United States Lime & Minerals, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Financial statements are unaudited. The Company operates two segments: Lime and Limestone Operations and Natural Gas Interests, all in the United States.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $38.7 million | $35.2 million | $75.4 million | $66.8 million |
| Gross profit | $10.4 million | $9.0 million | $19.0 million | $15.3 million |
| Gross margin | 27.0% | 25.5% | 25.2% | 22.8% |
| Operating profit | $8.0 million | $6.7 million | $14.4 million | $10.8 million |
| Net income | $5.7 million | $4.6 million | $10.2 million | $7.4 million |
| Diluted EPS | $1.02 | $0.83 | $1.83 | $1.33 |
- Lime and Limestone revenue increased 10.8% in the quarter and 13.4% year to date, primarily from higher sales volumes and product-price increases of approximately 1.6% and 1.5%, respectively.
- Natural Gas Interests revenue declined 8.9% in the quarter because production fell approximately 15.9%, partly offset by a 7.0% increase in average natural gas prices. Year-to-date revenue increased 2.7% as higher prices offset a 19.0% production decline.
- Operating margins were 20.7% in Q2 and 19.1% year to date, compared with 19.0% and 16.1% in the comparable 2013 periods. SG&A represented 6.3% of Q2 revenue and 6.1% year to date.
- Net cash provided by operating activities was $15.9 million for the first six months, versus $12.5 million in 2013. Capital expenditures were $5.5 million, compared with $4.0 million.
- Cash and cash equivalents were $56.0 million at June 30, 2014, versus $49.5 million at December 31, 2013. Total assets were $193.0 million and stockholders’ equity was $146.3 million.
- Total debt was $19.2 million, including $5.0 million classified as current. The Company had no revolving-facility borrowings other than $0.7 million of letters of credit. Debt declined from $21.7 million at December 31, 2013.
- The Company paid $1.4 million in dividends during the first six months, or $0.125 per share in each quarter. A further $0.125-per-share dividend was declared for payment September 19, 2014.
Material changes versus the prior comparable period
- Second-quarter revenue increased 10.0%, gross profit increased 16.3%, operating profit increased 20.1%, and net income increased 23.6% year over year.
- Six-month revenue increased 12.9%, gross profit increased 24.6%, operating profit increased 33.3%, and net income increased 38.3%.
- Improved results were driven primarily by stronger lime and limestone volumes, especially from industrial and oil and gas services customers, modest pricing gains, and operating leverage.
- A significant portion of Q2 lime volume came from sales to another lime producer for delivery to its customers. Management stated that this business could continue at a reduced rate but may cease in the near future.
- Interest expense declined 12.3% in Q2 and 15.4% year to date because of lower average debt balances.
Guidance, outlook, risks, and unusual items
- Management expects demand for lime and limestone products to increase slightly during the remainder of 2014 compared with the second half of 2013, but expressed concern about construction demand if Congress fails to provide long-term Highway Trust Fund funding.
- Management believes cash on hand and operating cash flow will be sufficient for operating needs, capital requirements, debt service, liquidity needs, and regular dividends in the near future. No specific earnings or revenue guidance was provided.
- The Company’s debt bears floating rates, although interest-rate hedges fix LIBOR components through maturity. Current stated interest rates range from 6.445% to 7.250%, depending on the debt tranche. Hedge liabilities were $1.1 million at June 30, 2014.
- Material risks include demand and pricing exposure in construction, steel, industrial, and oil and gas markets; energy, freight, and transportation costs; weather, mine and facility disruptions; regulatory and mine-safety requirements; cybersecurity and IT failures; project cost overruns; debt-service and interest-rate exposure; and declining natural gas production.
- The Company adopted no early implementation of the new revenue-recognition standard, ASU 2014-09, which becomes effective January 1, 2017. The impact was still under evaluation.
- On July 25, 2014, the Company entered into a new employment agreement with CEO Timothy W. Byrne, effective January 1, 2015. The agreement includes a base salary of at least $410,000, performance-based compensation, equity awards, and potential severance payments.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether the temporary or potentially ending sales to another lime producer materially affect second-half 2014 volumes and revenue.
- Whether construction demand is affected by Highway Trust Fund funding uncertainty and broader economic conditions.
- The sustainability of improved lime and limestone volumes, pricing, and margins.
- Natural gas production declines, realized prices, reserve and drilling activity, and the continuing contribution of the Natural Gas Interests segment.
- The timing and size of required debt repayments, including the $10.0 million Term Loan and $6.7 million Draw Term Loan final payments due December 31, 2015.
- Future capital expenditures, modernization or development projects, and compliance with mine-safety and environmental requirements.
- The potential financial impact of the new CEO employment and incentive agreement, including change-in-control severance provisions.