United States Lime & Minerals Inc: Form 10-Q for the period ended Sep 30, 2024

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 expenses 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 threats and incidents, utility disruptions, supply chain delays and disruptions, labor shortages 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; (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 pressures in, and the impact of government policies on, particular industries, including oil and gas services, utility plants, steel, construction, and industrial, effects of governmental fiscal and budgetary constraints, including the level of highway construction and infrastructure funding, changes to tax laws, legislative impasses, extended governmental shutdowns, downgrades and defaults on U.S. government obligations, trade wars, tariffs, international incidents, including conflicts in Ukraine, Israel, and the broader Middle East, oil cartel production and supply actions, sanctions, economic and regulatory uncertainties under state governments and the United States Administration and Congress, inflation, recession, and other macroeconomic concerns, Federal Reserve responses to macroeconomic concerns, including the effect of changing interest rates, and inability to continue to maintain or increase prices for the Company’s products, including passing through any increased costs of energy, labor, parts and supplies, and changes in inflationary expectations; (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; (ix) estimates of resources and reserves and remaining lives of reserves; (x) the impact of potential global pandemics, epidemics, or disease outbreaks, and governmental responses thereto, including decreased demand, lower prices, tightened labor and other markets, and increased costs, and the risk of non-compliance with health and safety protocols and 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, 2023 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, oil and gas services, and agriculture (including poultry producers) 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, 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.

Our revenues increased 19.4% and 10.2% in the third quarter and first nine months 2024, respectively, compared to the third quarter and first nine months 2023. Revenues from our lime and limestone operations increased 19.6% in the third quarter 2024, compared to the third quarter 2023, due to a 14.2% increase in the average selling prices for our lime and limestone products and a 5.4% increase in sales volumes of our lime and limestone products, which was principally due to increased demand from our construction and roof shingle customers. Revenues from our lime and limestone operations increased 10.3% in the first nine months 2024, compared to the first nine months 2023, due to a 14.3% 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 customers, which was partially offset by increased demand from our industrial and roof shingle customers. While overall demand from our construction customers is down for the first nine months 2024, compared to the first nine months 2023, construction demand improved in the third quarter 2024 as weather conditions in the South-Central United States returned to a more normal pattern compared to the heavier than usual rainfalls that we experienced in the first half 2024.

Our gross profit increased 53.1% and 36.9% in the third quarter and first nine months 2024, respectively, compared to the third quarter and first nine months 2023. Gross profit from our lime and limestone operations increased 53.3% and 37.0% in the third quarter and first nine months 2024, respectively, compared to the third quarter and first nine months 2023. The increases in gross profit resulted primarily from the increases in revenues discussed above and decreases in operating expenses, somewhat attributed to lower natural gas prices and optimizing fuel blends on our kilns.

On May 2, 2024, our shareholders approved an increase in the number of authorized shares of our common stock from 30,000,000 to 45,000,000. On July 12, 2024, we effected a 5-for-1 split of our common stock, in the form of a stock dividend of four additional shares of common stock for each share outstanding to shareholders of record at the close of business on June 21, 2024 (the “Stock Split”). All share and per share information, including stock-based compensation, throughout this Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the Stock Split. The shares of common stock retain a par value of $0.10 per share.

Liquidity and Capital Resources.

Net cash provided by operating activities was $87.4 million in the first nine months 2024, compared to $64.7 million in the first nine months 2023, an increase of $22.7 million, or 35.1%. 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 2024, net cash provided by operating activities was principally composed of $81.8 million net income, $18.1 million DD&A, and $3.6 million stock-based compensation, partially offset by $0.8 million deferred income taxes and a $15.3 million decrease from changes in operating assets and liabilities. Changes in operating assets and liabilities in the first nine months 2024 included an increase of $14.9 million in trade receivables, net, due primarily to increased sales in the third quarter 2024 compared to the fourth quarter 2023, and an increase of $3.5 million in inventories, partially offset by a decrease of $1.9 million in prepaid expenses and other current assets and an increase of $1.2 million in accounts payable and accrued expenses. 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, 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.

We had $16.4 million in capital expenditures in the first nine months 2024, compared to $20.5 million in the first nine months 2023. Net cash used in financing activities was $4.3 million in the first nine months 2024, compared to $3.4 million in the first nine months 2023, consisting primarily of cash dividends paid in each period.

Cash and cash equivalents increased $67.0 million to $255.0 million at September 30, 2024 from $188.0 million at December 31, 2023.

We are not committed to any planned capital expenditures until actual orders are placed for equipment. As of September 30, 2024, we did not have any material commitments for open purchase orders. In September 2024, we received the necessary permit to construct a new vertical kiln at our Texas Lime Company facility. We estimate the construction costs of the new kiln and related equipment and infrastructure will total approximately $65 million. We intend to fund this modernization and development project at our Texas Lime Company facility through cash on hand and cash flows from operations.

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 provides 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, 2024, we had no debt outstanding and no draws on the Revolving Facility other than $0.5 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 2024 were $89.4 million, compared to $74.9 million in the third quarter 2023, an increase of $14.5 million, or 19.4%. Revenues from our lime and limestone operations were $89.2 million in the third quarter 2024, compared to $74.6 million in the third quarter 2023, an increase of $14.6 million, or 19.6%. The increase in our revenues in the third quarter 2024, compared to the third quarter 2023, resulted from an increase in the average selling prices for our lime and limestone products and increased sales volumes of our lime and limestone products, principally due to increased demand from our construction and roof shingle customers.

For the first nine months 2024, revenues were $237.7 million, compared to $215.6 million in the first nine months 2023, an increase of $22.0 million, or 10.2%. For the first nine months 2024, our lime and limestone revenues were $236.9 million, compared to $214.8 million in the first nine months 2023, an increase of $22.1 million, or 10.3%. The increase in our revenues in the first nine months 2024, compared to the first nine months 2023, resulted from an increase in the average selling prices for our lime and limestone products, partially offset by decreased sales volumes of our lime and limestone products, principally due to decreased demand from our construction customers, offset in part by increased demand from our industrial and roof shingle customers.

Gross profit was $43.1 million in the third quarter 2024, compared to $28.2 million in the third quarter 2023, an increase of $15.0 million, or 53.1%. Gross profit from our lime and limestone operations in the third quarter 2024 was $43.2 million, compared to $28.2 million in the third quarter 2023, an increase of $15.0 million, or 53.3%. The increase in gross profit in the third quarter 2024, compared to the third quarter 2023, resulted primarily from the increased revenues discussed above and a decrease in operating expenses, somewhat attributed to lower natural gas prices and optimizing fuel blends on our kilns.

Gross profit was $108.5 million in the first nine months 2024, compared to $79.3 million in the first nine months 2023, an increase of $29.3 million, or 36.9%. Gross profit from our lime and limestone operations in the first nine months 2024 was $108.7 million, compared to $79.3 million in the first nine months 2023, an increase of $29.4 million, or 37.0%. The increase in gross profit in the first nine months 2024, compared to the first nine months 2023, resulted primarily from the increased revenues discussed above and a decrease in operating expenses, somewhat attributed to lower natural gas prices and optimizing fuel blends on our kilns.

Selling, general and administrative (“SG&A”) expenses were $5.0 million in the third quarter 2024, compared to $4.4 million in the third quarter 2023, an increase of $0.6 million, or 14.3%. SG&A expenses were $14.7 million in the first nine months 2024, compared to $12.8 million in the first nine months 2023, an increase of $1.9 million, or 14.7%. The increases in SG&A expenses in the 2024 periods, compared to the comparable 2023 periods, were primarily due to increased personnel expenses, including stock-based compensation.

Other (income) expense, net was $3.1 million income in the third quarter 2024 and $8.4 million income in the first nine months 2024, compared to $2.2 million income in the third quarter 2023 and $5.5 million income in the first nine months 2023. The increases of $0.9 million and $2.9 million in other (income) expense, net during the 2024 periods, compared to the comparable 2023 periods, were primarily due to interest earned on higher average balances in our cash and cash equivalents.

Income tax expense was $7.8 million and $20.4 million in the third quarter and first nine months 2024, compared to $5.3 million and $14.4 million in the comparable 2023 periods. The increases in income tax expense in the 2024 periods, compared to the comparable 2023 periods, were due to the increases in income before taxes.

Our net income was $33.4 million ($1.16 per share diluted) in the third quarter 2024, compared to net income of $20.7 million ($0.73 per share diluted) in the third quarter 2023, an increase of $12.6 million, or 60.9%. For the first nine months 2024, our net income was $81.8 million ($2.85 per share diluted), compared to $57.5 million ($2.02 per share diluted) in the first nine months 2023, an increase of $24.3 million, or 42.2%.

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, 2024 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.