United States Lime & Minerals, Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual Form 10-K, not a quarterly filing; fourth-quarter information is presented in unaudited supplementary data. The company operates two segments: Lime and Limestone Operations and Natural Gas Interests, entirely within the United States.
Business Context
- Lime and limestone products serve construction, metals, environmental, oil and gas services, industrial, roofing and agricultural customers.
- Natural Gas Interests consist of royalty and non-operating working interests in Barnett Shale wells in Johnson County, Texas. The company does not operate the wells.
- The company produced approximately 3 million tons of limestone in 2013 and operated at approximately 57% of aggregate plant capacity.
- At December 31, 2013, limestone reserves included approximately 21 million tons of proven and 80 million tons of probable reserves in Texas, 16 million tons of proven and 76 million tons of probable reserves in Arkansas, and 13 million tons of probable reserves at St. Clair, Oklahoma.
Financial Performance and Key Metrics
| ($ in thousands, except per-share data) | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $133,765 | $138,525 | Down 3.4% |
| Lime and limestone revenue | $128,003 | $131,404 | Down 2.6% |
| Natural gas revenue | $5,762 | $7,121 | Down 19.1% |
| Gross profit | $30,800 | $33,438 | Down 7.9% |
| Operating profit | $21,651 | $24,245 | Down 10.7% |
| Income before taxes | $19,833 | $22,101 | Down 10.3% |
| Net income | $14,800 | $16,423 | Down 9.9% |
| Diluted earnings per share | $2.66 | $2.87 | Down 7.3% |
| Net income margin | 11.1% | 11.9% | Down 0.8 percentage points |
| Gross margin | 23.0% | 24.1% | Down 1.1 percentage points |
| Operating margin | 16.2% | 17.5% | Down 1.3 percentage points |
- 2013 lime and limestone gross profit was $27.9 million, compared with $29.5 million in 2012. Natural Gas Interests gross profit was $2.9 million, compared with $3.9 million.
- Natural gas production declined to 1.0 BCF from 1.2 BCF. The average sales price increased to $5.86 per MCF from $5.74, but normal production declines reduced revenue.
- SG&A was $9.1 million, broadly unchanged from $9.2 million in 2012. Interest expense declined to $1.9 million from $2.2 million, and the effective tax rate declined to 25.4% from 25.7%.
- Comprehensive income was $15.7 million, including $0.9 million of other comprehensive income primarily from interest-rate hedges and pension adjustments.
Cash Flow, Liquidity and Capital Structure
- Cash provided by operating activities was $33.5 million, up from $31.7 million in 2012.
- Capital expenditures were $8.9 million, primarily for recurring plant and facility projects; investing cash outflow was $8.7 million.
- Cash and cash equivalents increased to $49.5 million from $29.8 million.
- Total debt was $21.7 million at year-end, down from $26.7 million, consisting of $13.3 million under the Term Loan and $8.3 million under the Draw Term Loan. The company repaid $5.0 million of term debt during 2013.
- The company had no cash borrowings under its $30 million revolving facility, although $660 thousand of letters of credit were outstanding.
- Debt maturities include $5.0 million due in 2014, with the remaining $16.7 million due in 2015. The revolving facility matures June 1, 2015.
- Interest-rate swaps fixed LIBOR components on the term loans. The swaps had a $1.5 million mark-to-market liability at December 31, 2013.
- Management expects normal recurring capital expenditures of approximately $7 million to $9 million annually over the next several years and believes cash on hand and operating cash flow will cover operating, capital, debt-service and dividend requirements in the near term.
Material Changes Versus the Prior Comparable Period
- Lower steel-related demand reduced lime and limestone volumes; construction and environmental demand improved, but fourth-quarter construction demand was hurt by unfavorable weather.
- Average lime and limestone prices increased approximately 1.2%, partially offsetting a roughly 3.8% volume-related revenue decline.
- Fourth-quarter weather caused production inefficiencies and higher costs, partially offset by approximately $0.6 million of lower stripping costs for the year.
- Natural gas revenue and gross profit declined because of normal well production declines, despite slightly higher realized prices.
- Debt declined by $5.0 million, while cash increased by $19.7 million. Treasury-stock purchases fell sharply to $0.2 million from $40.8 million in 2012.
- Stockholders’ equity increased to $136.8 million from $120.4 million, and total assets increased to $187.5 million from $174.2 million.
Outlook, Risks and Unusual Items
- Management expects continued recurring capital spending and is evaluating the economics and market demand for modernizing the St. Clair plant after receiving an Oklahoma air permit for a new vertical regenerative kiln.
- The company believes fourth-quarter construction demand was postponed rather than permanently lost because customer projects remained underway, but it provided no formal revenue or earnings guidance.
- Key risks include economic weakness, demand from construction and steel customers, natural gas price and production volatility, fuel and freight inflation, weather, equipment failures, labor disruptions, permitting and environmental compliance costs, and cybersecurity or information-technology disruptions.
- Greenhouse-gas, air-quality and hydraulic-fracturing regulation could increase capital, operating and permitting costs or limit operations.
- Natural gas reserves are depleting assets. No new wells were being drilled at year-end, and the company has limited operational control because third-party operators determine drilling and production activity.
- Proved natural gas reserves declined to 7.6 BCF from 8.3 BCF. The standardized measure of discounted future net cash flows increased to $13.6 million from $12.8 million, based on SEC-prescribed pricing assumptions.
- Asset retirement obligations were $1.3 million, with estimated annual expenditures of approximately $0.1 million to $0.2 million during 2014–2018.
- Management reported 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.
- The company declared a quarterly dividend of $0.125 per share on January 29, 2014, payable March 20, 2014. No dividends were paid during 2013 or 2012.
Important Facts for Investors to Verify
- Whether lime and limestone volumes recover, particularly in steel and construction markets, and whether price increases offset energy, freight and compliance costs.
- The timing and refinancing implications of the $21.7 million debt balance, including 2015 maturities and covenant compliance.
- Actual recurring and discretionary capital spending, including any St. Clair modernization decision.
- The production decline, reserve depletion and operator drilling plans for the Barnett Shale interests.
- The effect of environmental, greenhouse-gas, mine-safety and hydraulic-fracturing requirements on future costs and permits.
- The assumptions underlying the $13.6 million standardized measure of gas reserves, which is not a fair-value estimate and is sensitive to prices, costs, production and discounting.
- Seasonal and weather-related variability, especially the fourth-quarter 2013 disruption and its effect on subsequent customer shipments.