United States Lime & Minerals, Inc. — Fiscal 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017, with quarterly information for the fourth quarter. The company operates two segments: Lime and Limestone Operations and Natural Gas Interests. Lime and limestone products serve construction, industrial, environmental, metals, oil and gas services, roofing and agricultural customers across U.S. markets.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $144.8 million | $139.3 million | +4.0% |
| Lime and limestone revenue | $142.6 million | $137.2 million | +4.0% |
| Natural gas revenue | $2.2 million | $2.1 million | +6.7% |
| Gross profit | $34.4 million | $33.1 million | +3.9% |
| Gross margin | 23.7% | 23.8% | Down 0.1 point |
| Operating profit | $24.2 million | $23.5 million | +3.2% |
| Operating margin | 16.7% | 16.9% | Down 0.2 point |
| Net income | $27.1 million | $17.8 million | +52.9% |
| Diluted EPS | $4.86 | $3.19 | +52.4% |
| Operating cash flow | $34.3 million | $37.8 million | Down 9.4% |
| Capital expenditures | $21.3 million | $17.7 million | +20.8% |
| Cash and equivalents | $85.0 million | $74.7 million | +13.8% |
| Debt | $0 | $0 | No change |
The company generated a 2017 net margin of approximately 18.7%. Total assets increased to $228.4 million from $210.2 million, while stockholders’ equity increased to $205.3 million from $179.6 million. The company paid $3.0 million of dividends, or $0.54 per share, during 2017.
Fourth-quarter 2017 revenue was $35.2 million, gross profit was $7.8 million and net income was $11.6 million, compared with fourth-quarter 2016 revenue of $34.2 million, gross profit of $7.4 million and net income of $3.9 million.
Material changes versus the prior comparable period
- Lime and limestone revenue increased primarily from higher sales volumes, especially to oil and gas services and industrial customers; environmental-customer volumes declined.
- Average lime and limestone product prices increased approximately 0.8%, while sales volumes contributed approximately 3.2% to the segment’s revenue growth.
- Natural gas revenue benefited from a 19.3% increase in average realized prices, partly offset by a 12.6% decline in production volumes from normal well depletion.
- Lime and Limestone Operations gross profit increased 1.9%, but higher stripping costs at the Batesville Quarry reduced profitability. The company reduced Batesville reserves by approximately 2 million tons because of unexpected weathered limestone and increased stripping requirements.
- Natural Gas Interests gross profit increased to $0.7 million from $0.1 million, primarily due to lower depletion and lease operating expenses and higher prices.
- Net income benefited from a $7.4 million one-time deferred-tax benefit related to the Tax Cuts and Jobs Act, which reduced the federal corporate tax rate from 35% to 21% beginning in 2018. Management expects future effective tax rates to decline approximately 8 to 10 percentage points.
- Operating cash flow declined despite higher net income, principally because the tax-law change reduced deferred-tax benefits and because inventories and prepaid expenses increased.
Liquidity, capital allocation and debt
- Cash increased by $10.3 million during 2017 to $85.0 million.
- The company had no outstanding debt at December 31, 2017, with a $75.0 million revolving credit facility available, subject to approximately $7.1 million of outstanding letters of credit. The facility matures May 7, 2020 and includes a potential $50 million accordion feature.
- Capital expenditures were $21.3 million, including $9.7 million for the St. Clair kiln project. The company expects approximately $12 million annually for recurring capital and re-equipping projects over the next several years.
- The St. Clair kiln project has an estimated total cost of approximately $50 million. Through December 31, 2017, the company had incurred approximately $14.3 million and had approximately $14.7 million of outstanding project purchase obligations. Completion was expected near the end of 2018.
- Total contractual obligations were approximately $26.0 million, including $17.6 million of purchase obligations, $4.9 million of operating leases, $1.8 million of mineral leases and $1.6 million of other liabilities.
- The company expects cash on hand and operating cash flow to fund operations, capital needs, dividends and the remaining approximately $7.2 million authorization under its share repurchase program, absent a significant acquisition.
Guidance, outlook, risks and unusual items
- Management expects potential demand benefits from infrastructure funding, increased domestic steel activity and oil and gas drilling, but the timing and magnitude are uncertain.
- Production capacity is not fully utilized; 2017 utilization of aggregate plant capacity was approximately 63%. Demand, pricing pressure and higher energy, freight and transportation costs may limit margin expansion.
- Key operating risks include weather, mining conditions, equipment failures, labor disruptions, fuel and electricity costs, rail and trucking availability, environmental compliance, permitting and construction delays or cost overruns.
- Environmental risks include potential changes to ozone and other air-quality standards, Lime MACT requirements, greenhouse-gas regulation, permitting requirements and reclamation obligations. Environmental capital expenditures were approximately $0.4 million in 2017, and recurring environmental costs were approximately $0.7 million.
- The company’s natural gas interests comprise 39 producing wells, with 0.6 BCF of 2017 production and 4.6 BCF of proved natural gas reserves at year-end. No new wells have been completed since 2011, and there are no present plans to drill additional wells at current market prices.
- Natural gas reserves are depleting assets, and the company does not control drilling or production decisions. Future revenue depends on existing-well production, operator actions and volatile natural gas and natural gas liquids prices.
- The company sold its Houston trucks in December 2017 for approximately net book value and entered into a dedicated transportation agreement with a third-party carrier.
- Management and the independent auditor concluded that internal control over financial reporting was effective, and the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Separate recurring operating performance from the $7.4 million one-time tax benefit when assessing 2017 earnings and EPS.
- Confirm the final cost, completion date, operating performance and expected return of the St. Clair vertical kiln project.
- Monitor Batesville Quarry stripping costs, reserve revisions and their effect on lime and limestone margins.
- Assess whether demand growth in construction, industrial and oil and gas services can offset weaker environmental and utility demand and continued pricing competition.
- Track energy, freight, transportation and rail costs, including the company’s ability to pass those costs through to customers.
- Evaluate the decline profile, realized pricing and operator plans for the natural gas interests, which have no current drilling program.
- Review environmental permitting, greenhouse-gas and Lime MACT developments for potential compliance costs or operational restrictions.
- Verify ongoing cash generation relative to recurring capital expenditures, dividends and the remaining share repurchase authorization.