United States Lime & Minerals, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly results for the three months ended March 31, 2016, filed May 3, 2016. 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 agriculture customers. Operations are located in Arkansas, Colorado, Louisiana, Oklahoma, and Texas.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $33.6 million | $30.1 million | Up 11.7% |
| Gross profit | $7.8 million | $5.9 million | Up 33.8% |
| Gross margin | 23.4% | 19.5% | Up 3.9 percentage points |
| Operating profit | $5.4 million | $3.5 million | Up 57.2% |
| Operating margin | 16.2% | 11.5% | Up 4.7 percentage points |
| Net income | $4.1 million | $2.4 million | Up 71.9% |
| Diluted EPS | $0.73 | $0.42 | Up $0.31 |
| Cash flow from operations | $7.9 million | $7.5 million | Up 4.8% |
| Capital expenditures | $3.9 million | $3.4 million | Up $0.5 million |
Lime and Limestone Operations revenue was $33.2 million, up 12.9%, driven primarily by approximately 11.9% higher sales volumes and approximately 1.0% higher average product prices. Segment gross profit increased 39.2% to $7.9 million. Natural Gas Interests revenue declined 38.5% to $0.4 million, and segment gross profit declined to a $0.1 million loss.
Cash and cash equivalents were $60.6 million at March 31, 2016, compared with $59.9 million at December 31, 2015. Total assets were $195.8 million, total liabilities were $28.2 million, and stockholders’ equity was $167.6 million. The company reported no debt outstanding and had $0.7 million of letters of credit outstanding under its revolving facility.
The company paid $0.7 million in dividends during the quarter, or $0.125 per share, and repurchased 50,068 shares for $2.7 million at a weighted-average price of $53.52 per share. The remaining authorization under the $10 million repurchase program was $7.2 million at March 31, 2016.
Material changes versus the prior comparable period
- Total revenue increased $3.5 million, primarily from stronger lime and limestone demand, partly offset by weaker natural gas results.
- Lime and limestone volume growth reflected stronger construction and industrial demand; construction comparisons benefited from inclement weather in the first quarter of 2015. Environmental demand decreased.
- Natural gas production declined approximately 10.3% to 160 thousand MCF, while the average realized price fell to $2.69 per MCF from $3.75 per MCF. Management attributed the decline to lower natural gas and natural gas liquids prices and normal production declines from existing wells.
- Interest expense decreased 81.7% to $59,000, primarily because the company repaid its term-loan debt in the second quarter of 2015 and repurchased related interest-rate hedges.
- SG&A was essentially unchanged at $2.4 million, but declined to 7.2% of revenue from 8.0%.
- Financing cash outflows increased to $3.3 million from $2.0 million, principally because of higher treasury-share purchases; the prior-year period included $1.25 million of term-loan repayments.
Guidance, outlook, risks, contingencies, and unusual items
Management stated that cash on hand and operating cash flow should be sufficient for operating requirements, capital needs, potential modernization and expansion projects, dividends, and continued share repurchases for the near future. No formal revenue or earnings guidance was provided. Management estimated a 2016 effective income tax rate of approximately 25.2%, primarily reflecting statutory depletion benefits.
The company has a $75 million secured revolving credit facility maturing May 7, 2020, with a potential $50 million accordion feature, but no revolver borrowings at quarter-end. Dividends and share repurchases are subject to credit-agreement requirements, including a pro forma Cash Flow Leverage Ratio below 3.00 to 1.00 for repurchases.
Key risks include demand and pricing weakness in construction, steel, industrial, environmental, and oil and gas markets; commodity, fuel, electricity, transportation, and freight costs; weather and operating disruptions; equipment, project execution, and cost-overrun risks; permitting, environmental, health and safety, regulatory, and litigation matters; cybersecurity or information-technology disruptions; customer credit risk; natural gas price and production declines; and the ability to finance or integrate acquisitions.
The filing notes that results for the quarter are not necessarily indicative of full-year performance. The FASB issued new lease and share-based-payment accounting standards; the company was evaluating their effects and had not adopted them as of the filing.
On April 27, 2016, the board declared another $0.125-per-share quarterly dividend, payable June 17, 2016. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether construction and industrial demand remains strong and whether the first-quarter volume increase was affected by favorable weather comparisons.
- The sustainability of improved lime and limestone margins and the company’s ability to manage fuel, labor, freight, and other operating costs.
- Natural gas prices, production declines, depletion expense, and the continuing contribution or losses from the Natural Gas Interests segment.
- Compliance with revolving-credit covenants and the conditions governing future share repurchases and dividends.
- Planned capital spending, modernization or expansion projects, and any resulting financing requirements.
- Regulatory, mine-safety, environmental, permitting, litigation, and operational-continuity developments.
- The impact and adoption timing of ASU 2016-02 on leases and ASU 2016-09 on employee share-based payments.