United States Lime & Minerals, Inc. — Q3 2017 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2017. The company operates two segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests. Operations are located in the United States, primarily in Arkansas, Colorado, Louisiana, Oklahoma and Texas. The company had 5,576,676 common shares outstanding as of October 26, 2017.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $36.9 million | $38.7 million | $109.6 million | $105.1 million |
| Gross profit | $9.6 million | $10.6 million | $26.6 million | $25.7 million |
| Gross margin | 25.8% | 27.3% | 24.3% | 24.4% |
| Operating profit | $6.9 million | $8.1 million | $19.0 million | $18.4 million |
| Net income | $5.7 million | $6.1 million | $15.6 million | $13.8 million |
| Diluted EPS | $1.01 | $1.09 | $2.79 | $2.48 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $24.0 million | $25.9 million |
At September 30, 2017, cash and cash equivalents were $82.2 million, compared with $74.7 million at December 31, 2016. Total current assets were $114.6 million versus current liabilities of $7.8 million. Total liabilities were $28.1 million and stockholders’ equity was $194.2 million.
The company had no debt outstanding and no revolver borrowings other than $7.0 million of letters of credit, including $6.5 million related to the St. Clair kiln project. The credit facility provides for a $75 million revolving facility plus a potential $50 million accordion feature, maturing May 7, 2020. Capital expenditures were $14.5 million in the first nine months, including approximately $6.4 million for the St. Clair project.
Cash dividends were $0.135 per share in each of the first three quarters of 2017. A further $0.135 per-share dividend was declared on October 26, 2017, payable December 15, 2017.
Material changes versus the prior comparable period
- Third-quarter revenue decreased 4.4% to $36.9 million, primarily because Lime and Limestone sales volumes declined 4.4%. Hurricane Harvey caused minor facility damage but adversely affected certain construction customers.
- First-nine-month revenue increased 4.3% to $109.6 million, driven primarily by a 3.1% increase in Lime and Limestone sales volumes. Realized prices were flat in the quarter and 0.2% higher for the nine-month period.
- Third-quarter gross profit decreased 9.6% and gross margin declined to 25.8% from 27.3%. Nine-month gross profit increased 3.8%, while the nine-month gross margin was broadly stable.
- Third-quarter net income decreased 6.8%; nine-month net income increased 12.5%. Lower tax expense, reflecting St. Clair project tax credits and a lower estimated effective tax rate, supported the nine-month earnings increase.
- Natural Gas Interests revenue declined 8.7% in the quarter because production volumes fell 12.5%, partly offset by higher prices. Nine-month revenue increased 13.8% because prices rose 26.6%, despite a 12.8% production decline.
- Operating cash flow declined 7.4% for the first nine months, while capital expenditures increased from $12.2 million to $14.5 million.
- SG&A increased to $2.7 million in the quarter and $7.6 million year to date, principally due to higher non-cash stock-based compensation.
Guidance, outlook, risks and unusual items
The company estimates a 2017 effective income tax rate of 20.3%, primarily due to statutory depletion and tax credits associated with the St. Clair kiln project. It expects cash on hand and operating cash flow to fund operating requirements, capital needs, dividends and the remaining share-repurchase authorization in the near future, absent a significant acquisition.
The St. Clair modernization and expansion project includes a new fuel-efficient vertical kiln. Approximately $10.3 million had been incurred through September 30, 2017, with approximately $20.0 million of remaining commitments. Total project cost is estimated at approximately $50 million, with completion expected by the end of 2018. The company had hedged its related 3.7 million euro obligation; the hedge had a $181,000 asset fair value at September 30, 2017.
Principal risks include construction delays or cost overruns, demand and pricing conditions in construction, environmental, steel, industrial and oil and gas markets, fuel and freight costs, weather and operational disruptions, regulatory and mine-safety requirements, cybersecurity and information-technology disruptions, permitting, litigation, and declining production or commodity prices in the Natural Gas Interests segment. No new wells have been drilled or completed on the company’s oil and gas properties since 2011.
The company plans to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method and does not currently expect a material effect. It is evaluating the future lease and hedge-accounting standards. Management concluded that disclosure controls were effective as of September 30, 2017, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the timing, total cost, remaining commitments and operating benefits of the St. Clair kiln project.
- Monitor quarterly Lime and Limestone volumes, pricing and customer demand, particularly following Hurricane Harvey and changes in construction and oil and gas activity.
- Assess the effect of declining production volumes and commodity prices on Natural Gas Interests revenue and profitability.
- Reconcile operating cash flow with the company’s capital-spending, dividend and share-repurchase plans.
- Review revolver availability after the $7.0 million of outstanding letters of credit and confirm compliance with leverage and other credit agreement covenants.
- Evaluate future impacts from lease, revenue-recognition and hedge-accounting standards, as well as mine-safety and environmental regulations.