United States Lime & Minerals, Inc. — Q1 2015 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly results for the three months ended March 31, 2015, compared with the three months ended March 31, 2014. The Company operates two U.S. segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests in the Barnett Shale. The Company had 5,597,686 common shares outstanding as of May 7, 2015.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $30.1 million | $36.7 million | Down 18.1% |
| Gross profit | $5.9 million | $8.6 million | Down 31.5% |
| Gross margin | 19.5% | 23.4% | Down 3.9 percentage points |
| Operating profit | $3.5 million | $6.4 million | Down 46.0% |
| Operating margin | 11.5% | 17.4% | Down 5.9 percentage points |
| Net income | $2.4 million | $4.5 million | Down 47.4% |
| Diluted earnings per share | $0.42 | $0.80 | Down $0.38 |
| Cash flow from operations | $7.5 million | $3.8 million | Up 98.1% |
| Capital expenditures | $3.4 million | $2.9 million | Up $0.6 million |
| Balance-sheet metric | March 31, 2015 | December 31, 2014 |
|---|---|---|
| Cash and cash equivalents | $60.5 million | $58.3 million |
| Total assets | $200.2 million | $200.4 million |
| Total debt | $15.4 million | $16.7 million |
| Stockholders’ equity | $156.7 million | $154.7 million |
Lime and Limestone Operations generated $29.4 million of revenue and $5.7 million of gross profit. Natural Gas Interests generated $0.7 million of revenue and $0.2 million of gross profit. The Company paid a quarterly dividend of $0.125 per share, or approximately $0.7 million in total.
Material changes versus the prior comparable period
- Lime and limestone revenue declined 16.2%, primarily because product sales volumes fell approximately 16.6%. Average product prices increased approximately 0.4%.
- Lime and limestone gross profit declined 25.3% because of lower revenue and volume.
- Natural gas revenue declined 57.2%, reflecting an approximately 50.1% decrease in average natural gas prices and a 7.1% decline in production volumes. Production was 187 thousand MCF at an average price of $3.75 per MCF, versus 218 thousand MCF at $7.52 per MCF in Q1 2014.
- Gross margin contracted as cost of revenues declined less than revenue. Depreciation, depletion and amortization increased to $3.9 million from $3.6 million.
- SG&A increased 9.9% to $2.4 million, driven primarily by higher credit-card fees, insurance and personnel costs, including stock-based compensation.
- Interest expense decreased 19.3% to $0.3 million because of lower average debt, although each period included approximately $0.2 million of interest-rate hedge settlement payments.
- Operating cash flow increased despite lower earnings, primarily because of a $1.4 million decrease in trade receivables in Q1 2015 versus a $4.7 million increase in Q1 2014.
Liquidity, debt and subsequent financing actions
At March 31, 2015, the Company had $15.4 million of term debt outstanding, no revolver balance, and $0.7 million of letters of credit. Cash increased to $60.5 million. The Company’s term loans were secured and subject to interest-rate hedges.
On May 7, 2015, the Company used cash to repay the $15.4 million term-loan balance and paid $0.5 million to repurchase the related hedges. The hedge repurchase is expected to add approximately $0.3 million to second-quarter interest expense, while debt repayment is expected to reduce second-half interest expense by approximately $0.5 million.
On the same date, the Company amended its credit agreement to replace the prior $30 million revolving facility with a $75 million revolving facility maturing May 7, 2020, plus a four-year accordion feature for up to an additional $50 million subject to lender approval. Borrowings bear interest at LIBOR plus 1.000% to 2.000%, and the undrawn commitment fee ranges from 0.200% to 0.350%. As of the report date, only $0.7 million of letters of credit was outstanding under the new facility. Management stated that approximately $45 million of cash remained after the debt repayment and hedge repurchase.
Guidance, outlook, risks and unusual items
- Management expected construction demand to return to more normal levels for the remainder of 2015, but expected steel and oil-and-gas-services demand to remain below the prior-year level.
- Persistent ice, snow and rain adversely affected construction demand in Q1, and unusually persistent rain continued into Q2.
- Lower steel production and reduced oil-and-gas drilling activity, following declines in oil and gas prices, reduced lime and limestone demand.
- Natural gas production is subject to normal well declines, commodity-price volatility, regulatory conditions, pipeline capacity and the absence of drilling activity on the Company’s properties.
- Key broader risks include demand and pricing conditions in construction, steel and oil and gas; fuel, energy, transportation and freight costs; weather and operational disruptions; mine-safety and environmental regulation; permitting; cybersecurity and information-technology disruptions; project cost overruns; acquisitions; litigation; and access to liquidity.
- The estimated 2015 effective income tax rate was approximately 24.9%, below the federal statutory rate primarily because of statutory depletion.
- The Company was considering termination of the Corson Pension Plan, which could require approximately $0.4 million of cash and reduce income by approximately $0.6 million, net of tax benefits.
- A regular $0.125-per-share dividend was declared on April 29, 2015, payable June 19, 2015.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2015, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether construction demand recovered as expected and whether steel and oil-and-gas-services demand remained depressed.
- Subsequent-quarter volume, pricing and margin trends in the Lime and Limestone Operations.
- Natural gas prices, production declines and the contribution of the Natural Gas Interests.
- Cash usage following the term-loan repayment, dividend payments, capital expenditures and any modernization, expansion or acquisition activity.
- Actual borrowings, letters of credit, interest expense and covenant compliance under the new $75 million revolving facility.
- The timing and financial effect of any Corson Pension Plan termination.
- Mine-safety disclosures in Exhibit 95.1 and any resulting citations, penalties, remediation costs or operating restrictions.