United States Lime & Minerals, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed April 28, 2017. Financial statements are unaudited and presented in accordance with U.S. GAAP. The company operates Lime and Limestone Operations and Natural Gas Interests, all in the United States.
Financial performance and condition
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $36.2 million | $33.6 million | +7.6% |
| Gross profit | $8.2 million | $7.8 million | +5.0% |
| Gross margin | 22.8% | 23.4% | Down 0.6 points |
| Operating profit | $5.8 million | $5.4 million | +6.8% |
| Income before taxes | $5.9 million | $5.4 million | +9.3% |
| Net income | $4.6 million | $4.1 million | +13.6% |
| Diluted EPS | $0.83 | $0.73 | +13.7% |
| Cash flow from operations | $6.1 million | $7.9 million | Down 23.4% |
| Capital expenditures | $4.2 million | $3.9 million | +6.9% |
Liquidity and leverage: Cash and cash equivalents were $75.8 million at March 31, 2017, compared with $74.7 million at December 31, 2016. The company had no debt outstanding and no revolver borrowings, although $6.5 million of letters of credit reduced availability under its $75 million revolving facility. The facility includes a potential $50 million accordion feature and matures May 7, 2020. Total liabilities were $29.9 million and stockholders’ equity was $183.7 million.
Margins and cash flow: Operating margin was 16.1%, compared with 16.2% in the prior-year quarter, while net margin improved to 12.8% from 12.1%. Operating cash flow was reduced by a $3.2 million increase in trade receivables. Cash funded $4.2 million of capital expenditures, $0.8 million of dividends and $0.1 million of treasury-share purchases, resulting in a $1.1 million increase in cash.
Material changes versus the prior comparable period
- Lime and limestone revenue increased 7.1%, primarily from a 7.4% increase in sales volumes; average realized product prices declined approximately 0.3%.
- Lime and limestone gross profit increased 1.1% to $8.0 million, but segment gross margin declined to 22.6% from 23.9%, mainly due to higher discretionary outside contractor stripping costs and lower prices.
- Natural Gas Interests revenue increased 47.2% to $0.6 million. Higher gas and natural gas liquids prices more than offset a 14.5% decline in production volumes from normal well declines. The segment moved from a $0.1 million gross loss to $0.2 million of gross profit.
- SG&A remained $2.4 million, declining to 6.7% of revenue from 7.2%.
- Income tax expense decreased 3.5% to $1.3 million, aided by tax credits associated with the St. Clair kiln project. Management estimated a 2017 effective tax rate of approximately 22.2%.
- The quarterly dividend increased to $0.135 per share from $0.125. No shares were repurchased under the public repurchase program during the quarter.
Guidance, outlook, risks and unusual items
- The St. Clair kiln modernization and expansion project is estimated to cost approximately $50 million through 2018 and is expected to be completed by the end of 2018. Approximately $4.4 million had been incurred through March 31, 2017, including $1.3 million during the quarter; approximately $7.0 million of related commitments remained.
- Management stated that, absent a significant acquisition, cash on hand and operating cash flow should be sufficient for operating needs, capital requirements, the St. Clair project, dividends and the remaining share-repurchase authorization of approximately $7.2 million.
- The company entered into foreign-exchange hedges covering approximately 5.5 million euros related to the kiln project. The hedges had a $0.3 million liability at March 31, 2017 and expose the company to counterparty credit risk.
- The Natural Gas Interests include 39 existing wells, with no new wells drilled or completed since 2011. Production is subject to normal declines, commodity-price volatility, operator changes and the possibility that no additional wells will be drilled.
- Key disclosed risks include demand and pricing for lime and limestone products, construction and industrial activity, energy and freight costs, operational interruptions, weather and natural disasters, regulatory and permitting requirements, mine-safety enforcement, cybersecurity disruptions, project delays or cost overruns, customer credit risk and access to financing.
- 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 method and does not currently expect a material impact. The company is evaluating the lease standard, which could have increased reported assets and liabilities; undiscounted long-term lease commitments were $6.8 million at December 31, 2016.
- The board declared a regular $0.135-per-share dividend on April 25, 2017, payable June 16, 2017.
Important facts for investors to verify
- Progress, remaining commitments and total spending for the approximately $50 million St. Clair kiln project.
- Whether higher lime and limestone volumes persist and whether pricing and stripping costs improve enough to restore segment margins.
- Accounts receivable collection and the resulting effect on operating cash flow.
- Availability under the revolving facility after the $6.5 million of letters of credit and compliance with leverage and dividend/share-repurchase covenants.
- Natural gas production declines, commodity prices and the future drilling plans of the relevant operators.
- Potential effects of the pending lease and revenue-recognition accounting standards.
- Mine-safety, environmental, permitting, regulatory and project-execution matters disclosed in the filing and related exhibits.