United States Lime & Minerals, Inc. — 2018 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2018. The company operates two segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests. Operations are conducted in the United States, primarily serving construction, industrial, environmental, metals, oil and gas services, roofing, and agriculture customers.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $35.3 million | $36.9 million | $109.8 million | $109.6 million |
| Gross profit | $7.2 million | $9.6 million | $23.9 million | $26.6 million |
| Gross margin | 20.4% | 25.8% | 21.8% | 24.3% |
| Operating profit | $4.4 million | $6.9 million | $16.0 million | $19.0 million |
| Net income | $4.6 million | $5.7 million | $15.5 million | $15.6 million |
| Diluted EPS | $0.81 | $1.01 | $2.76 | $2.79 |
| Operating cash flow | Not separately provided | Not separately provided | $31.8 million | $24.0 million |
| Capital expenditures | Not separately provided | Not separately provided | $31.7 million | $14.5 million |
At September 30, 2018, cash and cash equivalents were $83.2 million, compared with $85.0 million at December 31, 2017. Total assets were $246.0 million and stockholders’ equity was $219.3 million. The company had no debt outstanding and had $1.3 million of letters of credit, including $0.9 million related to the St. Clair kiln project, counted against its revolving facility. The credit facility provides for $75 million of revolver capacity plus a potential $50 million accordion feature and matures May 7, 2020.
Cash dividends were $0.135 per share in each of the first three quarters. On October 30, 2018, the board declared another $0.135 per share dividend, payable December 14, 2018.
Material changes versus the prior comparable period
- Third-quarter revenue declined 4.5%, primarily because Lime and Limestone sales volume declined 4.5%. Persistent September rains in Texas affected construction demand, while the company also cited lower environmental demand following the loss of a municipal water-treatment account.
- Nine-month revenue was broadly stable, increasing 0.2%. Higher steel-related demand offset weaker construction and environmental demand.
- Lime and Limestone gross profit declined 26.2% in the quarter and 11.8% year to date. Margins were pressured by lower volume and higher stripping costs in the quarter, and by higher stripping, fuel, and transportation costs year to date.
- Management stated that the elevated stripping costs were not expected to continue into the fourth quarter.
- Natural Gas Interests revenue increased 10.5% in the quarter and 7.2% year to date, primarily from higher prices despite declining production. Production was 123 thousand MCF in Q3 and 380 thousand MCF year to date, compared with 137 thousand and 425 thousand MCF, respectively, in 2017.
- Income tax expense fell substantially due primarily to the 2017 Tax Act, which reduced the federal corporate tax rate to 21%, together with research and development credits and statutory depletion. Management estimated a 2018 effective tax rate of 9.8%.
- Operating cash flow increased 32.9% year to date, while capital expenditures more than doubled, driven by the St. Clair kiln project.
Guidance, outlook, risks, contingencies, and unusual items
- The St. Clair modernization and expansion project, including a new fuel-efficient vertical kiln, is estimated to cost approximately $50 million. The company expected commissioning by the end of 2018; $33.5 million had been incurred and $30.1 million paid through September 30, 2018.
- Most of the remaining St. Clair project spending was expected in the fourth quarter of 2018 and in 2019. Open capital-expenditure orders totaled approximately $4.6 million, including $2.1 million related to St. Clair.
- Management believed cash on hand and operating cash flow would meet operating, capital, dividend, and near-term liquidity needs, absent a significant acquisition, and could support up to $7.2 million of remaining authorized share repurchases. No program shares were repurchased in the third quarter.
- Key risks include construction and environmental demand weakness, loss of major accounts, competition and pricing pressure, transportation availability and costs, fuel costs, adverse weather, project delays or cost overruns, permitting and regulatory matters, mine-safety requirements, cybersecurity or operational disruptions, and declining natural-gas production.
- The company hedged Euro-denominated equipment obligations. At September 30, 2018, hedges covered 2.9 million Euros and had a net fair-value liability of $35 thousand. The company remained exposed to unhedged foreign-exchange movements and counterparty performance.
- The company adopted the new revenue-recognition standard on January 1, 2018 with no material opening retained-earnings impact. It estimated that adoption of the new lease standard in 2019 would add approximately $3.0 million each of right-of-use assets and lease liabilities.
- Management stated that disclosure controls and procedures were effective as of September 30, 2018 and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Progress, final cost, commissioning status, and operating benefits of the St. Clair kiln project.
- Whether construction and environmental demand recover after weather-related weakness and customer losses.
- Trends in stripping, fuel, freight, and labor costs and their effect on Lime and Limestone margins.
- Cash conversion relative to the substantially higher capital-spending program.
- Availability and covenant capacity under the revolving credit facility, including letters of credit and project commitments.
- Continuation of the $0.135 quarterly dividend and any use of the remaining share-repurchase authorization.
- Natural-gas production declines, commodity prices, and the absence of new wells since 2011.
- Mine-safety disclosures in Exhibit 95.1 and any permitting, regulatory, litigation, or environmental developments.