United States Lime & Minerals, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the three months ended March 31, 2018, filed April 27, 2018. The company operates two segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests. It operates in Arkansas, Colorado, Louisiana, Oklahoma and Texas.
Lime and limestone products serve construction, industrial, environmental, metals, oil and gas services, roofing and agriculture customers. Natural Gas Interests comprise royalty and non-operating working interests in producing Barnett Shale wells in Johnson County, Texas. No new wells have been drilled or completed on the company’s oil and gas properties since 2011.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $35.3 million | $36.2 million | Down 2.4% |
| Gross profit | $7.0 million | $8.2 million | Down 14.6% |
| Gross margin | 20.0% | 23.4% | Down 3.4 points |
| Operating profit | $4.5 million | $5.8 million | Down 22.0% |
| Income before taxes | $4.8 million | $5.9 million | Down 18.7% |
| Income tax expense | $0.6 million | $1.3 million | Down 57.1% |
| Net income | $4.3 million | $4.6 million | Down 7.7% |
| Diluted earnings per share | $0.76 | $0.83 | Down $0.07 |
| Operating cash flow | $6.5 million | $6.1 million | Up 6.2% |
| Capital expenditures | $7.6 million | $4.2 million | Up $3.4 million |
Cash and cash equivalents were $83.3 million at March 31, 2018, compared with $85.0 million at December 31, 2017. Total assets were $231.0 million and stockholders’ equity was $209.1 million. The company had no debt outstanding and had $7.3 million of letters of credit, including $6.8 million related to the St. Clair kiln project, counted against its revolving facility.
The company’s credit agreement provides a $75 million revolving facility, plus a potential $50 million accordion feature, maturing May 7, 2020. The company was in compliance with the facility’s terms at March 31, 2018.
The company paid a quarterly dividend of $0.135 per share during the quarter. On April 25, 2018, the board declared another $0.135 per-share dividend, payable June 15, 2018.
Material changes versus the prior comparable period
- Lime and limestone revenue declined 2.3%, primarily because product sales volumes fell 4.0%, principally among construction customers. Average prices increased 1.7%.
- Record rainfall in the Dallas-Fort Worth area during February negatively affected Texas construction demand. Increased steel demand partly offset the construction weakness.
- Lime and limestone gross profit decreased 15.3% to $6.8 million, and segment gross margin declined to 19.6% from 22.6%. Management attributed the deterioration primarily to increased stripping costs at the Batesville, Arkansas quarry, higher fuel prices and higher transportation costs.
- Natural Gas Interests revenue remained approximately $0.6 million, while segment gross profit remained approximately $0.2 million. Production declined to 130 thousand MCF from 146 thousand MCF, partly offset by a higher average realized price of $4.41 per MCF versus $4.35.
- Income tax expense fell primarily because the Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21% beginning in 2018. The company estimates an 11.7% effective tax rate for 2018, aided by statutory depletion and tax credits related to the St. Clair project.
- Capital expenditures increased substantially, including approximately $5.2 million for the St. Clair kiln project versus $1.3 million in Q1 2017.
- Operating cash flow increased despite lower earnings, while investing cash use increased because of the higher capital program. Cash declined $1.7 million during the quarter.
- The company adopted the new revenue recognition standard on January 1, 2018 using the modified retrospective method. It reported no opening retained-earnings impact and expects the ongoing effect to be immaterial.
Guidance, outlook, risks and unusual items
The St. Clair modernization and expansion project includes a new fuel-efficient vertical kiln and related improvements. Total project cost is estimated at approximately $50 million, with completion expected by the end of 2018. The company had incurred $19.2 million through March 31, 2018, of which $17.7 million had been paid in cash, and had approximately $10.1 million of related commitments.
Management expects higher fuel and transportation costs to continue during 2018. It believes cash on hand and operating cash flow, absent a significant acquisition, will be sufficient for operating requirements, capital needs, the St. Clair project, dividends and the remaining $7.2 million authorized under its share repurchase program. No shares were repurchased under that program during the quarter.
Key risks include construction delays or cost overruns at St. Clair; weather and operating interruptions; volatility in fuel, energy, transportation and freight costs; demand and pricing conditions in construction, steel, industrial and oil and gas markets; competition and infrastructure funding; regulatory, environmental, mine-safety and permitting requirements; cybersecurity and information-technology disruptions; customer credit risk; and declining or uncertain natural gas production.
The company has foreign exchange hedges covering the remaining 2.2 million euros of contractual kiln-project payments. The hedges had a fair value asset of $67 thousand at March 31, 2018. The filing states that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the St. Clair kiln is completed by the end of 2018 and remains within the approximately $50 million budget.
- Actual construction, steel and other end-market demand and the effect of weather on lime and limestone volumes.
- Whether stripping, fuel and transportation costs continue to pressure margins.
- Cash generation relative to remaining St. Clair commitments, capital expenditures, dividends and potential share repurchases.
- Availability under the revolving facility after considering the $7.3 million of outstanding letters of credit and compliance with leverage covenants.
- Changes in natural gas production, prices, operator activity and well-decline rates, given the absence of new drilling since 2011.
- Implementation effects of the new revenue standard and future effects of the pending lease and hedging accounting standards.