United States Lime & Minerals, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 28, 2020. The filing is an annual report, not a standalone fourth-quarter filing. The company operates primarily through its Lime and Limestone Operations segment, with immaterial natural gas interests reported in Other.
Business Context
The company manufactures and distributes pulverized limestone, quicklime, hydrated lime and lime slurry to construction, industrial, environmental, metals, oil and gas services, roofing and agricultural customers. Operations are located in Arkansas, Colorado, Louisiana, Oklahoma and Texas, and all 2019 sales were in the United States.
- Approximately 600 customers contributed to lime and limestone sales; no customer represented more than 10% of such sales.
- Construction, industrial, environmental, metals, oil and gas services and roof shingle demand were identified as the strongest demand sources in 2019.
- The company produced approximately 3 million tons of limestone and employed 282 people at year-end.
- Capacity utilization was approximately 64% of aggregate annual plant capacity.
Financial Performance and Liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $158.3 million | $144.4 million | Up 9.6% |
| Lime and limestone revenue | $157.0 million | $141.9 million | Up 10.6% |
| Gross profit | $41.7 million | $30.5 million | Up 36.7% |
| Operating profit | $29.2 million | $20.0 million | Up 46.2% |
| Income before taxes | $30.9 million | $21.6 million | Up 43.3% |
| Net income | $26.1 million | $19.7 million | Up 32.4% |
| Diluted earnings per share | $4.64 | $3.51 | Up 32.2% |
| Operating cash flow | $47.0 million | $38.7 million | Up 21.4% |
| Capital expenditures | $27.1 million | $53.8 million | Down 49.6% |
- Gross margin increased to 26.4% from 21.1%; operating margin increased to 18.5% from 13.8%; net margin increased to 16.5% from 13.6%.
- Lime and limestone sales volumes increased 8.6%, while average product prices increased 2.0%.
- Lower fuel costs and operating efficiencies from the new St. Clair kiln were principal contributors to improved gross profit.
- Cash and cash equivalents declined to $54.3 million from $67.2 million, principally because of a $30.0 million special dividend.
- The company had no debt outstanding at December 31, 2019. Its revolving credit facility provided $75.0 million of capacity, with an additional $50.0 million accordion feature subject to lender approval; $0.4 million of letters of credit were outstanding.
- Total assets were $247.0 million and stockholders’ equity was $217.1 million at year-end.
Material Changes Versus Prior Period
- Demand improved primarily among construction and environmental customers. Favorable Texas weather supported construction demand relative to 2018, when sustained rains adversely affected activity.
- The St. Clair fuel-efficient kiln began producing commercially saleable quicklime in the second quarter of 2019. The company had spent $44.2 million on the kiln and related modernization project through year-end and expects total project cost of approximately $50 million.
- Capital spending declined as St. Clair project spending fell to $5.6 million from $26.2 million in 2018, although 2019 included $8.0 million for Batesville quarry equipment and $2.8 million for a Dallas-Fort Worth slurry terminal.
- Natural gas revenue declined to $1.3 million from $2.5 million, and the company recorded a $0.9 million impairment charge on natural gas assets in the fourth quarter.
- The effective tax rate increased to 15.7% from 8.7%; 2018 benefited from research and development credits, while 2017 included a one-time $7.4 million tax benefit from the Tax Cuts and Jobs Act.
- Cash dividends totaled $33.1 million, including the $30.0 million special dividend, compared with $3.0 million in 2018. The board subsequently increased the regular quarterly dividend to $0.16 per share from $0.135.
- The company adopted lease accounting guidance effective January 1, 2019, increasing assets and liabilities by approximately $3.9 million with no retained-earnings impact.
Outlook, Commentary, Risks and Unusual Items
- Management expects normal recurring capital spending of approximately $12.0 million annually over the next several years. As of December 31, 2019, open orders and contractual commitments for Lime and Limestone Operations totaled $2.1 million.
- Absent a significant acquisition opportunity, management expects to fund operating needs, capital requirements and the increased regular dividend from cash on hand and operating cash flow.
- Management cited potential support from Texas highway funding improvements and proposed federal infrastructure spending, but the timing and magnitude of any demand benefit remain uncertain.
- Demand and prices have not been sufficient to fully utilize the company’s additional production capacity. The company must continue managing fuel, electricity, transportation and freight costs while maintaining product pricing.
- Key risks include cyclical demand from construction, steel, oil and gas and utility customers; coal-fired power plant retirements; regional competition and pricing pressure; weather and operational disruptions; fuel and freight volatility; rail and trucking availability; project delays or cost overruns; and cybersecurity incidents.
- Environmental and permitting risks are significant. Potential changes involving ozone standards, greenhouse-gas emissions, climate regulation and the Lime MACT rule could increase compliance costs, restrict operations or delay expansions.
- The company accrued $1.5 million for asset retirement obligations at year-end and expects annual related expenditures of approximately $0.1 million to $0.2 million during 2020–2024.
- The company reported no material legal proceedings expected to adversely affect its financial condition, results of operations, cash flows or competitive position. Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor Verification Items
- Verify whether the St. Clair kiln reaches anticipated production efficiency and whether the remaining project spending is consistent with the approximately $50 million estimate.
- Monitor volume, pricing and capacity utilization trends, particularly in construction, environmental, steel and oil and gas end markets.
- Assess the company’s ability to sustain improved margins amid fuel, freight, labor and regulatory cost pressures.
- Review cash deployment, the increased regular dividend and the effect of future acquisitions or capital projects on liquidity.
- Track environmental rulemaking, permitting requirements and potential greenhouse-gas or Lime MACT obligations.
- Evaluate the impact of the natural gas asset impairment and the continuing decline in natural gas-related revenue.
- Confirm compliance with the revolving credit agreement’s leverage, dividend and share-repurchase covenants if debt is incurred.