Business Context and Reporting Period
United States Lime & Minerals, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company manufactures lime and limestone products for construction, industrial, environmental, metals, oil and gas, roofing, and agricultural customers. Operations are conducted in the United States, with one reportable segment: lime and limestone operations. The company also holds non-operated natural gas interests.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Revenue | $37.5 million | $39.0 million | $76.0 million | $76.8 million |
| Gross profit | $10.4 million | $9.7 million | $20.2 million | $18.4 million |
| Gross margin | 27.6% | 25.0% | 26.6% | 24.0% |
| Operating profit | $7.5 million | $7.1 million | $14.1 million | $13.1 million |
| Operating margin | 19.9% | 18.2% | 18.6% | 17.1% |
| Net income | $6.1 million | $6.0 million | $11.6 million | $11.2 million |
| Diluted EPS | $1.08 | $1.07 | $2.07 | $1.99 |
| Operating cash flow | Not separately provided | Not separately provided | $27.1 million | $20.0 million |
| Capital expenditures | Not separately provided | Not separately provided | $10.6 million | $12.4 million |
Cash and cash equivalents were $68.8 million at June 30, 2020, compared with $54.3 million at December 31, 2019. Total assets were $259.3 million and stockholders’ equity was $227.6 million. The company had no debt outstanding and only $0.4 million of letters of credit outstanding under its $75 million revolving credit facility. The facility matures May 2, 2024 and includes a potential $50 million accordion feature, subject to lender approval.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue declined 3.6%, while six-month revenue declined 1.0%.
- Lime and limestone sales volumes decreased 7.5% in the quarter and 4.8% year to date, primarily because of weaker demand from environmental, oil and gas services, and steel customers. Construction demand partially offset these declines.
- Average realized prices for lime and limestone products increased 4.3% in the quarter and 4.2% year to date.
- Gross profit increased 6.5% in the quarter and 9.8% year to date, primarily due to lower fuel costs and operating efficiencies from the new St. Clair kiln. These benefits partly offset lower volumes and COVID-19-related costs.
- SG&A expense increased to $2.9 million from $2.6 million in the quarter and to $6.1 million from $5.3 million year to date, driven primarily by personnel and stock-based compensation expense, legal and acquisition-related costs, and COVID-19 costs.
- Interest and other income declined substantially because of lower interest rates and lower average cash balances. Interest expense remained minimal despite the company having no outstanding debt.
- Operating cash flow increased 35.4% year over year, supported by higher net income, noncash charges, and favorable working-capital changes, including collections of trade receivables.
- Capital expenditures declined by $1.8 million year to date. The company reported no material commitments for open purchase orders at June 30, 2020.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal revenue or earnings guidance. Management expects cash on hand and operating cash flow to fund operating requirements, capital needs, potential modernization and expansion projects, liquidity needs, and regular quarterly dividends in the near term, absent a significant acquisition.
COVID-19 caused economic disruption and reduced demand in several end markets. Management expects continued economic slowdown, potential further demand reductions, pricing pressure, and higher costs if restrictions continue or expand. Facility outbreaks, employee quarantines, supply-chain interruptions, transportation constraints, or government restrictions could impair production, sales, and deliveries. Management stated that the company had not experienced a material impact on operating cash flow or liquidity through June 30, 2020.
On July 1, 2020, the company acquired Carthage Crushed Limestone in Missouri for $9 million cash, subject to adjustment. The acquisition was intended to complement the company’s geographic footprint and occurred after the reporting period.
The company paid quarterly dividends of $0.16 per share in March and June 2020. On July 29, 2020, the board declared another $0.16 per-share dividend payable September 18, 2020. The company also repurchased shares primarily to satisfy tax-withholding obligations on vested restricted stock.
The last foreign-exchange hedge expired in April 2020. The company identifies exposure to fuel, energy, transportation, interest rates, commodity demand, regulatory and permitting requirements, mine safety, reserve estimates, cybersecurity, weather, natural disasters, and broader economic conditions as material risks.
Investor Verification Points
- Verify the final purchase-price allocation, acquired assets, liabilities, and expected contribution from the Carthage Crushed Limestone acquisition.
- Monitor COVID-19 effects on volumes, pricing, plant operations, employee availability, transportation, and end-market demand.
- Assess whether improved gross margins from lower fuel costs and the St. Clair kiln are sustainable as volumes and input costs change.
- Review cash-flow conversion, working-capital movements, capital expenditure requirements, and liquidity after the $9 million acquisition.
- Confirm compliance with revolving-credit covenants and the company’s ability to maintain dividends and any future share repurchases.
- Review mine-safety disclosures, permitting matters, environmental requirements, litigation, and other contingencies in the complete filing and exhibits.