Business Context and Reporting Period
United States Lime & Minerals, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company operates two segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests. Lime and limestone products serve construction, industrial, environmental, metals, oil and gas services, roofing and agricultural customers. Operations are located in Arkansas, Colorado, Louisiana, Oklahoma and Texas.
Financial Performance and Position
Amounts are in thousands, except per-share data.
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $43,559 | $35,272 | $120,312 | $109,801 |
| Gross profit | $13,483 | $7,196 | $31,903 | $23,870 |
| Gross margin | 31.0% | 20.4% | 26.5% | 21.8% |
| Operating profit | $10,555 | $4,406 | $23,663 | $16,014 |
| Operating margin | 24.2% | 12.5% | 19.7% | 14.6% |
| Net income | $9,902 | $4,554 | $21,063 | $15,454 |
| Diluted EPS | $1.76 | $0.81 | $3.75 | $2.76 |
- Q3 revenue increased 23.5%, gross profit increased 87.4%, operating profit increased 139.5% and net income increased 117.4% year over year.
- Nine-month revenue increased 9.6%, gross profit increased 33.7%, operating profit increased 47.8% and net income increased 36.3%.
- Lime and Limestone Operations generated $43.3 million of Q3 revenue and $119.3 million for the nine months. Natural Gas Interests generated $0.3 million and $1.0 million, respectively.
- Net cash provided by operating activities was $36,180 for the nine months, versus $31,838 in the prior-year period.
- Capital expenditures were $20,423 for the nine months, compared with $31,687 in 2018. The company spent $3,900 on the St. Clair kiln project during the period.
- Cash and cash equivalents were $80,731 at September 30, 2019, compared with $67,218 at December 31, 2018.
- The company had no debt outstanding. Its revolving credit facility provides commitments of up to $75 million, plus a potential $50 million accordion feature, and had $1.2 million of letters of credit outstanding.
- Total assets were $273,833 and stockholders’ equity was $242,669 at September 30, 2019.
Material Changes Versus the Prior Comparable Period
- Lime and limestone sales volumes increased 21.8% in Q3 and 8.9% for the nine months. Average realized prices increased 2.8% and 1.6%, respectively.
- Growth was primarily driven by construction and environmental demand. Improved weather benefited construction demand in Q3, although some Q3 volume reflected projects delayed by adverse weather in Q2. Steel-related demand declined in Q3.
- Lime and Limestone gross profit increased 92.7% in Q3 and 37.8% for the nine months, reflecting higher revenue, improved efficiency from the new St. Clair kiln and lower stripping costs than in the 2018 periods.
- Natural Gas Interests revenue declined 47.4% in Q3 and 44.9% for the nine months. Production fell to 113 thousand MCF in Q3 from 123 thousand MCF, while the average price declined to $2.61 per MCF from $4.53. No new wells have been drilled or completed since 2011.
- The new vertical kiln at St. Clair continued producing commercially saleable quicklime. The old kiln was removed from service, resulting in a $0.2 million disposal loss included in cost of revenues.
- The company adopted the new lease standard on January 1, 2019, recording approximately $3.9 million of additional assets and liabilities with no retained earnings impact.
- SG&A increased modestly in dollars but declined to 6.8% of revenue for both Q3 and the nine-month period, compared with 7.9% and 7.2%, respectively, in the prior year.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash on hand and operating cash flow should be sufficient for operating needs, capital requirements, remaining St. Clair project payments, dividends and potentially up to $7.2 million of remaining share repurchases in the near future, absent a significant acquisition.
- The St. Clair kiln project is expected to cost approximately $50 million in total. The company had incurred $44.1 million, including $43.4 million paid in cash, as of September 30, 2019, and anticipated most of the remaining cost would be incurred and paid by the end of the first half of 2020.
- Management estimated a 2019 effective income tax rate of 15.5%, primarily reflecting statutory depletion and research and development tax credits.
- The company declared a regular quarterly dividend of $0.135 per share on October 30, 2019, payable December 13, 2019.
- Key risks include demand and pricing in construction, steel, industrial and oil and gas markets; competition; infrastructure spending; fuel, energy, transportation and freight costs; weather and operating interruptions; project delays or cost overruns; environmental, mine-safety and permitting requirements; reserve depletion; natural gas price and production declines; credit-market conditions; and cybersecurity or information-system disruptions.
- Foreign exchange hedges covering 0.7 million Euros had a fair-value liability of $50 at September 30, 2019. The company remains exposed to exchange-rate movements on obligations not effectively hedged and to counterparty performance.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2019, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Verify the remaining cost, timing and operating performance of the St. Clair kiln project and whether the anticipated first-half 2020 completion and payment schedule was achieved.
- Assess whether construction and environmental demand, pricing and higher lime and limestone volumes are sustainable after weather-related project timing effects.
- Monitor the decline in natural gas production, prices and gross profit, particularly because no new wells have been drilled since 2011.
- Reconcile cash generation with capital expenditures, dividends and any future share repurchases, including the unused portion of the repurchase authorization.
- Review compliance with revolving-credit covenants, the $1.2 million of outstanding letters of credit and the availability of the facility for future capital needs.
- Evaluate exposure to energy, transportation, raw-material, permitting, mine-safety and environmental costs, as well as potential operational disruptions.
- Confirm the company’s estimated 15.5% effective tax rate and the continued benefit of statutory depletion and research and development tax credits.