Prepared remarks
Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the NACCO Industries Second Quarter 2026 Earnings Call. It is now my pleasure to turn the call over to Christina Kmetko, Investor Relations. Please go ahead.
Good morning, everyone, and thank you for joining us for our 2026 second quarter earnings call. I'm Christina Kmetko, and I'm responsible for Investor Relations at NACCO. Joining me today are J.C. Butler, NACCO's President and CEO; and Elizabeth Loveman, our Senior Vice President and Controller. Yesterday, we released our second quarter results and filed our 10-Q with the SEC. Both documents are available on our website. During today's call, we will reference non-GAAP measures, which we believe provide additional insight into how we manage our business. Reconciliations to the most directly comparable GAAP measures are also available on our website. Before we begin, let me remind you that today's remarks include forward-looking statements. Actual results may differ materially from those indicated due to a variety of risks and uncertainties, which are described in our earnings release, 10-Q and other SEC filings. We undertake no obligation to update these statements. Now I'll turn the call over to J.C. for his opening remarks. J.C.?
Thanks, Christy, and good morning, everyone. I want to start by saying that from an operating standpoint, the second quarter showed meaningful progress across NACCO's businesses. Utility Coal Mining, Contract Mining and Minerals and Royalties all contributed nicely to strong year-over-year improvement in gross profit and adjusted EBITDA. As we disclosed in our earnings release, the second quarter included impairment charges related to solar development projects that more than offset the strong operating performance of our established businesses and resulted in a consolidated operating and net loss. During the quarter, additional information and developments regarding two solar development projects within ReGen Resources became available, which caused us to reassess the economics of these projects. This included updated information about increased costs and delays in connecting generation facilities to the grid.
These negative developments collectively reached a tipping point in the quarter. Two key factors are at play. Tax law changes tied to the One Big Beautiful Bill Act, which was signed into law just over a year ago, created tremendous timing and related procurement challenges for renewable development projects like ours, which were started long before the One Big Beautiful Bill came into play. Those factors, coupled with intense short-term demand for generating equipment, EPC services and equipment required to connect projects to the grid and price increases linked to this demand and tariffs created a perfect storm. As part of our routine quarterly review, it became apparent that two impacted projects were veering off the path we anticipated, leading us to take the impairment. Our review of the situation resulted in impairment charges totaling $12 million in the quarter. We believe these impairments reflect a realistic view of the challenges in developing solar projects today, and we believe this was the right call for our business.
We are not treating this as business as usual. We understand that the impairment raises questions about our capital allocation discipline, particularly in a business with risks that differ from our established mining and natural resources operations. We reassess these projects based on updated costs, timing, grid connection, regulatory and market information, and we are pursuing a range of alternatives to monetize these investments and reduce future exposure. These alternatives include potential asset sales, contract amendments and other strategic actions. Depending on the outcome, there could be additional curtailment charges, but our focus is on preserving value where possible and limiting future capital requirements. As many of you know, we have always taken a long-term approach to building this company. We invest in business and opportunities where we believe our operating expertise, core skills, patience and disciplined capital investments can create value over time.
That approach has helped grow and diversify NACCO over the years, in most instances, with great success. However, an important part of that philosophy is continually evaluating investments as markets evolved. We assess opportunities against our financial objectives and expected returns, and we are willing to adjust our priorities when we see better paths to long-term value creation. Recent developments with our solar projects have reinforced the need to apply heightened scrutiny to investments outside our established operating platforms. With that, let's turn to our core businesses. At Utility Coal Mining, Mississippi Lignite Mining Company was a main driver of the operating profit increase in Utility Coal Mining as our team effectively responded to changing conditions. Operational issues at the customer's power plant affected production requirements and our team shifted resources to planned reclamation activities.
This reduced our asset retirement obligation rather than having those costs be recognized as an expense that would have impacted second quarter earnings. This nimble response allowed them to continue working, while also advancing work that supports the long-term life cycle of the mine and is consistent with how our coal mining teams operate. We have long-standing customer relationships built around reliability, safety, environmental responsibility and the ability to adapt to situations as required. Separately, we are actively engaged with the customer regarding the delayed payments disclosed in our 10-Q. We are focused on collecting amounts owed, preserving our contractual rights and evaluating all options available under the contract. While we will not discuss specific legal strategies on this call, we understand the importance of enforcing the economic protections in the contract if payment delays continue.
Contract Mining continues to be our primary growth platform for mining with strong second quarter results reflecting the successful execution of this growth. The new dragline services work in Palm Beach County, Florida is ramping up. Our Limestone Mining operations continue to serve growing customer requirements, and we are preparing to begin operations at a new limestone quarry in Arizona later this year. This business builds on our existing expertise through geographic and mineral expansion and a growing portfolio of long-term contracts with strong customers. We are improving profitability, enhancing earnings visibility and creating long-term value. That kind of growth fits NACCO well. In Minerals and Royalties, we continue to successfully manage a diversified portfolio of oil and gas, mineral and royalty interests and related investments. This business aligns well with our core growth strategy by leveraging our core skills and assets to generate meaningful ongoing cash flows across the broad range of natural resource businesses.
The team continues to take a disciplined data-driven approach to evaluating the portfolio and future opportunities. While second quarter results for Minerals and Royalties were strong, results in this segment can be affected by commodity prices, production timing and the pace of domestic development activity. We manage the portfolio with a long-term view and continue to build on the quality of the assets we own. We expect profits in this segment to moderate near term due to normal production declines on existing wells and a continuation of the current pace of domestic development activity, particularly in natural gas. Mitigation Resources continues to build its platform in natural resource restoration and reclamation services. We are pleased to see that Mitigation Resources is building a strong and sustainable business by leveraging our environmental and land management skills and experience.
While performance is currently variable as this business grows, Mitigation Resources is on a very nice trajectory towards profitability that we believe will provide consistent results as the business expands. Stepping back, the first half of the year reinforced what we believe makes us unique. We have core legacy businesses that generate strong earnings and cash flow today, growth platforms that are expanding and a disciplined investment process that requires us to continually evaluate where capital can create the most value. Sometimes that means investing for growth. Sometimes it means adjusting course as facts and circumstances change. Both are part of responsible long-term investment discipline. As part of our disciplined investment approach, we remain focused on strengthening our balance sheet. We are prioritizing the use of free cash flow to enhance liquidity and reduce debt, while continuing to fund disciplined high-return investment opportunities.
We anticipate investing up to $35 million in the remainder of the year, primarily for business development opportunities, but only if investment opportunities meet our capital investment criteria. Recent developments have reinforced our focus on investing where there are clear value creation pathways. We believe this approach positions us to execute our growth strategies while strengthening our balance sheet and creating long-term value for our shareholders. With that, I'll turn the call over to Liz to walk through the financial results and outlook in more detail. Liz?
Thank you, J.C. Building on J.C.'s operational comments, I'll provide an overview of our financial results. The key takeaway is that our operating businesses delivered strong quarterly year-over-year profit improvements, while reported GAAP results reflected the solar-related impairment charges J.C. discussed. Consolidated revenues were $72.3 million, up 6% from $68.2 million in the prior year quarter. Gross profit was $15.2 million, up 123% from $6.8 million last year, reflecting strong performance across each reportable segment. The consolidated operating loss was $2.3 million compared with an operating loss of less than $100,000 in the prior year quarter. The net loss was $1 million or $0.13 per diluted share compared with net income of $3.3 million or $0.44 per diluted share in the 2025 second quarter. Consolidated adjusted EBITDA was up 72% to $15.9 million from $9.3 million last year.
This measure excludes the solar-related charges and highlights the improvement in the underlying operating businesses. At the segment level, Utility Coal Mining results were affected by operational issues at Mississippi Lignite Mining Company's customer's power plant. While revenues decreased due to lower customer requirements, operating profit increased to $6.3 million from $1.2 million in the prior year quarter and segment adjusted EBITDA increased to $8.7 million from $3.4 million. These improvements primarily reflect better Mississippi Lignite Mining Company results as resources were shifted to planned reclamation activities as well as increased earnings from unconsolidated operations and lower operating expenses. Looking forward, we expect full year Utility Coal Mining operating profit to increase year-over-year due to the strong first half performance. In the second half of 2026, we expect results at Mississippi Lignite Mining Company to decline from the first half due to lower customer demand, higher diesel fuel costs and an anticipated inventory impairment charge.
We are also monitoring the customer's payment status closely, and our outlook reflects the need for continued caution around customer demand, collection timing and inventory valuation. Earnings at the unconsolidated mining operations are also expected to decrease due to the completion of reclamation services at the Sabine Mining Company on September 30, 2026. Segment profitability is expected to improve in 2027, driven by increases in both the consolidated and unconsolidated mining operations. In the Contract Mining segment, current quarter results benefited from the commencement and ramp-up of the Palm Beach County dragline services contract. This contract, combined with increased customer requirements and deliveries at the Limestone Mining operations, led to a 34% increase in revenues net of reimbursed costs and substantial year-over-year increases in both operating profit and segment adjusted EBITDA.
Operating profit increased to $3.8 million from $1 million and segment adjusted EBITDA increased to $6.3 million from $3.9 million. For both the second half and full year of 2026, we expect substantial year-over-year growth in Contract Mining operating profit and segment adjusted EBITDA. Second half results are expected to moderate from the strong first half due to lower anticipated customer demand. In 2027, a full year of earnings contributions from the Palm Beach dragline services contract, together with potential new deals in the pipeline, are expected to lead to significant operating profit improvement. In the Minerals and Royalties segment, operating profit increased to $6.7 million from $5.2 million and segment adjusted EBITDA increased to $7.7 million from $6.1 million. The improvements were primarily due to a 46% increase in royalty revenues, driven by higher oil prices and a favorable adjustment to prior period pricing estimates, partly offset by lower second quarter earnings from our Eiger investment.
For the remainder of 2026, we expect increased income from our Eiger investment and higher oil prices to be more than offset by anticipated production declines and a changing mix of production and development activity. As a result, operating profit and segment adjusted EBITDA are projected to decline compared with the first half of 2026 as well as the second half and full year 2025. In 2027, we expect the Minerals and Royalties segment to continue generating meaningful earnings and cash flow, although operating profit is expected to moderate primarily due to normal production declines and the continuation of the current moderate pace of domestic development activity. At the consolidated level, we expect a strong performance generated by our reportable segments during the first half of 2026 to drive year-over-year improvements in full year 2026 consolidated adjusted EBITDA, which excludes the solar impairment charges and a $7.8 million pretax pension settlement charge recorded in 2025.
Given the effect of these changes and potential curtailment and impairment charges in the second half of 2026, we anticipate second half and full year operating profit and net income will be lower than in 2025. Consolidated adjusted EBITDA in the second half of 2026 is expected to remain strong, although the pace of growth is expected to moderate relative to both the first half of 2026 and prior year periods. From a liquidity standpoint, at June 30, 2026, we had outstanding debt of $120.1 million. Total liquidity was $114.6 million, consisting of $45.5 million of cash and $69.1 million of availability under our revolving credit facility. While we anticipate a moderate year-over-year increase in cash generated from operations, cash flow before financing is projected to remain a use of cash in 2026, reflecting our planned investment activity. We expect cash flow before financing for 2026 to improve modestly over 2025, and we expect that improvement to continue into 2027. With that, I'll turn the call back to J.C. for closing remarks.
Thanks, Liz. To wrap up, the second quarter demonstrated the strength of our core operating businesses. Our teams are executing well. Contract Mining continues to demonstrate the value of the long-term growth platform we are building, and our other businesses continue to expand capabilities that can contribute over time. At the same time, we are focused on directing capital only towards the opportunities we believe offer the strongest risk-adjusted returns. We remain focused on execution, liquidity, disciplined capital investments and long-term cash flow generation. As recent investments mature and new contracts contribute more fully, we expect our businesses to support improving results and stronger cash flows over time. We'll now turn the call over to any questions you may have.
Questions and answers
And our first question comes from Douglas Weiss with DSW Investments.
So congrats on another good result. I guess starting with MLMC. What — it seems like there are a few things going on at once there, and I was hoping to just get a little more clarity on each. I guess you alluded in the 10-Q to reduced demand for MLMC's generation. My sense, I would have thought that demand would be pretty steady given the growing need for electricity. Could you just comment on that?
Yes, sure. It's a good question. There are three things at play. One is we deliver the fuel, the power plant generates electrons and TVA takes the electrons to put onto the grid. We stand ready to deliver the fuel when it's needed as we're contractually obligated to do. The power plant operates when it is able to operate. The plant goes through both planned outages, which are typically periods of routine maintenance done during the spring and the fall when the weather is moderate and there is less demand on the grid, and unplanned outages, which have occurred several times in recent years. During the second quarter, there was a significant unplanned outage at the plant. We knew it was going to be down for a while when they were repairing it. So we diverted our work to reclamation activities that get charged to the balance sheet as opposed to the income statement because we have a reclamation liability.
The other piece is when the plant is up and available, whether TVA is taking the electrons or not. It's called dispatch. There are times when, generally, increasing demand drives more dispatch, but there are periods when TVA finds itself with excess electrons, and it will choose which assets to dispatch. Tax law changes sometimes cause renewables to be dispatched ahead of baseload generation because of the tax credits. And then there are just other times when the weather is mild or other factors reduce demand and TVA doesn't need the electrons. So we are subject to the plant being up and running and TVA needing the electrons. Our history is our history. The forecast is based on what we hear from our customer at TVA. The indications we get are general and not specific day by day or week by week, so it can change. Our current expectation is what it is, and we will see how that plays out with the power plants and TVA with respect to electrons. Does that explain it?
Yes. That's helpful. And as far as the receivable, it doesn't sound like from a practical standpoint there's much in the near term to be done on that except wait for the plant to be more fully utilized.
I can tell you we're paying a lot of attention to it. We're keenly focused on it, and we will continue to enforce and pursue the clear rights to remedy that we have in our contract. The contract was entered into in 1995; it runs until 2032. It's been the same contract throughout, so we're very familiar with the terms.
Right, right. Okay. Let's see. I had a kind of bigger picture or longer-term question on power production in North Dakota. I was reading about proposals to extend the pipeline from the Bakken across North Dakota. I'm just curious how likely you think those projects are to go forward or that project is to go forward? And if that would potentially introduce new gas-fired competition into the region over the next — I guess, really over the next decade.
Well, there are multiple pipeline projects being discussed in North Dakota. We're not a party to those projects, so it's hard for me to comment on their likelihood. I can tell you it's an incredibly energy-rich state with tremendous coal and oil reserves and associated natural gas. The state is an energy exporter, and I think there are lots of opportunities for the North Dakota generation industry to support more generation. There is a lot of demand in the upper Midwest that can be served. I don't think many of those projects are real competition for us. At the same time, there's a lot of transmission being developed. Just as pipelines are at various stages of development, there's a lot of transmission work underway in the upper Midwest, North Dakota and beyond. I think of transmission like a highway system: if you keep expanding transmission, you reduce congestion and electrons can get to the markets they need.
Okay. As you continue your reinvestment program, I'm curious — and I've asked this from time to time — if you are seeing better returns in contract mining or oil and gas or Mitigation Resources. I'm just curious if you have one of those segments where you are beginning to feel it's the most fruitful place for you to reinvest your capital?
That's an interesting question and one we think about a lot. We've been on this reinvestment journey for over 10 years, with most emphasis in the last five. Each of our core businesses, as we've developed investment theses and business models, has continued to evolve and find ways to capture efficiencies in our operations that enhance margins. We've modified contract structures and evolved customer engagement in ways that are mutually beneficial. If we can deliver more value to customers, that's good for us. I view this across all our core businesses. Each business has attributes that make it attractive on its own, but they also work together as part of the collective whole. Our mining business and our mitigation business clearly benefit from work done in our coal mining business, and our coal mining business and mitigation business benefit from things we're doing on the North American mining side.
We call it a one-team approach. There are synergies across the businesses. The third way I think about this is diversification. We're seeing an energy renaissance in the United States around fossil fuels, but we want to do things that are complementary to those businesses so we have strength if political forces change. Basic consumer and industrial demand for electrons supports our outlook. Overall, the improving business models, synergies between businesses and the desire for diversification to create a more stable, long-term platform lead us to a balanced approach to investing.
Right. Yes, makes sense. Looking at your customers on the Contract Mining side, it does skew towards Cemex at the moment. How much of a priority is it for you to broaden the customer mix over the next few years?
That's a great question. We already have relationships with a number of the large players in aggregates and cement production. We're getting more opportunities to do business with them because they see the work we do at one quarry or a couple of quarries and ask us to evaluate other operations. In many instances that turns into additional projects. We're about to start operating a dragline later this year in Phoenix, Arizona for an existing customer, and that opportunity came about because we were already doing business with one of the major players. We also find geographic relationships. We started in South Florida with one successful long-term aggregates producer and over time expanded to do business with others in South Florida and Central Florida. As we expand, most growth has occurred through our dragline services. For a few years we've also used Wirtgen surface miners in test cases with other operators, and we've seen mixed results — sometimes it works as expected, sometimes we learn and adapt.
We're seeing opportunities to grow because of our relationships and being in the neighborhood. Our lithium operation in northern Nevada is another example of expanding presence. The Palm Beach County project, where we have multiple draglines, is a big deal. Putting four draglines on one project is significant; we're commissioning the third and expect a fourth later this year. This project is different because we're mining material for use in a large infrastructure project related to Lake Okeechobee and the Everglades rather than mining aggregates for sale. That opened a new market for us and creates opportunities to apply our skills in different ways. As we operate in more places, we see more opportunities for growth and believe they will convert into expanded opportunities in the future.
Yes. No, that's great. Just circling quickly on Mississippi Lignite, and maybe you don't want to comment too much on legal issues, but I'm just curious if you're able to articulate what recourse you have a little more granularly? Are you — do you have more recourse than a typical unsecured creditor?
You're right; I'm not going to comment on legal strategies. But we have a clear understanding of our contractual rights and other points of leverage in this relationship. We are very active in understanding those levers and how they can be deployed, but I don't think it's appropriate to comment further than that.
Enough. Congrats again on the good quarter and look forward to speaking in three months.
Doug, we appreciate your ongoing interest. Thanks for your questions.
With no further questions in queue, I will now turn the call back over to Christy Kmetko for closing remarks.
Okay. Thank you. We'll end the Q&A session there. Before we wrap up, I'd just like to provide a few reminders. A replay of our call will be available later this morning. We'll also post a transcript on our website when it becomes available. If you have any questions, please reach out to me. My phone number is on the earnings release. I hope you enjoy the rest of your day. And I'll turn it back to Tina to conclude the call. Thank you so much.
Thank you again for joining us today. This concludes today's conference call. You may now disconnect.