United States Lime & Minerals, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited and prepared under U.S. GAAP. The company operates two segments: Lime and Limestone Operations and Natural Gas Interests.
Financial Performance and Position
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $32.9 million | $32.5 million | $66.5 million | $62.5 million |
| Gross profit | $7.2 million | $7.0 million | $15.1 million | $12.9 million |
| Gross margin | 22.0% | 21.6% | 22.7% | 20.6% |
| Operating profit | $4.9 million | $4.6 million | $10.4 million | $8.1 million |
| Net income | $3.7 million | $2.6 million | $7.8 million | $4.9 million |
| Diluted EPS | $0.66 | $0.46 | $1.39 | $0.88 |
| Operating cash flow | Not separately provided | Not separately provided | $14.9 million | $13.8 million |
- Revenue mix: Lime and Limestone Operations generated $32.4 million in second-quarter revenue and $65.5 million for the six-month period. Natural Gas Interests generated $0.5 million and $0.9 million, respectively.
- Liquidity: Cash and cash equivalents were $63.0 million at June 30, 2016, compared with $59.9 million at December 31, 2015.
- Debt: The company reported no debt outstanding and no draws on its $75 million revolving credit facility, other than $0.7 million of letters of credit. The facility matures May 7, 2020 and includes a potential $50 million accordion feature, subject to lender approval.
- Capital spending: Six-month capital expenditures were $7.9 million, compared with $6.3 million in the prior-year period.
- Dividends and repurchases: The company paid $1.4 million in dividends during the first six months, or $0.125 per share per quarter. It repurchased $2.8 million of treasury shares during the period; no shares were repurchased under the public program during the second quarter.
- Balance sheet: Total assets were $198.2 million and stockholders’ equity was $170.8 million at June 30, 2016.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue increased 1.3%; six-month revenue increased 6.3%.
- Lime and Limestone revenue increased 1.9% in the quarter and 7.2% year to date, primarily from higher sales volumes of approximately 2.0% and 6.6%, respectively. Construction demand improved, while oil and gas services demand remained weaker.
- Lime and Limestone gross profit increased 6.4% in the quarter and 21.3% year to date. Segment gross margins improved to 22.4% and 23.2%, respectively, from 21.4% and 20.5%.
- Natural Gas Interests revenue declined 24.9% in the quarter and 31.8% year to date due to lower prices and normal production declines. The segment recorded gross losses of $4 thousand and $85 thousand, respectively, versus prior-year gross profits.
- Net income increased 44.1% in the quarter and 57.5% year to date. Results benefited from higher operating profit, sharply lower interest expense, and the absence of the prior-year Corson Plan termination expense.
- Interest expense declined 89.3% in the quarter and 86.6% year to date following repayment of the company’s term loans and repurchase of related interest-rate hedges in May 2015.
- Operating cash flow increased 8.3% year to date, while investing cash use increased because of higher capital expenditures. Financing cash use declined substantially because the prior-year period included $16.7 million of term-loan repayments.
Outlook, Risks, and Unusual Items
- Management stated that cash on hand and operating cash flow should be sufficient for near-term operating, capital, modernization, expansion, development, dividend, and share-repurchase needs.
- The company provided no formal revenue or earnings guidance. Management noted that construction demand was improving, but demand and pricing from other customer groups remained challenging.
- Key risks include construction, steel, industrial, utility, and oil and gas demand; product pricing and competition; weather; fuel, electricity, transportation, and freight costs; facility interruptions; mine and permitting requirements; regulatory and environmental matters; cybersecurity and information-technology disruptions; project delays or cost overruns; and natural gas price and production declines.
- The company has 39 existing natural gas wells, with production declining at normal rates. No new drilling activity is described.
- The effective tax rate for 2016 is estimated at approximately 25.2%, principally below the federal statutory rate because of statutory depletion.
- New lease accounting and share-based-payment accounting standards were issued in 2016. The company was evaluating their effects and had not quantified the impact.
- The company declared a $0.125-per-share quarterly dividend on July 28, 2016, payable September 16, 2016.
- The 2015 Corson Plan termination produced a $0.9 million pretax expense and a $0.2 million cash payment; the plan was fully settled and requires no further contributions.
Investor Verification Checklist
- Verify the sustainability of higher Lime and Limestone volumes, margins, and construction-related demand.
- Monitor natural gas prices, production declines, depletion expense, and the segment’s contribution to earnings.
- Confirm cash generation relative to planned capital expenditures, dividends, and the remaining share-repurchase authorization of approximately $7.2 million at June 30, 2016.
- Review the revolving-credit covenants, including the requirement that the pro forma Cash Flow Leverage Ratio remain below 3.00 to 1.00 for share repurchases.
- Assess exposure to fuel, freight, labor, weather, permitting, mine-safety, environmental, and regulatory costs.
- Review the potential balance-sheet effects of the pending lease and share-based-payment accounting standards.
- Confirm that disclosure controls and procedures were determined effective and that no material change in internal control over financial reporting occurred during the quarter.