United States Lime & Minerals, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed April 30, 2020. The company manufactures lime and limestone products for construction, industrial, environmental, metals, oil and gas, roofing, and agriculture customers. It operates in Arkansas, Colorado, Louisiana, Oklahoma, and Texas and reports one primary segment.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $38.440 million | $37.799 million | +1.7% |
| Gross profit | $9.877 million | $8.693 million | +13.6% |
| Gross margin | 25.7% | 23.1% | +2.6 percentage points |
| Operating profit | $6.658 million | $6.020 million | +10.6% |
| Operating margin | 17.3% | 16.0% | +1.3 percentage points |
| Net income | $5.544 million | $5.128 million | +8.1% |
| Diluted EPS | $0.98 | $0.91 | +$0.07 |
| Net cash from operating activities | $11.508 million | $7.474 million | +52.8% |
| Capital expenditures | $6.106 million | $5.684 million | +7.4% |
MD&A rounds operating cash flow to $11.4 million for 2020 and $7.5 million for 2019.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $58.796 million at March 31, 2020, compared with $54.260 million at December 31, 2019.
- Total assets were $251.867 million; total liabilities were $29.700 million; stockholders’ equity was $222.167 million.
- The company had no debt outstanding and only $0.4 million of letters of credit drawn against its $75 million revolving credit facility. The facility matures May 2, 2024 and includes a potential $50 million accordion feature, subject to lender approval.
- The company paid $0.899 million in dividends during the quarter, or $0.16 per share, and repurchased $0.064 million of treasury stock through tax-withholding-related share tenders.
Material Changes Versus Q1 2019
- Lime and limestone revenue increased 2.0%, primarily from a 4.9% increase in average realized prices, partly offset by a 2.9% decline in sales volume. Lower demand from environmental and oil and gas services customers contributed to the volume decline.
- Gross profit benefited from higher prices, lower fuel costs, and operating efficiencies associated in part with the new kiln at the St. Clair facility, which began commercial production in Q2 2019.
- SG&A increased to $3.219 million from $2.673 million, primarily because of higher personnel, stock-based compensation, and legal expenses.
- Interest and other income declined to $0.247 million from $0.492 million because of lower cash balances and reduced interest rates.
- Effective income tax rate decreased to 19.0% from 20.5%, primarily because of statutory depletion. Management does not expect the 2019 research and development tax-credit benefit to recur in 2020.
- Operating cash flow improved substantially, principally because Q1 2019 included a larger increase in trade receivables and unfavorable working-capital changes.
- The company adopted the expected-credit-loss standard, ASU 2016-13, on January 1, 2020 using a modified-retrospective approach. Management reported no material effect on the financial statements.
Outlook, Risks, and Unusual Items
- COVID-19 restrictions began affecting business activity during the final two weeks of March and did not materially affect Q1 results. Management expects an economic slowdown beginning in Q2, with potentially greater effects on oil and gas drilling, roofing, and steel customers.
- The company considers itself an essential business and expects to continue serving essential customers, including water and wastewater treatment, air-emissions control, infrastructure, and certain critical manufacturing industries.
- Potential COVID-19 impacts include reduced demand, employee or plant quarantines, supply-chain disruption, transportation constraints, maintenance limitations, facility shutdowns, and delays to modernization or expansion projects. Management stated that an extended severe disruption could adversely affect cash flow and liquidity.
- Management expects cash on hand and operating cash flow, absent a significant acquisition, to fund operations, capital needs, potential projects, liquidity requirements, and regular dividends for the near future.
- The company identified risks related to fuel and transportation costs, product demand and pricing, weather and operational interruptions, permitting and environmental regulation, reserve estimates, cybersecurity, litigation, and credit-market conditions.
- On April 29, 2020, the board declared a regular quarterly dividend of $0.16 per share, payable June 12, 2020 to shareholders of record May 22, 2020.
- Foreign-exchange hedges covering 0.3 million euros related to equipment commitments had a net liability fair value of $9 thousand at March 31, 2020.
Investor Verification Items
- Verify the pace and duration of COVID-19-related demand declines, particularly in oil and gas, roofing, steel, environmental, and construction markets.
- Track realized pricing, shipment volumes, fuel costs, and the sustainability of St. Clair kiln efficiencies.
- Review capital expenditure requirements and any new modernization, expansion, development, or acquisition commitments.
- Confirm compliance with revolving-credit covenants, including the maximum 3.50-to-1 Cash Flow Leverage Ratio and dividend and repurchase conditions.
- Assess cash-flow conversion and working-capital trends, including receivable collections and credit-loss allowances.
- Review mine-safety disclosures in Exhibit 95.1 and monitor permitting, environmental, health, safety, and regulatory developments.