NACCO INDUSTRIES INC - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_______________________________________________________________________________________________________________________________________________________________________________________________________

FORM 10-Q


(Mark One)
☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	September 30, 2022


☐						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

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

☐

Accelerated Filer

☑

Non-accelerated filer

☐

Smaller reporting company

☑

Emerging growth company

☐

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 ☐ No þ

Number of shares of Class A Common Stock outstanding at October 28, 2022: 5,775,954

Number of shares of Class B Common Stock outstanding at October 28, 2022: 1,566,329

NACCO INDUSTRIES, INC.

TABLE OF CONTENTS

Page Number

Part I.

FINANCIAL INFORMATION

Item 1

Financial Statements

Unaudited Condensed Consolidated Balance Sheets

Unaudited Condensed Consolidated Statements of Operations

Unaudited Condensed Consolidated Statements of Comprehensive Income

Unaudited Condensed Consolidated Statements of Cash Flows

Unaudited Condensed Consolidated Statements of Changes in Equity

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3

Quantitative and Qualitative Disclosures About Market Risk

Item 4

Controls and Procedures

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3

Defaults Upon Senior Securities

Item 4

Mine Safety Disclosures

Part I

FINANCIAL INFORMATION

Item 1. Financial Statements

NACCO INDUSTRIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	SEPTEMBER 30 2022		DECEMBER 31 2021
	(In thousands, except share data)
ASSETS
Cash and cash equivalents	$	92,754	$	86,005
Trade accounts receivable	23,603		25,667
Accounts receivable from affiliates	6,672		5,605
Inventories	61,799		54,085

Federal income tax receivable	23,046		15,054
Prepaid insurance	4,249		2,016
Other current assets	17,156		14,621
Total current assets	229,279		203,053
Property, plant and equipment, net	213,435		193,167

Intangibles, net	29,001		31,774

Investments in unconsolidated subsidiaries	9,853		19,090
Operating lease right-of-use assets	7,912		8,911
Investment in private company equity units	19,958		5,000
Other non-current assets	50,766		46,225
Total assets	$	560,204	$	507,220
LIABILITIES AND EQUITY
Accounts payable	$	11,371	$	12,208
Accounts payable to affiliates	699		741

Current maturities of long-term debt	2,955		2,527
Asset retirement obligations	1,820		1,820
Accrued payroll	16,640		16,339

Deferred revenue	1,334		4,082
Other current liabilities	9,150		8,299
Total current liabilities	43,969		46,016
Long-term debt	15,322		18,183
Operating lease liabilities	8,944		9,733
Asset retirement obligations	43,326		42,131
Pension and other postretirement obligations	4,943		6,605
Deferred income taxes	11,299		14,792
Liability for uncertain tax positions	9,280		10,113
Other long-term liabilities	7,700		7,531
Total liabilities	144,783		155,104
Stockholders' equity
Common stock:
Class A, par value $1 per share, 5,775,910 shares outstanding (December 31, 2021 - 5,616,568 shares outstanding)	5,776		5,616
Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,566,373 shares outstanding (December 31, 2021 - 1,566,613 shares outstanding)	1,566		1,567
Capital in excess of par value	23,235		16,331
Retained earnings	392,666		336,778
Accumulated other comprehensive loss	(7,822)		(8,176)
Total stockholders' equity	415,421		352,116
Total liabilities and equity	$	560,204	$	507,220

See notes to Unaudited Condensed Consolidated Financial Statements.

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NACCO INDUSTRIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	THREE MONTHS ENDED				NINE MONTHS ENDED
	SEPTEMBER 30				SEPTEMBER 30
	2022		2021		2022		2021
	(In thousands, except per share data)
Revenues	$	61,793	$	51,742	$	178,185	$	142,743
Cost of sales	43,965		37,413		128,867		111,737
Gross profit	17,828		14,329		49,318		31,006
Earnings of unconsolidated operations	14,588		17,652		43,802		46,536
Contract termination settlement	—		10,333		14,000		10,333
Operating expenses
Selling, general and administrative expenses	17,790		13,830		48,415		40,471
Amortization of intangible assets	867		902		2,772		2,795
(Gain) loss on sale of assets	2		(10)		(2,451)		17
Asset impairment charges	3,939		—		3,939		—
	22,598		14,722		52,675		43,283
Operating profit	9,818		27,592		54,445		44,592
Other (income) expense
Interest expense	486		493		1,495		1,208
Interest income	(352)		(101)		(692)		(321)
Closed mine obligations	398		372		1,155		1,119
Loss (gain) on equity securities	316		(445)		1,676		(2,530)
Income from equity method investee	(2,156)		—		(2,156)		—
Other contract termination settlements	—		—		(16,882)		—
Other, net	(354)		(161)		(1,648)		(418)
	(1,662)		158		(17,052)		(942)
Income before income tax provision	11,480		27,434		71,497		45,534
Income tax provision	866		2,597		11,121		5,231
Net income	$	10,614	$	24,837	$	60,376	$	40,303

Earnings per share:
Basic earnings per share	$	1.45	$	3.47	$	8.27	$	5.65
Diluted earnings per share	$	1.45	$	3.47	$	8.24	$	5.63

Basic weighted average shares outstanding	7,337		7,165		7,302		7,136
Diluted weighted average shares outstanding	7,337		7,165		7,329		7,153

See notes to Unaudited Condensed Consolidated Financial Statements.

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NACCO INDUSTRIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	THREE MONTHS ENDED				NINE MONTHS ENDED
	SEPTEMBER 30				SEPTEMBER 30
	2022		2021		2022		2021
	(In thousands)
Net income	$	10,614	$	24,837	$	60,376	$	40,303

Reclassification of pension and postretirement adjustments into earnings, net of $38 and $105 tax benefit in the three and nine months ended September 30, 2022, respectively, and net of $42 and $127 tax benefit in the three and nine months ended September 30, 2021, respectively.	118		143		354		429
Total other comprehensive income	118		143		354		429
Comprehensive income	$	10,732	$	24,980	$	60,730	$	40,732

See notes to Unaudited Condensed Consolidated Financial Statements.

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NACCO INDUSTRIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	NINE MONTHS ENDED
	SEPTEMBER 30
	2022		2021
	(In thousands)
Operating activities





Net cash provided by operating activities	$	54,929	$	67,794

Investing activities
Expenditures for property, plant and equipment and acquisition of mineral interests	(42,004)		(35,534)
Proceeds from the sale of property, plant and equipment	2,824		547

Other	(58)		(52)
Net cash used for investing activities	(39,238)		(35,039)

Financing activities
Additions to long-term debt	1,664		3,633
Reductions of long-term debt	(2,118)		(3,131)
Net reductions to revolving credit agreements	(4,000)		(30,000)
Cash dividends paid	(4,488)		(4,200)


Net cash used for financing activities	(8,942)		(33,698)

Cash and cash equivalents
Total increase (decrease) for the period	6,749		(943)
Balance at the beginning of the period	86,005		88,450
Balance at the end of the period	$	92,754	$	87,507

See notes to Unaudited Condensed Consolidated Financial Statements.

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NACCO INDUSTRIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


	Class A Common Stock		Class B Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
	(In thousands, except per share data)
Balance, January 1, 2021	$	5,490	$	1,568	$	10,895	$	294,270	$	(11,599)	$	300,624
Stock-based compensation	92		—		923		—		—		1,015
Conversion of Class B to Class A shares	1		(1)		—		—		—		—
Net income	—		—		—		8,961		—		8,961
Cash dividends on Class A and Class B common stock: $0.1925 per share	—		—		—		(1,374)		—		(1,374)
Reclassification adjustment to net income, net of tax	—		—		—		—		143		143
Balance, March 31, 2021	$	5,583	$	1,567	$	11,818	$	301,857	$	(11,456)	$	309,369
Stock-based compensation	12		—		1,110		—		—		1,122
Net income	—		—		—		6,505		—		6,505
Cash dividends on Class A and Class B common stock: $0.1975 per share	—		—		—		(1,412)		—		(1,412)
Reclassification adjustment to net income, net of tax	—		—		—		—		143		143
Balance, June 30, 2021	$	5,595	$	1,567	$	12,928	$	306,950	$	(11,313)	$	315,727
Stock-based compensation	12		—		1,614		—		—		1,626
Net income	—		—		—		24,837		—		24,837
Cash dividends on Class A and Class B common stock: $0.1975 per share	—		—		—		(1,414)		—		(1,414)
Reclassification adjustment to net income, net of tax	—		—		—		—		143		143
Balance, September 30, 2021	$	5,607	$	1,567	$	14,542	$	330,373	$	(11,170)	$	340,919

Balance, January 1, 2022	$	5,616	$	1,567	$	16,331	$	336,778	$	(8,176)	$	352,116
Stock-based compensation	145		—		978		—		—		1,123

Conversion of Class B to Class A shares	1		(1)		—		—		—		—
Net income	—		—		—		12,582		—		12,582
Cash dividends on Class A and Class B common stock: $0.1975 per share	—		—		—		(1,445)		—		(1,445)
Reclassification adjustment to net income, net of tax	—		—		—		—		118		118
Balance, March 31, 2022	$	5,762	$	1,566	$	17,309	$	347,915	$	(8,058)	$	364,494
Stock-based compensation	7		—		2,325		—		—		2,332

Net income	—		—		—		37,180		—		37,180
Cash dividends on Class A and Class B common stock: $0.2075 per share	—		—		—		(1,521)		—		(1,521)
Reclassification adjustment to net income, net of tax	—		—		—		—		118		118
Balance, June 30, 2022	$	5,769	$	1,566	$	19,634	$	383,574	$	(7,940)	$	402,603
Stock-based compensation	7		—		3,601		—		—		3,608


Net income	—		—		—		10,614		—		10,614
Cash dividends on Class A and Class B common stock: $0.2075 per share	—		—		—		(1,522)		—		(1,522)
Reclassification adjustment to net income, net of tax	—		—		—		—		118		118
Balance, September 30, 2022	$	5,776	$	1,566	$	23,235	$	392,666	$	(7,822)	$	415,421

See notes to Unaudited Condensed Consolidated Financial Statements.

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NACCO INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(In thousands, except as noted and per share amounts)

NOTE 1—Nature of Operations and Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of NACCO Industries, Inc.® (“NACCO”) and its wholly owned subsidiaries (collectively, the “Company”). NACCO brings natural resources to life by delivering aggregates, minerals, reliable fuels and environmental solutions through its robust portfolio of NACCO Natural Resources businesses. The Company operates under three business segments: Coal Mining, North American Mining ("NAMining") and Minerals Management. The Coal Mining segment operates surface coal mines for power generation companies. The NAMining segment is a trusted mining partner for producers of aggregates, activated carbon, lithium and other industrial minerals. The Minerals Management segment, which includes the Catapult Mineral Partners business, acquires and promotes the development of mineral interests. Mitigation Resources of North America® ("Mitigation Resources") provides stream and wetland mitigation solutions.

The Company also has items not directly attributable to a reportable segment. Intercompany accounts and transactions are eliminated in consolidation.

Effective January 1, 2022, the Company changed the composition of its reportable segments. As a result, the Company retrospectively changed its computation of segment operating profit to reclassify the results of Caddo Creek Resources Company, LLC (“Caddo Creek”) and Demery Resources Company, LLC ("Demery") from the Coal Mining segment into the NAMining segment as these operations provide mining solutions for producers of industrial minerals, rather than for power generation. The Coal Mining segment now includes only mines that deliver coal to power generation companies. This segment reporting change has no impact on consolidated operating results. All prior period segment information has been reclassified to conform to the new presentation. See Note 8 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 Coal Mining segment, operating as The North American Coal Corporation® ("NACoal"), operates surface coal mines under long-term contracts with power generation companies pursuant to a service-based business model. Lignite coal is surface mined in North Dakota, Texas and Mississippi. Each mine is fully integrated with its customer's operations and is the exclusive supplier of coal to its customer's facilities.

During the three and nine months ended September 30, 2022, the Coal Mining segment's operating coal mines were: The Coteau Properties Company (“Coteau”), Coyote Creek Mining Company, LLC (“Coyote Creek”), The Falkirk Mining Company (“Falkirk”), Mississippi Lignite Mining Company (“MLMC”) and The Sabine Mining Company (“Sabine”). Each of these mines deliver their coal production to adjacent power plants or synfuels plants under long-term supply contracts. MLMC’s coal supply contract contains a take or pay provision; all other coal supply contracts are requirements contracts under which earnings can fluctuate. Certain coal supply contracts can be terminated early, which would result in a reduction to future earnings.

On May 2, 2022, Great River Energy (“GRE”) completed the sale of Coal Creek Station and the adjacent high-voltage direct current transmission line to Rainbow Energy Center, LLC (“Rainbow Energy”) and its affiliates. As a result of the completion of the sale of Coal Creek Station, the Coal Sales Agreement, the Mortgage and Security Agreement and the Option Agreement between GRE and Falkirk were terminated. The Company recognized a gain of $30.9 million within the accompanying Unaudited Condensed Consolidated Statements of Operations during the second quarter of 2022 as GRE paid NACoal $14.0 million in cash, as well as transferred ownership of an office building with an estimated fair value of $4.1 million, and conveyed membership units in a privately-held company involved in the ethanol industry with an estimated fair value of $12.8 million, as agreed to under the termination and release of claims agreement between Falkirk and GRE. See Note 5 for further discussion on fair value. Prior to receiving the membership units from GRE, the Company held a $5.0 million investment in the same privately-held company carried at cost, less impairment. Subsequent to the receipt of the additional membership units on May 2, 2022, the Company began to account for the investment under the equity method of accounting subject to a one quarter reporting lag.

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The new Coal Sales Agreement (“CSA”) between Falkirk and Rainbow Energy became effective upon the closing of the transaction. Falkirk continues to supply all coal requirements of Coal Creek Station and is paid a management fee per ton of coal delivered. To support the transfer to new ownership, Falkirk has agreed to a reduction in the current per ton management fee from the effective date of the new CSA through May 31, 2024. After May 31, 2024, the per ton management fee increases to a higher base in line with 2021 fee levels, and thereafter adjusts annually according to an index which tracks broad measures of U.S. inflation. Rainbow Energy is responsible for funding all mine operating costs, including mine reclamation, and directly or indirectly providing all of the capital required to operate the mine. 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.

During the three and nine months ended September 30, 2021, the Coal Mining segment's operating coal mines also included Bisti Fuels Company, LLC (“Bisti”). Effective September 30, 2021, the contract mining agreement between Bisti and its customer, Navajo Transitional Energy Company ("NTEC"), was terminated.

Coteau operates the Freedom Mine in North Dakota. All coal production from the Freedom Mine is delivered to Basin Electric Power Cooperative (“Basin Electric”). Basin Electric utilizes the coal at the Great Plains Synfuels Plant (the “Synfuels Plant”), Antelope Valley Station and Leland Olds Station. The Synfuels Plant is a coal gasification plant, owned by Dakota Gasification Company (“Dakota Gas’), a subsidiary of Basin Electric, that manufactures synthetic natural gas and produces fertilizers, solvents, phenol, carbon dioxide, and other chemical products for sale. During 2020, Basin Electric informed Coteau that it is considering changes that may result in modifications to its Synfuels Plant that could potentially reduce or eliminate coal requirements at the Synfuels Plant. During 2021, Bakken Energy (“Bakken”) and Basin Electric signed a non-binding term sheet to transfer ownership of the assets of Dakota Gas to Bakken. Bakken stated the closing date is expected to be April 1, 2023. The closing is subject to the satisfaction of specified conditions. As part of the term sheet between Basin Electric and Bakken, Basin Electric indicated that the Synfuels Plant will continue existing operations through 2026. Basin Electric is also considering other options for the Synfuels Plant if the transaction with Bakken does not close.

Sabine operates the Sabine Mine in Texas. All production from Sabine is delivered to Southwestern Electric Power Company's (“SWEPCO”) Henry W. Pirkey Plant (the “Pirkey Plant”). SWEPCO is an American Electric Power (“AEP”) company. AEP intends to retire the Pirkey Plant in 2023. Sabine expects deliveries to cease during the first quarter of 2023 at which time it expects to begin final reclamation. Funding for mine reclamation is the responsibility of SWEPCO.

At Coteau, Coyote Creek, Falkirk and Sabine, the Company is 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. The customers are responsible for funding all mine operating costs, including final mine reclamation, and directly or indirectly provide all of the capital required to build and operate the mine. This contract structure eliminates exposure to spot coal market price fluctuations while providing income and cash flow with minimal capital investment. Other than at Coyote Creek, debt financing provided by or supported by the customers is without recourse to NACCO and NACoal. See Note 6 for further discussion of Coyote Creek's guarantees.

Coteau, Coyote Creek, Falkirk and Sabine each meet the definition of a variable interest entity ("VIE"). In each case, 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 associated with these VIEs is reported as Earnings of unconsolidated operations on the Unaudited Condensed Consolidated Statements of Operations and the Company’s investment is reported on the line Investments in unconsolidated subsidiaries in the Unaudited Condensed 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 provision line on the Unaudited Condensed Consolidated Statements of Operations includes income taxes related to these entities. See Note 6 for further information on the Unconsolidated Subsidiaries.

While Falkirk meets the definition of a VIE, the completion of the Rainbow Energy transaction resulted in a VIE reconsideration event. As the terms of the contract between Falkirk and Rainbow Energy are substantially the same as the terms of the contract between Falkirk and GRE, Falkirk will remain a VIE and Rainbow Energy is the primary beneficiary; therefore, NACCO will continue to account for Falkirk under the equity method.

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

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activities. To the extent the Unconsolidated Subsidiary performs such final reclamation, it is compensated for providing those services in addition to receiving reimbursement from customers for costs incurred.

The MLMC contract is the only operating coal contract in which the Company 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 and 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, fluctuations in diesel fuel prices can result in significant fluctuations in earnings at MLMC.

MLMC delivers coal to the Red Hills Power Plant in Ackerman, Mississippi. The Red Hills Power Plant supplies electricity to the Tennessee Valley Authority ("TVA") under a long-term Power Purchase Agreement. MLMC’s contract with its customer runs through 2032. TVA’s power portfolio includes coal, nuclear, hydroelectric, natural gas and renewables. The decision of which power plants to dispatch is determined by TVA. Reduction in dispatch of the Red Hills Power Plant will result in reduced earnings at MLMC.

NAMining Segment

The NAMining segment provides value-added contract mining and other services for producers of industrial minerals. The segment is a primary platform for the Company’s growth and diversification of mining activities outside of the thermal coal industry. NAMining provides contract mining services for independently owned mines and quarries, creating value for its customers by performing the mining aspects of its customers’ operations. This allows customers to focus on their areas of expertise: materials handling and processing, product sales and distribution. NAMining historically operated primarily at limestone quarries in Florida, but is focused on continuing to expand outside of Florida, mining materials other than limestone and expanding the scope of mining operations provided to its customers.

NAMining utilizes both fixed price and management fee contract structures. Certain of the entities within the NAMining segment are VIEs and are accounted for under the equity method as Unconsolidated Subsidiaries. See Note 6 for further discussion.

Minerals Management Segment

The Minerals Management segment derives income primarily by leasing its royalty and mineral interests to third-party exploration and production companies, and, to a lesser extent, other mining companies, granting them the rights to explore, develop, mine, produce, market and sell gas, oil, and coal in exchange for royalty payments based on the lessees' sales of those minerals.

During the first nine months ended September 30, 2022, the Minerals Management segment had capital expenditures totaling $12.3 million, primarily related to the $11.4 million acquisition of mineral interests in the Texas portion of the Permian Basin and the Wyoming portion of the Powder River Basin during the third quarter of 2022. During the first nine months of 2022, the Minerals Management segment also acquired mineral interests in the New Mexico portion of the Permian Basin. The Minerals Management segment intends to make future acquisitions of mineral and royalty interests that meet the Company’s acquisition criteria as part of its growth strategy.

The Company’s legacy royalty and mineral interests are located in Ohio (Utica and Marcellus shale natural gas), Louisiana (Haynesville shale and Cotton Valley formation natural gas), Texas (Cotton Valley and Austin Chalk formation natural gas), Mississippi (coal), Pennsylvania (coal, coalbed methane and Marcellus shale natural gas), Alabama (coal, coalbed methane and natural gas) and North Dakota (coal, oil and natural gas). The majority of the Company’s legacy reserves were acquired as part of its historical coal mining operations.

The Minerals Management segment owns royalty interests, mineral interests, nonparticipating royalty interests, and overriding royalty interests. The Company may own more than one type of mineral and royalty interest in the same tract of land. For example, where the Company owns an overriding royalty interest in a lease on the same tract of land in which it owns a mineral interest, the overriding royalty interest in that tract will relate to the same gross acres as the mineral interest in that tract.

The Minerals Management segment will benefit from the continued development of its mineral properties without the need for investment of additional capital once mineral and royalty interests have been acquired. The Minerals Management segment does not have any investments under which it would be required to bear the cost of exploration, production or development.

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As an owner of royalty and mineral interests, the Company’s access to information concerning activity and operations of its royalty and mineral interests is limited. The Company does not have information that would be available to a company with oil and natural gas operations because detailed information is not generally available to owners of royalty and mineral interests.

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, 2022, the results of its operations, comprehensive income, cash flows and changes in equity for the nine months ended September 30, 2022 and 2021 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, 2021.

The balance sheet at December 31, 2021 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 the prior period Unaudited Condensed Consolidated Financial Statements have been reclassified to conform to the current period's presentation.

NOTE 2—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 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, the management service is primarily to oversee the operation of the equipment, and delivery of aggregates or other minerals 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 or fixed fee and the general and administrative fee (as applicable). Fluctuations in revenue from period to period result from changes in customer demand primarily due to increases and decreases in activity levels on individual contracts and variances in reimbursable costs.

Included within NAMining, Caddo Creek has a fixed-price contract to perform mine reclamation. The management service to perform mine reclamation 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. Revenue from this contract is recognized over time utilizing the cost-to-cost method to measure the extent of progress toward completion of the performance obligation. The Company believes the cost-to-cost method is the most appropriate method to measure progress and that the rate at which costs are incurred to fulfill the contract best depicts the transfer of control to the customer. The extent of progress towards completion is measured based on the ratio of costs incurred to date compared to total estimated costs at completion, and revenue is recorded proportionally based on an estimated profit margin.

The Minerals Management segment enters into contracts which grant third-party lessees 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.

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Under these contracts, granting exclusive right, title, and interest in and to minerals 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 Company believes that the provisions of royalty contracts are customary in the industry. Up-front lease bonus payments represent the fixed portion of the transaction price and are 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 volumes or MMBtu delivered, however, the terms of these variable payments relate specifically to the Company's 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.

Recognition of revenue and recognition of profit related to the Caddo Creek contract requires the use of assumptions and estimates related to the total contract value, the total cost at completion, and the measurement of progress towards completion of the performance obligation. Due to the nature of the contract, developing the estimated total contract value and total cost at completion requires the use of significant judgment. The total contract value includes variable consideration. The Company includes variable consideration in the transaction price at the most likely amount to be earned, based upon the Company’s assessment of expected performance. The Company records these amounts only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.

Cost Reimbursement

Certain contracts include reimbursement from customers of actual costs incurred for the purchase of supplies, equipment and services in accordance with contractual terms. Such reimbursable revenue is variable and subject to uncertainty, as the amounts received and timing thereof is highly dependent on factors outside of the Company’s control. Accordingly, reimbursable revenue is fully constrained and not recognized until the uncertainty is resolved, which typically occurs when the related costs are incurred on behalf of a customer. The Company is considered a principal in such transactions and records the associated revenue at the gross amount billed to the customer with the related costs recorded as an expense within cost of sales.

Prior Period Performance Obligations

The Company records royalty income in the month production is delivered to the purchaser. As a non-operator, the Company has limited visibility into when new wells start producing and production statements may not be received for 30 to 90 days or more after the date production is delivered. As a result, the Company is required to estimate the amount of production delivered to the purchaser of the product and the price that will be received for the sale of the product. The expected sales volumes and prices for these properties are estimated and recorded in "Trade accounts receivable" in the accompanying Unaudited Condensed Consolidated Balance Sheets. The difference between the Company’s estimates and the actual amounts received is recorded in the month that payment is received from the third-party lessee. For the three months ended September 30, 2022, royalty income recognized in the reporting periods related to performance obligations satisfied in prior reporting periods was immaterial. For the nine months ended September 30, 2022, royalty income of $2.1 million was recognized for a settlement related to the Company’s ownership interest in certain mineral rights. For the three and nine months ended September 30, 2021, the Company recognized $1.8 million of variable consideration that was previously constrained due to uncertainty of collectability.

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 8 to the Unaudited Condensed Consolidated Financial Statements for further discussion of segment reporting.

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	THREE MONTHS ENDED				NINE MONTHS ENDED
	SEPTEMBER 30				SEPTEMBER 30
	2022		2021		2022		2021
Timing of Revenue Recognition
Goods transferred at a point in time	$	22,043	$	20,436	$	68,402	$	61,931
Services transferred over time	39,750		31,306		109,783		80,812
Total revenues	$	61,793	$	51,742	$	178,185	$	142,743

Contract Balances

The opening and closing balances of the Company’s current and long-term accounts receivable, contract assets and contract liabilities are as follows:


	Contract balances
	Trade accounts receivable		Contract asset (long-term)		Contract liability (current)		Contract liability (long-term)
Balance, January 1, 2022	$	25,667	$	5,985	$	4,082	$	1,453
Balance, September 30, 2022	23,603		5,985		1,334		1,860
Increase (decrease)	$	(2,064)	$	—	$	(2,748)	$	407

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 amount of royalty revenue recognized in both of the three months ended September 30, 2022 and 2021 that was included in the opening contract liability was $0.2 million. The amount of royalty revenue recognized in both of the nine months ended September 30, 2022 and 2021 that was included in the opening contract liability was $0.7 million. 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 $0.8 million in the remainder of 2022, $1.7 million in 2023, $0.5 million in 2024, $0.2 million in 2025 and a de minimis amount in 2026 related to the contract liability remaining at September 30, 2022. The difference between the opening and closing balances of the Company’s contract balances results from the timing difference between the Company’s performance and the customer’s payment.

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

NOTE 3—Inventories

Inventories are summarized as follows:


	SEPTEMBER 30 2022		DECEMBER 31 2021
Coal	$	20,751	$	19,352
Mining supplies	41,048		34,733
Total inventories	$	61,799	$	54,085

NOTE 4—Stockholders' Equity

Stock Repurchase Program: On November 10, 2021, the Company's Board of Directors approved a stock repurchase program ("2021 Stock Repurchase Program") providing for the purchase of up to $20.0 million of the Company’s outstanding Class A common stock through December 31, 2023.

The timing and amount of any repurchases under the 2021 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,

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market conditions for the Company's Class A Common Stock and other legal and contractual restrictions. The 2021 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 2021 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. The Company has not repurchased any shares of common stock under the 2021 Stock Repurchase Program through September 30, 2022.

NOTE 5—Fair Value Disclosure

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, 2022
Assets:
Equity securities	$	14,084	$	14,084	$	—	$	—

	$	14,084	$	14,084	$	—	$	—




	December 31, 2021
Assets:
Equity securities	$	16,070	$	16,070	$	—	$	—
	$	16,070	$	16,070	$	—	$	—

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 2021, Bellaire contributed $5.0 million to establish a mine water treatment trust (the "Mine Water Treatment Trust") to assure the long-term treatment of post-mining discharge. 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 Company recognized a loss of $0.5 million and $2.7 million during the three and nine months ended September 30, 2022, respectively, and a gain of less than $0.1 million and $1.0 million during the three and nine months ended September 30, 2021, respectively, related to the Mine Water Treatment Trust.

Prior to 2021, the Company invested $2.0 million in equity securities of a public company with a diversified portfolio of royalty producing mineral interests. The investment is reported at fair value based upon quoted market prices in active markets for identical assets; therefore, it is classified as Level 1 within the fair value hierarchy. The Company recognized a gain of $0.2 million and $1.0 million during the three and nine months ended September 30, 2022, respectively, and a gain of $0.4 million and $1.6 million during the three and nine months ended September 30, 2021, respectively, related to the investment in these equity securities.

The gains and losses related to equity securities are reported on the line Loss (gain) on equity securities in the Other (income) expense section of the Unaudited Condensed Consolidated Statements of Operations.

As discussed in Note 1, the Company recorded the estimated fair value of an office building and membership units of a privately held company during the second quarter of 2022. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value measurement hierarchy. Level 3 fair market values were determined using a variety of information, including estimated future cash flows and external appraisals, and considered both the income and market approaches.

The significant assumptions used in determining the fair value of the membership units are the estimated future cash flows and the discount rate applied to the estimated future cash flows. The estimate of future cash flows is based on available historical information and forecasts provided by the privately held company that are inherently uncertain. Management determined the appropriate discount rate based on the weighted average cost of capital ("WACC"). The WACC takes into account both the

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after-tax cost of debt and cost of equity. A major component of the cost of equity is the current risk-free rate on twenty-year U.S. Treasury bonds as well as company specific risk and size premiums.

In determining the $4.1 million fair value of the office building, the Company engaged an independent real estate appraiser to appraise the property utilizing observed sales transactions for similar assets as well as consideration of an income approach.

Prior to receiving the membership units from GRE, the Company held a $5.0 million investment in the same privately-held company. The Company previously elected to use the measurement alternative to fair value included in ASC 321, Investments – Equity Securities, that allows investments without readily determinable fair values to be carried at cost less impairment, if any, adjusted for observable price changes in orderly transactions for the identical or similar investments. The Company determined that the receipt of the additional membership units does not represent an observable transaction as defined in ASC 321. As such, the Company will add the fair value of the additional membership units of $12.8 million to the $5.0 million historical cost basis of the existing membership units, the total of which is the initial measurement of the Company’s equity method investment.

Subsequent to the receipt of the additional membership units on May 2, 2022, the Company began to account for the investment under the equity method of accounting subject to a one quarter reporting lag. The Company recorded $2.2 million, which represents its share of the privately-held company's second quarter earnings and immaterial basis difference adjustments, during the third quarter of 2022 on the "Income from equity method investee" line within the accompanying Unaudited Condensed Consolidated Statements of Operations.

The office building is included in Property, plant and equipment, net and the investment in the privately-held company is included in Investment in private company equity units within the accompanying Unaudited Condensed Consolidated Balance Sheets.

The Company regularly performs reviews of potential future development projects and identified certain legacy assets where future development is unlikely. As a result, the Company estimated the fair value of the assets using unobservable inputs, which are classified as Level 3 inputs. The long-lived assets, which included land, prepaid royalties and capitalized leasehold costs, were written off to zero in the third quarter of 2022 and resulted in non-cash asset impairment charges of $3.9 million in the Minerals Management segment. The impairment charges are reported on the line "Asset impairment charges" in 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, 2022 and 2021.

NOTE 6—Unconsolidated Subsidiaries

Each of the Company's wholly owned Unconsolidated Subsidiaries, within the Coal Mining and NAMining segments, meet the definition of a VIE. The Unconsolidated Subsidiaries are capitalized primarily with debt financing provided by or supported by their respective customers, and generally 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, the Company 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 $9.9 million and $19.1 million at September 30, 2022 and December 31, 2021, respectively. The Company's maximum risk of loss relating to these entities is limited to its invested capital, which was $4.7 million and $7.6 million at September 30, 2022 and December 31, 2021, respectively. Earnings of unconsolidated operations were $14.6 million and $43.8 million during the three and nine months ended September 30, 2022, respectively, and $17.7 million and $46.5 million during the three and nine months ended September 30, 2021.

The contract mining agreement between Bisti and NTEC was terminated effective September 30, 2021. As of October 1, 2021, NTEC assumed control and responsibility for operation and all reclamation of the Navajo Mine.

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

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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.

NOTE 7—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 8—Business Segments

The Company’s operating segments are: (i) Coal Mining, (ii) NAMining and (iii) Minerals Management. 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 Chief Operating Decision Maker utilizes operating profit to evaluate segment performance and allocate resources.

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 include primarily administrative costs related to public company reporting requirements at the parent company and the financial results of Mitigation Resources and Bellaire. Mitigation Resources 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.

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As discussed in Note 1, the Company retrospectively changed its computation of segment operating profit to reclassify the results of Caddo Creek and Demery from the Coal Mining segment into the NAMining segment. See Note 1 for additional discussion of the Company's reportable segments. The following tables present revenue, operating profit, capital expenditures and depreciation expense:


	THREE MONTHS ENDED				NINE MONTHS ENDED
	SEPTEMBER 30				SEPTEMBER 30
	2022		2021		2022		2021
Revenues
Coal Mining	$	22,599	$	20,946	$	70,163	$	63,577
NAMining	22,962		20,429		67,180		58,228
Minerals Management	16,172		10,607		40,888		21,715
Unallocated Items	1,092		1,594		1,901		2,647
Eliminations	(1,032)		(1,834)		(1,947)		(3,424)
Total	$	61,793	$	51,742	$	178,185	$	142,743

Operating profit (loss)
Coal Mining	$	6,089	$	21,985	$	34,616	$	37,769
NAMining	(210)		1,448		2,318		3,803
Minerals Management	10,616		9,454		35,317		17,862
Unallocated Items	(6,780)		(5,170)		(18,171)		(14,738)
Eliminations	103		(125)		365		(104)
Total	$	9,818	$	27,592	$	54,445	$	44,592





Expenditures for property, plant and equipment and acquisition of mineral interests
Coal Mining	$	3,141	$	5,646	$	11,141	$	10,378
NAMining	604		13,309		8,985		19,127
Minerals Management	11,397		450		12,346		5,948
Unallocated Items	1,944		2		9,532		81
Total	$	17,086	$	19,407	$	42,004	$	35,534

Depreciation, depletion and amortization
Coal Mining	$	4,257	$	4,306	$	12,683	$	12,534
NAMining	1,585		1,031		4,545		2,966
Minerals Management	660		423		1,781		1,392
Unallocated Items	67		36		175		106
Total	$	6,569	$	5,796	$	19,184	$	16,998

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Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Amounts 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 include NACCO Industries, Inc.® (“NACCO”) and its wholly owned subsidiaries (collectively, the “Company”). NACCO brings natural resources to life by delivering aggregates, minerals, reliable fuels and environmental solutions through its robust portfolio of NACCO Natural Resources businesses. The Company operates under three business segments: Coal Mining, North American Mining ("NAMining") and Minerals Management. The Coal Mining segment operates surface coal mines for power generation companies. The NAMining segment is a trusted mining partner for producers of aggregates, activated carbon, lithium and other industrial minerals. The Minerals Management segment, which includes the Catapult Mineral Partners business, acquires and promotes the development of mineral interests. Mitigation Resources of North America® (“Mitigation Resources”) provides stream and wetland mitigation solutions.

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

The Company’s operating segments are further described below:

Coal Mining Segment

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million, as agreed to under the termination and release of claims agreement between Falkirk and GRE. See Note 5 for further discussion on fair value. Prior to receiving the membership units from GRE, the Company held a $5.0 million investment in the same privately-held company carried at cost, less impairment. Subsequent to the receipt of the additional membership units on May 2, 2022, the Company began to account for the investment under the equity method of accounting subject to a one quarter reporting lag.

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NAMining Segment

Minerals Management Segment

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Refer to the discussion of the Company's Critical Accounting Policies and Estimates as disclosed on pages 45 through 46 in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The Company's Critical Accounting Policies and Estimates have not materially changed since December 31, 2021.

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
	2022			2021			2022			2021
Revenues:
Coal Mining	$	22,599		$	20,946		$	70,163		$	63,577
NAMining	22,962			20,429			67,180			58,228
Minerals Management	16,172			10,607			40,888			21,715
Unallocated Items	1,092			1,594			1,901			2,647
Eliminations	(1,032)			(1,834)			(1,947)			(3,424)
Total revenue	$	61,793		$	51,742		$	178,185		$	142,743
Operating profit (loss):
Coal Mining	$	6,089		$	21,985		$	34,616		$	37,769
NAMining	(210)			1,448			2,318			3,803
Minerals Management	10,616			9,454			35,317			17,862
Unallocated Items	(6,780)			(5,170)			(18,171)			(14,738)
Eliminations	103			(125)			365			(104)
Total operating profit	9,818			27,592			54,445			44,592
Interest expense	486			493			1,495			1,208
Interest income	(352)			(101)			(692)			(321)
Closed mine obligations	398			372			1,155			1,119
Loss (gain) on equity securities	316			(445)			1,676			(2,530)
Income from equity method investee	(2,156)			—			(2,156)			—
Other contract termination settlements	—			—			(16,882)			—
Other, net	(354)			(161)			(1,648)			(418)
Other (income) expense, net	(1,662)			158			(17,052)			(942)
Income before income tax provision	11,480			27,434			71,497			45,534
Income tax provision	866			2,597			11,121			5,231
Net income	$	10,614		$	24,837		$	60,376		$	40,303

Effective income tax rate	7.5		%	9.5		%	15.6		%	11.5		%

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

Third Quarter of 2022 Compared with Third Quarter of 2021, and First Nine Months of 2022 Compared with First Nine Months of 2021

Other income, net

During the second quarter of 2022, GRE transferred ownership of an office building with an estimated fair value of $4.1 million and conveyed membership units in a privately-held company with an estimated fair value of $12.8 million, as agreed to under

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the termination and release of claims agreement between Falkirk and GRE. The Company recognized a gain of $16.9 million on the "Other contract termination settlements" line within the accompanying Unaudited Condensed Consolidated Statements of Operations during the second quarter of 2022 as a result of the transactions with GRE.

Loss (gain) on equity securities represents changes in the market price of invested assets reported at fair value. The change in the third quarter of 2022 and the first nine months of 2022 compared with the respective 2021 periods was due to fluctuations in the market prices of the exchange-traded equity securities.

See Note 5 to the Unaudited Condensed Consolidated Financial Statements for further discussion of the Other contract termination settlements, equity method investment and equity securities.

Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. Since 2021, the Company has participated in a voluntary program with the IRS called Compliance Assurance Process (“CAP”). The objective of CAP is to contemporaneously work with the IRS to achieve federal tax compliance and resolve all or most of the issues prior to filing of the tax return. The Company recognized a $1.2 million discrete tax benefit during the third quarter of 2022, primarily due to the IRS concluding its examination of tax years 2013-2016.

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 estimated annual effective income tax rate differs from the U.S. federal statutory rate due, in part, to the benefit from percentage depletion. Changes in the estimated annual effective tax rate result in a cumulative adjustment. The increase in the effective income tax rate for the nine months ended September 30, 2022 compared with the 2021 period reflects the impact of a higher forecast of full-year pre-tax income in 2022 compared with the prior year, including the $30.9 million gain recognized as a result of the settlement under the termination and release of claims agreement with GRE.

The Inflation Reduction Act of 2022 (the “Act”) was signed into U.S. law on August 16, 2022. The Act includes various tax provisions, including an excise tax on stock repurchases and a corporate alternative minimum tax that generally applies to U.S. corporations with average adjusted financial statement income over a three-year period in excess of $1 billion. The Company does not expect the Act to materially impact its financial statements. The enactment of additional tax reform legislation could adversely impact the Company’s financial position and results of operations. Legislation or other changes in U.S. tax law, including the elimination of certain U.S. federal income tax benefits currently available to coal mining and oil and gas exploration and development companies, could increase the Company’s tax liability and adversely affect its after-tax profitability.

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LIQUIDITY AND CAPITAL RESOURCES OF NACCO

Cash Flows

The following tables detail NACCO's changes in cash flow for the nine months ended September 30:


	2022		2021		Change
Operating activities:




Net cash provided by operating activities	$	54,929	$	67,794	$	(12,865)

Investing activities:
Expenditures for property, plant and equipment and acquisition of mineral interests	(42,004)		(35,534)		(6,470)
Other	2,766		495		2,271
Net cash used for investing activities	(39,238)		(35,039)		(4,199)
Cash flow before financing activities	$	15,691	$	32,755	$	(17,064)

The $12.9 million change in net cash provided by operating activities was primarily due to a net unfavorable change in working capital, mainly attributable to an increase in Federal income tax receivable in the first nine months of 2022 compared with a decrease in the first nine months of 2021. The $20.1 million increase in net income was offset by non-cash adjustments recognized during the first nine months of 2022, including $16.9 million related to the termination and release of claims agreement between Falkirk and GRE.


	2022		2021		Change
Financing activities:
Net reductions to long-term debt and revolving credit agreement	$	(4,454)	$	(29,498)	$	25,044
Cash dividends paid	(4,488)		(4,200)		(288)


Net cash used for financing activities	$	(8,942)	$	(33,698)	$	24,756

The change in net cash used for financing activities was primarily due to fewer repayments as a result of a reduction in borrowings under the Company’s revolving line of credit during the first nine months of 2022 compared with the first nine months of 2021.

Financing Activities

Financing arrangements are obtained and maintained at the NACoal level. NACoal has a secured revolving line of credit of up to $150.0 million (the “NACoal Facility”) that expires in November 2025. There were no borrowings outstanding under the NACoal Facility at September 30, 2022. At September 30, 2022, the excess availability under the NACoal Facility was $119.3 million, which reflects a reduction for outstanding letters of credit of $30.7 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 September 30, 2022, 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 September 30, 2022. During the nine months ended September 30, 2022, the average borrowing under the NACoal Facility was $2.6 million and the weighted-average annual interest rate was 3.8%.

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

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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 September 30, 2022, NACoal was in compliance with all financial covenants in the NACoal Facility.

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

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

limitations.

The Company believes funds available from cash on hand, the NACoal Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the NACoal Facility in November 2025.

Expenditures for property, plant and equipment and mineral interests

Expenditures for property, plant and equipment and mineral interests were $42.0 million during the first nine months of 2022. Planned expenditures for the remainder of 2022 are expected to be approximately $14 million in the Coal Mining segment, $3 million in the NAMining segment and $2 million at Mitigation Resources. Planned expenditures for 2023 are expected to be approximately $10 million in the Coal Mining segment, $29 million in the NAMining segment and $10 million in the Minerals Management segment.

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 2023 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 the Thacker Pass lithium project.

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

Capital Structure

NACCO's consolidated capital structure is presented below:


	SEPTEMBER 30 2022		DECEMBER 31 2021		Change
Cash and cash equivalents	$	92,754	$	86,005	$	6,749
Other net tangible assets	333,506		276,733		56,773
Intangible assets, net	29,001		31,774		(2,773)
Net assets	455,261		394,512		60,749
Total debt	(18,277)		(20,710)		2,433
Bellaire closed mine obligations	(21,563)		(21,686)		123
Total equity	$	415,421	$	352,116	$	63,305
Debt to total capitalization	4%		6%		(2)%

The increase in other net tangible assets at September 30, 2022 compared with December 31, 2021 was primarily due to an increase in Property, plant and equipment, the receipt of the membership units in a privately-held company and office building that were transferred from GRE with a fair value of $12.8 million and $4.1 million, respectively, and an increase in Federal income tax receivable.

Contractual Obligations, Contingent Liabilities and Commitments

Since December 31, 2021, 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 pages 50 through 51 in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of certain guarantees related to Coyote Creek.

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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:


	THREE MONTHS		NINE MONTHS
	2022	2021	2022	2021
Unconsolidated operations	7,210	8,206	19,061	21,733
Consolidated operations	750	768	2,397	2,378
Total tons delivered	7,960	8,974	21,458	24,111

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
	2022		2021		2022		2021
Revenues	$	22,599	$	20,946	$	70,163	$	63,577
Cost of sales	20,933		17,817		64,421		55,950
Gross profit	1,666		3,129		5,742		7,627
Earnings of unconsolidated operations(a)	13,300		16,380		40,086		42,718
Contract termination settlement	—		10,333		14,000		10,333
Selling, general and administrative expenses	8,008		6,960		22,439		20,152
Amortization of intangible assets	867		902		2,772		2,795
Loss (gain) on sale of assets	2		(5)		1		(38)
Operating profit	$	6,089	$	21,985	$	34,616	$	37,769

(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.

Third Quarter of 2022 Compared with Third Quarter of 2021

Revenues increased 7.9% in the third quarter of 2022 compared with the third quarter of 2021 primarily due to a higher per ton sales price at MLMC.

The following table identifies the components of change in operating profit for the third quarter of 2022 compared with the third quarter of 2021:


	Operating Profit
2021	$	21,985
Increase (decrease) from:
Contract termination settlement received in 2021	(10,333)
Earnings of unconsolidated operations	(3,080)
Gross profit	(1,463)
Selling, general and administrative expenses	(1,048)
Gain on sale of assets	(7)
Amortization of intangibles	35
2022	$	6,089

Operating profit decreased $15.9 million in the third quarter of 2022 compared with the third quarter of 2021 due to the $10.3 million payment related to the Bisti contract termination recognized during the third quarter of 2021, a decrease in the earnings of unconsolidated operations, a decrease in gross profit and an increase in selling, general and administrative expenses.

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The decrease in earnings of unconsolidated operations was primarily due to a reduction in the per ton management fee at Falkirk as well as the Bisti contract termination as of September 30, 2021. These decreases were partially offset by an increase in customer requirements at Coteau.

The decrease in gross profit was primarily due to an increase in the cost per ton delivered at MLMC, due in part to an increase in the costs of diesel fuel as well as repairs and maintenance expense.

The increase in selling, general and administrative expenses was primarily due to higher employee-related costs.

First Nine Months of 2022 Compared with First Nine Months of 2021

Revenues increased 10.4% in the first nine months of 2022 compared with the first nine months of 2021 primarily due to a higher per ton sales price at MLMC.

The following table identifies the components of change in operating profit for the first nine months of 2022 compared with the first nine months of 2021:


	Operating Profit
2021	$	37,769
Increase (decrease) from:
Earnings of unconsolidated operations	(2,632)
Selling, general and administrative expenses	(2,287)
Gross profit	(1,885)
Gain on sale of assets	(39)
Contract termination settlements in 2022 and 2021, net	3,667
Amortization of intangibles	23
2022	$	34,616

Operating profit decreased $3.2 million in the first nine months of 2022 compared with the first nine months of 2021 primarily due to a decrease in the earnings of unconsolidated operations, an increase in selling, general and administrative expenses and a decrease in gross profit.

The decrease in earnings of unconsolidated operations was primarily due to a reduction in earnings as a result of the Bisti contract termination as of September 30, 2021 as well as a reduction in the per ton management fee at Falkirk. These decreases were partially offset by a contractual price escalation and an increase in customer requirements at Coteau.

The increase in selling, general and administrative expenses was primarily due to higher employee-related costs and professional service expenses.

The decrease in gross profit was primarily due to an increase in the cost per ton delivered at MLMC, due in part to an increase in the cost of diesel fuel.

The decreases in operating profit were partially offset by an increase in contract termination settlements. The $14.0 million contract termination settlement from GRE recognized during the second quarter of 2022 was partially offset by the $10.3 million payment related to the Bisti contract termination recognized during the third quarter of 2021.

NORTH AMERICAN MINING ("NAMining") SEGMENT

FINANCIAL REVIEW

Tons delivered by the NAMining segment were as follows for the three and nine months ended September 30:


	THREE MONTHS		NINE MONTHS
	2022	2021	2022	2021


Total tons delivered	13,421	14,215	40,756	40,460

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The results of operations for the NAMining segment were as follows for the three and nine months ended September 30:


	THREE MONTHS				NINE MONTHS
	2022		2021		2022		2021
Total revenues	$	22,962	$	20,429	$	67,180	$	58,228
Reimbursable costs	15,259		12,278		41,337		37,835
Revenues excluding reimbursable costs	$	7,703	$	8,151	$	25,843	$	20,393

Total revenues	$	22,962	$	20,429	$	67,180	$	58,228
Cost of sales	21,853		18,886		62,086		53,678
Gross profit	1,109		1,543		5,094		4,550
Earnings of unconsolidated operations(a)	1,288		1,272		3,716		3,818
Selling, general and administrative expenses	2,607		1,372		6,417		4,510
Loss (gain) on sale of assets	—		(5)		75		55
Operating profit (loss)	$	(210)	$	1,448	$	2,318	$	3,803

(a) See Note 6 to the Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's unconsolidated subsidiaries, including summarized financial information.

Third Quarter of 2022 Compared with Third Quarter of 2021

Total revenues increased 12.4% in the third quarter of 2022 compared with the third quarter of 2021 primarily due to an increase in reimbursable costs, which have an offsetting amount in cost of sales and have no impact on operating profit, as well as a higher average per ton sales price at the consolidated operations. These improvements were partially offset by a reduction in revenue at Caddo Creek as the scope of final reclamation activities declined.

The following table identifies the components of change in operating profit (loss) for the third quarter of 2022 compared with the third quarter of 2021:


	Operating Profit (Loss)
2021	$	1,448
Increase (decrease) from:
Selling, general and administrative expenses	(1,000)
Voluntary retirement program charge	(769)
Gain on sale of assets	(5)
Gross profit	100
Earnings of unconsolidated operations	16
2022	$	(210)

Operating profit decreased $1.7 million in the third quarter of 2022 compared with the third quarter of 2021 primarily due to an increase in selling, general and administrative expenses and a voluntary retirement charge.

During the third quarter of 2022, the Company implemented a voluntary retirement program for employees who met certain age and service requirements to reduce overall headcount. As a result of this program, the third quarter 2022 operating loss includes a charge of $0.8 million related to one-time termination benefits. The increase in selling, general and administrative expenses was mainly due to higher employee-related costs.

The increase in gross profit was due to higher earnings at consolidated quarries, partially offset by a reduction in earnings at Caddo Creek as the scope of final mine reclamation activities declined.

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First Nine Months of 2022 Compared with First Nine Months of 2021

Total revenues increased 15.4% in the first nine months of 2022 compared with the first nine months of 2021 primarily due to an increase in reimbursable costs, which have an offsetting amount in cost of sales and have no impact on operating profit, as well as an increase in customer requirements and tons delivered at the consolidated operations.

The following table identifies the components of change in operating profit for the first nine months of 2022 compared with the first nine months of 2021:


	Operating Profit
2021	$	3,803
Increase (decrease) from:
Selling, general and administrative expenses	(1,672)
Voluntary retirement program charge	(769)
Earnings of unconsolidated operations	(102)
Loss on sale of assets	(20)
Gross profit	1,078
2022	$	2,318

Operating profit decreased $1.5 million in the first nine months of 2022 compared with the first nine months of 2021 primarily due to an increase in selling, general and administrative expenses and a voluntary retirement charge, partially offset by an increase in gross profit.

The increase in gross profit was primarily attributable to the earnings associated with the reclamation contract and water sales at Caddo Creek, partially offset by a decrease in gross profit from the active operations mainly due to an increase in employee-related costs.

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
	2022		2021		2022		2021
Revenues	$	16,172	$	10,607	$	40,888	$	21,715
Cost of sales	1,006		755		2,487		2,398
Gross profit	15,166		9,852		38,401		19,317
Selling, general and administrative expenses	611		398		1,672		1,455
Gain on sale of assets	—		—		(2,527)		—
Asset impairment charges	3,939		—		3,939		—
Operating profit	$	10,616	$	9,454	$	35,317	$	17,862

During the three and nine months ended September 30, 2022, the oil and natural gas industry experienced continued improvement in commodity prices compared with the respective 2021 periods, primarily due to:

•Higher demand as the impact from COVID-19 abates;

•Changes in domestic supply and demand dynamics as well as increased discipline around production and capital investments by oil and gas companies; and

•Instability and constraints on global supply, particularly with respect to instability in Russia and Ukraine.

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Oil and natural gas prices have been historically volatile and may continue to be volatile in the future. The table below demonstrates such volatility with the average price as reported by the United States Energy Information Administration for the three and nine months ended September 30:


	THREE MONTHS				NINE MONTHS
	2022		2021		2022		2021
West Texas Intermediate Average Crude Oil Price	$	93.18	$	70.62	$	98.79	$	64.83
Henry Hub Average Natural Gas Price	$	7.99	$	4.36	$	6.71	$	3.62

Revenues and operating profit increased significantly in the three and nine months ended September 30, 2022 compared with the respective 2021 periods. The increase is primarily due to substantially higher natural gas and oil prices, increased production due in part to income generated from newly developed wells on Company leases during 2022 as well as $2.1 million of settlement income recognized during the first quarter of 2022. The settlement relates to the Company’s ownership interest in certain mineral rights. In addition, operating profit increased due to a $2.4 million gain on the sale of land related to legacy operations during the second quarter of 2022.

The Company regularly performs reviews of potential future development projects and identified certain legacy coal assets where future development is unlikely. The long-lived assets, which included land, prepaid royalties and capitalized leasehold costs, were written off in the third quarter of 2022 and resulted in non-cash asset impairment charges of $3.9 million.

UNALLOCATED ITEMS AND ELIMINATIONS

FINANCIAL REVIEW

Unallocated Items and Eliminations were as follows for the three and nine months ended September 30:


	THREE MONTHS				NINE MONTHS
	2022		2021		2022		2021
Operating loss	$	(6,677)	$	(5,295)	$	(17,806)	$	(14,842)

The operating loss increased $1.4 million and $3.0 million in the three and nine months ended September 30, 2022, respectively, compared with the respective 2021 periods primarily due to higher employee-related costs.

NACCO Industries, Inc. Outlook

Coal Mining Outlook - 2022

In fourth-quarter 2022, the Company expects coal deliveries to increase moderately from 2021, while the Coal Mining segment operating profit is expected to be comparable to the prior year. Lower earnings anticipated at the Falkirk Mine as a result of the reduction in the per ton management fee through May 2024, to support the transition of the Coal Creek Station Power Plant to Rainbow Energy, are expected to be offset by higher earnings at Coteau due to an increase in tons delivered and contractual price escalation. Segment Adjusted EBITDA is expected to increase modestly primarily due to improved EBITDA at MLMC where increased depreciation expense associated with capital expenditures in recent years has negatively affected operating profit.

Coal Mining operating profit and Segment Adjusted EBITDA for the 2022 full year is expected to decrease compared with 2021, both including and excluding the contract termination payments received in 2022 and 2021. The expected reductions are primarily the result of reduced earnings at both the consolidated and unconsolidated coal mining operations as well as higher operating expenses recognized in the first nine months of 2022.

Capital expenditures are expected to be approximately $14 million in the fourth quarter of 2022 and approximately $25 million for the 2022 full year.

The Company's contract structure at each of its coal mining operations eliminates exposure to spot coal market price fluctuations. However, fluctuations in natural gas prices and the availability of renewable power generation, particularly wind, can contribute to changes in power plant dispatch and customer demand for coal. Sustained higher natural gas prices could result in increased demand for coal. Changes to expectations for customer power plant dispatch could affect the Company’s outlook for the remainder of 2022 and 2023, as well as 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 2023. Sabine expects deliveries to cease in the first quarter

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of 2023 at which time Sabine expects to begin final reclamation. Funding for mine reclamation is the responsibility of the customer.

Coal Mining Outlook - 2023

In 2023, the Company expects coal deliveries to decrease moderately from 2022 levels as a result of the cessation of Sabine deliveries in the 2023 first quarter and current expectations of customer requirements.

Coal Mining operating profit and Segment Adjusted EBITDA for the 2023 full year are expected to decrease significantly compared with 2022, including and excluding the $14.0 million GRE termination payment received in 2022. The decline is primarily the result of an expected significant reduction in earnings at the consolidated operations and an anticipated modest decrease in earnings of unconsolidated operations.

Results at the consolidated mining operations are projected to decrease significantly predominantly due to an expected substantial decline in earnings at MLMC driven by an increase in the cost per ton of coal delivered in 2023 versus 2022. Anticipated cost inflation on repairs, diesel fuel and supplies, as well as higher depreciation expense related to recent capital expenditures to develop a new mine area are expected to contribute to the higher cost per ton. MLMC sells lignite at contractually agreed upon prices which are subject to changes in the level of established indices generally reflecting inflation over time. The increase in production costs will not be offset by an immediate increase in the revenue generated from contractual price escalation as there is a lag in the timing of the effect of inflation on the index-based coal sales price.

The anticipated lower earnings at the unconsolidated coal mining operations is expected to be driven primarily by the reduction in the per ton management fee at Falkirk for all 12 months in 2023 compared with 7 months in 2022, as well as the cessation of Sabine deliveries starting late in the first quarter of 2023. These decreases are expected to be partly offset by higher earnings at Coteau.

Capital expenditures are expected to be approximately $10 million in 2023.

NAMining Outlook

NAMining expects tons delivered, operating profit and Segment Adjusted EBITDA to increase in the 2022 fourth quarter primarily because of anticipated increased earnings under existing contracts, including Sawtooth Mining. Excluding the effect of the charge for the voluntary retirement program, full-year operating profit is expected to increase over 2021.

Segment Adjusted EBITDA for the 2022 full year is expected to increase significantly compared with the prior year, including and excluding the third quarter voluntary retirement charge. This improvement is a result of the improvement in operating profit from higher reclamation income at Caddo Creek in the first nine months of 2022 and increased results at the active mining operations and Sawtooth Mining partially offset by an increase in operating expenses.

In 2023, NAMining expects full-year operating profit and Segment Adjusted EBITDA to increase significantly over 2022 due to increased results from active mining operations and an anticipated reduction in operating expenses, in part due to an anticipated reduction in employee-related costs from the voluntary retirement program.

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, 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. (TSX: LAC) (NYSE: LAC). Lithium Americas owns the lithium reserves at Thacker Pass and will be responsible for the processing and sale of the lithium produced. In October 2022, Lithium Americas provided an update on the Thacker Pass project, which noted that all key state-level permits had been issued for Thacker Pass, feasibility study results are expected in the first quarter of 2023 and construction is expected to begin in 2023. At maturity, this management fee contract is expected to deliver fee income similar to a mid-sized management fee coal mine.

NAMining expects full-year 2022 capital expenditures to be approximately $12 million, with approximately $3 million expended in the fourth quarter 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. In 2023, capital expenditures are expected to be approximately $29 million primarily for 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 five-year period from the equipment acquisition date.

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Minerals Management Outlook

The Minerals Management segment derives income from royalty-based leases under which lessees make payments to the Company based on their sale of natural gas, oil, natural gas liquids and coal, extracted primarily by third parties. Changing prices of natural gas and oil have a significant impact on Minerals Management’s operating profit.

In the 2022 fourth quarter and full year, operating profit and Segment Adjusted EBITDA are expected to continue to increase significantly over the respective prior year periods primarily driven by current expectations for natural gas and oil prices and increases in production volumes.

In 2023, operating profit and Segment Adjusted EBITDA are expected to decrease significantly compared with 2022 primarily driven by current market expectations for natural gas and oil prices, an anticipated reduction in volumes as existing wells follow their natural production decline and limited forecasted development of additional new wells by third-party lessees.

Based on market expectations, the Company's forecast assumes oil and gas market prices moderate in 2023 to levels in line with 2021 averages; however, commodity prices are inherently volatile. The actions of OPEC, the Russia-Ukraine conflict, inventory levels of natural gas and oil and the uncertainty associated with demand, as well as other factors, have the potential to impact future oil and gas prices. An increase in natural gas and oil prices above current expectations could result in improvements to the 2023 forecast.

As an owner of royalty and mineral interests, the Company’s access to information concerning activity and operations with respect to its interests is limited. The Company's expectations are based on the best information currently available and could vary positively or negatively as a result of adjustments made by operators, additional leasing and development and/or changes to commodity prices. The production decline is particularly pronounced in new wells, such as those that began production in the fourth quarter of 2021 and early in 2022 on Company leases. Development of new wells on existing interests could be accretive to future results.

In the third quarter of 2022, Minerals Management completed an $11.4 million acquisition of mineral interests in the Texas portion of the Permian Basin and the Wyoming portion of the Powder River Basin. Minerals Management is targeting additional investments in mineral and royalty interests of up to $10 million in 2023. Potential future acquisitions could be accretive to 2023 results

Consolidated Outlook

NACCO expects a significant increase in consolidated operating profit, net income and Consolidated Adjusted EBITDA in the fourth quarter of 2022 due to anticipated higher results at the Minerals Management and NAMining segments, as well as income from an equity interest in a North Dakota-based ethanol business.

For the 2022 full year, excluding the settlements associated with the GRE/Rainbow Energy transaction recognized in 2022 and the Bisti termination fee recognized in 2021, NACCO expects consolidated operating profit, net income and Consolidated Adjusted EBITDA to improve significantly over 2021. Substantially higher earnings in the Minerals Management segment, as well as income from an equity interest in a North Dakota-based ethanol business, are expected to be partially offset by significantly lower operating profit from the Coal Mining segment and an increase in unallocated employee-related expenses. In addition, income recognized in 2021 on exchange-traded equity securities held by the Company is not expected to reoccur due to a deterioration in public equity markets during 2022. The effective income tax rate, including the settlements associated with the GRE/Rainbow Energy transaction, is expected to be between 15% and 17%.

In 2023, NACCO expects consolidated net income to decrease significantly from 2022 largely due to $30.9 million of pre-tax contract termination income recognized during 2022. Excluding the effect of the contract termination settlements, net income is expected to decrease substantially due to significantly reduced royalty income at the Minerals Management segment and lower earnings in the Coal Mining segment, as well as an anticipated reduction in income from an equity interest in a North Dakota-based ethanol business. These reductions are expected to be partially offset by lower income tax expense and improved results in the NAMining segment. The Company expects an effective income tax rate between 2% and 5% in 2023. 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 total approximately $61 million in 2022, including approximately $12 million for expenditures at Mitigation Resources of North America®. The Company expects cash flow before financing activities in 2022 to be significantly lower than in 2021 primarily due to increased capital expenditures. In 2023, the Company expects capital expenditures of approximately $39 million, excluding Minerals Management. Minerals Management is targeting investments of up $10 million. Future investments at Mineral Management are expected to continue to align with the Company’s strategy of selectively acquiring mineral and royalty interests with a balance of near-term cash-flow yields and

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long-term growth potential. As a result of the forecasted capital expenditures and anticipated substantial decrease in net income, cash flow before financing activities in 2023 is expected to return to a significant use of cash.

As of September 30, 2022, the Company held an investment in Midwest AgEnergy, a North Dakota-based ethanol business. This investment is accounted for under the equity method. On October 26, 2022, Midwest AgEnergy announced that it has finalized an agreement under which the equity holders of Midwest AgEnergy, including NACCO, would sell their equity interests for cash. The transaction is expected to close before the end of 2022, however there can be no assurance that the transaction will be finalized in the anticipated timeframe or at all. The amount and timing of NACCO’s cash proceeds will be dependent on the terms of the transaction. The transaction is not expected to have a material impact on 2022 results of operations based on current estimates.

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 business. Each of these businesses continues to expand its pipeline of potential new projects with opportunities for growth and diversification.

NAMining is pursuing growth and diversification by expanding the scope of its business development activities to include potential customers who require a broad range of minerals and materials and by leveraging the Company’s core mining skills to expand the range of contract mining services it provides. The goal is to build NAMining into a leading provider of contract mining services for customers that produce a wide variety of minerals and materials. The Company believes NAMining can grow to be a substantial contributor to operating profit, delivering unlevered after-tax returns on invested capital in the mid-teens as this business model matures and achieves significant scale, but the pace of growth will be dependent on the mix and scale of new projects.

The Minerals Management segment continues to grow and diversify by pursuing acquisitions of mineral and royalty interests in the United States. The Minerals Management segment will benefit from the continued development of its mineral properties without additional capital investment, as all further development costs are borne entirely by third-party producers who lease the minerals. This business model can deliver higher average operating margins over the life of a reserve than traditional oil and gas companies that bear the cost of exploration, production and/or development. Catapult Mineral Partners, the Company’s business unit focused on managing and expanding the Company’s portfolio of oil and gas mineral and royalty interests, has developed a strong network to source and secure new acquisitions. The goal is to construct a high-quality diversified portfolio of oil and gas mineral and royalty interests in the United States that deliver near-term cash flow yields and long-term projected growth. The Company believes this business will provide unlevered after-tax returns on invested capital in the low-to-mid-teens as the portfolio of reserves and mineral interests grows and this business model matures.

Mitigation Resources continues to expand its business, which creates and sells stream and wetland mitigation credits and provides services to those engaged in permittee-responsible mitigation. This business offers an opportunity for growth and diversification in an industry where the Company has substantial knowledge and expertise and a strong reputation. During the first nine months of 2022, Mitigation Resources purchased property to establish a new mitigation bank north of Dallas/Fort Worth and established a joint venture to provide mitigation services for the Lake Ralph Hall project in Northern Texas. With these new 2022 projects, Mitigation Resources is involved in over 10 mitigation banks and permittee-responsible mitigation projects in Tennessee, Alabama, Mississippi and Texas and is making strong progress toward its goal to be a top ten provider of stream and wetland mitigation services in the Southeast United States. The Company believes that Mitigation Resources can provide solid rates of return as this business matures.

The Company also continues to pursue activities which can strengthen the resiliency of its existing coal mining operations. The Company remains focused on managing coal production costs and maximizing efficiencies and operating capacity at mine locations to help customers with management fee contracts be more competitive. These activities benefit both customers and the Company's Coal Mining segment, as fuel cost is a significant driver for power plant dispatch. Increased power plant dispatch results in increased demand for coal by the Coal Mining segment's customers. Fluctuating natural gas prices and availability of renewable energy sources, such as wind and solar, could affect the amount of electricity dispatched from coal-fired power plants.

The Company is committed to maintaining a conservative capital structure as it continues to grow and diversify, while avoiding unnecessary risk. Strategic diversification will generate cash that can be re-invested to strengthen and expand the businesses. The Company also continues to maintain the highest levels of customer service and operational excellence with an unwavering focus on safety and environmental stewardship.

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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 to or termination of customer or other third-party contracts, or a customer or other third party default under a contract, (2) any customer's premature facility closure, (3) a significant reduction in purchases by the Company's customers, including as a result of changes in coal consumption patterns of U.S. electric power generators, or changes in the power industry that would affect demand for the Company's coal and other mineral reserves, (4) changes in the prices of hydrocarbons, particularly diesel fuel, natural gas, natural gas liquids and oil, (5) failure or delays by the Company's lessees in achieving expected production of natural gas and other hydrocarbons; the availability and cost of transportation and processing services in the areas where the Company's oil and gas reserves are located; federal and state legislative and regulatory initiatives relating to hydraulic fracturing; and the ability of lessees to obtain capital or financing needed for well-development operations and leasing and development of oil and gas reserves on federal lands, (6) failure to obtain adequate insurance coverages at reasonable rates, (7) supply chain disruptions, including price increases and shortages of parts and materials, (8) the impact of the COVID-19 pandemic, including any impact on suppliers, customers and employees, (9) changes in tax laws or regulatory requirements, including the elimination of, or reduction in, the percentage depletion tax deduction, changes in mining or power plant emission regulations and health, safety or environmental legislation, (10) the ability of the Company to access credit in the current economic environment, or obtain financing at reasonable rates, or at all, and to maintain surety bonds for mine reclamation as a result of current market sentiment for fossil fuels, (11) impairment charges, (12) the effects of investors’ and other stakeholders’ increasing attention to environmental, social and governance (“ESG”) matters, (13) changes in costs related to geological and geotechnical conditions, repairs and maintenance, new equipment and replacement parts, fuel or other similar items, (14) regulatory actions, changes in mining permit requirements or delays in obtaining mining permits that could affect deliveries to customers, (15) weather conditions, extended power plant outages, liquidity events or other events that would change the level of customers' coal or aggregates requirements, (16) weather or equipment problems that could affect deliveries to customers, (17) changes in the costs to reclaim mining areas, (18) costs to pursue and develop new mining, mitigation and oil and gas opportunities and other value-added service opportunities, (19) delays or reductions in coal or aggregates deliveries, (20) the ability to successfully evaluate investments and achieve intended financial results in new business and growth initiatives, (21) disruptions from natural or human causes, including severe weather, accidents, fires, earthquakes and terrorist acts, any of which could result in suspension of operations or harm to people or the environment, and (22) the ability to attract, retain, and replace workforce and administrative employees.

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.

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 2022, 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

During the quarter ended September 30, 2022, there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, except as follows:

The value of our investment in a private company involved in the ethanol industry could decline, could be illiquid and could be volatile in terms of value and returns, which could adversely affect our financial condition and results of operations.

As of September 30, 2022, we held a $20.0 million investment in Midwest AgEnergy, a North Dakota-based ethanol business. Financial returns on ethanol investments are highly dependent on commodity prices, which are subject to significant volatility, uncertainty and regional supply shortages. The valuation for this investment is based, in part, on an assumption that the private company will implement carbon capture and storage to capture carbon dioxide generated in the ethanol production process. This process increases the value of the ethanol produced by the private company. Should this capture process be delayed or not implemented, the value of this investment may be impaired.

On October 26, 2022, Midwest AgEnergy announced that it has finalized an agreement, under which the equity holders of Midwest AgEnergy, including NACCO, would sell their equity interests. The transaction is expected to close before the end of 2022, however there can be no assurance that the transaction will be finalized in the anticipated timeframe or at all. The amount and timing of NACCO’s cash proceeds will be dependent on the terms of the transaction. The transaction is not expected to have a material impact on 2022 results of operations based on current estimates.

If for any reason the proposed merger is not completed, this investment will continue to be accounted for under the equity method under which we report our proportionate share of the net earnings or losses of this private company as a component of Income before income tax provision. If the earnings or losses of and distributions from this investment is material in any year, those earnings or losses may have a material effect on our net income, cash flows, financial condition and liquidity. We do not control the day-to-day operations of this investment; however, how the company is managed could impact our results of operations and cash flows. Additionally, this business is subject to laws, regulations, market conditions and other risks inherent in its operations.

If the announced transaction is not finalized, this investment is non-marketable and we may not be able to achieve a return on our investment in a timely manner, if at all. Midwest Ag Energy’s operating agreement restricts the Company's ability to transfer the membership units, resulting in a liquidity discount. Since there is no active market for the exchange of these securities, our ability to liquidate this investment will likely be dependent on a liquidity event. Valuations of privately-held companies are inherently complex and uncertain due to the lack of readily available market data for such securities. If we determine that this investment has experienced a decline in value, we will be required to recognize an impairment charge in net income. Any of these factors could adversely impact our results of operations, our cash flows and the value of our investment.

MLMC is subject to risks associated with its capital investment, operating and equipment costs, growing use of alternative generation that competes with coal fired generation, changes in customer demand and inflationary adjustments.

The profitability of MLMC is subject to the risk of loss of investment in this operation, increases in the cost of mining, changes in customer demand, growing competition from alternative power generation that competes with coal-fired generation and the emergence of adverse mining conditions. 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 $135 million of long-lived assets, including property, plant and equipment and a 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

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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.

MLMC sells lignite at contractually agreed upon prices which are subject to changes in the level of established indices over time. As diesel fuel is heavily weighted among the indices used to determine the coal sales price, fluctuations in diesel fuel prices can result in significant fluctuations in earnings at MLMC.

MLMC delivers coal to the Red Hills Power Plant in Ackerman, Mississippi. The Red Hills Power Plant supplies electricity to TVA under a long-term power purchase agreement. MLMC’s contract with its customer runs through 2032. TVA’s power portfolio includes coal, nuclear, hydroelectric, natural gas and renewables. In 2019, TVA published its updated Integrated Resource Plan, which indicates plans to increase its reliance on solar power. A decrease in the number of days TVA dispatches the Red Hills Power Plant would reduce MLMC's customer's demand for coal. The decision of which power plants to dispatch is determined by TVA.

Choctaw Generation Limited Partnership ("CGLP") leases the Red Hills Power Plant from a Southern Company subsidiary pursuant to a leveraged lease arrangement. CGLP's ability to make required payments to the Southern Company subsidiary is dependent on the operational performance of the Red Hills Power Plant. During 2020, Southern Company revised the estimated cash flows to be received under the leveraged lease which resulted in a full impairment of the lease investment. If any future lease payment is not paid in full, the Southern Company subsidiary may be unable to make its corresponding payment to the holders of the underlying non-recourse debt related to the Red Hills Power Plant. Failure to make the required payment to the debtholders could represent an event of default that would give the debtholders the right to foreclose on, and take ownership of, the Red Hills Power Plant from the Southern Company subsidiary. A foreclosure of the Red Hills Power Plant could have a material adverse effect on MLMC's financial condition, results of operations and cash flows. Southern Company publicly disclosed that all required lease payments have been paid in full through December 31, 2021. On October 27, 2022, Southern Company disclosed in its Form 10-Q, that it provided notice to the lessee, CGLP, to terminate the related operating and maintenance agreement effective June 30, 2023. The parties to the lease agreement are currently negotiating a potential restructuring, which could result in rescission of the termination notice. The ultimate outcome of this matter cannot be determined at this time but could have a material impact on the Company's financial statements if the operating and maintenance agreement is terminated.

Similar to the Company's unconsolidated mines, all production costs at MLMC are capitalized into inventory and recognized in cost of sales as tons are delivered. In periods of limited or no deliveries, MLMC may be required to reduce its inventory carrying value using the lower of cost and net realizable value approach, which could adversely affect MLMC’s results of operations.

Changes in customer demand for any reason, including, but not limited to, reduced mechanical availability of the customer’s power plant, dispatch of power generated by other energy sources ahead of coal, fluctuations in demand due to unanticipated weather conditions, regulations or comparable policies which may promote planned and unplanned outages at the Red Hills Power Plant, economic conditions, including an economic slowdown and a corresponding decline in the use of electricity, governmental regulations and inflationary adjustments could have a material adverse effect on MLMC's financial condition, results of operations and cash flows.

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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, 2022)	—	$	—	—	$	22,659,516
Month #2 (August 1 to 31, 2022)	—	$	—	—	$	22,659,516
Month #3 (September 1 to 30, 2022)	—	$	—	—	$	22,659,516
Total	—	$	—	—	$	22,659,516

(1) During 2021, the Company established a stock repurchase program allowing for the purchase of up to $20.0 million of the Company's Class A Common Stock outstanding through December 31, 2023. See Note 4 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, 2022.

Item 5 Other Information

None.

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Item 6 Exhibits


Exhibit
Number*						Description of Exhibits

10.1						Second Amendment to Coal Sales Agreement, by and between the Falkirk Mining Company and Rainbow Energy Center, LLC, dated August 5, 2022.**
31(i)(1)						Certification of J.C. Butler, Jr. pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act
31(i)(2)						Certification of Elizabeth I. Loveman pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act
32						Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed and dated by J.C. Butler, Jr. and Elizabeth I. Loveman
95						Mine Safety Disclosure Exhibit
101.INS						Inline XBRL Instance Document
101.SCH						Inline XBRL Taxonomy Extension Schema Document
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Numbered in accordance with Item 601 of Regulation S-K.

** Filed herewith.

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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:	November 2, 2022	/s/ Elizabeth I. Loveman
		Elizabeth I. Loveman
		Vice President and Controller (principal financial and accounting officer)