Business Context and Reporting Period
United States Lime & Minerals, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The Company operates two segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests in the Barnett Shale formation in Texas. The filing states that interim results are not necessarily indicative of full-year results.
Financial Results and Key Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $37.0 million | $39.1 million | $99.5 million | $114.4 million |
| Gross profit | $10.4 million | $9.9 million | $23.2 million | $28.9 million |
| Gross margin | 28.0% | 25.3% | 23.4% | 25.3% |
| Operating profit | $7.9 million | $7.5 million | $16.0 million | $21.9 million |
| Operating margin | 21.3% | 19.1% | 16.1% | 19.2% |
| Net income | $5.7 million | $5.4 million | $10.6 million | $15.6 million |
| Diluted EPS | $1.01 | $0.97 | $1.89 | $2.80 |
For the nine months, net cash provided by operating activities was $22.9 million versus $23.3 million in the prior-year period. Capital expenditures were $8.1 million versus $8.7 million. Financing cash outflows were $18.9 million, including $16.7 million of debt repayment and $2.1 million of dividends. Cash decreased from $58.3 million at December 31, 2014 to $54.5 million at September 30, 2015.
The Company had no debt outstanding at September 30, 2015, other than $0.7 million of letters of credit issued under its new revolving facility. Total current assets were $88.8 million and total liabilities were $28.5 million. Stockholders’ equity was $165.0 million. The Company paid quarterly dividends of $0.125 per share during the first three quarters and declared the same dividend for payment in December 2015.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 5.2%, while nine-month revenue declined 13.0%.
- Lime and limestone revenue decreased 3.7% in the third quarter and 11.5% for the nine months, primarily from lower sales volumes. Volume declines were approximately 5.6% and 12.5%, respectively, partly offset by product price increases of approximately 1.9% and 1.0%.
- Natural gas revenue fell 52.6% in the third quarter and 53.7% for the nine months because of lower production and substantially lower natural gas and natural gas liquids prices. Nine-month production was 548 thousand MCF at an average price of $3.56 per MCF, compared with 641 thousand MCF at $6.57 per MCF in 2014.
- Third-quarter gross profit increased 4.9%, and gross margin improved to 28.0%, primarily because of lower energy costs and lower discretionary outside contractor stripping costs. Nine-month gross profit decreased 19.6%, and gross margin declined to 23.4%.
- SG&A increased 2.6% in the third quarter and 3.7% for the nine months, causing SG&A as a percentage of revenue to rise to 6.7% and 7.3%, respectively.
- Interest expense declined sharply in the third quarter following the repayment of debt. The nine-month decline was partly offset by costs associated with repurchasing interest-rate hedges.
- Net income increased 4.6% in the third quarter but decreased 32.2% for the nine months. The nine-month result included a $0.9 million pretax settlement expense related to termination of the Corson defined benefit plan.
Guidance, Outlook, Risks and Unusual Items
- Management estimated a 2015 effective income tax rate of approximately 26.2%, primarily below the federal statutory rate because of statutory depletion.
- Management stated that cash on hand and operating cash flow should be sufficient for near-term operating requirements, capital needs, potential modernization and expansion projects, any debt service under the revolving facility, and regular dividends. No specific earnings or revenue guidance was provided.
- On May 7, 2015, the Company replaced its prior credit facilities with a $75 million revolving facility maturing May 7, 2020, with an additional $50 million accordion feature subject to lender approval. The facility is secured by Company assets and bears variable interest rates.
- The Company terminated the Corson Plan after receiving a favorable IRS determination letter. It paid $0.2 million, recognized a $0.9 million pretax settlement charge, and will not have future contribution obligations under that plan.
- Key operating risks include weak demand or pricing in construction, steel, industrial and oil and gas markets; adverse weather; energy, fuel, freight and transportation costs; production interruptions; mine safety and permitting requirements; environmental and regulatory costs; natural gas production declines and commodity-price volatility; project cost overruns; cybersecurity or information-technology disruptions; and access to liquidity or credit markets.
- The Company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether lower lime and limestone volumes, particularly from oil and gas and steel customers, persist or recover.
- The outlook for natural gas production declines and commodity prices, which materially reduced the Natural Gas Interests segment.
- The sustainability of the improved third-quarter lime and limestone margin in light of lower nine-month margins and ongoing cost pressures.
- Compliance with terms and financial requirements of the secured $75 million revolving facility, including the $0.7 million of outstanding letters of credit.
- Capital spending requirements for modernization, expansion and development projects, and their effect on cash available for dividends.
- Mine safety, permitting, environmental and regulatory matters disclosed in the filing and accompanying Exhibit 95.1.