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Item 5. Market for Registrant’s Common Equity

2022-03-02 compared with 2021-03-03 · 425 added, 12 removed, 43 unchanged (91% of the section changed)

26 unchanged sentences

® (“NACCO” or the “Company”).

NACCO, through a portfolio of mining and natural resources businesses, operates under three business segments:

NACCO brings natural resources to life by delivering aggregates, minerals, reliable fuels and environmental solutions through its robust portfolio of NACCO Natural Resources businesses.

The Company operates under three business segments:

Coal Mining, North American Mining ("NAMining") and Minerals Management.

The Coal Mining segment operates surface coal mines under long-term contracts with power generation companies and an activated carbon producer pursuant to a service-based business model.

The NAMining segment provides value-added contract mining and other services for producers of aggregates, lithium and other minerals.

The Minerals Management segment acquires and promotes the development of oil, gas and coal mineral interests, generating income primarily from royalty-based lease payments from third parties.

In addition, the Company has a business providing stream and wetland mitigation solutions.

The Company has items not directly attributable to a reportable segment which are not included as part of the measurement of segment operating profit, which are primarily administrative costs related to public company reporting requirements at the parent company and the financial results of 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.

The Coal Mining segment operates surface coal mines for power generation companies and an activated carbon producer.

The NAMining segment is a trusted mining partner for producers of aggregates, lithium and other minerals.

The Minerals Management segment, which includes the Catapult Mineral Partners (“Catapult”) business, acquires and promotes the development of mineral interests.

In addition, Mitigation Resources of North America ® (“Mitigation Resources”) provides stream and wetland mitigation solutions.

The Company has items not directly attributable to a reportable segment that are not included as part of the measurement of segment operating profit, which primarily includes administrative costs related to public company reporting requirements at the parent company and the financial results of Mitigation Resources and Bellaire Corporation ("Bellaire").

Bellaire manages the Company’s long-term liabilities related to former Eastern U.S.

underground mining activities.

As of January 1, 2020, the Company retrospectively changed its computation of segment operating profit to reclassify certain expenses, primarily related to executive and board compensation.

These expenses are now included in unallocated items.

The change in segment reporting reflected a decision to evaluate the financial performance of the Company’s segments excluding executive and board compensation.

All prior period segment information has been reclassified to conform to the new presentation.

This segment reporting change has no impact on consolidated operating results.

All financial statement line items below operating profit (other income, including interest expense and interest income, the provision for income taxes and net income) are presented and discussed within this Form 10-K on a consolidated basis.

11 unchanged sentences

The Company accounts for revenue in accordance with Accounting Standards Codification ("ASC") Topic 606, "Revenue from Contracts with Customers." See Note 3 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's revenue recognition.

Long-lived assets:

The Company periodically evaluates long-lived assets for impairment when changes in circumstances or the occurrence of certain events indicate the carrying amount of an asset may not be recoverable.

Upon identification of indicators of impairment, the Company evaluates the carrying value of the asset by comparing the estimated future undiscounted cash flows generated from the use of the asset and its eventual disposition with the asset's net carrying value.

If the carrying value of an asset is considered impaired, an impairment charge is recorded for the amount that the carrying value

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NACCO INDUSTRIES, INC.

AND SUBSIDIARIES

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

of the long-lived asset exceeds its fair value.

Fair value is estimated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company regularly performs reviews of potential future development projects and identified certain undeveloped properties where market conditions related to any future development deteriorated during 2020.

As a result, the Company recognized charges of $7.3 million in the Minerals Management segment and $1.1 million in the Coal Mining segment to write-off certain capitalized leasehold costs, prepaid royalties and other assets during 2020.

At MLMC, the costs of mining operations are not reimbursed by MLMC's customer.

As such, increased costs at MLMC or decreased revenues could materially reduce the Company's profitability.

Any reduction in customer demand at MLMC, including reductions related to reduced mechanical availability of the customer’s power plant, would adversely affect the Company's operating results and could result in significant impairments.

MLMC has approximately $136 million of long-lived assets, including property, plant and equipment and its coal supply agreement intangible asset, which are subject to periodic impairment analysis and review.

Identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including assumptions about future power plant dispatch levels, changes in operating costs and other factors that impact anticipated revenue and customer demand, requires significant judgment.

Actual future operating results could differ significantly from these estimates, which may result in an impairment charge in a future period, which could have a substantial impact on the Company’s results of operations.

Income taxes:

Tax law requires certain items to be included in the tax return at different times than the items are reflected in the financial statements.

Some of these differences are permanent, such as expenses that are not deductible for tax purposes, and some differences are temporary, reversing over time, such as depreciation expense.

These temporary differences create deferred tax assets and liabilities using currently enacted tax rates .

The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date.

Management is required to estimate the timing of the recognition of deferred tax assets and liabilities, make assumptions about the future deductibility of deferred tax assets and assess deferred tax liabilities based on enacted laws and tax rates for the appropriate tax jurisdictions to determine the amount of such deferred tax assets and liabilities.

Changes in the calculated deferred tax assets and liabilities may occur in certain circumstances, including statutory income tax rate changes, statutory tax law changes, or chan ges in the structure or tax status.

The Company's tax assets, liabilities, and tax expense are supported by historical earnings and losses and the Company's best estimates and assumptions of future earnings.

The Company assesses whether a valuation allowance should be established against its deferred tax assets based on consideration of all available evidence, both positive and negative, using a more likely than not standard.

This assessment considers, among other matters, scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations.

The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates the Company is using to manage the underlying businesses.

When the Company determines, based on all available evidence, that it is more likely than not that deferred tax assets will not be realized, a valuation allowance is established.

Since significant judgment is required to assess the future tax consequences of events that have been recognized in the Company's financial statements or tax returns, the ultimate resolution of these events could result in adjustments to the Company's financial statements and such adjustments could be material.

The Company believes the current assumptions, judgments and other considerations used to estimate the current year accrued and deferred tax positions are appropriate.

If the actual outcome of future tax consequences differs from these estimates and assumptions, due to changes or future events, the resulting change to the provision for income taxes could have a material impact on the Company's results of operations and financial position.

See Note 13 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's income taxes.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NACCO INDUSTRIES, INC.

AND SUBSIDIARIES

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

CONSOLIDATED FINANCIAL SUMMARY

The results of operations for NACCO were as follows for the years ended December 31:

Coal Mining $ 91,851 $ 72,088

NAMining 69,924 42,392

Minerals Management 31,003 14,721

Unallocated Items 4,695 2,133

Eliminations (5,627) (2,902)

Total revenue $ 191,846 $ 128,432

Operating profit (loss):

Coal Mining $ 49,059 $ 25,436

NAMining 109 1,872

Minerals Management 26,080 3,493

Unallocated Items (19,553) (17,256)

Eliminations (285) (97)

Total operating profit $ 55,410 $ 13,448

Interest expense 1,719 1,354

Interest income (449) (1,200)

Closed mine obligations 1,297 1,641

Gain on equity securities (3,423) (1,226)

Other, net (584) (1,379)

Other income, net (1,440) (810)

Income before income tax provision (benefit) 56,850 14,258

Income tax provision (benefit) 8,725 (535)

Net income $ 48,125 $ 14,793

Effective income tax rate 15.3 % (3.8) %

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

Other income, net

Interest income decreased $0.8 million primarily due lower interest rates and a lower average invested cash balance during 2021 compared with 2020.

Gain on equity securities represents changes in the market price of invested assets reported at fair value.

The change in 2021 compared with 2020 was due to fluctuations in the market prices of the underlying assets.

See Note 9 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's invested assets reported at fair value .

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 2020, the Company received a $1.0 million payment from NACC India's customer which has been reported on the line, Other, net.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NACCO INDUSTRIES, INC.

AND SUBSIDIARIES

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

The Company recorded an income tax expense of $8.7 million for the year ended December 31, 2021 on income before income tax of $56.9 million, or 15.3%, compared to income tax benefit of $0.5 million for the year ended December 31, 2020 on income before income tax of $14.3 million, or (3.8%).

The income tax benefit for the year ended December 31, 2020 included $7.3 million of discrete tax charges primarily related to settlement of tax examinations, reserves for uncertain tax positions and return to provision adjustments partially offset by a benefit of $4.7 million, primarily due to the rate differential related to carrying back losses under the provisions of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").

The CARES Act allows net operating tax losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

The Company generated a net tax operating loss in 2020 primarily due to the realization of certain deferred tax assets.

There were no material discrete items affecting income tax expense in 2021.

The effective income tax rate for 2021 reflects the impact of higher pre-tax income in 2021 compared with 2020, including the termination fee associated with the Bisti contract termination.

The effective income tax rate varies based upon the mix and timing of earnings between entities that benefit from percentage depletion and those that do not benefit from percentage depletion.

The benefit from percentage depletion is not directly related to the amount of pre-tax income recorded in a period.

See Note 13 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's income taxes.

LIQUIDITY AND CAPITAL RESOURCES

The following tables detail the change in cash flow for the years ended December 31:

2021 2020 Change

Operating activities:

Net income $ 48,125 $ 14,793 $ 33,332

Depreciation, depletion and amortization 23,085 18,114 4,971

Deferred income taxes (3,553) 7,517 (11,070)

Stock-based compensation 5,561 3,078 2,483

Gain on sale of assets (60) (269) 209

Inventory impairment charge — 1,973 (1,973)

Other asset impairment charge — 8,359 (8,359)

Other 1,973 (3,452) 5,425

Working capital changes (256) (52,599) 52,343

Net cash provided by (used for) operating activities 74,875 (2,486) 77,361

Investing activities:

Expenditures for property, plant and equipment and acquisition of mineral interests (44,561) (44,368) (193)

Proceeds from the sale of assets 633 571 62

Other (219) (2,187) 1,968

Net cash used for investing activities (44,147) (45,984) 1,837

Cash flow before financing activities $ 30,728 $ (48,470) $ 79,198

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NACCO INDUSTRIES, INC.

AND SUBSIDIARIES

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

The $77.4 million increase in net cash provided by (used for) operating activities was primarily the result of favorable working capital changes and an increase in net income.

Working capital changes primarily included:

• Decreased payments made under deferred compensation and long-term incentive compensation plans in 2021 compared with 2020.

• An increase in Accounts payable during 2021 compared with a decrease in Accounts payable during 2020 due to timing of payments.

2021 2020 Change

Financing activities:

Net (reductions) additions to long-term debt and revolving credit agreements $ (25,801) $ 20,073 $ (45,874)

Cash dividends paid (5,617) (5,375) (242)

Other (1,755) (670) (1,085)

Net cash (used for) provided by financing activities $ (33,173) $ 14,028 $ (47,201)

The change in net cash (used for) provided by financing activities was primarily due to repayments during 2021 compared with borrowings during 2020.

Financing Activities

Financing arrangements are obtained and maintained at the subsidiary level.

NACoal has a secured revolving line of credit of up to $150.0 million (the “NACoal Facility”) that expires in November 2025.

Borrowings outstanding under the NACoal Facility were $4.0 million at December 31, 2021.

At December 31, 2021, the excess availability under the NACoal Facility was $116.2 million, which reflects a reduction for outstanding letters of credit of $29.8 million.

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 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 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 December 31, 2021, for base rate and LIBOR loans were 1.25% and 2.25%, respectively.

The NACoal Facility has a commitment fee which is based upon achieving various levels of debt to EBITDA ratios.

The commitment fee was 0.35% on the unused commitment at December 31, 2021.

During the year ended December 31, 2021, the average borrowing under the NACoal Facility was $20.5 million and the weighted-average annual interest rate was 2.1%.

The NACoal Facility contains restrictive covenants, which require, among other things, NACoal to maintain a maximum net debt to EBITDA ratio of 2.75 to 1.00 and an interest coverage ratio of not less than 4.00 to 1.00.

The NACoal Facility provides the ability to make loans, dividends and advances to NACCO, with some restrictions based on maintaining a maximum debt to

EBITDA ratio of 1.50 to 1.00, or if greater than 1.50 to 1.00, a Fixed Charge Coverage Ratio of 1.10 to 1.00, in conjunction with maintaining unused availability thresholds of borrowing capacity, as defined in the NACoal Facility, of $15.0 million.

At December 31, 2021, NACoal was in compliance with all financial covenants in the NACoal Facility.

The obligations under the NACoal Facility are guaranteed by certain of NACoal's direct and indirect, existing and future

domestic subsidiaries, and is secured by certain assets of NACoal and the guarantors, subject to customary exceptions and

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 in November 2025.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NACCO INDUSTRIES, INC.

AND SUBSIDIARIES

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

Expenditures for property, plant and equipment and mineral interests

Following is a table which summarizes actual and planned expenditures (in millions):

Planned Actual Actual

2022 2021 2020

NACCO $ 68.0 $ 44.6 $ 44.4

Planned expenditures for 2022 are expected to be approximately $27 million in the NAMining segment, $22 million in the Coal Mining segment, $10 million in the Minerals Management segment and up to $9 million at Mitigation Resources.

In the Coal Mining segment, elevated levels of expected capital expenditures through 2022 are primarily related to spending at

MLMC as it develops a new mine area.

In the NAMining segment, expected capital expenditures through 2022 are primarily

for the acquisition, relocation and refurbishment of draglines as well as the acquisition of other mining equipment to support the expansion of contract mining services beyond NAMining's historical dragline-oriented model, including the acquisition of

equipment to support Thacker Pass.

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

Capital Structure

NACCO's consolidated capital structure is presented below:

2021 2020 Change

Cash and cash equivalents $ 86,005 $ 88,450 $ (2,445)

Other net tangible assets

276,733 244,907 31,826

Intangible assets, net 31,774 35,330 (3,556)

Net assets 394,512 368,687 25,825

Total debt (20,710) (46,465) 25,755

Closed mine obligations (21,686) (21,598) (88)

Total equity $ 352,116 $ 300,624 $ 51,492

Debt to total capitalization 6 % 13 % (7) %

The increase in other net tangible assets was primarily due to an increase in Property, plant and equipment including mineral interests and Other non-current assets at December 31, 2021 compared with December 31, 2020.

The increase in Other non-current assets is primarily due to an increase in pension assets and deferred financing fees as well as an increase in the market price of invested assets reported at fair value.

Contractual Obligations, Contingent Liabilities and Commitments

Pension and postretirement funding can vary significantly each year due to plan amendments, changes in the market value of plan assets, legislation and the Company’s decisions to contribute above the minimum regulatory funding requirements.

The Company does not expect to contribute to its pension plan in 2022.

NACCO maintains one supplemental retirement plan that pays monthly benefits to participants directly out of corporate funds and expects to pay benefits of approximately $0.5 million per year from 2022 through 2031.

Benefit payments beyond that time cannot currently be estimated.

NACCO also expects to make payments related to its other postretirement plans of approximately $0.2 million per year from 2022 through 2031.

Benefit payments beyond that time cannot currently be estimated.

All other pension benefit payments are made from assets of the pension plan.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NACCO INDUSTRIES, INC.

AND SUBSIDIARIES

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

NACCO has asset retirement obligations.

See Note 7 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's asset retirement obligations.

NACCO has leases.

See Note 10 to the Consolidated Financial Statements in this Form 10-K for further information on the Company's leases.

NACCO has unrecognized tax benefits, including interest and penalties.

See Note 13 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's income taxes.

NACoal is a party to certain guarantees related to Coyote Creek.

The Company believes that the likelihood of NACoal’s future performance under the guarantees is remote, and no amounts related to these guarantees have been recorded.

See Note 17 to the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's guarantees.

The Company utilizes letters of credit to support commitments made in the ordinary course of business.

As of December 31, 2021 and 2020, outstanding letters of credit totaled $29.8 million and $3.0 million, respectively.

The increase in outstanding letters of credit in 2021 is primarily due to the issuance of $20.0 million letters of credit to collateralize a portion of outstanding surety bonds used to guarantee performance of consolidated mine reclamation obligations.

ENVIRONMENTAL MATTERS

The Company is affected by the regulations of numerous agencies, particularly the Federal Office of Surface Mining, the U.S.

Environmental Protection Agency, the U.S.

Army Corps of Engineers and associated state regulatory authorities.

In addition, the Company closely monitors proposed legislation and regulation concerning SMCRA, CAA, ACE, CWA, RCRA, CERCLA and other regulatory actions.

Compliance with these increasingly stringent regulations could result in higher expenditures for both capital improvements and operating costs.

The Company’s policies stress environmental responsibility and compliance with these regulations.

Based on current information, management does not expect compliance with these regulations to have a material adverse effect on the Company’s financial condition or results of operations.

See Item 1 in Part I of this Form 10-K for further discussion of these matters.

SEGMENT RESULTS

COAL MINING SEGMENT

FINANCIAL REVIEW

Properties" on page 31 in this Form 10-K for discussion of the Company's mineral resources and mineral reserves.

Tons of coal delivered by the Coal Mining segment were as follows for the years ended December 31:

Unconsolidated mines 28,052 28,486

Consolidated mines 3,025 2,538

Total tons delivered 31,077 31,024

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NACCO INDUSTRIES, INC.

AND SUBSIDIARIES

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

The results of operations for the Coal Mining segment were as follows for the years ended December 31:

Revenues $ 91,851 $ 72,088

Cost of sales 79,167 70,452

Gross profit 12,684 1,636

Earnings of unconsolidated operations (a)

56,982 56,584

Contract termination settlement 10,333 —

Selling, general and administrative expenses 27,363 30,216

Amortization of intangible assets 3,556 2,572

Loss (gain) on sale of assets 21 (4)

Operating profit $ 49,059 $ 25,436

(a) See Note 17 to the Consolidated Financial Statements in this Form 10-K for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.

2021 Compared with 2020

Revenues increased 27.4% in 2021 compared with 2020 primarily due to an increase in customer demand and tons delivered at MLMC.

Also contributing to the change was the recognition of reclamation revenue from Caddo Creek.

During the fourth quarter of 2020, Caddo Creek entered into a contract with a subsidiary of Advanced Emissions Solutions to perform mine reclamation.

As a result of these changes, Caddo Creek financial results are consolidated within the Coal Mining segment.

The following table identifies the components of change in operating profit for 2021 compared with 2020:

Operating Profit

2020 $ 25,436

Increase (decrease) from:

Contract termination settlement 10,333

Gross profit, excluding MLMC's 2020 inventory impairment charge 9,075

MLMC 's inventory impairment charge during 2020 1,973

Voluntary separation program ("VSP") charge during 2020 1,475

Selling, general and administrative expenses, excluding VSP charge 1,378

Earnings of unconsolidated operations 398

Amortization of intangibles (984)

Net change on sale of assets (25)

2021 $ 49,059

Operating profit increased $23.6 million in 2021 compared with 2020.

The change in operating profit was primarily due to:

• The $10.3 million payment recognized during 2021 related to the Bisti contract termination.

• An increase in gross profit due to an increase in the profit per ton delivered at MLMC and earnings associated with the reclamation contract at Caddo Creek.

In addition, 2020 included certain costs associated with the termination of the Camino Real Fuels, LLC contract mining agreement and higher outside service expenses at Centennial Natural Resources.

• The following items recognized in the prior year did not recur in 2021:

◦ A $2.0 million inventory impairment charge at MLMC as mining costs exceeded net realizable value.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NACCO INDUSTRIES, INC.

AND SUBSIDIARIES

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

◦ A charge of $1.5 million related to one-time termination benefits as a result of a voluntary separation program for employees who met certain age and service requirements to reduce overall headcount.

◦ A $1.1 million asset impairment charge included in selling, general and administrative expenses in the table above.

• In addition, selling, general and administrative expenses in 2021 include a decrease in employee-related costs and professional service expenses, both partially offset by higher insurance expense.

Included in insurance expense is an increase of $1.3 million that is reimbursed by one of the Unconsolidated Subsidiaries.

The offsetting income related to the reimbursement is included in Earnings of unconsolidated operations.

NORTH AMERICAN MINING ("NAMining") SEGMENT

FINANCIAL REVIEW

Aggregate tons delivered by the NAMining segment were as follows for the years ended December 31:

Unconsolidated operations 9,938 9,367

Consolidated operations 42,565 36,546

Total tons delivered 52,503 45,913

The results of operations for the NAMining segment were as follows for the years ended December 31:

Total revenues $ 69,924 $ 42,392

Reimbursable costs 51,028 26,893

Revenues excluding reimbursable costs $ 18,896 $ 15,499

Revenues $ 69,924 $ 42,392

Cost of sales 67,078 39,266

Gross profit 2,846 3,126

Earnings of unconsolidated operations (a)

Selling, general and administrative expenses 6,610 5,138

Gain on sale of assets (12) (265)

Operating profit $ 109 $ 1,872

(a) See Note 17 to the Consolidated Financial Statements in this Form 10-K for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.

2021 Compared with 2020

Total revenues increased 64.9% in 2021 compared with 2020 primarily due to a $24.1 million increase in reimbursable costs, which have an offsetting amount in cost of sales and have no impact on operating profit.

The relocation of draglines related to new and amended contracts is the main driver of the increase in reimbursable costs.

The increase in revenues excluding reimbursable costs is primarily due to an increase in customer demand and tons delivered.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NACCO INDUSTRIES, INC.

AND SUBSIDIARIES

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

The following table identifies the components of change in operating profit for 2021 compared with 2020.

Operating Profit

Increase (decrease) from:

Selling, general and administrative expenses (1,472)

Gross profit (280)

Net change on sale of assets (253)

Earnings of unconsolidated operations 242

Operating profit decreased $1.8 million in 2021 compared with 2020 primarily due to an increase in selling, general and administrative expenses, mainly attributable to higher employee-related costs, which include an increase in business development expenses.

MINERALS MANAGEMENT SEGMENT

FINANCIAL REVIEW

The results of operations for the Minerals Management segment were as follows for the years ended December 31:

Revenues $ 31,003 $ 14,721

Cost of sales 2,988 2,342

Gross profit 28,015 12,379

Selling, general and administrative expenses 2,004 8,886

Gain on sale of assets (69) —

Operating profit $ 26,080 $ 3,493

2021 Compared with 2020

Revenues and operating profit increased in 2021 compared with 2020 primarily due to royalty income generated by gas production from the Ohio and Louisiana mineral interests, as well as oil production from the Permian Basin and Eagle Ford Shale mineral interests acquired late in the fourth quarter of 2020 and early in the second quarter of 2021, respectively.

Favorable changes in natural gas and oil prices also contributed to the improvement in revenues and operating profit.

In addition, the Company recognized $3.6 million of settlement income during 2021.

The decrease in selling, general and administrative expenses is primarily due to the absence of a $7.3 million asset impairment charge recognized in 2020.

As a result, the Company wrote-off certain capitalized leasehold costs and prepaid royalties related to legacy coal interests in 2020.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NACCO INDUSTRIES, INC.

AND SUBSIDIARIES

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

UNALLOCATED ITEMS AND ELIMINATIONS

FINANCIAL REVIEW

Unallocated Items and Eliminations were as follows for the years ended December 31:

Operating loss $ (19,838) $ (17,353)

2021 Compared with 2020

The operating loss increased during 2021 compared with 2020 primarily due to higher employee-related costs and an increase in expenses related to business development initiatives.

During the fourth quarter of 2020, the Company implemented a voluntary separation program for employees who met certain age and service requirements to reduce overall headcount.

As a result of this program, the 2020 operating loss includes a charge of $0.3 million related to one-time termination benefits.

NACCO Industries, Inc.

Coal Mining Outlook

As previously announced, GRE entered into an agreement to sell Coal Creek Station and the adjacent high-voltage direct current transmission line to Bismarck, North Dakota-based Rainbow Energy.

The closing of this sale is expected to occur in the second quarter of 2022.

Upon completion of the sale of Coal Creek Station, the existing agreements between GRE and Falkirk will terminate.

GRE will pay the Company $14.0 million, as well as transfer ownership of an office building and convey membership units in Midwest AgEnergy to wholly owned and consolidated subsidiaries of NACCO.

Upon closing of the sale to Rainbow Energy, a new Coal Sales Agreement ("CSA") between Falkirk and Rainbow Energy will become effective and Falkirk will continue supplying all coal requirements of Coal Creek Station.

Falkirk will be paid a management fee per ton of coal delivered for operating the mine, and Rainbow Energy will be responsible for funding all mine operating costs and directly or indirectly providing all of the capital required to operate the mine.

The CSA specifies that Falkirk will perform final mine reclamation, which will be funded in its entirety by Rainbow Energy.

The initial production period is expected to run ten years from the effective date of the CSA, but the CSA may be extended or terminated early under certain circumstances.

Coal Mining operating profit in 2022 is expected to decrease significantly compared with 2021.

This expected decrease is primarily the result of a decrease in coal deliveries from 2021 levels, as well as the termination of the Bisti contract.

An anticipated increase in operating expenses primarily due to expected higher insurance costs and other professional fees is also expected to contribute to the reduction in operating profit.

Results at the consolidated mining operations are expected to decrease significantly in 2022 from 2021 primarily due to expected substantially lower earnings at MLMC driven by an anticipated reduction in customer demand from 2021 levels, which contributes to an increase in the cost per ton.

Cost inflation on repairs, supplies and diesel fuel, and higher depreciation expense related to recent capital expenditures to develop a new mine area will also contribute to the increase in the cost per ton in 2022.

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.

The reduction in earnings at the unconsolidated Coal Mining operations is expected to be mainly driven by lower earnings at Falkirk resulting in part from a planned power plant outage prior to the expected closure of the Rainbow Energy transaction.

In addition, to support the transfer of Coal Creek Station, Falkirk has agreed to a reduction in the current per ton management fee from the effective date of the new CSA with Rainbow Energy through May 31, 2024.

After May 31, 2024, Falkirk's per ton management fee increases to a higher base in line with current fee levels, and thereafter adjusts annually according to an index

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NACCO INDUSTRIES, INC.

AND SUBSIDIARIES

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

which tracks a broad measure of U.S.

Termination of the Bisti contract in late 2021 will also contribute to a decline in the earnings at the unconsolidated mining operations in 2022.

Segment adjusted EBITDA, which excludes the termination payments of $10.3 million from Bisti's customer in 2021 and the anticipated $14 million contract termination fee from GRE in 2022, is expected to decrease significantly in 2022 from 2021 primarily as a result of the forecasted reduction in operating profit partially offset by an increase in depreciation, depletion and amortization expense.

The increase in depreciation, depletion and amortization expense is primarily due to higher capital expenditures at MLMC as a result of the development of a new mine area.

Capital expenditures are expected to be approximately $22 million in 2022.

The elevated levels of capital expenditures from 2019 through 2022 relate to the necessary development of a new mine area at MLMC, which will allow continued coal deliveries through the end of the contract.

The increase in capital expenditures associated with mine development will result in higher depreciation expense in future periods that will unfavorably affect future operating profit.

Capital expenditures for MLMC are expected to decline significantly beginning in 2023.

The Company's contract structure at each of its coal mining operations eliminates exposure to spot coal market price fluctuations.

However, fluctuations in natural gas prices and the availability of renewable generation, particularly wind, can contribute to changes in power plant dispatch and customer demand for coal.

The significant increase in natural gas prices in 2021 contributed to an increase in customer power plant dispatch and coal deliveries in 2021 over 2020.

Sustained higher natural gas prices could lead to increased demand for coal and positively affect the Coal Mining segment results in 2022.

Changes to expectations for customer power plant dispatch could affect the Company’s outlook for 2022 and over the longer term.

The owner of the power plant served by the Company's Sabine Mine in Texas intends to retire the power plant in the first quarter of 2023, at which time Sabine expects to begin final reclamation.

Funding for mine reclamation is the responsibility of the customer.

Coteau operates the Freedom Mine in North Dakota.

All coal production from the Freedom Mine is delivered to Basin Electric Power Cooperative.

Basin Electric utilizes the coal at the Great Plains Synfuels Plant, Antelope Valley Station and Leland Olds Station.

The Synfuels Plant is a coal gasification plant owned by Dakota Gas that manufactures synthetic natural gas and produces fertilizers, solvents, phenol, carbon dioxide and other chemical products for sale.

In August 2021, Basin Electric announced that it signed a non-binding term sheet which contemplates the sale of the assets of Dakota Gas.

As part of the announcement, Basin Electric indicated that the Synfuels Plant will continue existing operations through 2025.

The closing is subject to the satisfaction of specified conditions.

Basin Electric is also considering other options for the Synfuels Plant if the transaction with the potential buyer does not close.

NAMining Outlook

In 2022, NAMining expects full-year operating profit to increase significantly over 2021 due to an expected increase in customer requirements and contributions from contracts executed during 2021.

Segment adjusted EBITDA for 2022 is expected to increase significantly compared with the prior year as a result of the improvement in operating profit and an increase in depreciation expense.

During 2021, NAMining expanded its geographic footprint by entering into new contract mining services agreements at quarries in Indiana, Texas and Arkansas.

In addition, NAMining entered into a 15-year mining services contract with a new customer at a limestone quarry in Central Florida.

Presently, NAMining is operating two smaller draglines at this quarry while it relocates a larger dragline that will significantly increase production capacity once commissioned, which is expected to occur in the second half of 2022.

NAMining also amended a contract with a current customer to provide additional services at a limestone quarry in Florida.

NAMining continues to have a substantial pipeline of potential new projects and is pursuing a number of growth initiatives that, if successful, would be accretive to future earnings.

In 2019, NAMining's subsidiary, Sawtooth Mining, LLC, entered into a mining services agreement to serve as the exclusive contract miner for the Thacker Pass lithium project in northern Nevada, owned by Lithium Nevada Corp., a subsidiary of Lithium Americas Corp.

Lithium Americas owns the lithium reserves at Thacker Pass and will be responsible for the processing and sale of the lithium produced.

In January 2022, Lithium Americas provided an update on the Thacker Pass project, which noted that final permitting decisions are expected to be received in the first quarter of 2022.

Early-works construction is expected to begin in 2022.

At maturity, this management fee contract is expected to deliver fee income similar to a mid-sized management fee coal mine.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NACCO INDUSTRIES, INC.

AND SUBSIDIARIES

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

In 2022, capital expenditures are expected to be approximately $27 million primarily for the acquisition, relocation and refurbishment of draglines, as well as the acquisition of other mining equipment to support the continued expansion of contract-mining services beyond NAMining's historical dragline-oriented model, including the acquisition of equipment to support the Thacker Pass lithium project.

The cost of mining equipment related to Thacker Pass will be reimbursed by the customer over a seven-year period from the equipment acquisition date.

Minerals Management Outlook

The Minerals Management segment derives income from royalty-based leases under which lessees make payments to the Company based on their sale of natural gas, oil, natural gas liquids and coal, extracted primarily by third parties.

Operating profit and Segment adjusted EBITDA in 2022 are expected to decrease significantly from 2021 primarily driven by an anticipated reduction in production due to the natural decline curve on wells in Ohio, expectations for natural gas and oil prices, and the absence of $3.6 million of settlement income recognized in 2021.

The Company expects oil and gas market prices to moderate in 2022 and stabilize at levels consistent with averages over the second half of 2021.

Natural gas and oil benchmark prices increased during 2021 when compared with historical periods.

If natural gas and oil prices remain at higher levels than currently anticipated, results for the 2022 full year could be favorably impacted.

Commodity prices are inherently volatile and as an owner of royalty and mineral interests, the Company’s access to information concerning activity and operations of its interests is limited.

The Company's expectations are based on the best information currently available and could vary as a result of adjustments made by operators and/or changes to commodity prices.

The Company is in a period of transition where production from more recently acquired mineral interests is expected to begin to offset anticipated declines in production at legacy natural gas wells.

This transition is expected to occur over the next few years as the Company’s portfolio of recently acquired mineral interests continues to expand.

Minerals Management is targeting additional investments in mineral and royalty interests of approximately $10 million in 2022.

These investments are expected to be accretive, but each investment's contribution to earnings is dependent on the details of that investment, including the size and type of interests acquired and the stage and timing of mineral development.

The contribution of each investment could also vary due to commodity price changes.

These acquired interests are expected to align with the Company’s strategy of selectively acquiring mineral and royalty interests with a balance of near-term cash-flow yields and long-term growth potential, in high-quality reservoirs offering diversification from the Company’s legacy mineral interests.

Consolidated Outlook

Overall, in 2022, NACCO expects consolidated net income and Consolidated Adjusted EBITDA to decrease significantly from 2021.

Lower operating profit in the Coal Mining segment and an anticipated reduction in income in the Minerals Management segment are expected to be partially offset by higher operating profit at NAMining and lower income tax expense.

Additionally, the Company expects to recognize the value of the North Dakota office building and the membership units in Midwest AgEnergy, which are expected to be received as part of the compensation from GRE upon the closing of the transaction with Rainbow Energy.

Securing contracts for new mining projects and acquisitions of additional mineral interests could be accretive to the current forecast.

Consolidated capital expenditures are expected to be approximately $68 million in 2022.

Capital expenditures in 2022 include approximately $9 million for expenditures at Mitigation Resources of North America ® .

As a result of the forecasted capital expenditures and anticipated decrease in net income, cash flow before financing activities is expected to return to a significant use of cash in 2022.

Growth and Diversification

The Company is pursuing growth and diversification by strategically leveraging its core mining and natural resources management skills to build a strong portfolio of affiliated businesses.

Management continues to be optimistic about the long-term outlook for growth in the NAMining and Minerals Management segments and in the Company's Mitigation Resources

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What changed 10-K

Item 5. Market for Registrant’s Common Equity