United States Lime & Minerals, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016, with fourth-quarter results presented for the periods ended December 31, 2016 and 2015. The Company operates through Lime and Limestone Operations and Natural Gas Interests, all within the United States.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $139.3 million | $130.8 million | +6.5% |
| Lime and limestone revenue | $137.2 million | $128.4 million | +6.9% |
| Natural gas revenue | $2.1 million | $2.4 million | -14.5% |
| Gross profit | $33.1 million | $28.7 million | +15.2% |
| Operating profit | $23.5 million | $19.1 million | +23.0% |
| Net income | $17.8 million | $12.9 million | +37.8% |
| Diluted EPS | $3.19 | $2.30 | +38.7% |
| Cash flow from operations | $37.8 million | $32.5 million | +16.5% |
| Capital expenditures | $17.7 million | $11.5 million | +54.1% |
| Cash and equivalents | $74.7 million | $59.9 million | +24.7% |
| Debt outstanding | None | None | No change |
Margins: Gross margin was 23.8%, compared with 21.9% in 2015. Operating margin was 16.9%, compared with 14.5%, and net margin was 12.7%, compared with 9.8%. The effective tax rate declined to 24.8% from 26.2%.
Fourth quarter: Revenue was $34.2 million versus $31.3 million in the prior-year quarter; gross profit was $7.4 million versus $5.5 million; and net income was $3.9 million, or $0.70 diluted EPS, versus $2.3 million, or $0.41 diluted EPS.
Material changes versus prior comparable period
- Lime and limestone volumes increased, led by construction, environmental, industrial and roof-shingle demand. Average product prices declined approximately 0.2%.
- Natural gas revenue declined because production from existing wells fell approximately 12.9% and average realized prices declined approximately 1.6%. Natural gas gross profit fell 80.9%, to approximately $0.1 million.
- Lower energy, transportation and freight costs supported Lime and Limestone Operations profitability.
- Interest expense declined 76.3% following repayment of $15.4 million of term loans in May 2015.
- The Company invested $17.7 million in capital projects, including the St. Clair kiln project, Texas plant upgrades and Arkansas mobile equipment.
- The Company repurchased approximately 50,068 shares under its repurchase program for approximately $2.7 million during 2016. Approximately $7.2 million remained available under the program at year-end.
Liquidity, debt and capital commitments
- The Company had $74.7 million of cash and no outstanding borrowings at December 31, 2016.
- The revolving credit facility provides $75 million of capacity, with an additional $50 million accordion feature subject to lender approval. Letters of credit of approximately $6.4 million were outstanding, including approximately $5.8 million related to the St. Clair kiln project.
- Contractual obligations totaled approximately $18.6 million, including $10.0 million of purchase obligations, $5.0 million of operating leases and $1.8 million of mineral leases.
- Management expects cash on hand and operating cash flow to fund operations, recurring capital expenditures, the St. Clair project, increased dividends and the remaining share repurchase authorization, absent a significant acquisition.
Guidance, outlook and unusual items
- The St. Clair vertical kiln and related improvements are estimated to cost approximately $50 million and are expected to be completed within two years. Approximately $2.8 million had been paid in 2016, and approximately $8.6 million of open orders or contractual commitments were outstanding at year-end.
- Management expects continued construction demand, supported by the FAST Act, Texas transportation funding and potential infrastructure spending, but does not provide formal revenue or earnings guidance.
- Demand from oil and gas services, steel and coal-fired utility customers remains pressured. Natural gas interests are depleting assets; no additional wells have been completed since 2011 and no new drilling is currently planned at prevailing prices.
- The Company declared a quarterly dividend of $0.135 per share in January 2017, up from $0.125 per share. The 2016 annual dividend was $0.50 per share.
- Environmental, air-quality, greenhouse-gas, mine-safety and hydraulic-fracturing regulations may increase costs or restrict operations. Environmental capital expenditures were approximately $0.5 million in 2016, and recurring environmental costs were approximately $0.9 million.
- The Arkansas collective bargaining agreement remains in effect through January 2018. A union decertification petition was filed in February 2017, and its outcome was uncertain.
- The Company reported no material adverse legal proceedings and no unresolved SEC staff comments. Management and Grant Thornton concluded that internal controls over financial reporting were effective.
Investor verification points
- Verify whether construction and infrastructure demand offsets continuing weakness in oil and gas, steel and utility end markets.
- Assess execution, financing and cost-control risks associated with the approximately $50 million St. Clair kiln project.
- Monitor utilization, pricing and margins in Lime and Limestone Operations, which operated at approximately 62% of aggregate annual production capacity in 2016.
- Evaluate the depletion-driven decline in natural gas production, reserves and standardized measure, which fell to $4.2 million from $5.3 million.
- Review available liquidity after letters of credit, contractual commitments, capital spending, dividends and share repurchases.
- Track environmental permitting, greenhouse-gas and Lime MACT developments, as well as fuel, freight and transportation costs.