Business Context and Reporting Period
United States Lime & Minerals, Inc. filed an unaudited Form 10-Q for the quarter ended March 31, 2014. The company operates two segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests in the Barnett Shale formation in Texas.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $36.7 million | $31.6 million | Up 16.2% |
| Gross profit | $8.6 million | $6.3 million | Up 36.6% |
| Gross margin | 23.4% | 19.9% | Up 3.5 percentage points |
| Operating profit | $6.4 million | $4.1 million | Up 54.5% |
| Operating margin | 17.4% | 13.1% | Up 4.3 percentage points |
| Net income | $4.5 million | $2.8 million | Up 62.9% |
| Diluted EPS | $0.80 | $0.50 | Up $0.30 |
| Operating cash flow | $3.8 million | $5.4 million | Down 29.6% |
| Capital expenditures | $2.9 million | $1.5 million | Up approximately 92% |
- Lime and Limestone revenue was $35.1 million, up 16.2%; gross profit was $7.7 million, up 35.2%.
- Natural Gas Interests revenue was $1.6 million, up 14.7%; gross profit was $0.9 million, up 49.0%.
- Cash and cash equivalents were $48.5 million at March 31, 2014, compared with $49.5 million at December 31, 2013.
- Total debt was $20.4 million, consisting of $12.5 million under the Term Loan and $7.9 million under the Draw Term Loan. No revolving borrowings were outstanding.
- Current liabilities were $12.9 million, versus $14.3 million at year-end 2013; total liabilities were $47.9 million.
- Stockholders’ equity increased to $140.9 million from $136.8 million at December 31, 2013.
- The company paid a quarterly dividend of $0.125 per share, or approximately $0.7 million in total.
Material Changes Versus the Prior Comparable Period
- Lime and limestone product sales volumes increased approximately 14.9%, primarily due to stronger demand from construction, industrial and environmental customers. Average product prices increased approximately 1.3%.
- Natural gas production declined approximately 22.4% to 218 thousand MCF, reflecting normal production declines, while the average realized price increased approximately 37.1% to $7.52 per MCF from $5.49.
- Labor and other operating expenses increased, but declined as a percentage of revenue to 66.9% from 68.5%. Depreciation, depletion and amortization declined to 9.7% of revenue from 11.6%.
- SG&A increased only 1.8% to $2.2 million and declined to 6.0% of revenue from 6.8%.
- Interest expense declined 18.4% to $0.4 million due to lower average debt and lower interest-rate hedge settlement payments.
- Operating cash flow declined despite higher net income, principally because trade receivables increased $4.7 million and accounts payable and accrued expenses decreased $1.4 million.
- Financing cash outflows increased to $2.0 million, reflecting $1.25 million of debt repayment, $0.7 million of dividends and $0.1 million of treasury-share purchases.
Guidance, Outlook, Risks and Unusual Items
- Management estimated a 2014 effective income tax rate of approximately 25.2%, primarily below the federal statutory rate because of statutory depletion deductions.
- Management stated that cash on hand and operating cash flow should be sufficient for operating needs, capital requirements, debt service, liquidity needs and regular dividends for the near future.
- The company had no material open capital commitments not included in current liabilities and was not contractually committed to planned lime and limestone capital expenditures until equipment orders are placed.
- Debt facilities are secured by company assets and include scheduled principal payments, with final $10.0 million and $6.7 million payments due December 31, 2015 for the Term Loan and Draw Term Loan, respectively.
- Interest-rate hedges fixed LIBOR components at 4.695%, 4.875% and 5.500% for specified portions of the debt. The hedge liabilities had a fair value of $1.3 million at March 31, 2014.
- Key risks include demand and pricing for lime and limestone products, construction and steel-market conditions, energy and freight costs, weather and operational disruptions, project cost overruns, regulatory and mine-safety requirements, interest rates, debt service, hedge-counterparty performance and declining natural-gas production.
- On April 30, 2014, the company declared another $0.125-per-share quarterly dividend, payable June 20, 2014.
- The filing states $0.7 million of letters of credit in portions of the debt discussion, while the detailed debt note and another MD&A disclosure state $0.66 million or approximately $0.6 million. The precise amount should be verified.
Important Facts for Investors to Verify
- Confirm the amount and terms of letters of credit outstanding under the revolving facility.
- Assess whether higher lime and limestone volumes are sustainable after the weather-related construction postponements cited by management.
- Monitor natural-gas production declines, pricing and the absence or resumption of drilling activity.
- Review scheduled debt amortization and the $16.7 million of combined final principal payments due in December 2015.
- Evaluate whether operating cash flow remains adequate after receivables growth, capital expenditures, debt repayment and dividends.
- Review mine-safety disclosures in Exhibit 95.1 and any related regulatory exposure.
- Consider interest-rate hedge liabilities, settlement payments and counterparty risk.