United States Lime & Minerals, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2019. United States Lime & Minerals operates two segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests. The company produces and distributes lime and limestone products for construction, industrial, environmental, metals, oil and gas services, roofing, and agriculture customers. Its natural gas interests comprise royalty and non-operating working interests in 39 wells in the Barnett Shale region of Texas.
The financial statements are unaudited and should be read with the company’s 2018 Form 10-K. Management cautions that first-quarter results are not necessarily indicative of full-year results.
Financial performance and condition
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $37.8 million | $35.3 million | Up 7.1% |
| Lime and limestone revenue | $37.5 million | $34.7 million | Up 7.9% |
| Natural gas revenue | $0.3 million | $0.6 million | Down 41.7% |
| Gross profit | $8.7 million | $7.0 million | Up 23.5% |
| Gross margin | 23.1% | 20.0% | Up 3.1 percentage points |
| Operating profit | $6.0 million | $4.5 million | Up 32.7% |
| Net income | $5.1 million | $4.3 million | Up 20.3% |
| Diluted earnings per share | $0.91 | $0.76 | Up $0.15 |
| Operating cash flow | $7.5 million | $6.5 million | Up 14.6% |
| Capital expenditures | $5.7 million | $7.6 million | Down 25.4% |
Lime and limestone gross profit increased 27.9% to $8.7 million, and segment gross margin increased to 23.2% from 19.6%. Sales volume rose 6.1% and average realized prices increased 1.8%. SG&A was $2.7 million, or 7.1% of revenue, versus $2.5 million and 7.1% in the prior-year quarter.
Natural gas production declined to 118 thousand MCF from 130 thousand MCF, while the average realized price declined to $2.84 per MCF from $4.41. Natural gas gross profit fell to $7 thousand from $244 thousand.
At March 31, 2019, cash and cash equivalents were $68.3 million, compared with $67.2 million at December 31, 2018. Total assets were $255.1 million and stockholders’ equity was $227.6 million. The company had no debt outstanding and had $1.2 million of letters of credit outstanding under its revolving facility. The credit facility provided for $75 million of revolving capacity, plus a potential $50 million accordion feature.
Net cash used in financing activities was $0.8 million, primarily reflecting $0.8 million of dividends. The company paid a quarterly dividend of $0.135 per share. It also repurchased 753 shares for tax-withholding purposes but made no repurchases under its $10 million share repurchase program.
Material changes versus the prior comparable period
- Revenue, gross profit, operating profit, and net income improved, primarily due to stronger lime and limestone demand and less disruptive Texas weather.
- Lime and limestone sales volume increased 6.1%, and average prices increased 1.8%.
- Natural gas revenue and gross profit declined substantially because of lower prices and normal production declines.
- Income tax expense increased to $1.3 million from $0.6 million. The prior-year period benefited from research and development tax credits related to the St. Clair kiln project.
- Capital expenditures declined to $5.7 million from $7.6 million, including St. Clair project spending of $0.7 million versus $5.2 million.
- The company adopted the new lease accounting standard on January 1, 2019, recording approximately $3.9 million of right-of-use assets and corresponding liabilities with no retained-earnings impact.
- Operating lease liabilities totaled $4.1 million at March 31, 2019, including current and long-term portions.
Guidance, outlook, risks, contingencies, and unusual items
The St. Clair modernization and expansion project is estimated to cost approximately $50 million. Through March 31, 2019, the company had incurred approximately $41.2 million, of which $39.7 million had been paid in cash. The company applied heat to the new vertical kiln and began testing lime production; commercial depreciation was expected to begin when the kiln consistently produced saleable quicklime, anticipated in the second quarter of 2019. Most of the remaining project cost was expected to be incurred and paid by year-end 2019.
Management estimated a 2019 effective income tax rate of 20.5%, primarily reflecting statutory depletion. The filing does not provide formal revenue or earnings guidance.
Management stated that cash on hand and operating cash flow should be sufficient for operating requirements, capital needs, the St. Clair project, dividends, and the remaining $7.2 million share-repurchase authorization in the near future, absent a significant acquisition.
Key risks include construction delays or cost overruns; demand and pricing pressure in construction, steel, industrial, and oil and gas markets; fuel, energy, transportation, and freight cost volatility; weather, operational interruptions, accidents, cybersecurity incidents, and regulatory requirements; permitting and mine-safety matters; environmental and climate-related regulation; customer credit risk; and declining production or prices from the natural gas interests. Foreign-exchange hedges covered obligations totaling 0.7 million Euros at March 31, 2019, with a fair-value net liability of $42 thousand.
On May 2, 2019, after quarter-end, the company amended its credit agreement to extend the maturity of the revolving facility and any incremental borrowings to May 2, 2024 and renew the accordion feature. Other principal terms were unchanged. On May 1, 2019, the board declared another $0.135-per-share dividend, payable June 14, 2019.
Important facts for investors to verify
- Confirm the St. Clair kiln’s commercial production, remaining project cost, final timing, and resulting depreciation and operating performance.
- Monitor lime and limestone volumes, pricing, construction demand, and the company’s ability to offset fuel, energy, freight, and transportation costs.
- Assess the continued decline in natural gas production, prices, and segment profitability.
- Review liquidity, revolving-facility availability, letters of credit, covenant compliance, and the terms of the May 2, 2019 amendment.
- Evaluate the sustainability of dividends and the remaining share-repurchase authorization relative to project spending and operating cash flow.
- Review mine-safety disclosures, permitting requirements, environmental obligations, and potential regulatory or litigation exposure.
- Reconcile the estimated 20.5% annual tax rate with quarterly tax expense and the loss of prior-year research and development tax credits.