United States Lime & Minerals, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015; it is an annual Form 10-K rather than a quarterly filing. The company operates two segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests. Lime and limestone products are supplied primarily to construction, environmental, industrial, metals, roofing, oil and gas services, and agricultural customers across the United States.
At December 31, 2015, the company employed 323 people, operated facilities in Arkansas, Colorado, Louisiana, Oklahoma, and Texas, and had approximately 700 lime and limestone customers. No customer represented more than 10% of segment sales.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $130.8 million | $149.8 million | Down 12.7% |
| Lime and limestone revenue | $128.4 million | $144.6 million | Down 11.2% |
| Natural gas revenue | $2.4 million | $5.3 million | Down 53.6% |
| Gross profit | $28.7 million | $36.8 million | Down 22.0% |
| Operating profit | $19.1 million | $27.3 million | Down 30.2% |
| Net income | $12.9 million | $19.4 million | Down 33.5% |
| Diluted EPS | $2.30 | $3.47 | Down 33.7% |
| Net cash from operations | $32.5 million | $32.0 million | Up 1.6% |
| Capital expenditures | $11.5 million | $15.4 million | Down 25.3% |
Gross margin declined to 21.9% from 24.6%, operating margin declined to 14.5% from 18.2%, and net margin declined to 9.8% from 12.9%. Lower energy, freight, and discretionary contractor stripping costs partially offset the effect of reduced sales volumes.
Cash and cash equivalents increased to $59.9 million from $58.3 million. The company had no outstanding debt at year-end, although $0.7 million of letters of credit reduced availability under its revolving facility. Total assets were $196.5 million and stockholders’ equity was $166.6 million.
Material changes versus the prior comparable period
- Lime and limestone volumes fell approximately 12.4%, primarily because of weaker demand from oil and gas services, steel, and industrial customers. Average product prices increased approximately 1.2%.
- Construction demand was affected by unusually severe winter weather and exceptionally heavy rainfall during the first half of 2015, although construction demand improved in the fourth quarter.
- Natural gas production declined to 0.7 BCF from 0.8 BCF, while the average sales price declined to $3.41 per MCF from $6.28. Natural gas gross profit fell to $0.3 million from $2.8 million.
- The company repaid $16.7 million of term loans in the second quarter and paid $0.5 million to terminate related interest-rate hedges. Interest expense declined to $1.0 million from $1.5 million.
- The Corson pension plan was terminated in 2015. The termination generated a $0.9 million expense, or $0.6 million net of tax, and eliminated the need for future contributions.
- The company amended its credit agreement to establish a $75 million revolving facility maturing May 7, 2020, with an accordion feature for up to an additional $50 million, subject to lender approval.
- A $10 million share-repurchase program began in December 2015. The company repurchased 3,086 shares for $0.2 million during 2015 and had repurchased an additional 50,068 shares through March 3, 2016.
- Quarterly 2015 revenue was highest in the third quarter at $37.0 million; fourth-quarter net income was $2.3 million compared with $3.7 million in the prior-year quarter.
Cash flow, liquidity, debt, and commitments
- Operating cash flow of $32.5 million funded $11.5 million of capital investments, $16.7 million of debt repayment, $2.8 million of dividends, and the pension-plan termination payment.
- Management expects normal recurring capital spending of approximately $8 million to $10 million annually over the next several years.
- The company expects cash on hand and operating cash flow to fund operations, capital needs, dividends, and the remaining share repurchase authorization, absent a significant acquisition.
- Contractual obligations totaled $10.8 million, including $5.0 million of operating leases, $1.7 million of limestone mineral leases, $2.1 million of purchase obligations, and $2.1 million of other liabilities.
- The company reported no off-balance-sheet financing arrangements and no material litigation expected to adversely affect financial condition, results, cash flows, or competitive position.
Guidance, outlook, commentary, and risks
Management did not provide formal earnings or revenue guidance. Management expects construction demand to benefit from the FAST Act and Texas transportation-funding measures and stated that construction demand improved in late 2015 and carried into early 2016. However, available production capacity was not fully utilized; 2015 utilization was approximately 57%.
Management plans to focus on maintaining or increasing product prices, controlling operating and selling expenses, improving plant efficiency, and evaluating modernization, expansion, acquisitions, and potential modernization of the St. Clair plant. The St. Clair project remains subject to technical feasibility, economics, permitting, and market demand.
- Demand and pricing remain sensitive to U.S. economic conditions, construction activity, steel production, oil and gas drilling, utility coal usage, and government transportation funding.
- Lower oil and gas prices reduced demand from oil and gas services customers and reduced natural gas revenue, while also lowering the company’s energy, freight, and transportation costs.
- Natural gas interests are declining assets. The company has no ability to explore independently, no wells have been completed since 2011, and there are no present plans for additional drilling at current market prices.
- Environmental, greenhouse-gas, air-quality, mine-safety, permitting, reclamation, and hydraulic-fracturing regulations may increase costs, restrict operations, or make expansions more difficult.
- Key operating risks include severe weather, equipment failures, mining conditions, rail or trucking disruptions, fuel and electricity costs, labor interruptions, cybersecurity events, and the ability to sell additional capacity at acceptable prices.
- The company accrued approximately $2.1 million for asset-retirement obligations at year-end and estimates annual related expenditures of approximately $0.1 million to $0.2 million from 2016 through 2020.
Independent auditors Grant Thornton LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditors concluded that internal control over financial reporting was effective as of December 31, 2015.
Important facts for investors to verify
- Whether lime and limestone volumes and pricing recover, particularly in oil and gas services, steel, and industrial markets.
- Whether construction demand and FAST Act-related infrastructure spending translate into sustained shipment growth.
- The sustainability of the 2015 operating cash flow despite lower earnings and the company’s planned $8 million to $10 million annual capital spending.
- Progress and economics of the St. Clair modernization opportunity and any other expansion or acquisition plans.
- Natural gas production declines, reserve revisions, realized commodity prices, and the effect on depletion and future cash flows.
- Remaining share repurchases, dividend payments, and compliance with revolving-credit covenants.
- Potential costs or operational restrictions from environmental, greenhouse-gas, air-quality, mine-safety, and hydraulic-fracturing regulation.
- Utilization of the company’s production capacity, which was approximately 57% in 2015.