United States Lime & Minerals, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2018, filed July 27, 2018. The company operates two segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests in the Barnett Shale formation in Texas.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $39.2 million, up 7.5% | $74.5 million, up 2.6% |
| Gross profit | $9.6 million; 24.5% margin | $16.7 million; 22.4% margin |
| Operating profit | $7.1 million; 18.0% margin | $11.6 million; 15.6% margin |
| Net income | $6.6 million, up 25.8% | $10.9 million, up 10.1% |
| Diluted EPS | $1.18, versus $0.94 | $1.95, versus $1.77 |
| Operating cash flow | Not separately provided | $18.2 million, versus $16.6 million |
| Capital expenditures | Not separately provided | $19.4 million, versus $8.6 million |
At June 30, 2018, cash and cash equivalents were $82.3 million, compared with $85.0 million at December 31, 2017. Total assets were $238.7 million and stockholders’ equity was $215.1 million. The company had no debt outstanding and $1.3 million of letters of credit outstanding under its $75 million revolving credit facility. The facility also includes a $50 million accordion feature, subject to lender approval, and matures May 7, 2020.
Cash dividends were $0.135 per share in each of the first two quarters. The board subsequently declared another $0.135 per-share dividend payable September 14, 2018. The company also had up to $7.2 million remaining under its share repurchase authorization, extended through November 2018, although no program shares were repurchased during the quarter.
Material Changes Versus Prior Comparable Period
- Lime and limestone revenue increased 7.2% in the quarter and 2.5% year to date, primarily from higher sales volumes and slightly higher realized prices.
- Second-quarter lime and limestone volume increased 6.7%, driven principally by construction and steel demand; environmental demand declined. First-half volume increased 1.9%.
- Six-month lime and limestone gross profit declined 3.7%, and segment gross margin decreased to 22.0% from 23.4%, due primarily to higher Batesville stripping, fuel and transportation costs.
- Natural gas revenue increased 23.9% in the quarter and 5.8% year to date because of higher prices, despite declining production from existing wells. Second-quarter production was 126 thousand MCF at $5.42 per MCF, versus 142 thousand MCF at $3.89 per MCF.
- Net income benefited from lower income taxes following the 2017 Tax Act, which reduced the federal corporate tax rate to 21%. The company estimates an 11.3% effective tax rate for 2018.
- Capital expenditures more than doubled year to date, including $11.1 million for the St. Clair kiln project versus $2.1 million in the prior-year period.
Outlook, Risks, Contingencies and Unusual Items
The St. Clair modernization and expansion project, including a new fuel-efficient vertical kiln, is estimated to cost approximately $50 million and is expected to be commissioned by the end of 2018. Total project costs incurred were $25.2 million at June 30, 2018, with $23.7 million paid in cash. Open capital expenditure orders totaled approximately $7.9 million, including $5.4 million related to the kiln project.
Management believes cash on hand and operating cash flow should satisfy operating needs, capital requirements, dividends and permitted share repurchases in the near future, absent a significant acquisition. The filing provides no formal revenue or earnings guidance.
- Transportation capacity, trucking regulations, driver shortages and higher freight costs may constrain deliveries and margins; competitive pricing may limit cost recovery.
- Potential delays or cost overruns on the St. Clair project remain material execution risks.
- Demand and pricing depend on construction, steel, industrial, environmental, oil and gas and other end markets, as well as infrastructure spending, tariffs and economic conditions.
- Fuel, energy, transportation and raw-material costs remain volatile.
- Natural gas production is declining from existing wells, and no new wells have been drilled or completed on the company’s properties since 2011.
- Operations are subject to mining safety, environmental, permitting, regulatory, litigation, cybersecurity, weather and facility interruption risks.
- Foreign-exchange hedges covered obligations totaling 2.9 million euros at June 30, 2018; their reported fair value was a $3 thousand liability. Counterparty and unhedged currency exposure remain risks.
The company adopted the new revenue recognition standard on January 1, 2018 using the modified retrospective method with no opening retained-earnings impact. It expects the ongoing effect to be immaterial. The company estimates the future lease standard will add approximately $3.0 million of assets and liabilities.
Key Facts Investors Should Verify
- Progress, final cost and commissioning schedule for the approximately $50 million St. Clair kiln project.
- Whether higher transportation, fuel and quarry costs continue to pressure lime and limestone margins.
- Sustainability of construction and steel demand and the extent of weakness in environmental demand.
- Natural gas prices, production declines and any future drilling activity.
- Available liquidity after capital expenditures, dividends, letters of credit and any share repurchases.
- Compliance with revolving-credit covenants, including the 3.50-to-1 maximum Cash Flow Leverage Ratio.
- Future effects of lease, hedging and other accounting standards and the company’s estimated 11.3% effective tax rate.