United States Lime & Minerals, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2016, filed October 31, 2016. The company operates two segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests. Operations are located in the United States.
As of October 28, 2016, 5,564,575 common shares were outstanding. The financial statements are unaudited and should be read with the company’s 2015 Form 10-K.
Financial Results and Key Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $38.7 million | $37.0 million | $105.1 million | $99.5 million |
| Gross profit | $10.6 million | $10.4 million | $25.7 million | $23.2 million |
| Gross margin | 27.3% | 28.0% | 24.4% | 23.4% |
| Operating profit | $8.1 million | $7.9 million | $18.4 million | $16.0 million |
| Net income | $6.1 million | $5.7 million | $13.8 million | $10.6 million |
| Diluted EPS | $1.09 | $1.01 | $2.48 | $1.89 |
| Operating cash flow | Not separately provided | Not separately provided | $25.9 million | $22.9 million |
Lime and Limestone revenue increased 4.5% in the quarter and 6.2% year to date, primarily from sales-volume increases of approximately 5.8% and 6.4%, respectively. Average realized product prices decreased approximately 1.3% in the quarter and 0.2% year to date.
Natural Gas Interests revenue decreased 4.0% in the quarter and 23.6% year to date. Nine-month production declined to 473 thousand MCF from 548 thousand MCF, while the average price declined to $3.15 per MCF from $3.56. The segment generated a $19 thousand gross loss year to date versus $418 thousand of gross profit in the prior-year period.
At September 30, 2016, cash and cash equivalents were $68.9 million versus $59.9 million at December 31, 2015. Total assets were $205.3 million and total liabilities were $28.8 million. The company reported no debt outstanding and had $0.7 million of letters of credit under its revolving facility.
Capital expenditures were $12.2 million in the first nine months, compared with $8.1 million in the prior-year period. Financing cash outflows included $2.1 million of dividends and $2.8 million of treasury-share purchases.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 4.4%, while nine-month revenue increased 5.6%.
- Quarterly net income increased 7.1%; nine-month net income increased 30.5%.
- Nine-month operating cash flow increased 13.0% to $25.9 million.
- Nine-month interest expense fell 80.9% to $0.2 million, primarily because term loans and related interest-rate hedges were repaid or repurchased in May 2015.
- Quarterly consolidated gross margin declined to 27.3% from 28.0%, principally because of lower lime and limestone pricing. Nine-month gross margin improved to 24.4% from 23.4%.
- SG&A declined as a percentage of revenue to 6.4% in the quarter and 6.9% year to date, from 6.7% and 7.3%, respectively.
- The prior-year period included a $0.9 million expense related to termination of the Corson defined benefit plan; no further contributions are required.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide specific revenue or earnings guidance. It stated that cash on hand and operating cash flow should be sufficient for operating needs, capital requirements, the planned St. Clair modernization, dividends, and potential share repurchases in the near future.
The company decided to construct a new, more fuel-efficient vertical kiln and related improvements at its St. Clair plant at an estimated total cost of approximately $50 million. In October 2016, it entered commitments totaling approximately $10 million and expected to issue a $6.1 million letter of credit under its revolving facility for one construction contract.
The company has a $75 million secured revolving credit facility maturing May 7, 2020, with a potential $50 million accordion feature. Dividends and share repurchases are subject to credit-agreement compliance; repurchases generally require a pro forma Cash Flow Leverage Ratio below 3.00 to 1.00.
Key risks include competitive pricing and demand in construction, environmental, steel, industrial, and oil and gas markets; fuel, energy, transportation, and freight costs; production interruptions, weather, equipment, cybersecurity, and safety events; project delays or cost overruns; permitting and environmental regulation; mine-safety enforcement; customer credit; and declining natural-gas production and volatile commodity prices.
The board declared a regular quarterly dividend of $0.125 per share on October 27, 2016, payable December 16, 2016. The company repurchased no shares under its public program during the third quarter; $7.15 million remained available under the program at September 30, 2016.
Management concluded that disclosure controls and procedures were effective as of September 30, 2016, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Execution, timing, total cost, and funding requirements of the approximately $50 million St. Clair kiln project.
- Whether lime and limestone volume growth can continue despite pricing pressure and industry-specific demand weakness.
- Natural-gas production decline rates, commodity prices, and the segment’s return to profitability.
- Compliance with revolving-credit covenants and the effect of the planned $6.1 million letter of credit.
- Future capital expenditures, dividends, and share repurchases relative to operating cash flow.
- Potential effects of new revenue, lease, and share-based-payment accounting standards, which were still under evaluation or pending adoption.