United States Lime & Minerals Inc: Form 10-Q for the period ended Sep 30, 2023

Forward-Looking Statements. Any statements contained in this Report that are not statements of historical fact are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this Report, including without limitation statements relating to the Company’s plans, strategies, objectives, expectations, intentions, and adequacy of resources, are identified by such words as “will,” “could,” “should,” “would,” “believe,” “possible,” “potential,” “expect,” “intend,” “plan,” “schedule,” “estimate,” “anticipate,” and “project.” The Company undertakes no obligation to publicly update or revise any forward-looking statements. The Company cautions that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from expectations, including without limitation the following: (i) the Company’s plans, strategies, objectives, expectations, and intentions are subject to change at any time at the Company’s discretion; (ii) the Company’s plans and results of operations will be affected by its ability to maintain and increase its revenues and manage its growth; (iii) the Company’s ability to meet short-term and long-term liquidity demands, including meeting the Company’s operating and capital needs, including possible acquisitions and paying dividends, and conditions in the credit and equity markets, including the ability of the Company’s customers to meet their obligations; (iv) interruptions to operations and increased costs at the Company’s facilities resulting from changes in mining methods or conditions, variability of chemical or physical properties of the Company’s limestone and its impact on process equipment and product quality, inclement weather conditions, including more severe and frequent weather events resulting from climate change, natural disasters, accidents, IT systems failures or disruptions, including due to cybersecurity incidents or ransomware attacks, utility disruptions, supply chain delays and disruptions, labor shortages, disputes, and disruptions, or regulatory requirements; (v) volatile coal, petroleum coke, diesel, natural gas, electricity, and transportation costs and the consistent availability of trucks, truck drivers, and rail cars to deliver the Company’s products to its customers and solid fuels to its plants on a timely basis at competitive prices, including the impact of new or proposed additional rail regulations; (vi) the Company’s ability to expand its lime and limestone operations through projects and acquisitions of businesses with related or similar operations and the Company’s ability to obtain any required financing for such projects and acquisitions, to integrate the projects and acquisitions into the Company’s overall operations, and to sell any resulting increased production at acceptable prices; (vii) inadequate demand and/or prices for the Company’s lime and limestone products due to increased competition from competitors, increasing competition for certain customer accounts, conditions in the U.S. economy, recessionary concerns and pressures in, and the impact of government policies and/or borrowing rates on, particular industries, including oil and gas services, utility plants, steel, construction, and industrial, effects of governmental fiscal and budgetary constraints, including the level and pace of highway construction and infrastructure funding, changes to tax laws, legislative impasses, governmental shutdowns, trade wars, tariffs, international incidents, including conflicts in Ukraine and the Middle East, oil cartel production and supply actions, sanctions, economic and regulatory uncertainties under state governments and the United States Administration and Congress, inflation, Federal Reserve responses to inflationary concerns, including increased interest rates, and inability to continue to maintain or increase prices for the Company’s products, including passing through the increased costs of energy, parts and supplies, labor, transportation, and services; (viii) ongoing and possible new regulations, investigations, enforcement actions and costs, legal expenses, penalties, fines, assessments, litigation, judgments and settlements, taxes, and disruptions and limitations of operations, including those related to climate change, health and safety, human capital, diversity, and other environmental, social, governance, and sustainability considerations, and those that could impact the Company’s ability to continue or renew its operating permits or successfully secure new permits in connection with its modernization and expansion and development projects and acquisitions; (ix) estimates of reserves and remaining lives of reserves; (x) the impact of future potential global pandemics and governmental responses thereto, including decreased demand, lower prices, tightened labor and other markets, supply chain delays and disruptions, and increased costs, and the risk of non-compliance with health and safety protocols, social distancing and mask guidelines, and vaccination mandates, on the Company’s financial condition, results of operations, cash flows, and competitive position; (xi) the impact of social or political unrest; (xii) risks relating to mine safety and reclamation and remediation; and (xiii) other risks and uncertainties set forth in this Report or indicated from time to time in the Company’s filings with the Securities and Exchange Commission (the “SEC”), including the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Overview.

We are a manufacturer of lime and limestone products, supplying primarily the construction (including highway, road and building contractors), industrial (including paper and glass manufacturers), metals (including steel producers), environmental (including municipal sanitation and water treatment facilities and flue gas treatment processes), roof shingle manufacturers, agriculture (including poultry producers), and oil and gas services industries. We are headquartered in Dallas, Texas and operate lime and limestone plants and distribution facilities in Arkansas, Colorado, Louisiana, Missouri, Oklahoma, and Texas through our wholly owned subsidiaries, Arkansas Lime Company, ART Quarry TRS LLC (DBA Carthage Crushed Limestone), Colorado Lime Company, Mill Creek Dolomite, LLC (“Mill Creek”), Texas Lime Company, U.S. Lime Company, U.S. Lime Company-Shreveport, U.S. Lime Company-St. Clair, and U.S. Lime Company-Transportation.

We have identified one reportable segment based on the distinctness of our activities and products: lime and limestone operations. All operations are in the United States. Our other operations consists of natural gas interests through our wholly owned subsidiary, U.S. Lime Company-O&G, LLC. Assets related to our natural gas interests, unallocated corporate assets, and cash items are included in other identified assets. We do not believe that our natural gas interests are material to the current or prior periods.

On February 9, 2022, we acquired 100% of the equity interest of Mill Creek, a dolomite mining and production company located in Mill Creek, Oklahoma, for $5.6 million cash. Mill Creek contributed $1.2 million and $1.3 million to our revenues for the three months ended September 30, 2023 and 2022, respectively, and $3.5 million and $3.1 million to our revenues for the nine months ended September 30, 2023 and 2022, respectively.

In November 2022, we received objective evidence that a majority of the bargaining unit employees at our Arkansas facilities no longer supported union representation, and, accordingly, we withdrew recognition of the union. In June 2023, as part of a settlement with the National Labors Relations Board, we reinstated recognition of the union and are negotiating a new collective bargaining agreement with the union representing our Arkansas employees.

Our revenues increased 12.7% and 21.2% in the third quarter and first nine months 2023, respectively, compared to the third quarter and first nine months 2022. Revenues from our lime and limestone operations increased 13.5% in the third quarter 2023, compared to the third quarter 2022, due to a 17.5% increase in the average selling prices for our lime and limestone products, partially offset by a 4.0% decrease in sales volumes of our lime and limestone products, principally due to decreased demand from our construction, steel, and industrial customers, partially offset by increased demand from our environmental and roofing customers. Revenues from our lime and limestone operations increased 22.3% in the first nine months 2023, compared to the first nine months 2022, due to a 22.3% increase in the average selling prices for our lime and limestone products. Our sales volumes of lime and limestone products were essentially flat for the first nine months 2023, compared to the first nine months 2022, principally due to increased demand from our environmental and oil and gas services customers, offset by decreased demand from our steel, industrial, and construction customers. Looking ahead, we anticipate continued weak demand in some of our key markets as everyone deals with the impact of continuing inflation, higher interest rates, and increasingly uncertain geo-political situations.

Our gross profit increased 24.6% and 48.1% in the third quarter and first nine months 2023, respectively, compared to the third quarter and first nine months 2022. Gross profit from our lime and limestone operations increased 27.0% and 51.6% in the third quarter and first nine months 2023, respectively, compared to the third quarter and first nine months 2022. The increases in gross profit in the periods resulted primarily from the increased revenues discussed above, partially offset by increased production costs, principally from higher energy, parts and supplies, and labor costs.

Liquidity and Capital Resources.

Net cash provided by operating activities was $64.7 million in the first nine months 2023, compared to $43.9 million in the first nine months 2022, an increase of $20.8 million, or 47.3%. Our net cash provided by operating activities is composed of net income, depreciation, depletion and amortization (“DD&A”), deferred income taxes, stock-based compensation, other non-cash items included in net income and changes in working capital. In the first nine months 2023, net cash provided by operating activities was principally composed of $57.5 million net income, $17.8 million DD&A, and $2.4 million stock-based compensation, partially offset by $0.3 million deferred income taxes and a $12.6 million decrease from changes in operating assets and liabilities. Changes in operating assets and liabilities in the first nine months 2023 included an increase of $10.5 million in trade receivables, net, due primarily to increased sales in the third quarter 2023 compared to the fourth quarter 2022, and an increase of $4.2 million in inventories, net, partially offset by a decrease of $1.2 million in prepaid expenses and other current assets and an increase of $0.9 in accounts payable and accrued expenses. In the first nine months 2022, net cash provided by operating activities was principally composed of $34.6 million net income, $16.5 million DD&A, $2.2 million deferred income taxes, $1.9 million stock-based compensation, and a $11.1 million decrease from changes in operating assets and liabilities. Changes in operating assets and liabilities in the first nine months 2022 included an increase of $12.4 million in trade receivables, net, due primarily from increased sales in the third quarter 2022 compared to the fourth quarter 2021, an increase of $2.4 million in inventories, net, partially offset by a decrease of $1.1 million in prepaid expenses and other current assets and a $2.5 million increase in accounts payable and accrued expenses.

We had $20.5 million in capital expenditures in the first nine months 2023, compared to $23.8 million in the first nine months 2022, which included $5.6 million for the acquisition of Mill Creek. Net cash used in financing activities was $3.4 million in each of the first nine months 2023 and 2022, consisting primarily of cash dividends paid in each period.

Cash and cash equivalents increased $42.9 million to $176.3 million at September 30, 2023 from $133.4 million at December 31, 2022.

We are not committed to any planned capital expenditures until actual orders are placed for equipment. As of September 30, 2023, we did not have any material commitments for open purchase orders.

At September 30, 2023, our credit agreement with Wells Fargo Bank, N.A. (the “Lender”), as amended as of August 3, 2023, provides for a $75 million revolving credit facility (the “Revolving Facility”) and an incremental four-year accordion feature to borrow up to an additional $50 million on the same terms, subject to approval by the Lender or another lender selected by us. The credit agreement also provided for a $10 million letter of credit sublimit under the Revolving Facility. The Revolving Facility and any incremental loans mature on August 3, 2028.

Interest rates on the Revolving Facility are, at our option, SOFR, plus a SOFR adjustment rate of 0.10%, plus a margin of 1.000% to 2.000%, or the Lender’s Prime Rate, plus a margin of 0.000% to 1.000%, and a commitment fee range of 0.225% to 0.350% on the undrawn portion of the Revolving Facility. The Revolving Facility interest rate margins and commitment fee are determined quarterly in accordance with a pricing grid based upon our Cash Flow Leverage Ratio, defined as the ratio of our total funded senior indebtedness to earnings before interest, taxes, depreciation, depletion, amortization, and stock-based compensation expense (“EBITDA”) for the 12 months ended on the last day of the most recent calendar quarter, plus pro forma EBITDA from any businesses acquired during the period. Pursuant to a security agreement, dated August 25, 2004, the Revolving Facility is secured by our existing and hereafter acquired tangible assets, intangible assets, and real property. The maturity of the Revolving Facility and any incremental loans can be accelerated if any event of default, as defined under the credit agreement, occurs. Our maximum Cash Flow Leverage Ratio is 3.50 to 1.

We may pay dividends so long as we remain in compliance with the provisions of our credit agreement, and we may purchase, redeem or otherwise acquire shares of our common stock so long as our pro forma Cash Flow Leverage Ratio is less than 3.00 to 1.00 and no default or event of default exists or would exist after giving effect to such stock repurchase.

At September 30, 2023, we had no debt outstanding and no draws on the Revolving Facility other than $0.3 million of letters of credit, which count as draws against the available commitment under the Revolving Facility. We believe that, absent a significant acquisition, cash on hand and cash flows from operations will be sufficient to meet our operating needs, ongoing capital needs, including current and possible future modernization, expansion, and development projects, and liquidity needs and allow us to pay regular quarterly cash dividends for the near future.

Results of Operations.

Revenues in the third quarter 2023 were $74.9 million, compared to $66.5 million in the third quarter 2022, an increase of $8.4 million, or 12.7%. For the first nine months 2023, revenues were $215.6 million, compared to $177.9 million in the first nine months 2022, an increase of $37.8 million, or 21.2%. Revenues from our lime and limestone operations were $74.6 million in the third quarter 2023, compared to $65.7 million in the third quarter 2022, an increase of $8.9 million, or 13.5%. For the first nine months 2023, our lime and limestone revenues were $214.8 million, compared to $175.6 million in the first nine months 2022, an increase of $39.2 million, or 22.3%. The increase in our lime and limestone revenues in the third quarter 2023 resulted from the increases in the average selling prices for our lime and limestone products, partially offset by the decreased sales volumes of our lime and limestone products, principally due to decreased demand from our construction, steel, and industrial customers, partially offset by increased demand from our environmental and roofing customers. The increase in our lime and limestone revenues in the first nine months 2023 resulted from increases in the average selling prices for our lime and limestone products. Sales volumes of our lime and limestone products were essentially flat for the first nine months 2023, compared to the first nine months 2022, principally due to increased demand from our environmental and oil and gas services customers, offset by decreased demand from our steel, industrial, and construction customers.

Gross profit was $28.2 million in the third quarter 2023, compared to $22.6 million in the third quarter 2022, an increase of $5.6 million, or 24.6%. Gross profit from our lime and limestone operations in the third quarter 2023 was $28.2 million, compared to $22.2 million in the third quarter 2022, an increase of $6.0 million, or 27.0%. The increase in lime and limestone gross profit in the third quarter 2023, compared to the third quarter 2022, resulted primarily from the increased revenues discussed above, partially offset by increased production costs, principally from higher energy, parts and supplies, and labor costs.

Gross profit was $79.3 million in the first nine months 2023, compared to $53.5 million in the first nine months 2022, an increase of $25.7 million, or 48.1%. Gross profit from our lime and limestone operations in the first nine months 2023 was $79.3 million, compared to $52.3 million in the first nine months 2022, an increase of $27.0 million, or 51.6%. The increase in gross profit in the first nine months 2023, compared to the first nine months 2022, resulted primarily from the increased revenues discussed above, partially offset by the increased production costs.

Selling, general and administrative (“SG&A”) expenses were $4.4 million in the third quarter 2023, compared to $3.5 million in the third quarter 2022, an increase of $0.8 million, or 22.9%. SG&A expenses were $12.8 million in the first nine months 2023, compared to $11.0 million in the first nine months 2022, an increase of $1.8 million, or 16.3%. The increases in SG&A expenses in the 2023 periods, compared to the comparable 2022 periods, were primarily due to increased personnel expense.

We had no outstanding debt during any of the periods. Other (income) expense, net was $2.2 million and $5.5 million in the third quarter and first nine months 2023, respectively, compared to $0.5 million and $0.6 million in the comparable 2022 periods. The increases of $1.7 million and $4.9 million in income, respectively, in other (income) expense, net during the 2023 periods, compared to the comparable 2022 periods, were primarily due to higher interest rates on higher average balances in our cash and cash equivalents.

Income tax expense was $5.3 million and $14.4 million in the third quarter and first nine months 2023, compared to $3.8 million and $8.5 million in the comparable 2022 periods. The increases in income tax expense in 2023 periods, compared to the comparable 2022 periods, were due to the increases in income before taxes.

Our net income was $20.7 million ($3.63 per share diluted) in the third quarter 2023, compared to net income of $15.7 million ($2.77 per share diluted) in the third quarter 2022, an increase of $5.0 million, or 31.8%. For the first nine months 2023, our net income was $57.5 million ($10.09 per share diluted), compared to $34.6 million ($6.10 per share diluted) in the first nine months 2022, an increase of $22.9 million, or 66.2%.

Interest Rate Risk.

We could be exposed to changes in interest rates, primarily as a result of floating interest rates on the Revolving Facility. There was no outstanding balance on the Revolving Facility subject to interest rate risk at September 30, 2023. Any future borrowings under the Revolving Facility would be subject to interest rate risk. See Note 7 of Notes to condensed consolidated financial statements.

Under Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K, each operator of a coal or other mine is required to include disclosures regarding certain mine safety results in its periodic reports filed with the SEC. The operation of our quarries, underground mine and plants is subject to regulation by the federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977. The required information regarding certain mining safety and health matters, broken down by mining complex, for the quarter ended September 30, 2023 is presented in Exhibit 95.1 to this Report.

We believe we are responsible to employees to provide a safe and healthy workplace environment. We seek to accomplish this by: training employees in safe work practices; openly communicating with employees; following safety standards and establishing and improving safe work practices; involving employees in safety processes; and recording, reporting and investigating accidents, incidents and losses to avoid reoccurrence.

Following passage of the Mine Improvement and New Emergency Response Act of 2006, MSHA significantly increased the enforcement of mining safety and health standards on all aspects of mining operations. There has also been an increase in the dollar penalties assessed for citations and orders issued in recent years.