United States Lime & Minerals, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2017. The company operates two segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests. Lime and limestone products serve construction, environmental, industrial, metals, roofing, oil and gas services, and agricultural customers. Operations are located in Arkansas, Colorado, Louisiana, Oklahoma, and Texas. The natural gas interests relate to producing wells in the Barnett Shale in Johnson County, Texas.
The financial statements are unaudited and condensed. Management states that normal recurring adjustments have been recorded and that interim results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $36.5 million | $32.9 million | $72.7 million | $66.5 million |
| Gross profit | $8.8 million | $7.2 million | $17.1 million | $15.1 million |
| Gross margin | 24.2% | 22.0% | 23.5% | 22.7% |
| Operating profit | $6.3 million | $4.9 million | $12.1 million | $10.4 million |
| Operating margin | 17.3% | 15.0% | 16.7% | 15.6% |
| Net income | $5.3 million | $3.7 million | $9.9 million | $7.8 million |
| Diluted earnings per share | $0.94 | $0.66 | $1.77 | $1.39 |
All dollar amounts above are approximate and stated in millions unless otherwise indicated. Six-month net cash provided by operating activities was $16.6 million, compared with $14.9 million in 2016. Capital expenditures were $8.6 million, including approximately $2.1 million for the St. Clair kiln project. Cash dividends paid were $1.5 million, and treasury-share purchases were $0.2 million.
Cash and cash equivalents totaled $81.6 million at June 30, 2017, versus $74.7 million at December 31, 2016. Total assets were $219.5 million and stockholders’ equity was $188.8 million. The company had no debt outstanding and no revolver borrowings other than $6.9 million of letters of credit, including $6.3 million related to the St. Clair project. The revolving facility provides commitments of up to $75 million, with a potential $50 million accordion feature, and matures May 7, 2020.
Material changes versus the prior comparable period
- Second-quarter revenue increased 11.1%; six-month revenue increased 9.3%.
- Lime and Limestone revenue increased 11.1% in the quarter and 9.1% year to date, primarily from product-volume increases of approximately 9.9% and 8.6%, respectively. Average realized prices increased approximately 1.2% and 0.5%.
- Construction demand improved relative to the second quarter of 2016, which had been adversely affected by numerous rainfall days. Oil and gas services demand also increased.
- Lime and Limestone gross profit increased 20.4% in the quarter and 10.3% year to date. Segment gross margin increased to 24.3% and 23.4%, respectively, from 22.4% and 23.2%.
- Natural Gas revenue increased 9.7% in the quarter and 27.0% year to date because higher prices more than offset declining production. Production fell 11.7% in the quarter and 13.0% year to date, while average prices increased to $3.89 and $4.12 per MCF from $3.21 and $2.95.
- SG&A increased in absolute dollars but declined as a percentage of revenue to 6.9% for the quarter and 6.8% year to date, from 7.0% and 7.1%.
- Net income increased 43.2% in the quarter and 27.7% year to date. The effective tax rate was approximately 20.3% for 2017, supported by statutory depletion and tax credits associated with the St. Clair project.
- Cash from operations increased 11.6% year to date, while capital expenditures increased from $7.9 million to $8.6 million. Treasury-share purchases declined from $2.8 million to $0.2 million.
Guidance, outlook, risks, contingencies, and unusual items
The St. Clair modernization and expansion project, including a more fuel-efficient vertical kiln and related improvements, is progressing. The company estimates total project costs of approximately $50 million through 2018 and completion by the end of 2018. Approximately $5.5 million had been incurred and approximately $22.0 million of commitments existed at June 30, 2017; elsewhere in the filing, approximately $20.0 million of project-related commitments are identified as not included in current liabilities. The filing does not provide a clear explanation for the difference between these disclosed commitment amounts.
Management believes cash on hand and operating cash flow should fund operating requirements, capital needs, the St. Clair project, dividends, and up to approximately $7.2 million of remaining authorized share repurchases in the near future, absent a significant acquisition. No shares were repurchased under the public program during the quarter. A regular quarterly dividend of $0.135 per share was declared July 26, 2017, payable September 15, 2017.
Foreign-exchange hedges cover approximately €5.5 million of the St. Clair project obligation. Their fair value was an $88,000 asset at June 30, 2017, compared with a $352,000 liability at December 31, 2016. The company remains exposed to counterparty credit risk.
Key risks include demand and pricing conditions in construction, steel, industrial, utilities, and oil and gas services; fuel, energy, transportation, and freight costs; availability of trucks, drivers, and rail cars; operating interruptions, weather, accidents, cybersecurity, and regulatory requirements; delays or cost overruns on the St. Clair project; permitting, environmental, health and safety, litigation, and mine-safety matters; and declining production and uncertain future drilling in the natural gas interests. No new wells have been drilled or completed on the company’s oil and gas properties since 2011.
The company adopted the stock-compensation accounting update in the first quarter of 2017 without a material effect. It expects to adopt the new revenue standard on January 1, 2018 using the modified retrospective approach and does not currently expect a material effect. The lease standard is expected to increase recognized assets and liabilities; the filing estimates undiscounted long-term lease commitments of $6.8 million at December 31, 2016 but does not yet quantify the final accounting impact.
Important facts for investors to verify
- Progress, remaining commitments, total spending, timing, and potential cost overruns for the approximately $50 million St. Clair kiln project.
- Whether increased lime and limestone volumes and pricing are sustainable, particularly across construction and oil and gas services markets.
- Natural gas production declines, commodity prices, operator activity, and the likelihood of additional drilling.
- Availability under the revolving facility after the $6.9 million of letters of credit and compliance with leverage and dividend/share-repurchase covenants.
- Cash flow sufficiency after capital spending, dividends, project commitments, and any future acquisitions or repurchases.
- Mine-safety disclosures, permitting status, regulatory actions, and environmental or litigation contingencies in Exhibit 95.1 and subsequent filings.
- The final impact of the new lease and revenue accounting standards when adopted.