Business Context and Reporting Period
United States Lime & Minerals, Inc. filed its Form 10-K for the fiscal year ended December 31, 2018. 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 across the United States. Natural Gas Interests comprise royalty and non-operated working interests in producing Barnett Shale wells in Texas.
Sales are seasonal, typically strongest in the second and third quarters. The company employed 287 people at year-end and had approximately 5.6 million shares outstanding as of February 28, 2019.
Financial Performance and Position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $144.4 million | $144.8 million | Down 0.3% |
| Lime and limestone revenue | $141.9 million | $142.6 million | Down 0.5% |
| Natural gas revenue | $2.5 million | $2.2 million | Up 12.6% |
| Gross profit | $30.5 million | $34.4 million | Down 11.3% |
| Operating profit | $20.0 million | $24.2 million | Down 17.4% |
| Net income | $19.7 million | $27.1 million | Down 27.5% |
| Diluted EPS | $3.51 | $4.86 | Down 27.8% |
| Operating cash flow | $38.7 million | $34.3 million | Up 13.0% |
| Capital expenditures | $53.8 million | $21.3 million | Up materially |
| Cash and equivalents | $67.2 million | $85.0 million | Down $17.8 million |
| Total debt | None | None | No change |
Gross margin declined to 21.1% from 23.7%, and operating margin declined to 13.8% from 16.7%. Net margin was 13.6% versus 18.7%. SG&A increased to $10.5 million, or 7.3% of revenue, from $10.2 million, or 7.0%.
Fourth-quarter 2018 revenue was $34.6 million, gross profit was $6.6 million and net income was $4.2 million, compared with fourth-quarter 2017 revenue of $35.2 million, gross profit of $7.8 million and net income of $11.6 million.
Material Changes Versus the Prior Comparable Period
- Lime and limestone sales volumes decreased approximately 1.8%, principally because of lower construction and environmental demand. Average product prices increased approximately 1.3%.
- Extended rainy weather in Texas reduced construction demand, and the company lost a municipal water-treatment account. Increased steel capacity utilization partly offset these effects.
- Lime and limestone gross profit fell 12.4% to $29.5 million, primarily because of higher quarrying and transportation costs.
- Natural gas revenue increased because average prices rose approximately 25.6%, more than offsetting a 13.0% production decline from existing wells. Natural gas gross profit increased 37.9% to $1.0 million.
- Net income was affected by the absence of the $7.4 million one-time deferred-tax benefit recognized in 2017 under the Tax Cuts and Jobs Act. The 2018 effective tax rate was 8.7%, compared with a negative 8.8% in 2017.
- Operating cash flow increased despite lower net income, while investing cash outflows increased substantially because of capital projects and property acquisitions.
Liquidity, Capital Allocation and Outlook
- The company had $67.2 million of cash, no outstanding debt and $1.2 million of letters of credit at December 31, 2018.
- A $75 million revolving credit facility, with a $50 million accordion feature subject to lender approval, matures May 7, 2020. The facility is secured and has financial covenants, including a maximum cash-flow leverage ratio of 3.50 to 1.00.
- The St. Clair vertical kiln project is expected to cost approximately $50 million in total. The company had paid $38.7 million through year-end and expected most remaining costs to be paid by the end of 2019. Start-up was expected around the end of the first quarter of 2019.
- Management expects approximately $12 million of annual recurring capital spending over the next several years, excluding major expansion projects and acquisitions.
- The company paid approximately $3.0 million in dividends in 2018 and retained authorization to repurchase approximately $7.2 million of common stock through November 30, 2019. No shares were repurchased under the program during 2018.
- Management expects cash on hand and operating cash flow to fund operations, capital needs, dividends and the remaining repurchase authorization, absent a significant acquisition.
- Natural gas production is expected to decline as existing wells deplete. No new wells have been completed since 2011, and there were no present plans to drill additional wells at current commodity prices.
Risks, Contingencies and Unusual Items
- Demand and pricing are exposed to construction, steel, industrial, oil and gas and utility-sector cycles. Coal-fired power-plant retirements reduce demand for lime used in flue-gas treatment.
- Profitability is sensitive to fuel, electricity, diesel, transportation and freight costs, with limited ability to pass all increases to customers.
- Weather, equipment failures, mine or plant incidents, rail or trucking disruptions, labor interruptions and natural disasters could reduce production or shipments.
- Environmental, greenhouse-gas, air-quality, water, mining-safety and permitting requirements may increase costs or restrict future plant modifications and expansions. Environmental capital expenditures were approximately $1.2 million in 2018, and asset-retirement obligations were approximately $1.5 million.
- The St. Clair kiln project remains subject to commissioning, execution and cost-overrun risk, as well as uncertainty regarding product output and market demand for added capacity.
- Natural Gas Interests are non-operated and dependent on third-party operators, commodity prices, production declines, regulatory requirements and the economic viability of existing wells.
- Contractual obligations totaled approximately $10.1 million at year-end, including operating leases, mineral leases, purchase obligations and other liabilities. Management stated that ordinary-course litigation was not expected to have a material adverse effect.
- The company adopted the new revenue-recognition standard in 2018 without a material effect. It expected the 2019 lease standard to add approximately $3.5 million of right-of-use assets and lease liabilities to the balance sheet.
Important Facts for Investors to Verify
- Verify the start-up, commercial production and final cost of the St. Clair kiln, including the timing of depreciation and realized operating efficiencies.
- Monitor construction and environmental demand, pricing, quarrying costs and freight costs, which drove the 2018 margin decline.
- Reconcile 2018 earnings with and without the nonrecurring 2017 tax benefit to assess underlying performance.
- Assess whether operating cash flow can sustain the company’s elevated capital program, dividends and potential share repurchases without debt financing.
- Track depletion, production volumes and commodity prices for the declining Natural Gas Interests.
- Review the revolving-credit facility’s May 2020 maturity, collateral and covenant restrictions before assuming additional liquidity is available on unchanged terms.
- Consider the effects of future environmental rules, permitting requirements and greenhouse-gas regulation on capital costs, operating costs and customer demand.