease right-of-use assets
11,721

 
—

Other non-current assets
29,781

 
27,656

Total assets
$
412,770

 
$
376,991

LIABILITIES AND EQUITY
 

 
 

Accounts payable
$
9,004

 
$
7,746

Accounts payable to affiliates
37

 
1,653

Revolving credit agreements
—

 
4,000

Current maturities of long-term debt
394

 
654

Asset retirement obligations
1,826

 
1,826

Accrued payroll
20,243

 
19,853

Deferred compensation
13,465

 
—

Other current liabilities
7,806

 
6,516

Total current liabilities
52,775

 
42,248

Long-term debt
7,284

 
6,367

Operating lease liabilities
12,669

 
—

Asset retirement obligations
33,365

 
35,877

Pension and other postretirement obligations
9,365

 
10,429

Deferred income taxes
7,361

 
2,846

Deferred compensation
—

 
12,939

Other long-term liabilities
6,696

 
15,581

Total liabilities
129,515

 
126,287

Stockholders' equity
 

 
 

Common stock:
 

 
 

Class A, par value $1 per share, 5,425,640 shares outstanding (December 31, 2018 - 5,352,590 shares outstanding)
5,425

 
5,352

Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,568,680 shares outstanding (December 31, 2018 - 1,568,810 shares outstanding)
1,569

 
1,569

Capital in excess of par value
9,829

 
7,042

Retained earnings
279,801

 
250,352

Accumulated other comprehensive loss
(13,369
)
 
(13,611
)
Total stockholders' equity
283,255

 
250,704

Total liabilities and equity
$
412,770

 
$
376,991


See notes to Unaudited Condensed Consolidated Financial Statements.

2

NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2019
 
2018
 
2019
 
2018
 
(In thousands, except per share data)
Revenues
$
32,603

 
$
31,440

 
$
114,052

 
$
96,321

Cost of sales
26,416

 
25,345

 
85,812

 
79,956

Gross profit
6,187

 
6,095

 
28,240


16,365

Earnings of unconsolidated operations
17,438

 
17,141

 
47,851

 
48,119

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
14,341

 
12,032

 
39,782

 
34,522

Amortization of intangible assets
715

 
714

 
2,243

 
2,212

Gain on sale of assets

(94
)
 
(57
)
 
(131
)
 
(320
)
 
14,962

 
12,689

 
41,894

 
36,414

Operating profit
8,663

 
10,547

 
34,197


28,070

Other (income) expense
 
 
 
 
 
 
 
Interest expense
230

 
421

 
683

 
1,636

Interest income
(1,878
)
 
(94
)
 
(3,012
)
 
(326
)
Income from other unconsolidated affiliates
(327
)
 
(321
)
 
(972
)
 
(954
)
Closed mine obligations
383

 
272

 
1,079

 
994

Gain on equity securities
(108
)
 
(397
)
 
(1,067
)
 
(481
)
Other, net
(1,258
)
 
8

 
(1,236
)
 
(18
)
 
(2,958
)
 
(111
)
 
(4,525
)

851

Income before income tax provision
11,621

 
10,658

 
38,722


27,219

Income tax provision
1,357

 
1,458

 
5,465

 
3,450

Net income
$
10,264

 
$
9,200

 
$
33,257


$
23,769

 
 

 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic earnings per share
$
1.47

 
$
1.33

 
$
4.77

 
$
3.43

Diluted earnings per share
$
1.47

 
$
1.33

 
$
4.76

 
$
3.43

 
 

 
 
 
 
 
 
Basic weighted average shares outstanding
6,991

 
6,940

 
6,973

 
6,921

Diluted weighted average shares outstanding
6,991

 
6,940

 
6,992

 
6,939


See notes to Unaudited Condensed Consolidated Financial Statements.

3

NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Net income
$
10,264

 
$
9,200

 
$
33,257

 
$
23,769

Reclassification of pension and postretirement adjustments into earnings, net of $21 and $66 tax benefit in the three and nine months ended September 30, 2019, respectively, net of $25 and $86 tax benefit in the three and nine months ended September 30, 2018, respectively.
70

 
103

 
242

 
348

Total other comprehensive income
70

 
103

 
242

 
348

Comprehensive income
$
10,334

 
$
9,303

 
$
33,499

 
$
24,117


See notes to Unaudited Condensed Consolidated Financial Statements.



4


NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
2019
 
2018
 
(In thousands)
Operating activities
 
 
 
Net cash provided by operating activities
$
47,264

 
$
38,851

 
 
 
 
Investing activities
 
 
 
Expenditures for property, plant and equipment
(13,264
)
 
(14,632
)
Proceeds from the sale of property, plant and equipment
4,475

 
340

Other
(20
)
 
870

Net cash used for investing activities
(8,809
)
 
(13,422
)
 
 
 
 
Financing activities
 
 
 
Additions to long-term debt
1,065

 
759

Reductions of long-term debt
(498
)
 
(40,966
)
Net reductions to revolving credit agreements
(4,000
)
 
—

Cash dividends paid
(3,808
)
 
(3,433
)
Purchase of treasury shares
(1,410
)
 
(339
)
Net cash used for financing activities
(8,651
)
 
(43,979
)
 
 
 
 
Cash and cash equivalents
 
 
 
Total increase (decrease) for the period
29,804

 
(18,550
)
Balance at the beginning of the period
85,257

 
101,600

Balance at the end of the period
$
115,061

 
$
83,050

See notes to Unaudited Condensed Consolidated Financial Statements.

5

NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Class A Common Stock
Class B Common Stock
Capital in Excess of Par Value
Retained Earnings
Deferred Gain (Loss) on Equity Securities
Pension and Postretirement Plan Adjustment
 
Total Stockholders' Equity
 
(In thousands, except per share data)
Balance, January 1, 2018
$
5,282

$
1,570

$
4,447

$
216,490

 
$
2,727

 
$
(11,068
)
 
$
219,448

ASC 606 adoption (See Note 2)
—

—

—

(2,075
)
 
—

 
—

 
(2,075
)
ASU 2016-01 adoption
—

—

—

2,727

 
(2,727
)
 
—

 
—

ASU 2018-02 adoption
—

—

—

2,339

 
—

 
(2,179
)
 
160

Stock-based compensation
87

—

90

—

 
—

 
—

 
177

Net income
—

—

—

8,176

 
—

 
—

 
8,176

Cash dividends on Class A and Class B common stock: $0.1650 per share
—

—

—

(1,144
)
 
—

 
—

 
(1,144
)
Reclassification adjustment to net income, net of tax
—

—

—

—

 
—

 
140

 
140

Balance, March 31, 2018
$
5,369

$
1,570

$
4,537

$
226,513


$
—


$
(13,107
)

$
224,882

Stock-based compensation
7

—

785

—

 
—

 
—

 
792

Purchase of treasury shares
(2
)
—

(53
)
—

 
—

 
—

 
(55
)
Conversion of Class B to Class A shares
1

(1
)
—

—

 
—

 
—

 
—

Net income
—

—

—

6,393

 
—

 
—

 
6,393

Cash dividends on Class A and Class B common stock: $0.1650 per share
—

—

—

(1,145
)
 
—

 
—

 
(1,145
)
Reclassification adjustment to net income, net of tax
—

—

—

—

 
—

 
105

 
105

Balance, June 30, 2018
$
5,375

$
1,569

$
5,269

$
231,761

 
$
—

 
$
(13,002
)
 
$
230,972

Stock-based compensation
6

—

1,348

—

 
—

 
—

 
1,354

Purchase of treasury shares
(8
)
—

(276
)
—

 
—

 
—

 
(284
)
Net income
—

—

—

9,200

 
—

 
—

 
9,200

Cash dividends on Class A and Class B common stock: $0.1650 per share
—

—

—

(1,144
)
 
—

 
—

 
(1,144
)
Reclassification adjustment to net income, net of tax
—

—

—

—

 
—

 
103

 
103

Balance, September 30, 2018
$
5,373

$
1,569

$
6,341

$
239,817

 
$
—

 
$
(12,899
)
 
$
240,201













6

NACCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)

 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Class A Common Stock
Class B Common Stock
Capital in Excess of Par Value
Retained Earnings
Pension and Postretirement Plan Adjustment
 
Total Stockholders' Equity
 
(In thousands, except per share data)
Balance, January 1, 2019
$
5,352

$
1,569

$
7,042

$
250,352

$
(13,611
)
 
$
250,704

Stock-based compensation
102

—

795

—

—

 
897

Purchase of treasury shares
(36
)
—

(1,264
)
—

—

 
(1,300
)
Net income
—

—

—

15,018

—

 
15,018

Cash dividends on Class A and Class B common stock: $0.1650 per share
—

—

—

(1,153
)
—

 
(1,153
)
Reclassification adjustment to net income, net of tax
—

—

—

—

101

 
101

Balance, March 31, 2019
$
5,418

$
1,569

$
6,573

$
264,217

$
(13,510
)
 
$
264,267

Stock-based compensation
5

—

1,244

—

—

 
1,249

Purchase of treasury shares
(2
)
—

(83
)
—

—

 
(85
)
Net income
—

—

—

7,975

—

 
7,975

Cash dividends on Class A and Class B common stock: $0.1900 per share
—

—

—

(1,327
)
—

 
(1,327
)
Reclassification adjustment to net income, net of tax
—

—

—

—

71

 
71

Balance, June 30, 2019
$
5,421

$
1,569

$
7,734

$
270,865

$
(13,439
)
 
$
272,150

Stock-based compensation
5

—

2,119

—

—

 
2,124

Purchase of treasury shares
(1
)
—

(24
)
—

—

 
(25
)
Net income
—

—

—

10,264

—

 
10,264

Cash dividends on Class A and Class B common stock: $0.1900 per share
—

—

—

(1,328
)
—

 
(1,328
)
Reclassification adjustment to net income, net of tax
—

—

—

—

70

 
70

Balance, September 30, 2019
$
5,425

$
1,569

$
9,829

$
279,801

$
(13,369
)
 
$
283,255

See notes to Unaudited Condensed Consolidated Financial Statements.


7

NACCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(In thousands, except as noted and per share amounts)

NOTE 1—Nature of Operations and Basis of Presentation

Nature of Operations: The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of NACCO Industries, Inc.® (the “parent company” or “NACCO”) and its wholly owned subsidiaries (collectively, “NACCO Industries, Inc. and Subsidiaries” or the “Company”). Intercompany accounts and transactions are eliminated in consolidation. NACCO is the public holding company for The North American Coal Corporation® ("NACoal"). In the first quarter of 2019, the Company changed its segment reporting to three operating segments: Coal Mining, North American Mining (“NAMining”) and Minerals Management. The Company also has unallocated items not directly attributable to a reportable segment. Prior to January 1, 2019, NACoal was the Company’s operating segment. NACCO and Other, which included parent company operations and Bellaire Corporation (“Bellaire”), was the Company’s non-operating segment. Historical financial information for 2018 has been recast to conform to the current presentation. See Note 9 to the Unaudited Condensed Consolidated Financial Statements for further discussion of segment reporting.

The Company’s operating segments are further described below:

Coal Mining Segment
The operating coal mines are: Bisti Fuels LLC (“Bisti”), Caddo Creek Resources Company, LLC (“Caddo Creek”), Camino Real Fuels, LLC (“Camino Real”), The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), Demery Resources Company, LLC (“Demery”), The Falkirk Mining Company (“Falkirk”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”). Liberty Fuels Company, LLC (“Liberty”) ceased all mining and delivery of lignite in 2017 and commenced final mine reclamation in 2018. Centennial Natural Resources (“Centennial”), located in Alabama, ceased coal production at the end of 2015.

At all operating coal mines other than MLMC, the Company operates as a contract miner pursuant to a “management fee” contract. Under these long-term contracts, the customer is responsible for funding all mine operating costs and directly or indirectly provides all of the capital required to build and operate the mine. Debt financing provided by or supported by the customers is without recourse to NACCO and NACoal. As a result, these contracts meet the definition of a variable interest entity (“VIE”). NACCO is not the primary beneficiary of the VIE as it does not exercise financial control; therefore, NACCO does not consolidate the results of these operations within its financial statements. Instead, these contracts are accounted for as equity method investments. The income before income taxes is reported as Earnings of unconsolidated operations on the Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in Unconsolidated Subsidiaries in the Consolidated Balance Sheets. The mines that meet the definition of a VIE are referred to collectively as the “Unconsolidated Subsidiaries.” For tax purposes, the Unconsolidated Subsidiaries are included within the NACCO consolidated U.S. tax return; therefore, the income tax expense line on the statements of operations includes taxes related to these entities. All of the Unconsolidated Subsidiaries are accounted for under the equity method. See Note 7 for further discussion. MLMC and Centennial are consolidated operations.

The coal reserves at Coteau, Falkirk, Coyote, MLMC and Centennial are owned or controlled by the Company. The coal reserves at all other mines are owned or controlled by the respective mine’s customer. The Unconsolidated Subsidiaries are paid a management fee per ton of coal or heating unit (MMBtu) delivered. Each contract specifies the indices and mechanics by which fees change over time, generally in line with broad measures of U.S. inflation. This contract structure eliminates exposure to spot coal market price fluctuations.

NAMining Segment
NAMining operates primarily at limestone quarries in Florida, but is focused on expanding outside of Florida and into mining materials other than limestone. NAMining operates under both management fee contracts and contracts that provide for a fixed price per ton. Income before income taxes for NAMining locations are consolidated within NACCO’s consolidated financial statements or are unconsolidated and included on the line Earnings of unconsolidated operations, depending on how each contract is structured. All of the Unconsolidated Subsidiaries are accounted for under the equity method. See Note 7 for further discussion.

During the third quarter of 2019, the Company entered into a mining agreement, through a newly-created, wholly owned subsidiary, Sawtooth Mining, LLC, (“Sawtooth”), to serve as exclusive contract miner for the Thacker Pass lithium project in

8

northern Nevada. Thacker Pass is believed to be the largest known lithium deposit in the United States and is 100% owned by Lithium Nevada Corp., a wholly owned subsidiary of Lithium Americas Corp. 
Sawtooth, which will be reported within the NAMining segment, will design, construct, operate, and maintain the Thacker Pass surface mine, which will supply Lithium Nevada's lithium-bearing claystone ore requirements. The mining agreement provides that Lithium Nevada will reimburse Sawtooth for its operating and mine reclamation costs, and pay Sawtooth a management fee per metric ton of lithium delivered during the 20-year contract term.  During the development of the project, Sawtooth will provide Lithium Nevada $3.5 million in cash to assist in project development and provide certain engineering services related primarily to mine design and permitting.  As of September 30, 2019, the Company has provided $1.0 million to Lithium Nevada. The $1.0 million is included in the Unaudited Condensed Consolidated Balance Sheet on the line Other non-current assets. Under the terms of the mining agreement, Lithium Nevada will pay Sawtooth a success fee upon achievement of certain engineering, construction and production milestones.  After Lithium Nevada secures required permits and financing for the project, Sawtooth intends to acquire up to $50.0 million of mining equipment.  The cost of this mining equipment will be reimbursed over a seven-year period from the equipment acquisition date. Lithium Nevada estimates that it will secure all major permits by the end of 2020, commence plant construction in 2021 and commence production of lithium products in 2023. 
Minerals Management Segment
The Minerals Management segment promotes the development of the Company’s oil, gas and coal reserves, generating income primarily from royalty-based lease payments from third parties. The majority of the Company’s existing reserves were acquired as part of its historical coal mining operations. The Minerals Management segment derives income primarily by entering into contracts with third-party operators, granting them the rights to explore, produce and sell natural resources in exchange for royalty payments based on the lessees' sales of natural gas and, to a lesser extent, oil and coal. Specialized employees in the Minerals Management segment also provide surface and mineral acquisition and lease maintenance services related to Company operations.

Basis of Presentation: These financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position of the Company at September 30, 2019, the results of its operations, comprehensive income, cash flows and changes in equity for the nine months ended September 30, 2019 and 2018 have been included. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date but does not include all of the information or notes required by U.S. GAAP for complete financial statements.

Certain amounts in prior period Unaudited Condensed Consolidated Financial Statements have been reclassified to conform to the current period's presentation.

NOTE 2—Recently Issued Accounting Standards

Accounting Standards Adopted in 2019: NACCO adopted Accounting Standard Update ("ASU") 2016-02, Leases (Topic 842), which is codified in Accounting Standards Codification 842, Leases (“ASC 842”), on January 1, 2019, using the modified retrospective transition method (the "guidance").

The most significant effect to the Unaudited Condensed Consolidated Balance Sheet relates to the recognition of new right-of-use assets (“ROU assets”) and lease liabilities for operating leases of real estate, mining and other equipment that expire at various dates through 2031. The majority of the Company's leases are operating leases. See the table below for further information on the Unaudited Condensed Consolidated Balance Sheet. Many leases include renewal and/or fair value or bargain purchase options, which are not recognized on the Unaudited Condensed Consolidated Balance Sheet. The Company's lease agreements do not contain lease payments that depend on an index or a rate, as such, minimum lease payments do not include variable lease payments. There was no cumulative effect adjustment to the opening balance of retained earnings. The adoption of this guidance did not have a material effect on the Company’s results of operations, cash flows, liquidity or debt-covenant compliance. NACCO did not apply the standard to the comparative periods presented in the year of adoption.

The Company elected many of the available practical expedients permitted under the guidance, which among other items, allow the Company to carry forward its historical lease classification, not reassess leases for the definition of a lease under the new standard and not separate lease components from nonlease components for all classes of underlying assets. The Company also

9

elected the practical expedient to carry forward the historical accounting treatment for existing land easement agreements. Upon the adoption of ASC 842, NACCO did not record a ROU asset and related lease liability for leases with an initial term of 12 months or less.

Leased assets and liabilities include the following:
Description
Location
SEPTEMBER 30
2019
Assets
 
 
   Operating
Operating lease right-of-use assets
$
11,721

   Finance
Property, plant and equipment, net (a)

238

 
 
 
Liabilities
 
 
Current
 
 
   Operating
Other current liabilities
$
1,413

   Finance
Current maturities of long-term debt
161

Noncurrent
 
 
   Operating
Operating lease liabilities
12,669

   Finance
Long-term debt
93

(a) Finance leased assets are recorded net of accumulated amortization of $3.0 million as of September 30, 2019.
The components of lease expense were as follows:
 
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
 
SEPTEMBER 30
 
SEPTEMBER 30
Description
Location
2019
 
2019
Lease expense
 
 
 
 
Operating lease cost
Selling, general and administrative expenses
$
569

 
$
1,783

Finance lease cost:
 
 
 
 
Amortization of leased assets
Cost of sales
104

 
300

Interest on lease liabilities
Interest expense

4

 
10

Variable lease expense
Selling, general and administrative expenses
141

 
416

Short-term lease expense
Selling, general and administrative expenses
79

 
242

Net lease expense
 
$
897

 
$
2,751


Future minimum finance and operating lease payments were as follows at September 30, 2019:
 
Finance
Leases
 
Operating
Leases
 
Total
Remainder of 2019
$
119

 
$
612

 
$
731

2020
58

 
2,229

 
2,287

2021
37

 
2,125

 
2,162

2022
37

 
2,150

 
2,187

2023
16

 
1,659

 
1,675

Subsequent to 2023
—

 
10,951

 
10,951

Total minimum lease payments
267

 
19,726

 
$
19,993

Amounts representing interest
13

 
5,644

 
 
Present value of net minimum lease payments
$
254

 
$
14,082

 
 

10


As most of the Company's leases do not provide an implicit rate, the Company determines the incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The Company considers its credit rating and the current economic environment in determining this collateralized rate. The assumptions used in accounting for ASC 842 were as follows for the three and nine months ended September 30, 2019:
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
September 30
 
September 30
 
2019
 
2019
Weighted average remaining lease term (years)
 
 
 
   Operating
9.76

 
9.76

   Finance
1.95

 
1.95

 
 
 
 
Weighted average discount rate
 
 
 
   Operating
6.99
%
 
6.99
%
   Finance
5.36
%
 
5.36
%

The following table details cash paid for amounts included in the measurement of lease liabilities for the three and nine months ended September 30:
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
September 30
 
September 30
 
2019
 
2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
Operating cash flows from operating leases
$
608

 
$
1,768

Operating cash flows from finance leases
4

 
10

Financing cash flows from finance leases
115

 
347


NOTE 3—Revenue Recognition

Nature of Performance Obligations
At contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each promised good or service that is distinct. To identify the performance obligations, the Company considers all of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.
Each mine or mine area has a contract with its respective customer that represents a contract under ASC 606. For its consolidated entities, the Company’s performance obligations vary by contract and consist of the following:
At MLMC, each MMBtu delivered during the production period is considered a separate performance obligation. Revenue is recognized at the point in time that control of each MMBtu of lignite transfers to the customer. Fluctuations in revenue from period to period generally result from changes in customer demand.
At NAMining entities, the management service to oversee the operation of the equipment and delivery of limestone is the performance obligation accounted for as a series. Performance momentarily creates an asset that the customer simultaneously receives and consumes; therefore, control is transferred to the customer over time. Consistent with the conclusion that the customer simultaneously receives and consumes the benefits provided, an input-based measure of progress is appropriate. As each month of service is completed, revenue is recognized for the amount of actual costs incurred, plus the management fee and the general and administrative fee (as applicable). Fluctuations in revenue from period to period result from changes in customer demand and variances in reimbursable costs primarily due to increases and decreases in activity levels on individual contracts.
The Company enters into royalty contracts which grant the right to explore, develop, produce and sell minerals controlled by the Company. These arrangements result in the transfer of mineral rights for a period of time; however, no rights to the actual land are granted other than access for purposes of exploration, development, production and sales. The mineral rights revert back to the Company at the expiration of the contract.

11

Under these royalty contracts, granting exclusive right, title, and interest in and to minerals, if any, is the performance obligation. The performance obligation under these contracts represents a series of distinct goods or services whereby each day of access that is provided is distinct. The transaction price consists of a variable sales-based royalty and, in certain arrangements, a fixed component in the form of an up-front lease bonus payment. As the amount of consideration the Company will ultimately be entitled to is entirely susceptible to factors outside its control, the entire amount of variable consideration is constrained at contract inception. The fixed portion of the transaction price will be recognized over the primary term of the contract, which is generally five years.
Significant Judgments
The Company’s contracts with its customers contain different types of variable consideration including, but not limited to, management fees that adjust based on coal volumes or MMBtu delivered or limestone yards, however, the terms of these variable payments relate specifically to our efforts to satisfy one or more, but not all of, the performance obligations (or to a specific outcome from satisfying the performance obligations), in the contract. Therefore, the Company allocates each variable payment (and subsequent changes to that payment) entirely to the specific performance obligation to which it relates. Management fees, as well as general and administrative fees, are also adjusted based on changes in specified indices (e.g., CPI) to compensate for general inflation changes. Index adjustments, if applicable, are effective prospectively. Certain contracts include reimbursement of actual costs incurred.

Disaggregation of Revenue
In accordance with ASC 606-10-50, the Company disaggregates revenue from contracts with customers into major goods and service lines and timing of transfer of goods and services. The Company determined that disaggregating revenue into these categories achieves the disclosure objective of depicting how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The Company’s business consists of the Coal Mining, NAMining and Minerals Management segments as well as Unallocated Items. See Note 9 to the Unaudited Condensed Consolidated Financial Statements for further discussion of segment reporting.

The following table disaggregates revenue by major sources:
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
Major Goods/Service Lines
2019
 
2018
 
2019
 
2018
Coal Mining
$
18,799

 
$
18,583

 
$
58,119

 
$
57,040

NAMining
8,993

 
9,092

 
30,496

 
28,372

Minerals Management
5,022

 
3,902

 
25,950

 
11,244

Unallocated Items
52

 
—

 
726

 
—

Eliminations
(263
)
 
(137
)
 
(1,239
)
 
(335
)
Total revenues
$
32,603

 
$
31,440

 
$
114,052

 
$
96,321

 
 
 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
 
 
Goods transferred at a point in time
$
18,049

 
$
17,975

 
$
56,012

 
$
55,170

Services transferred over time
14,554

 
13,465

 
58,040

 
41,151

Total revenues
$
32,603

 
$
31,440

 
$
114,052

 
$
96,321


Contract Balances
The opening and closing balances of the Company’s current and long-term contract liabilities and receivables are as follows:
 
Contract balances
 
Trade accounts receivable, net
 
Contract liability (current)
 
Contract liability (long-term)
Balance, January 1, 2019
$
20,817

 
$
754

 
$
2,008

Balance, September 30, 2019
13,540

 
726

 
1,543

Increase (decrease)
$
(7,277
)
 
$
(28
)
 
$
(465
)


12

As described above, the Company enters into royalty contracts that grant exclusive right, title, and interest in and to minerals. The transaction price consists of a variable sales-based royalty and, in certain arrangements, a fixed component in the form of an up-front lease bonus payment. The timing of the payment of the fixed portion of the transaction price is upfront, however, the performance obligation is satisfied over the primary term of the contract, which is generally five years. Therefore, at the time any such up-front payment is received, a contract liability is recorded which represents deferred revenue. The difference between the opening and closing balance of this contract liability, which is shown above, primarily results from the difference between new lease bonus payments received and amortization of up-front lease bonus payments received in previous periods.

The amount of revenue recognized in the three months ended September 30, 2019 and September 30, 2018 that was included in the opening contract liability was $0.1 million and $0.4 million, respectively. The amount of revenue recognized in the nine months ended September 30, 2019 and September 30, 2018 was $0.5 million and $1.0 million, respectively. This revenue consists of up-front lease bonus payments received under royalty contracts that are recognized over the primary term of the royalty contracts, which are generally five years. The Company expects to recognize an additional $0.2 million in the remainder of 2019, $0.7 million in both 2020 and 2021, $0.5 million in 2022, and $0.1 million in 2023 related to the contract liability remaining at September 30, 2019. The difference between the opening and closing balances of the Company’s accounts receivable and contract liabilities results from the timing difference between the Company’s performance and the customer’s payment. Contracts with payments in arrears are recognized as receivables.

The Company has no contract assets recognized from the costs to obtain or fulfill a contract with a customer.

NOTE 4—Inventories

Inventories are summarized as follows:
 
SEPTEMBER 30
2019
 
DECEMBER 31
2018
Coal
$
8,416

 
$
11,030

Mining supplies
24,671

 
20,179

 Total inventories
$
33,087

 
$
31,209


NOTE 5—Stockholders' Equity

Stock Repurchase Program: On February 14, 2018, the Company's Board of Directors approved a stock repurchase program ("2018 Stock Repurchase Program") providing for the repurchase of up to $25 million of the Company's outstanding Class A Common Stock through December 31, 2019. During the three and nine months ended September 30, 2019, the Company repurchased 525 and 39,049 shares, respectively, of Class A Common Stock under the 2018 Stock Repurchase Program for an aggregate purchase price of less than $0.1 million and $1.4 million, respectively. During the three and nine months ended September 30, 2018, the Company repurchased 8,699 and 10,367 shares, respectively, of Class A Common Stock under the 2018 Stock Repurchase Program for an aggregate purchase price of $0.2 million and $0.3 million, respectively. The timing and amount of any repurchases under the 2018 Stock Repurchase Program are determined at the discretion of the Company's management based on a number of factors, including the availability of capital, other capital allocation alternatives, market conditions for the Company's Class A Common Stock and other legal and contractual restrictions. The 2018 Stock Repurchase Program does not require the Company to acquire any specific number of shares and may be modified, suspended, extended or terminated by the Company without prior notice and may be executed through open market purchases, privately negotiated transactions or otherwise. All or part of the repurchases under the 2018 Stock Repurchase Program may be implemented under a Rule 10b5-1 trading plan, which would allow repurchases under pre-set terms at times when the Company might otherwise be restricted from doing so under applicable securities laws.


13

NOTE 6—Fair Value Disclosure

Recurring Fair Value Measurements: The following table presents the Company's assets and liabilities accounted for at fair value on a recurring basis:
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in
 
 
 
Significant
 
 
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
 
Identical Assets
 
Observable Inputs
 
Inputs
Description
 
Date
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
September 30, 2019
 
 
 
 
 
 
Assets:
 

 
 
 
 
 
 
Equity securities
 
$
9,588

 
$
9,588

 
$
—

 
$
—

 
 
$
9,588

 
$
9,588

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Equity securities
 
$
8,716

 
$
8,716

 
$
—

 
$
—

 
 
$
8,716

 
$
8,716

 
$
—

 
$
—


Bellaire Corporation (“Bellaire”) is a non-operating subsidiary of the Company with legacy liabilities relating to closed mining operations, primarily former Eastern U.S. underground coal mining operations. Prior to 2018, Bellaire established a $5.0 million mine water treatment trust (the "Mine Water Treatment Trust") to provide a financial assurance mechanism to assure the long-term treatment of post-mining discharges. Bellaire's Mine Water Treatment Trust invests in equity securities that are reported at fair value based upon quoted market prices in active markets for identical assets; therefore, they are classified as Level 1 within the fair value hierarchy. The Mine Water Treatment Trust realized a gain of $0.1 million and $1.1 million in the three and nine months ended September 30, 2019, respectively, and a gain of $0.4 million and $0.5 million in the three and nine months ended September 30, 2018, respectively. These gains are reported on the line Gain on equity securities in the Other (income) expense section of the Unaudited Condensed Consolidated Statements of Operations.

There were no transfers into or out of Levels 1, 2 or 3 during the nine months ended September 30, 2019 and 2018.

NOTE 7—Unconsolidated Subsidiaries

Each of NACoal's wholly owned Unconsolidated Subsidiaries meet the definition of a VIE. The Unconsolidated Subsidiaries are capitalized primarily with debt financing provided by or supported by their respective customers, and without recourse to NACCO and NACoal. Although NACoal owns 100% of the equity and manages the daily operations of the Unconsolidated Subsidiaries, the Company has determined that the equity capital provided by NACoal is not sufficient to adequately finance the ongoing activities or absorb any expected losses without additional support from the customers. The customers have a controlling financial interest and have the power to direct the activities that most significantly affect the economic performance of the entities. As a result, NACoal is not the primary beneficiary and therefore does not consolidate these entities' financial positions or results of operations. See Note 1 for a discussion of these entities.

The investment in the unconsolidated subsidiaries and related tax positions totaled $23.1 million and $20.1 million at September 30, 2019 and December 31, 2018, respectively. The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $6.0 million and $4.4 million at September 30, 2019 and December 31, 2018, respectively.

NACoal is a party to certain guarantees related to Coyote Creek. Under certain circumstances of default or termination of Coyote Creek’s Lignite Sales Agreement (“LSA”), NACoal would be obligated for payment of a "make-whole" amount to Coyote Creek’s third-party lenders. The “make-whole” amount is based on the excess, if any, of the discounted value of the remaining scheduled debt payments over the principal amount. In addition, in the event Coyote Creek’s LSA is terminated on or after January 1, 2024 by Coyote Creek’s customers, NACoal is obligated to purchase Coyote Creek’s dragline and rolling stock for the then net book value of those assets. To date, no payments have been required from NACoal since the inception of these guarantees. The Company believes that the likelihood NACoal would be required to perform under the guarantees is remote, and no amounts related to these guarantees have been recorded.


14

Summarized financial information for the Unconsolidated Subsidiaries is as follows:
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2019
 
2018
 
2019
 
2018
Revenues
$
187,488

 
$
205,838

 
$
552,610

 
$
570,902

Gross profit
$
20,059

 
$
22,359

 
$
53,826

 
$
63,827

Income before income taxes
$
17,827

 
$
17,408

 
$
49,080

 
$
48,986


NOTE 8—Contingencies

Various legal and regulatory proceedings and claims have been or may be asserted against NACCO and certain subsidiaries relating to the conduct of their businesses. These proceedings and claims are incidental to the ordinary course of business of the Company. Management believes that it has meritorious defenses and will vigorously defend the Company in these actions. Any costs that management estimates will be paid as a result of these claims are accrued when the liability is considered probable and the amount can be reasonably estimated.  If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss. 

These matters are subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of an adverse impact on the Company’s financial position, results of operations and cash flows of the period in which the ruling occurs, or in future periods.

NOTE 9—Business Segments

In the first quarter of 2019, the Company changed its reportable segments to reflect changes in the business, including growth at NAMining and Minerals Management. The Company modified its internal reporting structure to reflect a change in how its Chief Operating Decision Maker (“CODM”) assesses Company performance and makes decisions about resource allocations. As of January 1, 2019, the Company’s operating segments are: (i) Coal Mining, (ii) NAMining and (iii) Minerals Management. While the Company continues to pursue opportunities to add new coal mining operations to the Coal Mining segment, the NAMining segment will serve as a platform for pursuing non-coal mining projects and the Minerals Management segment will work to capitalize on the Company’s oil, gas and coal reserves. In response to these changes, the Company determined the historical structure of reporting one operating segment was no longer representative of the way the business is managed. As a result, the Company effected a change in the reporting of its segment information.

The Company determines its reportable segments by first identifying its operating segments, and then by assessing whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. The Company’s CODM utilizes operating profit to evaluate segment performance and allocate resources. Operating profit for each segment includes an allocation of shared costs based on a reasonable measure of utilization.
The Company also has unallocated items not directly attributable to a reportable segment which are not included as part of the measurement of segment operating profit, primarily administrative costs related to public company reporting requirements, the financial results of the Company’s mitigation banking business, Mitigation Resources of North America® (“MRNA”), and Bellaire. MRNA generates and sells stream and wetland mitigation credits (known as mitigation banking) and provides services to those engaged in permittee-responsible stream and wetland mitigation. Bellaire manages the Company’s long-term liabilities related to former Eastern U.S. underground mining activities. Transactions between segments are accounted for as third-party arrangements for purposes of presenting segment results of operations and are eliminated in consolidation.
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-Q on a consolidated basis. Included within other income on the line Income from other unconsolidated affiliates within the Unaudited Condensed Consolidated Statements of Operations is the financial results of NoDak Energy Services, LLC ("NoDak"). NoDak operates and maintains a coal drying system at a customer’s power plant. The NoDak contract expires in the first quarter of 2020.

15

See Note 1 for additional discussion of the Company's reportable segments. The following tables present revenue, operating profit, depreciation expense and capital expenditures:
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
Coal Mining
$
18,799

 
$
18,583

 
$
58,119

 
$
57,040

NAMining
8,993

 
9,092

 
30,496

 
28,372

Minerals Management
5,022

 
3,902

 
25,950

 
11,244

Unallocated Items
52

 
—

 
726

 
—

Eliminations
(263
)
 
(137
)
 
(1,239
)
 
(335
)
Total
$
32,603

 
$
31,440

 
$
114,052

 
$
96,321

 
 
 
 
 
 
 
 
Operating profit (loss)
 

 
 

 
 
 
 
Coal Mining
$
7,341

 
$
9,814

 
$
19,639

 
$
26,409

NAMining
(391
)
 
281

 
(842
)
 
1,072

Minerals Management
3,900

 
2,770

 
22,358

 
8,926

Unallocated Items
(2,286
)
 
(2,318
)
 
(7,115
)
 
(8,337
)
Eliminations
99

 
—

 
157

 
—

Total
$
8,663

 
$
10,547

 
$
34,197

 
$
28,070

Expenditures for property, plant and equipment
 
 
 
 
 
 
 
Coal Mining
$
2,291

 
$
2,162

 
$
6,542

 
$
6,588

NAMining
4,971

 
3,122

 
6,213

 
6,353

Minerals Management
—

 
—

 
291

 
1,182

Unallocated Items
35

 
166

 
218

 
509

Total
$
7,297

 
$
5,450

 
$
13,264

 
$
14,632

 
 
 
 
 
 
 
 
Depreciation, depletion and amortization
 
 
 
 
 
 
 
Coal Mining
$
3,102

 
$
3,097

 
$
9,252

 
$
9,030

NAMining
588

 
441

 
1,699

 
1,263

Minerals Management
324

 
250

 
1,057

 
562

Unallocated Items
30

 
27

 
87

 
80

Total
$
4,044

 
$
3,815

 
$
12,095

 
$
10,935



NOTE 10—Asset Retirement Obligations

The Company's asset retirement obligations are principally for costs to close its surface mines and reclaim the land it has disturbed as a result of its normal mining activities as well as for costs to dismantle certain mining equipment at the end of the life of the mine. A reconciliation of the Company's beginning and ending aggregate carrying amount of the asset retirement obligations are as follows:
 
 
Asset Retirement Obligations
Balance at December 31, 2018
 
$
37,703

Liabilities settled during the period
 
(4,559
)
Accretion expense
 
1,888

Revision of estimated cash flows
 
159

Balance at September 30, 2019
 
$
35,191



16

During the second quarter of 2019, the Company transferred the mine permits for certain Centennial mines to an unrelated third party.  As a result of these transfers, the Company was relieved of the associated mine reclamation obligations and recorded a $5.4 million reduction to Centennial's asset retirement obligation, $2.4 million of which is reflected as "Liabilities settled during the current period" and $3.0 million of which is reflected as "Revisions in estimated cash flows" in the table above.  As part of these transactions, the Company transferred a $3.4 million escrow account and paid $2.4 million of cash, resulting in a net loss on the transactions of $0.4 million recognized within cost of sales in the Unaudited Condensed Consolidated Statement of Operations. The reduction to the asset retirement obligation related to the Centennial transfers was offset by a $3.1 million increase to the asset retirement obligation related to MLMC due to updated cost estimates and changes in timing. This increase is reflected as "Revisions in estimated cash flows" in the table above.

NOTE 11— Other Events and Transactions

North American Coal Corporation India Private Limited ("NACC India") was formed to provide technical business advisory services to the third-party owner of a coal mine in India. During 2014, NACC India's customer defaulted on its contractual payment obligations and as a result of this default, NACC India terminated its contract with the customer and began pursuing contractual remedies. During the third quarter of 2019, the Company received payment of $2.7 million from NACC India's customer, of which $1.4 million related to past invoices and has been reported on the line Other, net, and $1.3 million represented interest income and has been reported on the line Interest income. Both of these lines are in the Other (income) expense section of the Unaudited Condensed Consolidated Statements of Operations.

17

Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except as noted and per share data)

Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in these forward-looking statements are set forth below under the heading “Forward-Looking Statements."
Management's Discussion and Analysis of Financial Condition and Results of Operations includes NACCO Industries, Inc.® (“NACCO”) and its wholly owned subsidiaries (collectively, the “Company”). NACCO is the public holding company for The North American Coal Corporation® ("NACoal").  The Company has three operating segments: (i) Coal Mining, (ii) North American Mining ("NAMining") and (iii) Minerals Management. The Company also has unallocated items not directly attributable to a reportable segment which are not included as part of the measurement of segment operating profit, primarily administrative costs related to public company reporting requirements, the financial results of the Company’s mitigation banking business, Mitigation Resources of North America® (“MRNA”), and Bellaire Corporation (“Bellaire”). MRNA generates and sells stream and wetland mitigation credits (known as mitigation banking) and provides services to those engaged in permittee-responsible stream and wetland mitigation. Bellaire manages the Company’s long-term liabilities related to former Eastern U.S. underground mining activities.

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-Q on a consolidated basis. Included within other income on the line Income from other unconsolidated affiliates is the financial results of NoDak Energy Services, LLC ("NoDak"). NoDak operates and maintains a coal drying system at a customer’s power plant. The NoDak contract expires in the first quarter of 2020.

The Company’s operating segments are further described below:

Coal Mining Segment
The Coal Mining segment operates surface coal mines pursuant to a service-based business model under long-term contracts with power generation companies and activated carbon producers. Coal is surface-mined in North Dakota, Texas, Mississippi, Louisiana and on the Navajo Nation in New Mexico. Each mine is fully integrated with its customer operations.

The operating coal mines are: Bisti Fuels LLC (“Bisti”), Caddo Creek Resources Company, LLC (“Caddo Creek”), Camino Real Fuels, LLC (“Camino Real”), The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), Demery Resources Company, LLC (“Demery”), The Falkirk Mining Company (“Falkirk”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”). Liberty Fuels Company, LLC (“Liberty”) ceased all mining and delivery of lignite in 2017 and commenced final mine reclamation in 2018.

Centennial Natural Resources (“Centennial”), located in Alabama, ceased coal production at the end of 2015. Since 2015, the Company has sold or transferred certain Centennial equipment and mineral reserves. The Company continues to evaluate strategies for the remaining mineral reserves and a dragline, although the book value of the remaining mineral reserves and the dragline was reduced to zero in years prior to 2018. Cash expenditures related to mine reclamation at Centennial will continue until mine reclamation is complete, or ownership of, or responsibility for, the remaining mines is transferred.

Coteau, Coyote, Falkirk, MLMC and Sabine supply lignite coal for power generation. Bisti and Camino Real supply sub-bituminous and bituminous coal, respectively, for power generation. Caddo Creek and Demery supply lignite coal for the production of activated carbon. Each of these mines deliver their coal production to adjacent or nearby power plants, synfuels plants or activated carbon processing facilities under long-term supply contracts. With the exception of Camino Real, each mine is the exclusive supplier of coal to its customers' facilities. Camino’s customer takes all coal produced by the mine but also purchases additional coal from other suppliers.

This segment has a strong history of customer retention due to the long-term nature of its contracts and the proximity of the Company’s mines to its customers’ facilities. With the exception of Camino Real, whose contract expires in 2021 but has renewal provisions, other contract expiration dates range from 2022 through 2045. The contract that expires in 2022 may be extended for three additional periods of five years each, or until 2037, at NACoal’s option.

At all operating coal mines other than MLMC, the Company operates as a contract miner pursuant to a management fee contract. Under these long-term contracts, the customer is responsible for funding all mine operating costs and directly or

18

indirectly provides all of the capital required to build and operate the mine. Debt financing provided by or supported by the customers is without recourse to NACCO and NACoal. As a result, these contracts meet the definition of a variable interest entity (“VIE”). NACCO is not the primary beneficiary of the VIE as it does not exercise financial control; therefore, NACCO does not consolidate the results of these operations within its financial statements. Instead, these contracts are accounted for as equity method investments. The income before income taxes is reported as Earnings of unconsolidated operations on the Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in Unconsolidated Subsidiaries in the Consolidated Balance Sheets. The mines that meet the definition of a VIE are referred to collectively as the “Unconsolidated Subsidiaries.” For tax purposes, the Unconsolidated Subsidiaries are included within the NACCO consolidated U.S. tax return; therefore, the income tax expense line on the statements of operations includes taxes related to these entities. All of the Unconsolidated Subsidiaries are accounted for under the equity method. MLMC and Centennial are consolidated operations.

The coal reserves at Coteau, Falkirk, Coyote, MLMC and Centennial are owned or controlled by the Company. The coal reserves at all other mines are owned or controlled by the respective mine’s customer. The Unconsolidated Subsidiaries are paid a management fee per ton of coal or heating unit (MMBtu) delivered. Each contract specifies the indices and mechanics by which fees change over time, generally in line with broad measures of U.S. inflation. This contract structure eliminates exposure to spot coal market price fluctuations.

The Company performs contemporaneous reclamation activities at each mine in the normal course of operations. Under all of the Unconsolidated Subsidiaries’ contracts, the customer has the obligation to fund final mine reclamation activities. Under certain contracts, the Unconsolidated Subsidiary holds the mine permit and is therefore responsible for final mine reclamation activities. To the extent the Unconsolidated Subsidiary performs such final reclamation, it is compensated for providing those services in addition to receiving reimbursement for costs incurred.

The MLMC contract is the only operating coal contract in which NACoal is responsible for all operating costs, capital requirements and final mine reclamation; therefore, MLMC is consolidated within NACCO’s financial statements. MLMC sells coal to its customer at a contractually agreed-upon price which adjusts monthly, primarily based on changes in the level of established indices which reflect general U.S. inflation rates. Profitability at MLMC is affected by customer demand for coal, changes in the indices that determine sales price and actual costs incurred. As diesel fuel is heavily weighted among the indices used to determine the coal sales price, the persistence of low diesel fuel prices can negatively affect earnings at MLMC.

Centennial is also a consolidated entity within the Coal Mining segment as NACoal is responsible for carrying costs and final mine reclamation.

North American Mining Segment
The NAMining segment provides value-added contract mining and other services for producers of aggregates, lithium and other minerals. The segment is a primary platform for the Company’s growth and diversification outside of the coal industry.

NAMining provides contract mining services for independently owned quarries, creating value for its customers by performing the mining aspects of its customers’ quarry operations. This allows customers to focus on their areas of expertise: materials handling and processing, product sales and distribution.

NAMining operates primarily at limestone quarries in Florida, but is focused on expanding outside of Florida and into mining materials other than limestone. NAMining operates under both management fee contracts and contracts that provide for a fixed price per ton. Income before income taxes for NAMining locations are consolidated within NACCO’s consolidated financial statements or are unconsolidated and included on the line Earnings of unconsolidated operations, depending on how each contract is structured.

During the third quarter of 2019, the Company entered into a mining agreement, through a newly-created, wholly owned subsidiary, Sawtooth Mining, LLC, (“Sawtooth”), to serve as exclusive contract miner for the Thacker Pass lithium project in northern Nevada. Thacker Pass is believed to be the largest known lithium deposit in the United States and is 100% owned by Lithium Nevada Corp., a wholly owned subsidiary of Lithium Americas Corp. 
Sawtooth, which will be reported within the NAMining segment, will design, construct, operate, and maintain the Thacker Pass surface mine, which will supply Lithium Nevada's lithium-bearing claystone ore requirements. The mining agreement provides that Lithium Nevada will reimburse Sawtooth for its operating and mine reclamation costs, and pay Sawtooth a management fee per metric ton of lithium delivered during the 20-year contract term.  During the development of the project, Sawtooth will provide Lithium Nevada $3.5 million in cash to assist in project development and provide certain engineering services related primarily to mine design and permitting.  As of September 30, 2019, the Company has provided $1.0 million to Lithium

19

Nevada which is included in the Unaudited Condensed Consolidated Balance Sheet on the line Other non-current assets. Under the terms of the mining agreement, Lithium Nevada will pay Sawtooth a success fee upon achievement of certain engineering, construction and production milestones.  After Lithium Nevada secures required permits and financing for the project, Sawtooth intends to acquire up to $50.0 million of mining equipment.  The cost of this mining equipment will be reimbursed over a seven-year period from the equipment acquisition date. Lithium Nevada estimates that it will secure all major permits by the end of 2020, commence plant construction in 2021 and commence production of lithium products in 2023. 
Minerals Management Segment
The Minerals Management segment promotes the development of the Company’s oil, gas and coal reserves, generating income primarily from royalty-based lease payments from third parties. The Company’s gas, oil and coal reserves are located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Mississippi, Pennsylvania, Alabama and North Dakota (coal). The majority of the Company’s existing reserves were acquired as part of its historical coal mining operations. The Minerals Management segment derives income primarily by entering into contracts with third-party operators, granting them the rights to explore, produce and sell natural resources in exchange for royalty payments based on the lessees' sales of natural gas and, to a lesser extent, oil and coal. Specialized employees in the Minerals Management segment also provide surface and mineral acquisition and lease maintenance services related to Company operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

As of January 1, 2019, the Company has updated its lease accounting policy in connection with the adoption of ASC 842 as further described in Note 2 to the accompanying Unaudited Condensed Consolidated Financial Statements.  Please also refer to the discussion of the Company's Critical Accounting Policies and Estimates as disclosed on pages 26 through 28 in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. The Company's remaining Critical Accounting Policies and Estimates have not materially changed since December 31, 2018.

























20

CONSOLIDATED FINANCIAL SUMMARY
The results of operations for NACCO were as follows for the three and nine months ended September 30:
 
THREE MONTHS
 
 NINE MONTHS
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
   Coal Mining
$
18,799

 
$
18,583

 
$
58,119

 
$
57,040

   NAMining
8,993

 
9,092

 
30,496

 
28,372

   Minerals Management
5,022

 
3,902

 
25,950

 
11,244

   Unallocated Items
52

 
—

 
726

 
—

   Eliminations
(263
)
 
(137
)
 
(1,239
)
 
(335
)
Total revenue
$
32,603

 
$
31,440

 
$
114,052

 
$
96,321

Operating profit (loss):
 
 
 
 
 
 
 
   Coal Mining
$
7,341

 
$
9,814

 
$
19,639

 
$
26,409

   NAMining
(391
)
 
281

 
(842
)
 
1,072

   Minerals Management
3,900

 
2,770

 
22,358

 
8,926

   Unallocated Items
(2,286
)
 
(2,318
)
 
(7,115
)
 
(8,337
)
   Eliminations
99

 
—

 
157

 
—

Total operating profit
$
8,663

 
$
10,547

 
$
34,197

 
$
28,070

   Interest expense
230

 
421

 
683

 
1,636

   Interest income
(1,878
)
 
(94
)
 
(3,012
)
 
(326
)
   Income from other unconsolidated affiliates
(327
)
 
(321
)
 
(972
)
 
(954
)
   Closed mine obligations
383

 
272

 
1,079

 
994

   Gain on equity securities
(108
)
 
(397
)
 
(1,067
)
 
(481
)
   Other, net
(1,258
)
 
8

 
(1,236
)
 
(18
)
Other (income) expense, net
(2,958
)
 
(111
)
 
(4,525
)
 
851

Income before income tax provision
11,621

 
10,658

 
38,722

 
27,219

Income tax provision
1,357

 
1,458

 
5,465

 
3,450

Net income
$
10,264

 
$
9,200

 
$
33,257

 
$
23,769

 
 
 
 
 
 
 
 
Effective income tax rate
11.7
%
 
13.7
%
 
14.1
%
 
12.7
%

The components of the change in revenues and operating profit are discussed below in "Segment Results."

Third Quarter of 2019 Compared with Third Quarter of 2018 and First Nine Months of 2019 Compared with First Nine Months of 2018

Other (income) expense, net

North American Coal Corporation India Private Limited ("NACC India") was formed to provide technical business advisory services to the third-party owner of a coal mine in India. During 2014, NACC India's customer defaulted on its contractual payment obligations and as a result of this default, NACC India terminated its contract with the customer and began pursuing contractual remedies. During the third quarter of 2019, the Company received payment of $2.7 million from NACC India's customer, of which $1.4 million related to past invoices and has been reported on the line Other, net, and $1.3 million represented interest income and has been reported on the line Interest income. Both of these lines are in the Other (income) expense section of the Unaudited Condensed Consolidated Statements of Operations.
Interest expense decreased in the third quarter and the first nine months of 2019 compared with the comparable 2018 periods by $0.2 million and $1.0 million, respectively, due to lower average borrowings under NACoal's revolving credit facility.

Interest income increased $1.8 million and $2.7 million, respectively, during the third quarter and the first nine months of 2019 compared with the 2018 periods due to the interest income related to the NACC India customer payment and increased income earned on invested cash.


21

Gain on equity securities represents returns on invested assets of Bellaire's Mine Water Treatment Trust. The increase in the first nine months of 2019 compared with the 2018 period was due to improved returns on invested assets, primarily in the first quarter of 2019. See Note 6 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Mine Water Treatment Trust.

Income Taxes

The Company evaluates and updates its estimated annual effective income tax rate on a quarterly basis based on current and forecasted operating results and tax laws. Consequently, based upon the mix and timing of actual earnings compared to projections of earnings between entities that benefit from percentage depletion and those that do not, the effective tax rate may vary quarterly. The quarterly income tax provision is generally comprised of tax expense on income or a benefit on a loss at the most recent estimated annual effective income tax rate, adjusted for the effect of discrete items. The increase in the effective income tax rate in 2019 compared with 2018 is primarily due to a change in the mix of earnings, including increased royalty income and income related to the payment from NACC India's customer. See Note 11 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the payment received from NACC India's customer.

LIQUIDITY AND CAPITAL RESOURCES OF NACCO

Cash Flows

Intercompany transactions can be significant since the income taxes resulting from the operations of the Unconsolidated Subsidiaries are solely the responsibility of the Company. At a segment level, these intercompany transactions can impact net cash used for operating activities. As a result, the Company analyzes cash flows on a consolidated basis.

The following tables detail NACCO's changes in cash flow for the nine months ended September 30:
 
2019
 
2018
 
Change
Operating activities:
 
 
 
 
 
Net cash provided by operating activities
$
47,264

 
$
38,851

 
$
8,413

 
 
 
 
 
 
Investing activities:
 
 
 
 
 
Expenditures for property, plant and equipment
(13,264
)
 
(14,632
)
 
1,368

Other
4,455

 
1,210

 
3,245

Net cash used for investing activities
(8,809
)
 
(13,422
)
 
4,613

Cash flow before financing activities
$
38,455

 
$
25,429

 
$
13,026


The $8.4 million increase in net cash provided by operating activities was primarily the result of the $9.5 million increase in net income.

The change in net cash used for investing activities was primarily attributable to a $4.1 million increase in proceeds from the sale of property, plant and equipment related to the sale of a dragline, included in "Other" investing activities in the table above, which was partially offset by a decrease in expenditures for property, plant and equipment.
 
2019
 
2018
 
Change
Financing activities:
 
 
 
 
 
Net additions (reductions) to long-term debt and revolving credit agreement
$
(3,433
)
 
$
(40,207
)
 
$
36,774

Cash dividends paid
(3,808
)
 
(3,433
)
 
(375
)
Purchase of treasury shares
(1,410
)
 
(339
)
 
(1,071
)
Net cash used for financing activities
$
(8,651
)
 
$
(43,979
)
 
$
35,328


The change in net cash used for financing activities was primarily due to repayments of borrowings during the first nine months of 2018.

Financing Activities

Financing arrangements are obtained and maintained at the NACoal level. NACCO has not guaranteed any borrowings of NACoal. The borrowing agreements at NACoal allow for the payment to NACCO of dividends and advances under certain

22

circumstances. Dividends (to the extent permitted by NACoal's borrowing agreement) and management fees are the primary sources of cash for NACCO and enable the Company to pay dividends to stockholders.

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.

NACoal has an unsecured revolving line of credit of up to $150.0 million (the “NACoal Facility”) that expires in August 2022. There were no borrowings outstanding under the NACoal Facility at September 30, 2019. At September 30, 2019, the excess availability under the NACoal Facility was $148.6 million, which reflects a reduction for outstanding letters of credit of $1.4 million.

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, effective September 30, 2019, for base rate and LIBOR loans were 0.75% and 1.75%, respectively. The NACoal Facility has a commitment fee which is based upon achieving various levels of debt to EBITDA ratios. The commitment fee was 0.30% on the unused commitment at September 30, 2019.

The NACoal Facility contains restrictive covenants, which require, among other things, NACoal to maintain a maximum debt to EBITDA ratio of 3.00 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 2.00 to 1.00, or if greater than 2.00 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. At September 30, 2019, NACoal was in compliance with all financial covenants in the NACoal Facility.

Capital Expenditures

Expenditures for property, plant and equipment were $13.3 million during the first nine months of 2019. NACCO estimates that capital expenditures for the fourth quarter of 2019 will be $15.1 million.

Consolidated capital expenditures are expected to be approximately $28.4 million for the full year 2019, primarily consisting of $13.9 million in the Coal Mining segment and $13.0 million in the NAMining segment. The remaining $1.5 million relates to the Minerals Management segment and Unallocated Items.

Consolidated capital expenditures are expected to be approximately $41 million in 2020, primarily consisting of $30 million in the Coal Mining segment and $10 million in the NAMining segment. The remaining $1 million relates to the Minerals Management segment and Unallocated Items.

In the Coal Mining segment, elevated levels of expected capital expenditures through 2021 are primarily related to spending at MLMC as it develops a new mine area. In the NAMining segment, capital expenditures in both 2019 and 2020 are primarily for the acquisition, relocation and refurbishment of draglines.

Capital expenditures are expected to be funded from internally generated funds and/or bank borrowings.




23

Capital Structure

NACCO's consolidated capital structure is presented below:
 
SEPTEMBER 30
2019
 
DECEMBER 31
2018
 
Change
Cash and cash equivalents
$
115,061

 
$
85,257

 
$
29,804

Net tangible assets
158,404

 
156,703

 
1,701

Intangible assets, net
38,273

 
40,516

 
(2,243
)
Net assets
311,738

 
282,476

 
29,262

Total debt
(7,678
)
 
(11,021
)
 
3,343

Bellaire closed mine obligations
(20,805
)
 
(20,751
)
 
(54
)
Total equity
$
283,255

 
$
250,704

 
$
32,551

Debt to total capitalization
3%
 
4%
 
(1)%

The increase in net assets was primarily due to the increase in cash.

Contractual Obligations, Contingent Liabilities and Commitments

The Company has updated its lease accounting policy in connection with the adoption of ASC 842 as further described in Note 2 to the accompanying Unaudited Condensed Consolidated Financial Statements.  Since December 31, 2018, there have been no significant changes in the total amount of NACCO's contractual obligations, contingent liabilities or commercial commitments, or the timing of cash flows in accordance with those obligations as reported on page 32 in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. See Note 7 to the Unaudited Condensed Consolidated Financial Statements for a discussion of certain guarantees related to Coyote Creek.

SEGMENT RESULTS

COAL MINING SEGMENT

FINANCIAL REVIEW

Tons of coal delivered by the Coal Mining segment were as follows for the three and nine months ended September 30 (in millions):
 
THREE MONTHS
 
 NINE MONTHS
 
2019
 
2018
 
2019
 
2018
Unconsolidated operations
8.7

 
9.8

 
24.2

 
26.3

Consolidated operations
0.7

 
0.7

 
2.2

 
2.2

Total tons delivered
9.4

 
10.5

 
26.4

 
28.5


The results of operations for the Coal Mining segment were as follows for the three and nine months ended September 30:
 
THREE MONTHS
 
 NINE MONTHS
 
2019
 
2018
 
2019
 
2018
Revenues
$
18,799

 
$
18,583

 
$
58,119

 
$
57,040

Total cost of sales
16,383

 
16,090

 
53,561

 
52,236

Gross profit
2,416

 
2,493

 
4,558

 
4,804

Earnings of unconsolidated operations(a)
16,211

 
17,004

 
45,521

 
47,614

Selling, general and administrative expenses
10,653

 
9,026

 
28,309

 
24,077

Amortization of intangible assets
715

 
714

 
2,243

 
2,212

Gain on sale of assets
(82
)
 
(57
)
 
(112
)
 
(280
)
Operating profit
$
7,341

 
$
9,814

 
$
19,639

 
$
26,409


(a) See Note 7 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.


24

Third Quarter of 2019 Compared with Third Quarter of 2018

Revenues

Revenues were comparable in the third quarter of 2019 compared with the third quarter of 2018.

Operating Profit

The following table identifies the components of change in operating profit for the third quarter of 2019 compared with the third quarter of 2018:
 
Operating Profit
2018
$
9,814

Increase (decrease) from:
 
Selling, general and administrative expenses
(1,627
)
Earnings of unconsolidated operations
(793
)
Gross profit
(77
)
Amortization of intangibles
(1
)
Net gain on sale of assets
25

2019
$
7,341


Operating profit decreased $2.5 million in the third quarter of 2019 compared with the third quarter of 2018 primarily due to an increase in selling, general and administrative expenses and a decrease in earnings of unconsolidated operations. The increase in selling, general and administrative expenses was primarily attributable to an increase in employee-related costs. The higher employee-related costs included an increase to the estimated non-cash equity component of incentive compensation of $0.7 million mainly due to a more than 20% improvement in the market price of the Company's stock during the third quarter. The decrease in earnings of unconsolidated operations was mainly due to fewer coal tons delivered as a result of changes in customer demand, primarily related to the timing and duration of planned outages at certain customer facilities. The modest decrease in gross profit was primarily due to an increase in the cost per ton delivered at MLMC partially offset by a favorable results at Centennial.

First Nine Months of 2019 Compared with First Nine Months of 2018

Revenues

Revenues increased $1.1 million in the first nine months of 2019 compared with the first nine months of 2018. The increase was primarily due to an increase in tons delivered at MLMC as a result of increased customer requirements and favorable pricing.

Operating Profit

The following table identifies the components of change in operating profit for the first nine months of 2019 compared with the first nine months of 2018:
 
Operating Profit
2018
$
26,409

Increase (decrease) from:
 
Selling, general and administrative expenses
(4,232
)
Earnings of unconsolidated operations
(2,093
)
Centennial asset retirement obligation revision in prior year
(960
)
Net gain on sale of assets
(168
)
Amortization of intangibles
(31
)
Gross profit, excluding asset retirement obligation revision in prior year
714

2019
$
19,639


Operating profit decreased $6.8 million in the first nine months of 2019 compared with the first nine months of 2018. The decrease was primarily the result of an increase in selling, general and administrative expenses, mainly due to higher employee-

25

related expenses, a decrease in earnings of unconsolidated operations and favorable revisions to Centennial's asset retirement obligation in the prior year.

The decrease in earnings of unconsolidated operations was primarily due to fewer coal tons delivered as a result of changes in customer demand, mainly related to the timing and duration of planned outages at certain customer facilities, partially offset by an increase in coal tons delivered at Bisti. Coal deliveries at Bisti were reduced during the prior year while the power plant's owners were installing additional environmental controls.

The change in Centennial's asset retirement obligation is attributable to the absence of a $1.0 million favorable revision that occurred during the prior year.

NORTH AMERICAN MINING ("NAMining") SEGMENT

FINANCIAL REVIEW
Tons of limestone delivered by the NAMining segment were as follows for the three and nine months ended September 30 (in millions):
 
THREE MONTHS
 
 NINE MONTHS
 
2019
 
2018
 
2019
 
2018
Unconsolidated operations
1.7

 
1.7

 
6.1

 
5.2

Consolidated operations
8.5

 
9.7

 
27.6

 
29.2

Total tons delivered
10.2

 
11.4

 
33.7

 
34.4


The results of operations for the NAMining segment were as follows for the three and nine months ended September 30:
 
THREE MONTHS
 
 NINE MONTHS
 
2019
 
2018
 
2019
 
2018
Revenues
$
8,993

 
$
9,092

 
$
30,496

 
$
28,372

Total cost of sales
9,407

 
8,415

 
29,880

 
26,179

Gross profit
(414
)
 
677

 
616

 
2,193

Earnings of unconsolidated operations(a)
1,227

 
137

 
2,330

 
505

Selling, general and administrative expenses
1,216

 
533

 
3,807

 
1,665

Gain on sale of assets
(12
)
 
—

 
(19
)
 
(39
)
Operating (loss) profit
$
(391
)
 
$
281

 
$
(842
)
 
$
1,072


(a) See Note 7 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.

Third Quarter of 2019 Compared with Third Quarter of 2018

Revenues

Despite a decrease in tons delivered, revenues decreased marginally in the third quarter of 2019 compared with the third quarter of 2018 due to a change in the mix of customer deliveries.


26

Operating (Loss) Profit

The following table identifies the components of change in operating (loss) profit for the third quarter of 2019 compared with the third quarter of 2018:
 
Operating Profit (Loss)
2018
$
281

Increase (decrease) from:
 
Gross profit
(1,091
)
Selling, general and administrative expenses
(683
)
Earnings of unconsolidated operations
1,090

Net gain on sale of assets
12

2019
$
(391
)

NAMining reported an operating loss of $0.4 million in the third quarter of 2019 compared with operating profit of $0.3 million in the third quarter of 2018. The 2019 operating loss was primarily due to a an increase in selling, general and administrative expenses, which includes higher employee-related and business development costs. The decrease in gross profit, mainly due to higher labor costs and an increase in supplies and repairs and maintenance expenses was offset by an improvement in earnings of unconsolidated operations. Both gross profit and earnings of unconsolidated operations benefited from new limestone mining contracts entered into since September 30, 2018.

First Nine Months of 2019 Compared with First Nine Months of 2018

Revenues

Despite the decrease in tons delivered at the consolidated operations, revenues increased in the first nine months of 2019 compared with the first nine months of 2018 due to a change in the mix of customer deliveries.

Operating (Loss) Profit

The following table identifies the components of change in operating (loss) profit for the first nine months of 2019 compared with the first nine months of 2018:
 
Operating Profit (Loss)
2018
$
1,072

Increase (decrease) from:
 
Selling, general and administrative expenses
(2,142
)
Gross profit
(1,577
)
Net gain on sale of assets
(20
)
Earnings of unconsolidated operations
1,825

2019
$
(842
)

NAMining reported an operating loss of $0.8 million in the first nine months of 2019 compared with operating profit of $1.1 million in the first nine months of 2018. The change is primarily due to an increase in selling, general and administrative expenses, which includes higher employee-related and business development costs. The improvement in earnings of unconsolidated operations was partially offset by the decrease in gross profit, mainly due to higher labor costs and supplies expense. Both gross profit and earnings of unconsolidated operations benefited from new limestone mining contracts entered into since September 30, 2018.

27

MINERALS MANAGEMENT SEGMENT
FINANCIAL REVIEW

The results of operations for the Minerals Management segment were as follows for the three and nine months ended September 30:
 
THREE MONTHS
 
 NINE MONTHS
 
2019
 
2018
 
2019
 
2018
Revenues
$
5,022

 
$
3,902

 
$
25,950

 
$
11,244

Total cost of sales
814

 
865

 
2,902

 
1,625

Gross profit
4,208

 
3,037

 
23,048

 
9,619

Selling, general and administrative expenses
308

 
267

 
690

 
694

Gain on sale of assets
—

 
—

 
—

 
(1
)
Operating profit
$
3,900

 
$
2,770

 
$
22,358

 
$
8,926


Third Quarter of 2019 Compared with Third Quarter of 2018 and First Nine Months of 2019 Compared with First Nine Months of 2018

Revenues and Operating Profit

Revenues and operating profit increased in the third quarter and the first nine months of 2019 compared with the 2018 periods, primarily due to an increase in the 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 operators increased activity on Minerals Management's reserves and additional pipeline, gas compression, and other transportation infrastructure came online in southeast Ohio.

UNALLOCATED ITEMS AND ELIMINATIONS

FINANCIAL REVIEW

Unallocated Items and Eliminations were as follows for the three and nine months ended September 30:
 
THREE MONTHS
 
 NINE MONTHS
 
2019
 
2018
 
2019
 
2018
Operating loss
$
(2,187
)
 
$
(2,318
)
 
$
(6,958
)
 
$
(8,337
)

Third Quarter of 2019 Compared with Third Quarter of 2018

Operating Loss

The operating loss for the three months ended September 30, 2019 was comparable to the operating loss for the three months ended September 30, 2018.

First Nine Months of 2019 Compared with First Nine Months of 2018

Operating Loss

The $1.4 million decrease in operating loss for the first nine months of 2019 compared with 2018 was primarily due to lower professional fees, partially offset by increased employee-related expenses. The first nine months of 2018 included professional fees incurred for arbitration with a former customer.

NACCO Industries, Inc. Outlook

Coal Mining Outlook - 2019
In the 2019 fourth quarter and full year, the Company expects coal deliveries to decrease compared with 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 2018.

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Revenues in the fourth quarter of 2019 are expected to decrease primarily as a result of the absence of a favorable $3.0 million contractual settlement recognized at MLMC in the fourth quarter of 2018. Excluding the contractual settlement, revenues in the 2019 fourth quarter and full year are expected to decrease modestly compared with the comparable 2018 periods due to reduced 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, the 2019 fourth quarter Coal Mining operating profit is expected to increase modestly compared with the 2018 fourth quarter primarily as a result of a reduction in operating expenses and improved results at the consolidated mining operations. These improvements are expected to be partially offset by reduced income at the unconsolidated Coal Mining operations as customer requirements are expected to be lower than the prior year.

Full-year 2019 operating profit is expected to decrease compared with full-year 2018, after 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. The decrease is primarily due to anticipated lower income at the unconsolidated Coal Mining operations as a result of reduced customer requirements, and higher operating expenses, partially offset by an anticipated improvement in results at the consolidated mining operations.

Capital expenditures are expected to be $7.4 million in the fourth quarter of 2019 and $13.9 million for the 2019 full year.

Coal Mining Outlook - 2020
In 2020, the Company expects coal deliveries to increase compared with 2019, primarily at the unconsolidated operations. The expected increase in coal deliveries is a result of an expected increase in customer requirements, as the Company's customers are forecasting a reduction in planned power plant outage days in 2020.

Coal Mining operating profit in 2020 is expected to increase substantially compared with 2019, predominantly in the first half of the year. This anticipated increase is primarily the result of an expected significant increase in income at the consolidated operations in the first half of 2020, and improved earnings at the unconsolidated Coal Mining operations throughout the year.
 
The increase at the consolidated operations is expected to be driven by improved results at MLMC, primarily due to an anticipated modest increase in customer demand and a reduction in the cost per ton of coal delivered in 2020 compared with 2019. In general, cost per ton delivered is lowest when the power plant requires a consistently high level of coal deliveries, primarily because costs are spread over more tons. Historically, periods of reduced or fluctuating deliveries, such as during planned or unplanned power plant outages or periods of fluctuating demand for electricity generated by the plant, have adversely affected MLMC's tons delivered, resulting in an increase in cost per ton delivered and reduced profitability. If customer demand at MLMC decreases from expected levels, it could unfavorably affect NACoal's 2020 earnings significantly.
 
Capital expenditures are expected to be approximately $30 million in 2020. Elevated levels of capital expenditures in 2019 through 2021 are primarily related to spending at MLMC as it develops a new mine area. These capital expenditures will result in an increase in depreciation that will unfavorably affect ongoing operating profit.

NAMining Outlook
NAMining expects operating profit in the fourth quarter of 2019 to be significantly lower than the 2018 fourth quarter primarily due to the absence of a $0.6 million gain on the sale of assets recognized in the 2018 fourth quarter. While down from the prior year, fourth quarter operating profit is expected to improve over the results in each of the first three quarters of 2019. However, NAMining expects full-year 2019 results to decrease compared with 2018 as the improved fourth quarter results will not offset the cumulative losses incurred in the first nine months of 2019.

NAMining expects 2020 full year operating results to improve significantly over 2019. Operating profit is expected to benefit from earnings associated with new limestone mining contracts.

In the third quarter of 2019, NAMining, through a new subsidiary, Sawtooth, entered into a new mining agreement to serve as exclusive contract miner for the Thacker Pass lithium project in northern Nevada. Thacker Pass, 100% owned by Lithium Nevada Corp., is believed to be the largest known lithium deposit in the United States. Sawtooth will design, construct, operate, and maintain the Thacker Pass surface mine, which will supply Lithium Nevada’s lithium-bearing claystone ore requirements. The mining agreement provides that Lithium Nevada will reimburse Sawtooth for its operating and mine reclamation costs, and pay Sawtooth a management fee per metric ton of lithium delivered during the 20-year contract term.

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Lithium Nevada estimates that it will secure all major permits by the end of 2020, commence plant construction in 2021 and commence production of lithium products in 2023.

During the development of the project, Sawtooth will provide Lithium Nevada $3.5 million in cash, of which $1.0 million has been provided as of September 30, 2019, to assist in project development and provide certain engineering services related primarily to mine design and permitting. Under the terms of the mining agreement, Lithium Nevada will pay Sawtooth a success fee upon achievement of certain engineering, construction and production milestones. After Lithium Nevada secures required permits and financing for the project, Sawtooth intends to acquire up to $50 million of mining equipment. The cost of this mining equipment will be reimbursed to Sawtooth over a seven-year period from the equipment acquisition date.
 
Capital expenditures are expected to be $6.7 million in the fourth quarter of 2019 and approximately $13 million and $10 million for the 2019 full year and 2020, respectively, primarily for the acquisition, relocation and refurbishment of draglines.

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 nine months of 2019 compared with the comparable 2018 period, 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 fourth quarter of 2019 and in the 2020 full year, royalty income is currently expected to decrease substantially over the comparable prior year periods. The 2020 decrease is expected to occur primarily in the first half of the year, as comparisons are made to historically high revenue levels in the first half of 2019. These decreases are based on natural gas price expectations and the natural production decline that occurs during the life of a well. New wells have high initial production rates and follow a natural decline before settling into relatively stable, long-term production. 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. 

Consolidated Outlook
Overall, NACCO expects a significant decrease in both operating profit and net income in the fourth quarter of 2019 compared with the fourth quarter of 2018 primarily as a result of the favorable prior year items noted previously. Excluding these items, operating profit is expected to decrease moderately mainly due to the substantial decrease in Minerals Management's and NAMining's results, partly offset by a modest improvement in earnings at the Coal Mining segment. Despite this decrease, net income is expected to increase primarily due to an anticipated lower effective income tax rate in the 2019 fourth quarter compared with the prior year.

For the 2019 full-year, consolidated net income is expected to increase significantly compared with 2018, including or excluding the favorable prior year items. The anticipated improvement in net income is primarily due to higher earnings in the Minerals Management segment and the receipt of $2.7 million pre-tax associated with a prior NACC India venture. These improvements are expected to be offset by decreased earnings in the Coal Mining and NAMining segments. 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.

In 2020, NACCO expects net income to decrease moderately compared with 2019, primarily in the first half of the year. An anticipated reduction in earnings in the Minerals Management segment is expected to be partially offset by improvements in earnings in the Coal Mining and NAMining segments. The full-year effective income tax rate is expected to be between 10% and 12%, excluding discrete items.

Consolidated cash flow before financing activities is expected to be substantially lower in the fourth quarter of 2019 compared with the fourth quarter of 2018 primarily due to an anticipated increase in capital expenditures. Despite the fourth-quarter decline, the Company expects full-year 2019 cash flow before financing activities to increase over 2018. Consolidated capital expenditures are expected to be $15.1 million in the fourth quarter of 2019 and $28.4 million for the full year.

In 2020, cash flow before financing activities is expected to result in a modest use of cash due to anticipated increased capital expenditures and payment of deferred compensation and other payroll liabilities. Consolidated capital expenditures are expected to be approximately $41 million in 2020, primarily consisting of $30 million in the Coal Mining segment and $10

30

million in the NAMining segment. The remaining $1 million of capital expenditures relates to Minerals Management segment and Unallocated Items.

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 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.

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 NAMining segment. NAMining has served as a strong growth platform by focusing on the operation and maintenance of draglines for limestone producers. NAMining 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, lithium 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, MRNA, creates and sells stream and wetland mitigation credits and provides services to those engaged in permittee-responsible mitigation.

FORWARD-LOOKING STATEMENTS

The statements contained in this Form 10-Q that are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are made subject to certain risks and uncertainties, which could cause actual results to differ materially from those 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 in tax laws or regulatory requirements, including changes in mining or power plant emission regulations and health, safety or environmental legislation, (2) changes in costs related to geological and geotechnical conditions, repairs and maintenance, new equipment and replacement parts, fuel or other similar items, (3) regulatory actions, changes in mining permit requirements or delays in obtaining mining permits that could affect deliveries to customers, (4) weather conditions, extended power plant outages, liquidity events or other events that would change the level of customers' coal or aggregates requirements, (5) weather or equipment problems that could affect deliveries to customers, (6) changes in the power industry that would affect demand for the Company's mineral reserves, (7) failure or delays by the Company's lessees in achieving expected production of natural gas and other hydrocarbons; the availability and cost of transportation and processing services in the areas where the Company's oil and gas reserves are located; federal and state legislative and regulatory initiatives relating to hydraulic fracturing; and the ability of lessees to obtain capital or financing needed for well development operations, (8) changes in the costs to reclaim mining areas, (9) costs to pursue and develop new mining and value-added service opportunities, (10) changes to or termination of a long-term mining contract, or a customer default under a contract, (11) delays or reductions in coal or aggregates deliveries, (12) changes in the prices of hydrocarbons, particularly diesel fuel, natural gas and oil, and (13) increased competition, including consolidation within the coal and aggregates industries.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a “smaller reporting company” as defined by Rule 12b-2 of the Securities Exchange Act of 1934, the Company is not required to provide this information.


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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures:  An evaluation was carried out under the supervision and with the participation of the Company's management, including the principal executive officer and the principal financial officer, of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, these officers have concluded that the Company's disclosure controls and procedures are effective.

Changes in internal control over financial reporting: During the third quarter of 2019, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II
OTHER INFORMATION

Item 1    Legal Proceedings
None.

Item 1A    Risk Factors
No material changes to the risk factors from the Company's Annual Report on Form 10-K for the year ended December 31, 2018. 

Item 2    Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Issuer Purchases of Equity Securities (1)
Period
(a)
Total Number of Shares Purchased
 
(b)
Average Price Paid per Share
 
(c)
Total Number of Shares Purchased as Part of the Publicly Announced Program
 
(d)
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (1)
Month #1
(July 1 to 31, 2019)
—

 
$
—

 
—

 
$
22,321,992

Month #2
(August 1 to 31, 2019)
—

 
$
—

 
—

 
$
22,321,992

Month #3
(September 1 to 30, 2019)
525

 
$
49.99

 
525

 
$
22,295,747

     Total
525

 
$
49.99

 
525

 
$
22,295,747


(1)
In February 2018, the Company established a stock repurchase program allowing for the purchase of up to $25.0 million of the Company's Class A Common Stock outstanding through December 31, 2019. See Note 5 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Company's stock repurchase program.
    
Item 3    Defaults Upon Senior Securities
None.

Item 4    Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 filed with this Quarterly Report on Form 10-Q for the period ended September 30, 2019.

Item 5    Other Information
None.


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Item 6    Exhibits
Exhibit
 
 
Number*
 
Description of Exhibits
 
 
 
31(i)(1)
 
31(i)(2)
 
32
 
95
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
*    Numbered in accordance with Item 601 of Regulation S-K.




34

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
NACCO Industries, Inc.
(Registrant)
 
 
Date:
October 30, 2019
/s/ Elizabeth I. Loveman
 
 
 
Elizabeth I. Loveman
 
 
 
Vice President and Controller
(principal financial and accounting officer)
 

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