United States Lime & Minerals, Inc. — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014; filed March 6, 2015. The filing is an annual report, not a standalone fourth-quarter filing, although fourth-quarter comparative data is included. The company operates two segments: Lime and Limestone Operations and Natural Gas Interests, entirely within the United States.
Business Context
- Lime and Limestone Operations manufacture pulverized limestone, quicklime, hydrated lime and lime slurry for construction, industrial, environmental, metals, oil and gas services, roofing and agricultural customers.
- Natural Gas Interests comprise royalty and non-operating working interests in Barnett Shale wells in Johnson County, Texas. The company does not operate the wells and has limited control over drilling, production and marketing.
- The company produced approximately 3 million tons of limestone in 2014 and operated its lime and limestone plants at approximately 67% of aggregate annual production capacity.
- At December 31, 2014, the company employed 313 people and had approximately 20 million tons of proven and 80 million tons of probable recoverable reserves at Texas Lime, plus substantial Arkansas and Oklahoma reserves.
Financial Performance and Position
| Metric | 2014 | 2013 | Change |
|---|
| Total revenue | $149.8 million | $133.8 million | +12.0% |
| Lime and limestone revenue | $144.6 million | $128.0 million | +12.9% |
| Natural gas revenue | $5.3 million | $5.8 million | -8.5% |
| Gross profit | $36.8 million | $30.8 million | +19.5% |
| Operating profit | $27.3 million | $21.7 million | +26.2% |
| Income before taxes | $25.9 million | $19.8 million | +30.7% |
| Net income | $19.4 million | $14.8 million | +30.9% |
| Diluted earnings per share | $3.47 | $2.66 | +30.5% |
| Gross margin | 24.6% | 23.0% | +1.6 percentage points |
| Operating margin | 18.2% | 16.2% | +2.0 percentage points |
| Net margin | 12.9% | 11.1% | +1.8 percentage points |
- Lime and limestone gross profit increased to $34.0 million from $27.9 million. Natural gas gross profit declined slightly to $2.8 million from $2.9 million.
- Operating expenses were $9.5 million, or 6.4% of revenue, versus $9.1 million, or 6.8%, in 2013. Interest expense declined to $1.5 million from $1.9 million.
- Natural gas production decreased to 0.8 BCF from 1.0 BCF, while the average sales price increased to $6.28 per MCF from $5.86. Proved natural gas reserves declined to 6.7 BCF from 7.6 BCF.
Cash Flow, Liquidity and Capital Structure
| Metric | 2014 | 2013 |
|---|
| Cash flow from operations | $32.0 million | $33.5 million |
| Cash used in investing | $15.1 million | $8.7 million |
| Capital expenditures and business acquisition spending | $15.4 million | $8.9 million |
| Cash used in financing | $8.1 million | $5.2 million |
| Cash and cash equivalents at year-end | $58.3 million | $49.5 million |
| Total debt at year-end | $16.7 million | $21.7 million |
| Stockholders’ equity | $154.7 million | $136.8 million |
- The company repaid $5.0 million of term loans, paid $2.8 million in dividends and repurchased $0.3 million of common stock.
- Debt consisted of $10.0 million under the Term Loan and $6.7 million under the Draw Term Loan. All principal was classified as current because it was due in 2015.
- The $30 million revolving facility had no cash borrowings but supported $0.7 million of letters of credit. The revolving facility matured June 1, 2015; the term loans had final principal payments due December 31, 2015.
- Management expected annual recurring capital spending of approximately $8 million to $10 million and believed cash on hand and operating cash flow would fund operations, capital needs, debt repayment and dividends.
- Interest-rate swaps fixed LIBOR on the term debt; the swaps had a $0.7 million mark-to-market liability at year-end.
Material Changes Versus 2013
- Revenue growth was driven primarily by higher lime and limestone volumes to construction, industrial, environmental and oil and gas services customers, as well as temporary sales to another lime producer. Average lime and limestone prices increased approximately 1.5%.
- Improved fourth-quarter weather shifted construction shipments into 2014 compared with weather-delayed shipments in the fourth quarter of 2013. Steel-customer volumes declined.
- Natural gas revenue fell because of normal production declines, despite higher realized prices. No new wells had been drilled or completed since 2011, and no wells were being drilled at year-end.
- Capital spending increased substantially, including $11.7 million for property, plant and equipment and approximately $3.7 million for the acquisition of a Houston trucking operation. The acquired land, buildings, trucks and equipment are intended primarily to support company deliveries.
- The company initiated steps to evaluate termination of its frozen Corson pension plan. The plan was underfunded by $0.3 million at year-end; termination could reduce net income by approximately $0.6 million, net of tax benefits, although termination was not committed.
- The board declared a quarterly dividend of $0.125 per share on January 29, 2015.
Outlook, Risks and Unusual Items
- Management expected lower 2015 demand from oil and gas services customers because of declining drilling activity and lower oil and gas prices, but expected lower fuel, transportation and freight costs to substantially offset that pressure.
- Construction demand remains sensitive to weather, highway funding, housing and general economic conditions. The company identified expiration of MAP-21 transportation funding on May 31, 2015 as a potential demand risk.
- Key cost risks include coal, petroleum coke, diesel, electricity, transportation and freight prices, as well as railcar and truck availability. The company has limited energy hedging activity.
- Environmental, air-quality, greenhouse-gas, mining-safety and permitting requirements could increase capital, operating and compliance costs or delay plant modernization and expansion. Environmental capital expenditures were approximately $1.0 million in 2014, and recurring environmental costs were approximately $0.9 million.
- The company reported a $1.3 million asset-retirement-obligation accrual and estimated annual related expenditures of approximately $0.1 million to $0.2 million through 2019.
- Natural gas results face depletion, commodity-price volatility, operator-controlled drilling decisions, hydraulic-fracturing regulation, pipeline constraints and geographic concentration in the Barnett Shale. The company cannot explore for new reserves independently.
- Other disclosed risks include severe weather, operational disruptions, equipment failures, labor interruptions, cybersecurity incidents, customer and supplier risks, litigation, and changes in tax or environmental regulation.
- Management stated that ordinary-course lawsuits and claims were not expected to have a material adverse effect. Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the company refinanced or repaid the $16.7 million of debt and renewed or replaced the revolving facility after its 2015 maturities.
- Whether lime and limestone demand, pricing and margins continued to offset weaker steel and oil and gas services demand.
- The effect of lower oil and gas prices and continued well-production declines on Natural Gas Interests revenue, reserves and standardized measure.
- Actual 2015 capital expenditures, the performance and strategic benefits of the Houston trucking acquisition, and any decision regarding St. Clair kiln modernization.
- Changes in environmental, greenhouse-gas, air-quality, mine-safety and hydraulic-fracturing requirements, including related compliance costs and permitting delays.
- Whether the Corson pension plan was terminated and the resulting impact on earnings, cash contributions and accumulated other comprehensive loss.
- Cash dividend sustainability, covenant compliance and available liquidity following debt repayment and scheduled capital spending.
