United States Lime & Minerals(USLM) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents unaudited condensed consolidated financial statements, notes, and management's discussion and analysis of financial condition and results of operations ITEM 1: FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, cash flows, and comprehensive notes Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity as of June 30, 2019, and December 31, 2018 Condensed Consolidated Balance Sheets (dollars in thousands): | Item | June 30, 2019 | December 31, 2018 | Change (vs. Dec 31, 2018) | | :-------------------------------- | :------------ | :---------------- | :------------------------ | | ASSETS | | | | | Total current assets | $110,298 | $101,358 | +$8,940 | | Property, plant and equipment, net | $146,628 | $142,764 | +$3,864 | | Operating lease right-of-use assets | $4,054 | — | +$4,054 | | Total assets | $261,473 | $244,671 | +$16,802 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | Total current liabilities | $9,442 | $7,963 | +$1,479 | | Deferred tax liabilities, net | $14,974 | $12,365 | +$2,609 | | Operating lease liabilities, excluding current portion | $2,547 | — | +$2,547 | | Total liabilities | $28,332 | $21,704 | +$6,628 | | Total stockholders' equity | $233,141 | $222,967 | +$10,174 | | Total liabilities and stockholders' equity | $261,473 | $244,671 | +$16,802 | Condensed Consolidated Statements of Operations This statement outlines the company's revenues, expenses, and net income for the three and six months ended June 30, 2019 and 2018 Condensed Consolidated Statements of Operations (dollars in thousands, except per share data): | Item | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Change (YoY) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | Change (YoY) | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------- | :----------------------------- | :----------------------------- | :----------- | | Revenues | $38,954 | $39,242 | -0.7% | $76,753 | $74,529 | +3.0% | | Gross profit | $9,727 | $9,637 | +0.9% | $18,420 | $16,674 | +10.5% | | Operating profit | $7,088 | $7,072 | +0.2% | $13,108 | $11,608 | +12.9% | | Income before income tax expense | $7,518 | $7,468 | +0.7% | $13,968 | $12,295 | +13.6% | | Income tax expense | $1,485 | $830 | +78.9% | $2,807 | $1,395 | +101.2% | | Net income | $6,033 | $6,638 | -9.1% | $11,161 | $10,900 | +2.4% | | Basic Net income per share | $1.07 | $1.19 | -10.1% | $1.99 | $1.95 | +2.1% | | Diluted Net income per share | $1.07 | $1.18 | -9.3% | $1.99 | $1.95 | +2.1% | Condensed Consolidated Statements of Comprehensive Income This statement presents net income and other comprehensive income components, such as mark-to-market adjustments for foreign exchange hedges Condensed Consolidated Statements of Comprehensive Income (dollars in thousands): | Item | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $6,033 | $6,638 | $11,161 | $10,900 | | Total other comprehensive income (loss) | $25 | $(55) | $5 | $(89) | | Comprehensive income | $6,058 | $6,583 | $11,166 | $10,811 | Condensed Consolidated Statements of Stockholders' Equity This statement details changes in common stock, additional paid-in capital, retained earnings, and treasury stock over the period Condensed Consolidated Statements of Stockholders' Equity (dollars in thousands): | Item | Balance at Dec 31, 2018 | Balance at June 30, 2019 | Change | | :-------------------------------- | :---------------------- | :--------------------- | :----- | | Common Stock (Amount) | $661 | $662 | +$1 | | Additional Paid-In Capital | $25,867 | $26,632 | +$765 | | Accumulated Other Comprehensive (Loss) Income | $(13) | $(8) | +$5 | | Retained Earnings | $250,568 | $260,212 | +$9,644 | | Treasury Stock | $(54,116) | $(54,357) | -$241 | | Total Stockholders' Equity | $222,967 | $233,141 | +$10,174 | Condensed Consolidated Statements of Cash Flows This statement summarizes cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2019 and 2018 Condensed Consolidated Statements of Cash Flows (dollars in thousands) for Six Months Ended June 30: | Activity | 2019 | 2018 | Change (YoY) | | :-------------------------------- | :----- | :----- | :----------- | | Net cash provided by operating activities | $20,036 | $18,230 | +$1,806 | | Net cash used in investing activities | $(11,899) | $(19,195) | +$7,296 | | Net cash used in financing activities | $(1,683) | $(1,689) | +$6 | | Net increase (decrease) in cash and cash equivalents | $6,454 | $(2,654) | +$9,108 | | Cash and cash equivalents at end of period | $73,672 | $82,346 | -$8,674 | Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures on accounting policies, business segments, financial instruments, and other relevant financial information 1. Basis of Presentation This note clarifies the preparation of the unaudited condensed financial statements and their relation to the full annual GAAP statements - The condensed consolidated financial statements are unaudited and prepared by management, including all necessary adjustments of a normal and recurring nature[15] - Certain information and footnote disclosures have been condensed or omitted compared to full GAAP statements, and should be read in conjunction with the 2018 Form 10-K[15] - Results for the three- and six-month periods ended June 30, 2019, are not necessarily indicative of full-year operating results[15] 2. Organization This note describes the company's two primary business segments: Lime and Limestone Operations and Natural Gas Interests - The Company operates through two business segments: Lime and Limestone Operations and Natural Gas Interests[16] - Lime and Limestone Operations manufactures lime and limestone products for construction, industrial, environmental, metals, oil and gas services, roof shingle, and agriculture industries across Arkansas, Colorado, Louisiana, Oklahoma, and Texas[16] - Natural Gas Interests include royalty and non-operating working interests in natural gas wells in Johnson County, Texas[16] 3. Accounting Policies This note details the company's revenue recognition, oil and gas accounting, comprehensive income, and the adoption of new lease accounting standards - Revenue for Lime and Limestone Operations is recognized upon shipment, with external freight billed to customers included in revenues and related costs in cost of revenues[17] - Natural Gas Interests revenue is recognized in the month of production and delivery[20] - The Company uses the successful-efforts method for oil and gas exploration and development expenditures[21] - Comprehensive income includes net income and mark-to-market gains/losses on foreign exchange derivative instruments[22] - The Company adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing right-of-use assets and lease liabilities for operating leases over one year[24] - This adoption resulted in a $3.9 million increase in both assets and liabilities with no impact on retained earnings[24] - ASU 2017-12 (Derivatives and Hedging) was also adopted with no impact on financial statements[25] Fair Values of Financial Instruments (dollars in thousands): | Item | June 30, 2019 | December 31, 2018 | | :-------------------- | :------------ | :---------------- | | Foreign exchange hedges | $(11) | $(16) | 4. Business Segments This note provides financial performance data for the Lime and Limestone Operations and Natural Gas Interests segments - The Company operates two segments: Lime and Limestone Operations and Natural Gas Interests, both entirely within the United States[26] - Management evaluates segment performance primarily based on revenues and gross profit, without allocating corporate overhead, interest expense, or interest income[26] Operating Results by Business Segment (dollars in thousands): | Item | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | | | | | | Lime and limestone operations | $38,581 | $38,557 | $76,046 | $73,271 | | Natural gas interests | $373 | $685 | $707 | $1,258 | | Gross profit | | | | | | Lime and limestone operations | $9,690 | $9,327 | $18,376 | $16,120 | | Natural gas interests | $37 | $310 | $44 | $554 | | Capital expenditures | | | | | | Lime and limestone operations | $6,676 | $5,333 | $12,360 | $19,378 | | Natural gas interests | — | — | — | — | 5. Income Per Share of Common Stock This note presents the calculation of basic and diluted net income per common share for the reported periods Income Per Share of Common Stock (dollars in thousands, except per share amounts): | Item | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income for basic and diluted income per common share | $6,033 | $6,638 | $11,161 | $10,900 | | Weighted-average shares for basic income per common share | 5,614 | 5,595 | 5,612 | 5,593 | | Basic net income per common share | $1.07 | $1.19 | $1.99 | $1.95 | | Diluted net income per common share | $1.07 | $1.18 | $1.99 | $1.95 | 6. Accumulated Other Comprehensive Income This note details the components of comprehensive income, including the impact of foreign exchange hedges Components of Comprehensive Income (dollars in thousands): | Item | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $6,033 | $6,638 | $11,161 | $10,900 | | Mark to market of foreign exchange hedges | $32 | $(72) | $6 | $(116) | | Deferred income tax (expense) benefit | $(7) | $17 | $(1) | $27 | | Comprehensive income | $6,058 | $6,583 | $11,166 | $10,811 | - The Company uses foreign exchange hedges to mitigate potential losses from Euro to U.S. Dollar exchange rate changes, primarily for contractual obligations related to the St. Clair kiln project and equipment purchases[30] - As of June 30, 2019, FX hedges for 0.7 million Euros remained outstanding, resulting in net liabilities of $11 thousand (included in accrued expenses)[30] 7. Inventories, Net This note provides a breakdown of the company's raw materials, finished goods, and service parts inventories Inventories, Net (dollars in thousands): | Item | June 30, 2019 | December 31, 2018 | Change | | :-------------------------- | :------------ | :---------------- | :----- | | Lime and limestone inventories: | | | | | Raw materials | $4,096 | $4,693 | -$597 | | Finished goods | $1,994 | $2,153 | -$159 | | Total lime and limestone inventories | $6,090 | $6,846 | -$756 | | Service parts inventories | $6,239 | $6,000 | +$239 | | Total inventories, net | $12,329 | $12,846 | -$517 | 8. Banking Facilities and Debt This note outlines the company's revolving credit facility, debt status, and restrictions on dividends and share repurchases - The Company has a $75 million revolving credit facility with Wells Fargo Bank, N.A., maturing on May 2, 2024, with an incremental $50 million accordion feature[33][34] - Interest rates are LIBOR plus a margin or Prime Rate plus a margin, determined by the Cash Flow Leverage Ratio[34] - As of June 30, 2019, the Company had no outstanding debt, only $1.2 million in letters of credit (including $0.8 million for the St. Clair kiln project) against the Revolving Facility[36] - Dividends and share repurchases are permitted subject to compliance with credit agreement provisions and specific Cash Flow Leverage Ratio thresholds (less than 3.00 to 1.00 for repurchases)[35] 9. Leases This note details the company's operating lease arrangements, associated costs, and future minimum lease payments - The Company holds operating leases for equipment, corporate office space, and distribution facilities, with remaining terms of 0 to 8 years (weighted-average of 3 years)[37] - Upon ASU 2016-02 adoption on January 1, 2019, operating lease liabilities were discounted at a weighted-average rate of 3.5%[37] Lease Costs (dollars in thousands) for 2019: | Item | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :----------------------------- | | Operating lease costs (Cost of revenues) | $555 | $1,040 | | Operating lease costs (SG&A) | $54 | $107 | | Rental revenues (Other (income) expense) | $(13) | $(25) | | Net lease cost | $596 | $1,122 | Future Minimum Lease Payments (dollars in thousands) as of June 30, 2019: | Year | Amount | | :--- | :----- | | 2019 (remaining) | $813 | | 2020 | $1,388 | | 2021 | $1,124 | | 2022 | $480 | | 2023 | $187 | | Thereafter | $264 | | Total future minimum lease payments | $4,256 | | Less imputed interest | $(244) | | Present value of lease liabilities | $4,012 | 10. Income Taxes This note explains the company's estimated effective income tax rate and factors influencing it, such as statutory depletion - The estimated effective income tax rate for 2019 is 20.1%, primarily lower than the federal statutory rate due to statutory depletion[39] - In 2018, the rate was further reduced by research and development tax credits related to the St. Clair kiln project[39] 11. Dividends This note reports the regular quarterly cash dividends paid by the company during the period - The Company paid regular quarterly cash dividends of $0.135 per share in March and June 2019, totaling $0.8 million each[40] 12. Subsequent Event This note discloses a significant event that occurred after the reporting period, specifically a dividend declaration - On July 31, 2019, the Board of Directors declared a regular quarterly cash dividend of $0.135 per share, payable on September 13, 2019[41] ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition, operational results, liquidity, and capital resources across its business segments Overview This section provides a high-level summary of the company's business segments, recent operational performance, and strategic initiatives like the St. Clair kiln project - The Company operates two segments: Lime and Limestone Operations (principal business, manufacturing products for various industries) and Natural Gas Interests (royalty and non-operating working interests)[43][44][45] - Lime and Limestone Operations revenues were flat in Q2 2019 but increased 3.8% in the first six months[46] - This increase was driven by increased average prices (1.8% in Q2, 1.5% in 6M) despite a 1.8% decrease in Q2 sales volumes (due to construction demand decline, partially offset by environmental demand)[46] - Six-month sales volumes increased 2.3% due to environmental and steel customers[46] - Lime and Limestone Operations gross profit increased 3.9% in Q2 2019 and 14.0% in the first six months, primarily due to increased average prices and decreased stripping costs in the six-month period[47] - Natural Gas Interests revenues decreased significantly (45.5% in Q2, 43.8% in 6M) and gross profit decreased (88.1% in Q2, 92.1% in 6M) due to lower prices and decreased production volumes from normal declines in existing wells[48] - The new vertical kiln at St. Clair began commercial production in Q2 2019 as part of a $50 million modernization project[49] - Approximately $43.3 million has been incurred, with 70% of the project placed into service by Q2 2019, and the remainder expected to be completed in H2 2019[49] - The Company has an extended share repurchase program for up to $7.2 million of common stock through November 2019, with no shares repurchased since Q1 2016[50] - Regular quarterly cash dividends of $0.135 per share were paid in Q1 and Q2 2019, and another was declared for Q3 2019[51] Liquidity and Capital Resources This section analyzes the company's cash flow, capital expenditures, and available credit facilities to assess its ability to meet financial obligations and fund operations Cash Flow Summary (dollars in thousands) for Six Months Ended June 30: | Item | 2019 | 2018 | Change (YoY) | | :-------------------------------- | :----- | :----- | :----------- | | Net cash provided by operating activities | $20,036 | $18,230 | +9.9% | | Capital expenditures | $12,360 | $19,378 | -36.2% | | Net cash used in financing activities | $1,683 | $1,689 | -0.4% | | Cash and cash equivalents at June 30 | $73,672 | $82,346 | -10.6% | | Cash and cash equivalents at Dec 31 | $67,218 | $85,000 | -20.9% | | Net increase (decrease) in cash and cash equivalents | $6,454 | $(2,654) | N/A | - Operating cash flow increased by $1.8 million (9.9%) in the first six months of 2019, primarily from net income and non-cash adjustments, partially offset by changes in working capital (increase in trade receivables, decrease in inventories)[52] - Capital expenditures decreased to $12.4 million in the first six months of 2019 from $19.4 million in 2018[53] - $3.8 million was allocated to the St. Clair kiln project in 2019 (compared to $11.1 million in 2018)[53] - The St. Clair project has incurred $43.3 million to date, with most of the remaining $50 million total cost expected by year-end 2019[53] - Cash and cash equivalents increased by $6.5 million to $73.7 million at June 30, 2019, from $67.2 million at December 31, 2018[54] - The Company has a $75 million revolving credit facility (maturing May 2, 2024) and a $50 million incremental accordion feature[55][56] - As of June 30, 2019, there was no outstanding debt, only $1.2 million in letters of credit[59] - Management believes current cash and operating cash flows are sufficient to meet operating, capital, and liquidity needs, including the St. Clair project, share repurchases, and dividends, absent a significant acquisition[59] Results of Operations This section provides a detailed analysis of the company's revenue, gross profit, expenses, and net income performance across its business segments Revenue Performance (dollars in thousands): | Segment | Q2 2019 Revenue | Q2 2018 Revenue | Q2 Change (YoY) | 6M 2019 Revenue | 6M 2018 Revenue | 6M Change (YoY) | | :-------------------------- | :-------------- | :-------------- | :-------------- | :-------------- | :-------------- | :-------------- | | Total Revenues | $38,954 | $39,242 | -0.7% | $76,753 | $74,529 | +3.0% | | Lime and Limestone Operations | $38,581 | $38,557 | +0.1% | $76,046 | $73,271 | +3.8% | | Natural Gas Interests | $373 | $685 | -45.5% | $707 | $1,258 | -43.8% | - Lime and Limestone revenues were flat in Q2 2019 due to decreased sales volumes (primarily from construction customers, offset by environmental demand) balanced by increased average prices[61] - Six-month revenues increased due to higher sales volumes and average prices[61] Natural Gas Interests Production and Pricing: | Metric | Q2 2019 | Q2 2018 | 6M 2019 | 6M 2018 | | :-------------------- | :------ | :------ | :------ | :------ | | Production volumes (MCF) | 113,000 | 126,000 | 231,000 | 256,000 | | Average price per MCF | $3.29 | $5.42 | $3.06 | $4.91 | Gross Profit Performance (dollars in thousands): | Segment | Q2 2019 Gross Profit | Q2 2018 Gross Profit | Q2 Change (YoY) | 6M 2019 Gross Profit | 6M 2018 Gross Profit | 6M Change (YoY) | | :-------------------------- | :------------------- | :------------------- | :-------------- | :------------------- | :------------------- | :-------------- | | Total Gross Profit | $9,727 | $9,637 | +0.9% | $18,420 | $16,674 | +10.5% | | Lime and Limestone Operations | $9,690 | $9,327 | +3.9% | $18,376 | $16,120 | +14.0% | | Natural Gas Interests | $37 | $310 | -88.1% | $44 | $554 | -92.1% | - Selling, general and administrative expenses (SG&A) remained relatively stable at $2.6 million in Q2 2019 and $5.3 million in 6M 2019, representing 6.8% and 6.9% of revenues, respectively[67] - Interest expense was minimal, and interest and other income, net, increased to $1.0 million in the first six months of 2019 from $0.8 million in 2018[68] - Income tax expense significantly increased by 78.9% in Q2 2019 and 101.2% in 6M 2019, primarily due to the absence of research and development tax credits in 2019 that were present in 2018 related to the St. Clair kiln project[69] Net Income Performance (dollars in thousands, except per share data): | Item | Q2 2019 | Q2 2018 | Q2 Change (YoY) | 6M 2019 | 6M 2018 | 6M Change (YoY) | | :-------------------- | :------ | :------ | :-------------- | :------ | :------ | :-------------- | | Net income | $6,033 | $6,638 | -9.1% | $11,161 | $10,900 | +2.4% | | Diluted EPS | $1.07 | $1.18 | -9.3% | $1.99 | $1.95 | +2.1% | ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to interest rate and foreign exchange risks and its strategies for mitigation - The Company is exposed to interest rate risk on its Revolving Facility, though there was no outstanding balance subject to this risk at June 30, 2019[71] - Foreign exchange risk exists for future payments denominated in Euros, but the Company uses foreign exchange hedges to fix its U.S. Dollar liability for 0.7 million Euros[72] ITEM 4: CONTROLS AND PROCEDURES This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes to internal controls - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2019, and concluded they were effective[73] - No material changes to internal control over financial reporting occurred during the quarter[74] PART II. OTHER INFORMATION This section includes disclosures on equity security sales, mine safety, and a list of exhibits filed with the report ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details the company's share repurchase program and any shares repurchased during the period - The Company has a share repurchase program to buy back up to $10 million of common stock, extended through November 2019 for the remaining $7.2 million[75] - No shares were repurchased under this program in Q2 2019[75] - Additionally, 2,361 shares were repurchased in Q2 2019 at $80.00 per share from employees/directors to cover tax withholding liabilities upon restricted stock lapse[76] ITEM 4: MINE SAFETY DISCLOSURES This section provides information on the company's mining operations, their regulation by MSHA, and safety initiatives - The Company's mining operations are regulated by the federal Mine Safety and Health Administration (MSHA)[77] - Detailed mine safety and health information for Q2 2019 is provided in Exhibit 95.1[77] - The Company emphasizes providing a safe and healthy workplace through training, communication, adherence to standards, employee involvement, and accident investigation[78] - MSHA has increased enforcement and penalties since the Mine Improvement and New Emergency Response Act of 2006[79] ITEM 6: EXHIBITS This section lists all documents and certifications filed as exhibits to the report - The report includes an Exhibit Index listing various documents incorporated by reference, such as the Eighth Amendment to the Credit Agreement, CEO/CFO certifications (Rule 13a-14(a)/15d-14(a) and Section 1350), Mine Safety Disclosures, and Interactive Data Files[81][82]