UNITED STATES LIME & MINERALS INC - Quarter Report: 2020 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

Form 10-Q 

(Mark One)

 

 

For the quarterly period ended March 31, 2020

OR

For the transition period from ........ to ........  

Commission file number is 000-04197

 

UNITED STATES LIME & MINERALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(972) 991-8400

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    ☒  No  ☐

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).  Yes    ☒  No  ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐  No  ☒

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date:  As of April 29,  2020, 5,627,185 shares of common stock, $0.10 par value, were outstanding.

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

(Unaudited)

 

 

 

See accompanying notes to condensed consolidated financial statements.

UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in thousands)

(Unaudited)

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.    Basis of Presentation

 

The condensed consolidated financial statements included herein have been prepared by United States Lime & Minerals, Inc. (the “Company”) without independent audit.  In the opinion of the Company’s management, all adjustments of a normal and recurring nature necessary to present fairly the financial position, results of operations, comprehensive income and cash flows for the periods presented have been made.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2019.  The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of operating results for the full year.

2.    Organization

The Company is a manufacturer of lime and limestone products, supplying primarily the construction (including highway, road and building contractors), industrial (including paper and glass manufacturers), environmental (including municipal sanitation and water treatment facilities and flue gas treatment processes), metals (including steel producers), oil and gas services, roof shingle manufacturers and agriculture (including poultry and cattle feed producers) industries. The Company is headquartered in Dallas, Texas and operates lime and limestone plants and distribution facilities in Arkansas, Colorado, Louisiana, Oklahoma and Texas through its wholly owned subsidiaries, Arkansas Lime Company, Colorado Lime Company, Texas Lime Company, U.S. Lime Company, U.S. Lime Company – Shreveport, U.S. Lime Company – St. Clair and U.S. Lime Company – Transportation. In addition, the Company, through its wholly owned subsidiary, U.S. Lime Company – O & G, LLC, has royalty and non-operated working interests in natural gas wells located in Johnson County, Texas, in the Barnett Shale Formation.

During 2019, the Company’s natural gas interests did not reach any of the quantitative thresholds for a reportable segment, and the results from its natural gas interests are not expected to be of significance in future periods.  The revenues, gross profit and operating profit of the natural gas interests are included in Other for reportable segment disclosures.  Segment disclosures for first three months ended March 31, 2019 have been recast to be consistent with the presentation for the three months ended March 31, 2020.

 

3.    Accounting Policies

 

Revenue Recognition.  The Company recognizes revenue for its lime and limestone operations when (i) a contract with the customer exists and the performance obligations are identified; (ii) the price has been established; and (iii) the performance obligations have been satisfied, which is generally upon shipment.  Revenues include external freight billed to customers with related costs accounted for as fulfillment costs and included in cost of revenues.  The Company’s returns and allowances are minimal.  External freight billed to customers in each of the first quarters 2020 and 2019 included in revenues was $6.9 million, which approximates the amount of external freight included in cost of revenues. Sales taxes billed to customers are not included in revenues.  For its natural gas interests, the Company recognizes revenue in the month of production and delivery.

 

The Company operates its lime and limestone operations within a single geographic region and derives all revenues from that segment from the sale of lime and limestone products.  See Note 4 to the condensed consolidated financial statements for disaggregation of revenues by segment, which the Company believes best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

Accounts Receivable.  On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).  ASU 2016-13 replaces the incurred impairment methodology in previous GAAP with a methodology that reflects expected credit losses and

requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The Company applied the amendments of ASU 2016-13 using a modified-retrospective approach, and as a result, amounts recorded prior to January 1, 2020 have not been retrospectively restated.  The implementation of ASU 2016-13 did not have a material impact on the Company’s results of operation, financial position, or cash flows. 

 

The majority of the Company’s trade receivables are unsecured.  Payment terms for all trade receivables are based on the underlying purchase orders, contracts or purchase agreements.  Under the new standard, the Company estimates credit losses relating to trade receivables based on an assessment of the current and forecasted probability of collection, historical trends, economic conditions and other significant events that may impact the collectability of accounts receivables. Due to the relatively homogenous nature of its trade receivables, the Company does not believe there is any meaningful asset-specific differences within its accounts receivable portfolio that would require the portfolio to be grouped below the consolidated level for review of credit losses. Credit losses relating to trade receivables have generally been within management expectations and historical trends.  Uncollected trade receivables are charged-off when identified by management to be unrecoverable.  The Company maintains an allowance for credit losses to reflect currently expected estimated losses resulting from the failure of customers to make required payments.

 

Successful-Efforts Method Used for Natural Gas Interests.  The Company uses the successful-efforts method to account for oil and gas exploration and development expenditures.  Under this method, drilling, completion and workover costs for successful exploratory wells and all development well costs are capitalized and depleted using the units-of-production method.  Costs to drill exploratory wells that do not find proved reserves are expensed.

 

Comprehensive Income.  Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.  Certain changes in assets and liabilities, such as mark-to-market gains or losses on foreign exchange derivative instruments designated as hedges, are reported as a separate component of the equity section of the balance sheet.  Such items, along with net income, are components of comprehensive income.

 

Leases.  The Company determines if an arrangement is a lease at inception.  When recording operating leases, the Company records a lease liability based on the net present value of the lease payments over the lease term and a corresponding right-of-use asset.  Operating leases are included in operating lease right-of-use assets, current portion of operating lease liabilities and operating lease liabilities, excluding current portion, on the balance sheet.  Lease expense is recognized over the lease term on a straight-line basis.  Lease terms include options to extend the lease when it is reasonably certain the Company will exercise the option.  For leases with a term of twelve months or less, the Company does not record a right-of-use asset and a lease liability and records lease expense on a straight-line basis.  See Note 10 to the condensed consolidated financial statements.

 

Fair Values of Financial Instruments.  Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”  The Company uses a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values, in determining the fair value of its financial assets and liabilities.  These tiers include:  Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.  Specific inputs used to value the Company’s foreign exchange hedges were Euro to U.S. Dollar exchange rates for the expected future payment dates for the Company’s commitments denominated in Euros. See Note 6 to the condensed consolidated financial statements.  There were no changes in the methods and assumptions used in measuring fair value during the period. 

 

The Company’s financial liabilities measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019, respectively, are summarized below (in thousands):

 

 

New Accounting Pronouncements.    In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13 (“ASU 2016-13”), “Financial Instruments - Credit Losses (Topic 326).” The new standard was effective for public companies, excluding smaller reporting companies, for reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. The standard replaced the incurred loss impairment methodology under current US GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The standard required a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company adopted ASU 2016-13 as of January 1, 2020 using a modified retrospective approach.  Adoption of this standard did not have a material effect on the Company’s condensed consolidated financial statements.  See Note 7 to the condensed consolidated financial statements.

 

 

4.   Business Segment

 

The Company has identified one reportable segment based on the distinctness of the Company’s activities and products: lime and limestone operations. All operations are in the United States. In evaluating the operating results of the Company, management primarily reviews revenues, gross profit and operating profit from the lime and limestone operations.  Operating profit from its lime and limestone operations includes all of the Company’s selling, general and administrative costs. The Company does not allocate interest income and expense and other expense to its lime and limestone operations.

 

During 2019, the Company’s natural gas interests did not reach any of the quantitative thresholds for a reportable segment, and the Company does not expect the results from its natural gas interests to be of significance in future periods.  The revenues, gross profit and operating profit from the Company’s natural gas interests are included in Other for the Company’s reportable segment disclosures.  Other identifiable assets include assets related to its natural gas interests, unallocated corporate assets and cash items.  Segment disclosures for the three months ended March 31, 2019 have been recast to be consistent with the presentation for the three months ended March 31, 2020.

 

The following table sets forth operating results and certain other financial data for the Company’s lime and limestone operations segment and other (in thousands):

 

 

 

5.    Income Per Share of Common Stock

 

The following table sets forth the computation of basic and diluted income per common share (in thousands, except per share amounts):

 

 

6.    Accumulated Other Comprehensive Income

 

The following table presents the components of comprehensive income (in thousands):

 

 

In May 2018, to hedge against potential losses due to changes in the Euro to U.S. Dollar exchange rates, the Company entered into foreign exchange (“FX”) hedges with Wells Fargo Bank, N.A. (“Wells Fargo”) as the counterparty to the FX hedges to fix the exchange rates for 2.2 million Euros in connection with a contractual obligation related to the purchase and installation of equipment at Arkansas Lime Company, of which FX hedges with respect to 0.3 million Euros remained outstanding at March 31, 2020. The Company will be exposed to credit losses in the event of non-performance by the counterparty to the FX hedges.  The FX hedges have been effective as defined under applicable accounting rules.  Therefore, changes in the fair value of the FX hedges are reflected in comprehensive income.  Due to changes in the U.S. Dollar, compared to the Euro, the fair value of the hedges resulted in net liabilities of $9 and $1 at March 31, 2020 and December 31, 2019, respectively, which is included in accrued expenses.

 

 

 

 

7.    Trade Receivables, Net

Additions and write-offs to the Company’s allowance for credit losses for the three months ended March 31, 2020 and 2019 were as follows (in thousands):

 

 

8.    Inventories, Net

 

Inventories are valued principally at the lower of cost, determined using the average cost method, or market.  Costs for raw materials and finished goods include materials, labor, and production overhead.  Inventories, net consisted of the following (in thousands):

 

 

 

9.   Banking Facilities and Debt

The Company’s credit agreement with Wells Fargo Bank, N.A. (the “Lender”), as amended as of May 2, 2019 and November 21, 2019, 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 the Company.  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 May 2, 2024.

Interest rates on the Revolving Facility are, at the Company’s option, LIBOR 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 0.200% 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 the Company’s Cash Flow Leverage Ratio, defined as the ratio of the Company’s 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 the Company’s 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. The Company’s maximum Cash Flow Leverage Ratio is 3.50 to 1.

The Company may pay dividends so long as it remains in compliance with the provisions of the Company’s credit agreement, and it may purchase, redeem or otherwise acquire shares of its common stock so long as its 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.

As of March 31, 2020, the Company had no debt outstanding and no draws on the Revolving Facility other than $0.4 million of letters of credit, which count as draws against the available commitment under the Revolving Facility. 

10.    Leases

 

The Company has operating leases for the use of equipment, corporate office space, and some of its terminal and distribution facilities.  The leases have remaining lease terms of 1 to 7 years, with a weighted-average remaining lease term of 3 years at March 31, 2020.  Some operating leases include options to extend the leases for up to 5 years.  At January 1, 2019, upon implementation of ASU 2016-02, the liability for the Company’s operating leases was discounted to present value using a weighted-average discount rate of 3.5%.  The components of lease costs for the three months ended March  31,  2020 and 2019 were as follows (in thousands):

 

(1)Includes the costs of leases with a term of 12 months or less.

 

As of March 31, 2020, future minimum payments under operating leases that were either non-cancelable or subject to significant penalty upon cancellation, including future minimum payments under renewal options that the Company is reasonably certain to exercise, were as follows (in thousands):

 

 

Supplemental cash flow information pertaining to the Company’s leasing activity for the three months ended March 31, 2020 and 2019  were as follows (in thousands):

 

 

 

11.    Income Taxes

 

The Company has estimated that its effective income tax rate for 2020 will be 19.0%.  The primary reason for the effective income tax rate being below the federal statutory rate is due to statutory depletion, which is allowed for income tax purposes and is a permanent difference between net income for financial reporting purposes and taxable income.

 

12.    Dividends

 

On March 13, 2020, the Company paid $0.9 million in cash dividends, based on a dividend of $0.16 per share of its common stock, to shareholders of record at the close of business on February 21, 2020. 

13.    Subsequent Event

 

On April 29, 2020, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.16  per share on the Company’s common stock.  This dividend is payable on June 12, 2020 to shareholders of record at the close of business on May 22, 2020.

ITEM 2:     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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, natural disasters, accidents, IT systems failures or disruptions, including due to cybersecurity incidents or regulatory requirements; (v) volatile coal, petroleum coke, diesel, natural gas, electricity, transportation and freight 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) unanticipated delays or cost overruns in completing modernization and expansion and development projects; (vii) the Company’s ability to expand its lime and limestone operations through projects and acquisitions of businesses with related or similar operations, including obtaining financing for such projects and acquisitions, and to sell any resulting increased production at acceptable prices; (viii) 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 construction, steel, industrial and oil and gas services, reduced demand from utility plants, effects of governmental fiscal and budgetary constraints, including the level of highway construction and infrastructure funding, changes to tax law, legislative impasses, extended governmental shutdowns, trade wars, tariffs, economic and regulatory uncertainties under state governments and the United States Administration and Congress, and inability to continue to maintain or increase prices for the Company’s products, including passing through the increased costs of transportation; (ix) 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 and health and safety 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; (xi) estimates of reserves and remaining lives of reserves; (xii) the impact of the coronavirus (“COVID-19”) pandemic on the Company’s financial condition, results of operations, cash flows, and competitive position; 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, 2019 and subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

 

Overview.

 

We have identified one reportable business segment based on the distinctness of our activities and products: lime and limestone operations. All operations are in the United States. Operating profit from our lime and limestone operations includes all of our selling, general and administrative costs. We do not allocate interest expense and interest and other income to our lime and limestone operations.

Through our lime and limestone operations, 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), environmental (including municipal sanitation and water treatment facilities and flue gas treatment processes), metals (including steel producers), oil and gas services, roof shingle manufacturers and agriculture (including poultry and cattle feed producers) industries.  We are headquartered in Dallas, Texas and operate lime and limestone

plants and distribution facilities in Arkansas, Colorado, Louisiana, Oklahoma and Texas through our wholly owned subsidiaries, Arkansas Lime Company, Colorado Lime Company, Texas Lime Company, U.S. Lime Company, U.S. Lime Company – Shreveport, U.S. Lime Company – St. Clair and U.S. Lime Company – Transportation.  The lime and limestone operations represent our principal business.

In addition to our lime and limestone operations, we hold natural gas interests through our wholly owned subsidiary, U.S. Lime Company – O & G, LLC.  In the fourth quarter of 2019, we determined our natural gas interests did not reach any of the quantitative thresholds for a reportable segment.  The revenues, gross profit and operating profit from our natural gas interests are included in Other for our reportable segment disclosures.  Assets related to our natural gas interests, unallocated corporate assets, and cash items are included in Other identified assets.  Segment disclosures for the first quarter 2019 have been recast to be consistent with the first quarter 2020 presentation.

Revenues increased 1.7% in the first quarter 2020, compared to the first quarter 2019.  Revenues from lime and limestone operations increased 2.0% in the first quarter 2020, compared to the first quarter 2019.  The increase in lime and limestone revenues in the first quarter 2020 resulted primarily from a 4.9% increase in average prices realized for our lime and limestone products, compared to the first quarter 2019, partially offset by decreased sales volume of 2.9%, principally due to reduced demand from our environmental and oil and gas services customers.

Gross profit increased 13.6% in the first quarter 2020, compared to the first quarter 2019.  The increased gross profit in the first quarter 2020, compared to the first quarter 2019, resulted primarily from the increased revenues discussed above, lower fuel costs, and increased operating efficiencies associated, in part, with the new kiln at the Company’s St. Clair facility, which began producing commercially saleable quicklime in the second quarter 2019.

We paid an increased regular quarterly cash dividend of $0.16 per share on our common stock in the first quarter 2020.  On April 29, 2020, the Board of Directors declared a regular quarterly cash dividend of $0.16 per share on our common stock.  This dividend is payable on June 12, 2020 to shareholders of record at the close of business on May 22, 2020.

The emergence of COVID-19 in the United States in the first quarter of 2020 has created significant volatility, uncertainty and economic disruption to the general business environment.  Federal, state, and local governmental responses to the COVID-19 pandemic, including restrictions requiring social distancing, and on business activities and movement of people,  began to take effect the last two weeks of March 2020 and, therefore, did not have a material impact on our financial condition or results of operations for the first quarter 2020.  We expect, however, a slowdown in the national economy beginning in the second quarter, and a possibly greater impact in certain industries, such as oil and gas drilling activities, roofing, and steel,  which we expect to result in continued reduction in demand for many of our products.  We will consider cost-cutting initiatives and ways to further increase operating efficiencies in an effort to mitigate some of the effects of the expected economic downturn.

As we respond to the unprecedented times brought upon us all by the COVID-19 pandemic, we have not wavered in our commitment to the safety of our employees and the other individuals at our facilities that deliver lime and limestone products to the essential businesses and communities that we serve.  In addition to our standard health and safety protocols, we have implemented enhanced protocols at all of our locations, including reduced access to facilities, screening of individuals on all sites, and the enforcement of social distancing and other practices that are consistent with, or exceed, the guidelines of the Center for Disease Control.

We are an essential business and anticipate continuing to deliver lime and limestone products to all of the essential businesses we serve.  Our lime and limestone products are used in the purification of drinking water, treatment of wastewater, and scrubbing of air emissions from incinerators, power plants, and industrial plants, as well as in the manufacture of paper and glass products.  Our limestone is used in the production of animal feed and is also used in products that have been recognized as part of the Critical Infrastructure Sector, including steel and other metal products, and commercial, residential, and public works construction.

Future events or governmental responses to COVID-19 may impede or prevent our ability to operate at one or more of our manufacturing facilities or limit our ability to transport our products to our customers.  For example, our lime and limestone products cannot be produced if all of our employees are required to work from home.  Specialized and difficult to replace skill sets are also required in the production of our lime and limestone products.  Should one or more of our facilities experience a COVID-19 outbreak requiring quarantining of employees possessing those skill sets,

it would disrupt our ability to produce, sell, and deliver our lime and limestone products and could have a material adverse effect on our financial condition, results of operations, cash flows, and competitive position.

Liquidity and Capital Resources.

 

Net cash provided by operating activities was $11.4 million in the first quarter 2020, compared to $7.5 million in the first quarter 2019, an increase of $3.9 million, or 52.8%.  Our net cash provided by operating activities is composed of net income, depreciation, depletion and amortization (“DD&A”), deferred income taxes, other non‑cash items included in net income and changes in working capital. In the first quarter 2020, net cash provided by operating activities was principally composed of $5.5 million net income, $4.7 million DD&A, $1.0 million deferred income taxes, $0.4 million stock‑based compensation, and a $49 thousand decrease from changes in operating assets and liabilities.  Changes in operating assets and liabilities in the first quarter 2020 included an increase of $0.2 million in trade receivables, net, and a decrease of $0.2 million in prepaid expenses and other assets.  In the first quarter 2019, net cash provided by operating activities was principally composed of $5.1 million net income, $4.1 million DD&A, $1.2 million deferred income taxes, $0.3 million stock‑based compensation, and a $3.7 million decrease from changes in operating assets and liabilities.  Changes in operating assets and liabilities in the first quarter 2019 included an increase of $3.1 million in trade receivables, net, a decrease of $0.2 million in prepaid expenses and other current assets, and a decrease of $0.9 million in accounts payable and accrued expenses.

We had $6.1 million in capital expenditures in the first quarter 2020, compared to $5.7 million in the first quarter 2019.  Net cash used in financing activities was $0.9 million in the first quarter 2020, compared to $0.8 million in the first quarter 2019, consisting primarily of cash dividends paid in each period. 

Cash and cash equivalents increased $4.5 million to $58.8 million at March 31, 2020, from $54.3 million at December 31, 2019.

Our credit agreement with Wells Fargo Bank, N.A. (the “Lender”), as amended as of May 2, 2019 and November 21, 2019, 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 May 2, 2024.

Interest rates on the Revolving Facility are, at our option, LIBOR 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 0.200% 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.

We are not committed to any planned capital expenditures until actual orders are placed for equipment.  As of March 31, 2020, we did not have any material commitments for open purchase orders.

At March 31, 2020, we had no debt outstanding and no draws on the Revolving Facility other than $0.4 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.  However, an extended period of severe economic disruption caused by the COVID-19 pandemic could negatively impact our cash flows from operations and our liquidity.

Results of Operations.

 

Revenues in the first quarter 2020 were $38.4 million, compared to $37.8 million in the first quarter 2019, an increase of $0.6 million, or 1.7%.  Revenues from our lime and limestone operations in the first quarter 2020 increased $0.7 million, or 2.0%, to $38.2 million from $37.5 million in the first quarter 2019.  As discussed above, the increase in revenues from our lime and limestone operations was primarily due to a 4.9% average increase in prices for our lime and lime stone products in the first quarter 2020, compared to the first quarter 2019, partially offset by decreased sales volume of 2.9%, principally due to reduced demand, from our environmental and oil and gas services customers.  Revenues also included $0.2 million and $0.3 million in the first quarters 2020 and 2019, respectively, from our natural gas interests.

Gross profit was $9.9 million in the first quarter 2020, compared to $8.7 million in the first quarter 2019, an increase of $1.2 million, or 13.6%.  Gross profit from our lime and limestone operations in the first quarter 2020 was $10.0 million, compared to $8.7 million in the first quarter 2019, an increase of $1.4 million,  or 15.6%.  The increase in gross profit in 2020, compared to 2019, resulted primarily from the increased revenues discussed above, lower fuel costs and increased operating efficiencies associated, in part, with the new kiln at our St. Clair facility, which began producing commercially saleable quicklime in the second quarter 2019.  Gross profit also included the impact of a $(162) thousand loss in 2020 and a $7 thousand profit in 2019 from our natural gas interests.

Selling, general and administrative expenses (“SG&A”) were $3.2 million in the first quarter 2020, compared to $2.7 million in the first quarter 2019. As a percentage of revenues, SG&A was  8.4% and 7.1% in the first quarters 2020 and 2019, respectively.  The increase in SG&A was primarily due to increased personnel expenses, including stock-based compensation, and legal expenses in the first quarter 2020, compared to the first quarter 2019.

Interest expense was $62 thousand in each of the first quarters 2020 and 2019, as we had no outstanding debt during either period.  Interest and other income, net was $0.2 million in the first quarter 2020, compared to $0.5 million in the first quarter 2019, a decrease of $0.2 million or 49.8%.  The decrease in interest income was due to lower average balances of cash and cash equivalents and reduced interest rates in the first quarter 2020, compared to the first quarter 2019.

Income tax expense was $1.3 million in each of the first quarters 2020 and 2019.  Our effective income tax rate was 19.0% and 20.5% in the first quarters 2020 and 2019, respectively.  Our effective income tax rate was reduced from the federal rate primarily due to statutory depletion, which is allowed for income tax purposes and is a permanent difference between net income for financial reporting purposes and taxable income.  For the year ended December 31, 2019, our effective income tax rate was 15.7% because of a reduction in the tax rate as a result of research and development tax credits.  We do not expect a reduction in our income tax rate due to research and development tax credits in 2020.

Our net income was $5.5 million ($0.98 per share diluted) in the first quarter 2020, compared to net income of $5.1 million ($0.91 per share diluted) in the first quarter 2019, an increase of $0.4 million, or 8.1%.

 

ITEM 3:     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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 March 31, 2020.  Any future borrowings under the Revolving Facility would be subject to interest rate risk.  See Note 9 of Notes to Condensed Consolidated Financial Statements.

 

Foreign Exchange Risk.

 

At March 31, 2020, we had contracts related to the purchase and installation of equipment that require future payments totaling 0.3 million Euros.  We have entered into foreign exchange hedges fixing our U.S. Dollar liability at $0.4 million.  We could be exposed to changes in the Euro to U.S. Dollar exchange rates for obligations not effectively fixed by the hedges.  See Note 6 of Notes to Condensed Consolidated Financial Statements.

 

ITEM 4:     CONTROLS AND PROCEDURES

 

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report.  Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures as of the end of the period covered by this Report were effective.

 

No change in our internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.     OTHER INFORMATION

 

ITEM 1A:     RISK FACTORS

 

There have been no material changes, other than as described below, from the risk factors set forth in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.  Please refer to that section for disclosures regarding what we believe are the more significant risks and uncertainties related to our business.

 

Our financial condition, results of operations, cash flows, and competitive position could be materially adversely impacted by the COVID-19 pandemic.  The extent to which COVID-19, and measures taken in response thereto, could materially adversely affect our financial condition, results of operations, cash flows, and competitive position will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities to contain the business, financial, and economic impact of the pandemic.

 

While we are continuing to execute our business continuity plans in response to the COVID-19 pandemic, there is the potential for increased disruptions to our business and operations from the pandemic.  For example, the continued impact of COVID-19 may limit our ability to produce, sell and deliver products to our customers; cause key management and plant-level employees not to be available to us; result in plant shutdowns due to contagion, in which case we may not be able to shift production to our other plants; cause disruptions to our supply chain as it relates to our suppliers and other vendors, as well as disrupt the supply chains of our customers; impede our ability to maintain and repair our plants and equipment; negatively impact our modernization, expansion, and development plans; as well as adversely impact demand for our lime and limestone products.  Although we cannot predict future developments, which are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities to contain the business, financial, and economic impact of the pandemic, COVID-19 could have a material adverse effect on our financial condition, results of operations, cash flows, and competitive position.

 

ITEM 2:     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Our Amended and Restated 2001 Long-Term Incentive Plan allows employees and directors to pay the exercise price for stock options and the tax withholding liability upon the lapse of restrictions on restricted stock by payment in cash and/or delivery of shares of common stock.  In the first quarter 2020, pursuant to these provisions, we repurchased 704 shares at a price of $90.53 per share, the fair market value of one share of our common stock on the date that they were tendered for payment of tax withholding liability upon the lapse of restrictions on restricted stock.

 

 

ITEM 4:    MINE SAFETY DISCLOSURES

 

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 March 31, 2020 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.

 

ITEM 6:    EXHIBITS

 

The Exhibit Index set forth below is incorporated by reference in response to this Item.

EXHIBIT INDEX

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.