Attached files

file filename
EX-95.1 - EX-95.1 - UNITED STATES LIME & MINERALS INCuslm-20191231ex95138dbb8.htm
EX-32.2 - EX-32.2 - UNITED STATES LIME & MINERALS INCuslm-20191231ex32253f340.htm
EX-32.1 - EX-32.1 - UNITED STATES LIME & MINERALS INCuslm-20191231ex32170172b.htm
EX-31.2 - EX-31.2 - UNITED STATES LIME & MINERALS INCuslm-20191231ex312e5d9c1.htm
EX-31.1 - EX-31.1 - UNITED STATES LIME & MINERALS INCuslm-20191231ex3114eda56.htm
EX-23.1 - EX-23.1 - UNITED STATES LIME & MINERALS INCuslm-20191231ex231d61b08.htm
EX-21.1 - EX-21.1 - UNITED STATES LIME & MINERALS INCuslm-20191231ex211144c22.htm
EX-10.13 - EX-10.13 - UNITED STATES LIME & MINERALS INCuslm-20191231ex1013e96bb.htm
EX-4.1 - EX-4.1 - UNITED STATES LIME & MINERALS INCuslm-20191231ex41c7a747a.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 000‑04197

United States Lime & Minerals, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Texas
(State or other jurisdiction of
incorporation or organization)

75‑0789226
(I.R.S. Employer
Identification Number)

5429 LBJ Freeway, Suite 230, Dallas, Texas
(Address of principal executive offices)

75240
(Zip code)

 

Registrant’s telephone number, including area code: (972) 991‑8400

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.10 par value

USLM

The Nasdaq Stock Market LLC

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark if the Registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐    No ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐    No ☒

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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.

 

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer ☒

 

Non-accelerated filer

 

Smaller reporting company ☒

 

     

Emerging growth company ☐

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 ☒

 

The aggregate market value of Common Stock held by non‑affiliates computed as of the last business day of the Registrant’s quarter ended June 30, 2019:  $163,950,400.

Number of shares of Common Stock outstanding as of February 27, 2020:  5,625,185.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the Registrant’s definitive Proxy Statement to be filed for its 2020 Annual Meeting of Shareholders. Part IV incorporates certain exhibits by reference from the Registrant’s previous filings.

 

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

Part I

 

ITEM 1. 

BUSINESS

1

ITEM 1A. 

RISK FACTORS

8

ITEM 1B. 

UNRESOLVED STAFF COMMENTS

11

ITEM 2. 

PROPERTIES

11

ITEM 3. 

LEGAL PROCEEDINGS

11

ITEM 4. 

MINE SAFETY DISCLOSURES

11

 

Part II

  

ITEM 5. 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

11

ITEM 6. 

SELECTED FINANCIAL DATA

13

ITEM 7. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

13

ITEM 7A. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

22

ITEM 8. 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

23

ITEM 9. 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

48

ITEM 9A. 

CONTROLS AND PROCEDURES

48

ITEM 9B. 

OTHER INFORMATION

48

 

Part III

  

ITEM 10. 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

49

ITEM 11. 

EXECUTIVE COMPENSATION

49

ITEM 12. 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

49

ITEM 13. 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

49

ITEM 14. 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

49

 

Part IV

  

ITEM 15. 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

50

ITEM 16. 

FORM 10-K SUMMARY

52

SIGNATURES 

53

 

 

 

ii

PART I

ITEM 1.  BUSINESS.

General.

United States Lime & Minerals, Inc. (the “Company,” the “Registrant,” “We” or “Our”), which was incorporated in 1950, conducts its business primarily through its Lime and Limestone Operations segment.  During 2019, our natural gas interests did not reach any of the quantitative thresholds for a reportable segment, and we do not expect the results from our natural gas interests to be of significance in future periods.  The revenues, gross profit and operating profit from our natural gas interests are included in Other for our reportable segment disclosures.  Disclosures  for 2018 and 2017 have been recast to be consistent with the 2019 presentation.

The Company’s principal corporate office is located at 5429 LBJ Freeway, Suite 230, Dallas, Texas 75240. The Company’s telephone number is (972) 991‑8400 and its internet address is www.uslm.com. The Company’s annual reports on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as the Company’s definitive proxy statement filed pursuant to Section 14(a) of the Exchange Act, are available free of charge on the Company’s website as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the “SEC”).

Lime and Limestone Operations.

Business and Products.  The Company, through its Lime and Limestone Operations, 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.

The Company extracts high‑quality limestone from its open‑pit quarries and an underground mine and then processes it for sale as pulverized limestone, quicklime, hydrated lime and lime slurry. Pulverized limestone (also referred to as ground calcium carbonate) (“PLS”) is produced by applying heat to dry the limestone, which is then ground to granular and finer sizes. Quicklime (calcium oxide) is produced by heating limestone to very high temperatures in kilns in a process called calcination. Hydrated lime (calcium hydroxide) is produced by reacting quicklime with water in a controlled process. Lime slurry (milk of lime) is a suspended solution of calcium hydroxide produced by mixing quicklime with water in a lime slaker.

PLS is used in the production of construction materials such as roof shingles and asphalt paving, as an additive to agriculture feeds, in the production of glass, as a soil enhancement, in flue gas treatment for utilities and other industries requiring scrubbing of emissions for environmental purposes and for mine safety dust in coal mining operations. Quicklime is used primarily in metal processing, in flue gas treatment, in soil stabilization for highway, road and building construction, as well as for oilfield roads and drill sites, in the manufacturing of paper products and in municipal sanitation and water treatment facilities. Hydrated lime is used primarily in municipal sanitation and water treatment facilities, in soil stabilization for highway, road and building construction, in flue gas treatment, in asphalt as an anti‑stripping agent, as a conditioning agent for oil and gas drilling mud, and in the production of chemicals. Lime slurry is used primarily in soil stabilization for highway, road and building construction.

Product Sales.  In 2019, the Company sold almost all of its lime and limestone products in the states of Arkansas, Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, New Mexico, Oklahoma, Tennessee and Texas.  Sales were made primarily by the Company’s nine sales employees who call on current and potential customers and solicit orders, which are generally made on a purchase‑order basis. The Company also receives orders in response to bids that it prepares and submits to current and potential customers.

1

Principal customers for the Company’s lime and limestone products are construction customers (including highway, road and building contractors), industrial customers (including paper manufacturers and glass manufacturers), environmental customers (including municipal sanitation and water treatment facilities and flue gas treatment processes), metals producers (including steel producers), oil and gas services companies, roof shingle manufacturers and poultry and cattle feed producers. During 2019, the strongest demand for the Company’s lime and limestone products was from construction customers, industrial customers, environmental customers, metals producers, oil and gas services companies and roof shingle manufacturers.

Approximately 600 customers accounted for the Company’s sales of lime and limestone products during 2019. No single customer accounted for more than 10% of such sales. The Company is generally not subject to significant customer demand and credit risks as its customers are considerably diversified as to geographic location and industry concentration. However, given the nature of the lime and limestone industry, the Company’s profits are very sensitive to changes in sales volume and prices.

Lime and limestone products are transported by truck and rail to customers generally within a radius of 400 miles of each of the Company’s plants. All of the Company’s 2019 sales were made within the United States.

Order Backlog.  The Company does not believe that backlog information accurately reflects anticipated annual revenues or profitability from year to year.

Seasonality.  The Company’s sales have typically reflected seasonal trends, with the largest percentage of total annual shipments and revenues normally being realized in the second and third quarters. Lower seasonal demand normally results in reduced shipments and revenues in the first and fourth quarters. Inclement weather conditions generally have a negative impact on the demand for lime and limestone products supplied to construction‑related customers, as well as on the Company’s open‑pit quarrying operations.

Limestone Reserves.  The Company’s limestone reserves contain at least 96% calcium carbonate (CaCO3). The Company has two subsidiaries that extract limestone from open‑pit quarries: Texas Lime Company (“Texas Lime”), which is located near Cleburne, Texas, and Arkansas Lime Company (“Arkansas Lime”), which is located near Batesville, Arkansas. U.S. Lime Company—St. Clair (“St. Clair”) extracts limestone from an underground mine located near Marble City, Oklahoma. Colorado Lime Company (“Colorado Lime”) owns property containing limestone deposits at Monarch Pass, Colorado. Existing crushed stone stockpiles on the property are being used to provide feedstock to the Company’s plant in Delta, Colorado. Access to all properties is provided by paved roads and, in the case of Arkansas Lime and St. Clair, also by rail.

Texas Lime operates a quarry and has lime, hydrated lime and limestone production facilities, located on approximately 4,100 acres of land that contains known high‑quality limestone reserves in a bed averaging 28 feet in thickness, with an overburden that ranges from 0 to 50 feet. Texas Lime also has mineral interests in approximately 330 acres of land adjacent to the northwest boundary of its property. The Texas Lime reserves, as of December 31, 2019, were approximately 29 million tons of proven recoverable reserves plus approximately 78 million tons of probable recoverable reserves. Assuming the current level of production and recovery rate is maintained, the Company estimates that these reserves are sufficient to sustain operations for more than 70 years.

Arkansas Lime operates two quarries and has lime, hydrated lime and limestone production facilities on a second site linked to the quarries by its own railroad. The quarries cover approximately 1,050 acres of land located in Independence County, Arkansas containing a known deposit of high‑quality limestone reserves (the “Batesville Quarry”). The average thickness of the high‑quality limestone bed is approximately 60 feet, with an average overburden thickness of approximately 30 feet. The reserves for the Batesville Quarry, as of December 31, 2019, were approximately 7 million tons of proven recoverable reserves.  In 2005, the Company acquired approximately 2,500 acres of land in nearby Izard County, Arkansas (the “Love Hollow Quarry”). The high‑quality reserves on these 2,500 acres, as of December 31, 2019, were approximately 76 million tons of probable recoverable reserves. The Company continues to assess opportunities to improve the transportation infrastructure between the Love Hollow Quarry and Arkansas Lime’s production facilities and other development costs to prepare the Love Hollow Quarry for mining. Assuming the current level of production and recovery rate is maintained, the Company estimates that its total reserves in Arkansas are sufficient to sustain operations for more than 60 years.

2

St. Clair operates an underground mine and has lime, hydrated lime and limestone production facilities located on approximately 1,400 acres that it owns containing high‑quality limestone reserves. The reserves, as of December 31, 2019, were approximately 12 million tons of probable recoverable reserves on 410 acres. Assuming the current level of production and recovery rate is maintained, the Company estimates that the probable recoverable reserves are sufficient to sustain operations for approximately 25 years. In addition, St. Clair also has the right to mine the high‑quality limestone contained in approximately 1,330 adjacent acres pursuant to long‑term mineral leases. The Company has not conducted a drilling program to identify and categorize reserves on the 1,330 leased acres.

During 2019, the Company produced approximately 3 million tons of limestone from its quarries and mine.

Colorado Lime acquired the Monarch Pass Quarry in November 1995 and has not carried out any mining on the property. A review of the potential limestone resources has been completed by independent geologists; however, the Company has not initiated a drilling program. Consequently, it is not possible to identify and categorize reserves. The Monarch Pass Quarry, which had been operated for many years until the early 1990s, contains a mixture of limestone types, including high‑quality calcium limestone and dolomite. Assuming the current level of production is maintained, the Company estimates that the remaining crushed stone stockpiles on the property are sufficient to supply its Delta, Colorado plant for approximately 15 years.

Quarrying and Mining.  The Company extracts limestone by the open‑pit method at its Texas and Batesville quarries. The Monarch Pass Quarry is also an open‑pit quarry but is not being mined at this time. The open‑pit method consists of removing any overburden comprising soil and other substances, including inferior limestone, and then extracting the exposed high‑quality limestone. The Company removes such overburden by utilizing both its own employees and equipment and those of outside contractors. Open‑pit mining is generally less expensive than underground mining. The principal disadvantage of the open‑pit method is that operations are subject to inclement weather and overburden removal. The limestone is extracted by drilling and blasting, utilizing standard mining equipment. At its St. Clair underground mine, the Company mines limestone using room and pillar mining.  We have no knowledge of any recent changes in the physical quarrying or mining conditions on any of our properties that have materially affected quarrying or mining operations.

Plants and Facilities.  After extraction, limestone is crushed and screened and, in the case of PLS, ground and dried, or, in the case of quicklime, processed in kilns. Quicklime may then be further processed in hydrators and slakers to produce hydrated lime and lime slurry. The Company processes and distributes lime and/or limestone products at four plants, six lime slurry facilities and three terminal facilities. All of its plants and facilities are accessible by paved roads, and, in the case of the Arkansas Lime and St. Clair plants and the terminal facilities, also by rail.

The Texas Lime plant has an annual capacity of approximately 470 thousand tons of quicklime from two preheater rotary kilns. The plant also has PLS equipment, which, depending on the product mix, has the capacity to produce approximately 800 thousand tons of PLS annually.

The Arkansas plant is situated at the Batesville Quarry. Utilizing three preheater rotary kilns, this plant has an annual capacity of approximately 630 thousand tons of quicklime. Arkansas Lime’s PLS and hydrating facilities are situated on a tract of 290 acres located approximately two miles from the Quarry, to which it is connected by a Company‑owned railroad. The PLS equipment, depending on the product mix, has the capacity to produce approximately 300 thousand tons of PLS annually.

After we brought the new vertical kiln into production at St. Clair in the second quarter 2019 and removed from service the older, non-preheater rotary kiln, the St. Clair plant has an annual capacity of approximately 250 thousand tons of quicklime from one preheater rotary kiln and one vertical kiln. The plant also has PLS equipment, which has the capacity to produce approximately 150 thousand tons of PLS annually.

The Company also maintains lime hydrating and bagging equipment at the Texas, Arkansas and St. Clair plants. Storage facilities for lime and limestone products at each plant consist primarily of cylindrical tanks, which are considered by the Company to be adequate to protect its lime and limestone products and to provide an available supply for customers’ needs at the expected volumes of shipments. Equipment is maintained at each plant to load trucks and, at the Arkansas Lime and St. Clair plants, to load railroad cars.

3

Colorado Lime operates a limestone grinding and bagging facility with an annual capacity of approximately 125 thousand tons, located on approximately three and one‑half acres of land in Delta, Colorado.

During 2019, the Company’s utilization rate was approximately 64% of its aggregate annual production capacity for the plants in its Lime and Limestone Operations.

U.S. Lime Company (“US Lime”) uses quicklime to produce lime slurry and has four Houston area facilities, including two distribution terminals connected to railroads, to serve the Greater Houston area construction market and four facilities to serve the Dallas‑Ft. Worth Metroplex. The Company established U.S. Lime Company—Transportation (“Transportation”) to deliver some of the Company’s products to its customers and facilities primarily in the Dallas‑Ft. Worth Metroplex.  In December 2017, Transportation sold its trucks in Houston, Texas for approximately their net book value and entered into a dedicated transportation services agreement with a third-party carrier to deliver the Company’s products to its customers and slurry facilities in the Houston metropolitan area.

U.S. Lime Company — Shreveport operates a distribution terminal in Shreveport, Louisiana, which is connected to a railroad, to provide lime storage, hydrating, slurrying and distribution capacity to service markets in Louisiana and East Texas.

The Company believes that its plants and facilities are adequately maintained and insured.

Employees.  At December 31, 2019, the Company employed 282 persons and is a party to two collective bargaining agreements. The collective bargaining agreement for the Texas facilities expires in November 2020.  The collective bargaining agreement for the Arkansas facilities expires in January 2023. Overall, the Company believes that its employee relations are good.

Competition.  The lime industry is highly regionalized and competitive, with price, quality, ability to meet customer demands and specifications, proximity to customers, personal relationships and timeliness of deliveries being the prime competitive factors. The Company’s competitors are predominantly private companies.

The lime industry is characterized by high barriers to entry, including: the scarcity of high‑quality limestone deposits on which the required zoning and permitting for extraction can be obtained; the need for lime plants and facilities to be located close to markets, paved roads and railroad networks to enable cost‑effective production and distribution; clean air and anti‑pollution regulations, including those related to greenhouse gas emissions, which make it more difficult to obtain permitting for new sources of emissions, such as lime kilns; and the high capital cost of the plants and facilities. These considerations reinforce the premium value of operations having permitted, long‑term, high‑quality limestone reserves and good locations and transportation relative to markets.

Lime producers tend to be concentrated on known high‑quality limestone formations where competition takes place principally on a regional basis.  While the steel industry and environmental‑related users, including utility plants, are the largest market sectors, the lime industry also counts chemical users and other industrial users, including paper manufacturers, oil and gas services and highway, road and building contractors, among its major customers. 

In recent years, the lime industry has experienced reduced demand from certain industries as they experience cyclical or secular downturns.  For example, demand from the Company’s steel and oil and gas services customers tends to vary with the demand for their products and services, which has continued to be cyclical.  In addition, utility plants are continuing to use more natural gas and renewable sources for power generation instead of coal, which reduces their demand for lime and limestone for flue gas treatment processes.  These reductions in demand have resulted in increased competitive pressures, including pricing and competition for certain customer accounts, in the industry. 

Consolidation in the lime industry has left the three largest companies accounting for more than two‑thirds of North American production capacity. In addition to the consolidations, and often in conjunction with them, many lime producers have undergone modernization and expansion and development projects to upgrade their processing equipment in an effort to improve operating efficiency.  We believe that our modernization and expansion projects in Texas and Arkansas and the recent kiln project at our St. Clair operations in Oklahoma, along with our lime slurry operations in Texas, should allow us to continue to remain competitive, protect our markets and position ourselves for the future. In addition, we will continue to evaluate internal and external opportunities for expansion, growth and

4

increased profitability, as conditions warrant, or opportunities arise. We may have to revise our strategy or otherwise consider ways to enhance the value of the Company, including by entering into strategic partnerships, mergers or other transactions.

Impact of Environmental Laws.  The Company owns or controls large areas of land on which it operates limestone quarries, an underground mine, lime plants and other facilities with inherent environmental responsibilities, compliance costs and liabilities.  These include maintenance and operating costs for pollution control equipment, the cost of ongoing monitoring programs, the cost of reclamation efforts and other similar environmental costs and liabilities. 

 

The Company’s operations are subject to various federal, state and local laws and regulations relating to the environment, health and safety and other regulatory matters, including the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act and analogous state and local laws (“Environmental Laws”).  These Environmental Laws grant the United States Environmental Protection Agency (the “EPA”) and state governmental agencies the authority to promulgate and enforce regulations that could result in substantial expenditures on pollution control, waste management, permitting and compliance activities. Many Environmental Laws also authorize private citizens and interest groups to file lawsuits in court to enforce alleged violations.  The failure to comply with Environmental Laws may result in administrative and civil penalties, injunctive relief and criminal prosecution.  The Company has not been named as a potentially responsible party in any federal superfund cleanup site or state-led cleanup site. 

 

The rate of change of Environmental Laws continues to be rapid, and compliance can require significant expenditures.  For example, the Clean Air Act required the Company’s lime plants to obtain Title V operating permits that have significant ongoing compliance costs.  In addition to the Title V permits, other environmental operating permits are required for the Company’s operations, and such permits are subject to modification during the permit renewal process and, in rare instances, could be revoked.  Over time, the EPA has increased the stringency of the National Ambient Air Quality Standards (“NAAQS”) under the Clean Air Act.

The EPA has lowered ozone standards and reclassified areas where State Implementation Plans (the “SIPs”) exist.  In October 2015, the EPA issued a final rule lowering the ground-level ozone NAAQS to 70 parts per billion.  In December 2018, the EPA issued a final rule affecting SIP requirements for attainment demonstrations, planning and implementation deadlines for reasonably available control technology, emissions inventories and emissions standards, and the timing of required SIP revisions.  State environmental agencies in the states in which we operate are currently in the process of revising their SIPs to comply.  For example, the Texas Commission on Environmental Quality issued a proposed rule package in November 2019 to incorporate the 2015 ozone NAAQS into the Texas SIP.  This and similar rulemakings could increase the cost of future plant modifications or expansions, increase compliance costs and have a material adverse effect on the Company’s financial condition, results of operations, cash flows and competitive position.    

EPA regulations require large emitters of greenhouse gases, including the Company’s plants, to collect and report greenhouse gas emissions data.  The EPA has previously indicated that it will use the data collected through the greenhouse gas reporting rules to decide whether to promulgate future greenhouse gas emission limits. The EPA and delegated states also regulate greenhouse gas emissions under the New Source Review permitting and Federal Operating Permit programs for facilities that are otherwise subject to permitting based on their emissions of conventional, non-greenhouse gas pollutants. Thus, any new facilities or major modifications to existing facilities that exceed the federal New Source Review emission thresholds for conventional pollutants may be required to use “best available control technology” and energy efficiency measures to minimize greenhouse gas emissions.

 

Although the timing and impact of climate change legislation and of regulations limiting greenhouse gas emissions are uncertain, the consequences of such legislation and regulation are potentially significant for the Company because the production of CO2 is inherent in the manufacture of lime through the calcination of limestone and combustion of fossil fuels.  Future greenhouse gas rulemaking could affect New Source Review permitting and, thereby, increase the time and costs of plant upgrades and expansions.  The passage of climate change legislation, and other regulatory initiatives by the Congress, the states or the EPA that restrict or tax emissions of greenhouse gases, could also adversely affect the Company.  There is no assurance that changes in the law or regulations will not be adopted, such as the imposition of a carbon tax, a cap-and-trade program requiring the Company to purchase carbon credits or other measures that would require reductions in emissions or changes to raw materials, fuel use or production rates.  Such

5

changes, if adopted, could have a material adverse effect on the Company’s financial condition, results of operations, cash flows and competitive position.

In addition to regulation, several court cases have been filed and decisions issued that may increase the risk of claims being filed by third parties against companies for their greenhouse gas emissions.  Such cases may seek to challenge air permits, to force reductions in greenhouse gas emissions or to recover damages for alleged climate change impacts to the environment, people and property.

The lime industry is currently undergoing a revision to a federal regulation that establishes national standards to meet the maximum achievable control technology (“MACT”) within the industry.  Also known as the “Lime MACT,” this rulemaking is the second revision to the initial Lime MACT promulgated in 2004.  The EPA published its proposed revision to the Lime MACT in September 2019 and the final rule is expected to be published in 2020.  The proposal included changes to the startup, shutdown and malfunction provisions contained in the current Lime MACT rule, but otherwise did not impose more stringent standards. A non-governmental organization submitted opposing comments arguing that the lime industry should be subject to all unregulated hazardous air pollutants. The pulp and paper industry is currently under litigation before the D.C. Circuit Court of Appeals.  In that litigation, a non-governmental organization has argued that the EPA was required to issue standards for unregulated hazardous air pollutants in MACT rulemaking.  These arguments are not industry-specific and, depending on the outcome of the case, could be applied to other industries, including the lime industry.

 

In addition to litigation risk, policy changes or changes in political leadership could affect the Lime MACT rulemaking. There is no assurance that the final Lime MACT rule will adopt the approach in the proposed rule, and the final Lime MACT could incorporate more stringent standards.  Depending on the outcome of the pulp and paper industry litigation, the rulemaking process could take 1-2 years before any new EPA standards would take effect, or the final Lime MACT rule could be published and effective in 2020.  Changes in the Lime MACT could have a material adverse effect on the Company’s financial condition, results of operations, cash flows and competitive position.

 

The Company also holds permits for process water and storm water discharges.  Any failure to comply with these permits could result in fines or other penalties.  Material changes to the terms of these permits in the future could also increase compliance costs. 

 

The manufacturing of lime and hydrated lime requires significant volumes of fresh water.  The Company operates multiple groundwater wells to provide water to its plants.  Groundwater pumping is subject to increased regulation, and in some areas the Company is required to obtain permits from groundwater conservation districts in order to pump groundwater.  Any failure to comply with these permits could result in fines or other penalties. 

 

The Company incurred capital expenditures related to environmental matters of $1.2 million, $1.2 million and $0.4 million in 2019, 2018 and 2017, respectively. The Company’s recurring costs associated with managing environmental permitting and waste recycling and disposal (e.g., used oil and lubricants) and maintaining pollution control equipment amounted to $0.5 million, $0.6 million and $0.7 million in 2019, 2018 and 2017, respectively.

The Company recognizes legal reclamation and remediation obligations associated with the retirement of long‑lived assets at their fair value at the time the obligations are incurred (“Asset Retirement Obligations” or “AROs”). Over time, the liability for AROs is recorded at its present value each period through accretion expense, and the capitalized cost is amortized over the useful life of the related asset. Upon settlement of the liability, the Company either settles the ARO for its recorded amount or recognizes a gain or loss. AROs are estimated based on studies and the Company’s process knowledge and estimates and are discounted using an appropriate interest rate. The AROs are adjusted when further information warrants an adjustment. The Company believes its accrual of $1.5 million for AROs at December 31, 2019 is reasonable.

 

6

Map of United States Lime & Minerals, Inc. Lime and Limestone Operations.

 

Picture 1

Other.

Our Other operations are conducted through our wholly owned subsidiary, U.S. Lime Company – O&G, LLC (“U.S. Lime – O&G”) and consist principally of a lease with respect to oil and gas rights on our Cleburne, Texas property, located in the Barnett Shale Formation.  Pursuant to the lease, we have royalty interests ranging from 15.4% to 20% in oil and gas produced from any successful wells drilled on the leased property and an option to participate in any well drilled on the leased property as a 20% non-operated working interest owner.  At December 31, 2019, our overall average interest under the oil and gas rights lease was 34.7% on 33 producing wells.

U.S. Lime – O&G has also entered into a drillsite agreement with an operator that has an oil and gas lease covering approximately 538 acres of land contiguous to our Johnson County, Texas property.  Pursuant to the drillsite agreement, we have a 3% royalty interest and a 12.5% non-operated working interest.  At December 31, 2019, we had a combined 12.4% royalty and non-operated working interest on 6 active wells drilled on a padsite located on our Johnson County, Texas property.

No new wells have been completed since 2011, and there are no plans to drill additional wells under either the oil and gas lease or the drillsite agreement.  During 2019, our natural gas interests did not reach any of the quantitative thresholds for a reportable segment, and we do not expect the results from our natural gas interests to be of significance in future periods.

7

ITEM 1A.  RISK FACTORS.

Our Lime and Limestone Operations are affected by general economic and regulatory conditions in the U.S. and specific economic and regulatory conditions in particular industries.

General and industry specific economic conditions in the United States have reduced demand for our lime and limestone products.  Specifically, demand from our utility customers has decreased due to the continuing trend in the United States to retire coal-fired utility plants.  In the past, our steel and oil and gas services customers have reduced their purchase volumes, at times, due to cyclical economic conditions in their industries.  The overall reduction in demand for lime and limestone products has also resulted in increased competitive pressures, including pricing pressure and competition for certain customer accounts, from other lime producers. 

We are also in a period of regulatory uncertainty. While various actions and proposals by the current Administration and Congress to reduce regulations in certain respects or as to certain industries, to increase infrastructure spending, to permit increased oil and gas drilling, to increase the use of coal, to stimulate steel and other manufacturing and to protect U.S. markets, as well as the impact of corporate tax reforms, may increase U.S. economic activity and the demand for our lime and limestone products, there can be no assurance that such results will be achieved or that they will benefit us or our customers. In addition, depending on the outcome and effects of such proposals, a variety of factors, including uncertainty with respect to governmental budgetary constraints, legislative impasses, extended government shutdowns, pandemics, trade wars, tariffs and increased inflationary pressures, could have a material adverse effect on our financial condition, results of operations, cash flows and competitive position that, on balance, may offset some or all of the benefits to us and our customers from the otherwise favorable regulatory changes.

For us to maintain or increase our profitability, we must maintain or increase our revenues and improve cash flows, manage our capital expenditures and control our operational and selling, general and administrative expenses. If we are unable to maintain our revenues and control our costs in these uncertain economic and regulatory times, our financial condition, results of operations, cash flows and competitive position could be materially adversely affected.

In the normal course of our Lime and Limestone Operations, we face various business and financial risks that could have a material adverse effect on our financial position, results of operations, cash flows and competitive position. Not all risks are foreseeable or within our ability to control.

These risks arise from various factors, including, but not limited to, fluctuating demand and prices for our lime and limestone products, including as a result of downturns in the economy and in the construction, industrial, steel and oil and gas services industries, and reduced demand from coal-fired utility plants, increased competitive pressures from other lime producers, changes in legislation and regulations, including Environmental Laws, health and safety regulations and requirements to renew or obtain operating permits, our ability to produce and store quantities of lime and limestone products sufficient in amount and quality to meet customer demands and specifications, the success of our modernization, expansion and development strategies, the uncertainty of our ability to sell our increased lime capacity from the new kiln at our St. Clair facility at acceptable prices, our ability to execute our strategies and complete projects on time and within budget, our ability to integrate, refurbish and/or improve acquired facilities, our access to capital, volatile costs, especially fuel, electricity, transportation and freight costs, inclement weather and the effects of seasonal trends.

We receive most of our coal and petroleum coke by rail, so the availability of sufficient solid fuels to run our plants could be diminished significantly in the event of major rail disruptions. Domestic coal and petroleum coke may also be exported, which can increase competition and prices for the domestic supply. In addition, our freight costs to deliver our lime and limestone products are high relative to the value of our products, and they have generally increased in recent years. Our costs for delivery of solid fuels, as well as our products, also increase as demand for rail and trucking by other industries increases, and revised Department of Transportation rules have reduced the availability of trucks, truck drivers and rail cars to deliver solid fuels to our plants and deliver our products to our customers. If we are unable to continue to pass along our variable coal, petroleum coke, diesel, natural gas, electricity, transportation and freight costs to our customers through higher prices or surcharges, our financial condition, results of operations, cash flows and competitive position could be materially adversely affected.

8

We quote our lime and limestone products on a delivered price basis to certain customers, which requires us to estimate future delivery costs. Our actual delivery costs may exceed these estimates, which would reduce our profitability.

Delivery costs are impacted by the price of diesel. When diesel prices increase, we incur additional fuel surcharges from freight companies that cannot be passed on to our customers that have been quoted a delivered price. Material increases in the price of diesel could have a material adverse effect on the Company’s profitability.

Governmental fiscal and budgetary constraints, legislative impasses, and extended government shutdowns have in the past, and may in the future, adversely impact our financial condition and results of operations in various ways.

Governmental fiscal and budgetary constraints, legislative impasses and extended government shutdowns may adversely impact our financial condition and results of operations in various ways, including possibly reduced highway construction and infrastructure funding by federal, state and local governmental agencies, which could reduce demand for our lime and limestone products from our construction customers.

Our mining and other operations are subject to operating risks that are beyond our control, which could result in materially increased operating expenses and decreased production and shipment levels that could materially adversely affect our Lime and Limestone Operations and their profitability.

We mine limestone in open pit and underground mining operations and process and distribute that limestone through our plants and other facilities. Certain factors beyond our control could disrupt our operations, adversely affect production and shipments and increase our operating costs, all of which could have a material adverse effect on our results of operations.  These include geological formation problems that may cause poor mining conditions, variability of chemical or physical properties of our limestone, an accident or other major incident at a site that may cause all or part of our operations to cease for some period of time and increase our expenses, mining, processing and plant equipment failures and unexpected maintenance problems that may cause disruptions and added expenses, strikes, job actions or other work stoppages that may disrupt our operations or those of our suppliers, contractors or customers and increase our expenses, and adverse weather conditions and natural disasters, such as hurricanes, tornadoes, heavy rains, flooding, ice storms, freezing weather, drought and other natural events, that may affect operations, transportation or customers.

If any of these conditions or events occurs, our operations may be disrupted, we could experience a delay or halt of production or shipments, our operating costs could increase significantly, and we could be exposed to fines, penalties, assessments and other liabilities. If our insurance coverage is limited or excludes a given condition or event, we may not be able to recover in full the losses that we may incur as a result of such conditions or events, some of which may be substantial.

We incur environmental compliance costs and liabilities in our Lime and Limestone Operations, including capital, maintenance and operating costs, with respect to pollution control equipment, the cost of ongoing monitoring programs, the cost of reclamation and remediation efforts and other similar costs and liabilities relating to our compliance with Environmental Laws.  We expect these costs and liabilities to continue or increase, including possible new costs, taxes and limitations on operations, including regulation of greenhouse gas emissions.  Similar environmental costs and liabilities may also be faced by some of our customers.

The rate of change of Environmental Laws has been rapid over the last decade, and we may face possible new uncertainties, costs and liabilities, taxes and limitations on operations, including those related to climate change initiatives.  Even with the current period of regulatory uncertainty that could result in deregulation in certain areas, we expect our expenditure requirements for future environmental compliance, including complying with nitrogen dioxide, sulfur dioxide, ozone and particulate matter emission limitations under the NAAQS and regulation of greenhouse gas emissions, to continue or increase.  Discovery of currently unknown conditions and unforeseen costs and liabilities could require additional expenditures. 

 

The regulation of greenhouse gas emissions remains an issue for the Company and some of its customers. There is no assurance that changes in the law or regulations will not be adopted, such as the imposition of a carbon tax, a cap-

9

and-trade program requiring companies to purchase carbon credits, or other measures that would require reductions in emissions or changes to raw materials, fuel use or production rates.  These changes, if adopted, could have a material adverse effect on the Company’s financial condition, results of operations, cash flows and competitive position. 

 

More stringent regulation of greenhouse gas emissions could also adversely affect the competitiveness of some of the Company’s customers, including coal-fired power plants, and indirectly the demand for our lime and limestone products.  For example, our utility customers are continuing to switch from coal to natural gas or renewable sources for power generation for environmental and regulatory as well as cost reasons, thus reducing demand for our lime and limestone products for flue gas treatment processes.

 

We intend to comply with all Environmental Laws and believe our accrual for environmental costs and liabilities at December 31, 2019 is reasonable. Because many of the requirements are subjective and therefore not quantifiable or presently determinable, or may be affected by additional legislation and rulemaking, including those related to climate change and greenhouse gas emissions, there is no assurance that we will be able to successfully secure new permits in connection with our future modernization and expansion and development projects, and it is not possible to accurately predict the aggregate future costs and liabilities relating to environmental compliance and their effect on our financial condition, results of operations, cash flows and competitive position.

 

The lime and limestone industry is highly regionalized and competitive.

Our competitors are predominately large private companies. The primary competitive factors in the lime industry are price, quality, ability to meet customer demands and specifications, proximity to customers, personal relationships and timeliness of deliveries, with varying emphasis on these factors depending upon the specific product application. To the extent that one or more of our competitors becomes more successful with respect to any key competitive factor, we may find it difficult to increase or maintain our prices or to retain certain customer accounts, and our financial condition, results of operations, cash flows and competitive position could be materially adversely affected.

To maintain our competitive position in the lime and limestone industry, we may need to continue to increase the efficiency of our operations and expand production capacity, obtain financing for any such projects and acquisitions at reasonable interest rates and acceptable terms and sell any resulting increased production at acceptable prices.

We may in the future undertake additional modernization and expansion and development projects and acquisitions. Such projects and acquisitions may require that we incur substantial debt, which may not be available to us at all or at reasonable interest rates or on acceptable terms. Given current and projected demand for lime and limestone products, we cannot guarantee that any such project or acquisition would be successful, that we would be able to sell any resulting increased production at acceptable prices or that any such sales would be profitable.

Although prices for our lime and limestone products have been relatively firm in past years, pricing competition has increased in recent years. We are unable to predict future demand and prices, given the current economic and regulatory uncertainties in the U.S. economy as a whole and in particular industries, and cannot provide any assurance that current levels of demand and prices will continue or that any future increases in demand or prices can be maintained.

We may be adversely affected by any disruption in, or failure of, our information technology systems, including due to cyber-security risks and incidents.

We rely upon the capacity, reliability and security of our information technology (“IT”) systems for our mining, manufacturing, sales, financial and administrative functions. We also face the challenge of supporting our IT systems and implementing upgrades when necessary, including the prompt detection and remediation of any cyber-security breaches.

Our IT systems security measures are focused on the prevention, detection and remediation of damage from computer viruses, natural disasters, unauthorized access, cyber‑attack and other similar disruptions. However, our IT systems protection measures may not be successful in preventing unauthorized access, intrusion and damage. Threats to our systems can derive from human error, fraud or malice on the part of employees or third parties or may result from

10

technological failure.  Any failure, accident or security breach involving our IT systems could result in disruption to our operations. A material breach in the security of our IT systems could negatively impact our mining and manufacturing operations, sales or financial and administrative functions, or result in the compromise of personal information of our employees, customers or suppliers. To the extent any such failure, accident or security breach results in disruption to our operations or sales or loss or disclosure of, or damage to, our data or confidential information, our costs could increase, and our reputation, business, results of operations and financial condition could be materially adversely affected. Additionally, should we experience a cyber-security event, we may incur substantial costs, including remediation costs, such as liability for stolen assets or information, repairs of system damage, legal costs and costs associated with regulatory actions.

ITEM 1B.  UNRESOLVED STAFF COMMENTS.

None.

 

ITEM 2.  PROPERTIES.

Reference is made to Item 1 of this Report for a description of the properties of the Company, and such description is hereby incorporated by reference in answer to this Item 2. As disclosed in Note 3 of Notes to Consolidated Financial Statements, the Company’s plants and facilities and reserves are subject to encumbrances to secure any Company loans under its credit agreement.

 

ITEM 3.  LEGAL PROCEEDINGS.

Information regarding any legal proceedings is set forth in Note 10 of Notes to Consolidated Financial Statements and is hereby incorporated by reference in answer to this Item 3.

 

ITEM 4.  MINE SAFETY DISCLOSURES.

Under Section 1503(a) of the Dodd‑Frank Wall Street Reform and Consumer Protection Act and Item 104 of 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 the Company’s 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 year ended December 31, 2019  is presented in Exhibit 95.1 to this Report.

The Company believes it is responsible to employees to provide a safe and healthy workplace environment. The Company seeks 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.

PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Company’s common stock is listed on the Nasdaq Global Market® under the symbol “USLM.” As of February 28,  2020, the Company had approximately 325 shareholders of record.

As of February 28,  2020, the Company had 500,000 shares of $5.00 par value preferred stock authorized; however, none has been issued.

11

PERFORMANCE GRAPH

The graph below compares the cumulative 5-year total shareholders’ return on the Company’s common stock with the cumulative total return on the NASDAQ Composite Index and a peer group index.  In 2018, the peer group consisted of Eagle Materials, Inc., Monarch Cement Co., U.S. Concrete, Inc. and Martin Marietta Materials, Inc.  In 2019, the peer group consisted of Eagle Materials, Inc., Mineral Technologies, Inc., Summit Materials Inc. and U.S. Concrete, Inc.  The peer group was revised in 2019 to better reflect the Company’s size.  The graph assumes that the value of the investment in the Company’s common stock and each index was $100 on December 31, 2014, and that all cash dividends, including the special cash dividend paid in the fourth quarter 2019, have been reinvested.

Picture 5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2014

    

2015

    

2016

    

2017

    

2018

    

2019

 

U.S. LIME & MINERALS, INC.

 

100.00

 

76.10

 

105.78

 

108.40

 

100.53

 

135.79

 

NASDAQ COMPOSITE INDEX

 

100.00

 

106.96

 

116.45

 

150.96

 

146.67

 

200.49

 

2018 PEER GROUP

 

100.00

 

112.33

 

181.23

 

191.83

 

133.92

 

212.20

 

2019 PEER GROUP

 

100.00

 

81.30

 

124.77

 

141.13

 

74.32

 

108.18

 

 

12

On November 30, 2019, our previously publicly announced share repurchase program expired.  We did not repurchase any shares pursuant to this program in the fourth quarter 2019 prior to the expiration of the share repurchase program.

The Company’s Amended and Restated 2001 Long‑Term Incentive Plan allows employees and directors to pay the exercise price upon the exercise of stock options and the tax withholding liability upon exercise of stock options or the lapse of restrictions on restricted stock by payment in cash and/or withholding or delivery of shares of the Company’s common stock to the Company. Pursuant to these provisions, the Company repurchased 2,361 shares at a price of $90.30 per share, the fair market value of one share on the date they were tendered to the Company, in the fourth quarter 2019 for payment of tax withholding liability upon the lapse of restrictions on restricted stock.

 

ITEM 6.  SELECTED FINANCIAL DATA.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

    

2019

    

2018

    

2017

    

2016

    

2015

 

 

 

(dollars in thousands, except per share amounts)

 

Operating results

 

 

 

 

 

 

 

 

 

 

 

 

Lime and limestone revenues

 

$

156,981

 

141,922

 

142,612

 

137,190

 

128,390

 

Other revenues

 

 

1,296

 

2,513

 

2,232

 

2,092

 

2,447

 

Total revenues

 

$

158,277

 

144,435

 

144,844

 

139,282

 

130,837

 

Gross profit

 

$

41,676

 

30,486

 

34,380

 

33,092

 

28,714

 

Operating profit (1)

 

$

29,246

 

20,002

 

24,227

 

23,480

 

19,086

 

Income before income tax expense (benefit)

 

$

30,900

 

21,568

 

24,943

 

23,618

 

17,481

 

Income tax expense (benefit) (2)

 

$

4,844

 

1,883

 

(2,205)

 

5,864

 

4,595

 

Net income

 

$

26,056

 

19,685

 

27,148

 

17,754

 

12,886

 

Net income per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

4.64

 

3.52

 

4.87

 

3.19

 

2.30

 

Diluted

 

$

4.64

 

3.51

 

4.86

 

3.19

 

2.30

 


(1)

Operating profit for the year ended December 31, 2019 was adversely impacted by an impairment charge of $930 to adjust the carrying value of the long-lived assets related to the Company’s natural gas interests.

(2)

Income tax expense (benefit) for the year ended December 31, 2017 includes the one-time effect of a $7,447 income tax benefit resulting from reduced federal income tax rates under the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

 

    

2019

    

2018

    

2017

    

2016

    

2015

 

Total assets

 

$

247,037

 

244,671

 

228,446

 

210,159

 

196,499

 

Stockholders’ equity per outstanding common share

 

$

38.62

 

39.76

 

36.73

 

32.23

 

29.72

 

Employees

 

 

282

 

287

 

318

 

321

 

323

 

 

 

ITEM 7.  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

13

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 for possible acquisitions, repurchasing the Company’s common stock 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 cyber-security 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 government 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; and (xii) 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 Quarterly Reports on Form 10‑Q.

OVERVIEW.

General.

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.

Our Lime and Limestone Operations represent our principal business. Our Other revenues are from natural gas interests, consisting of royalty and non‑operated working interests under an oil and gas lease and a drillsite agreement with two separate operators related to our Johnson County, Texas property, located in the Barnett Shale Formation, on which Texas Lime conducts its lime and limestone operations. Our principal management decisions related to our natural gas interests involve whether to participate as a non‑operated working interest owner by contributing our proportional costs for drilling proposed wells or workovers of existing wells. While we intend to continue to participate in future natural gas wells drilled and workovers of existing wells under the oil and gas lease and drillsite agreement, if any, we are not in the business of drilling for or producing natural gas and have no personnel with expertise in that field.

During 2019, our natural gas interests did not reach any of the quantitative thresholds for a reportable segment, and we do not expect the results from our natural gas interests to be of significance in future periods.  The revenues, gross profit and operating profit from our natural gas interests are included in Other in our reportable segment disclosures.  Assets related to our natural gas interests, unallocated corporate assets and cash items are included in Other identifiable assets.  Disclosures for 2018 and 2017 have been recast to be consistent with the 2019 presentation.

Revenues increased 9.6% in 2019 compared to 2018.  Revenues from our Lime and Limestone Operations increased 10.6% in 2019, compared to 2018, primarily due to increased sales volumes of 8.6% for our lime and limestone products in 2019, compared to 2018, and an increase in average product prices for our lime and limestone

14

products of 2.0%.  The 2019 increase in sales volumes resulted from increased demand, primarily from our construction and environmental customers.  

Gross profit increased 36.7% in 2019 compared to 2018. Gross profit from our Lime and Limestone Operations in 2019 increased 42.6%, compared to 2018, primarily due to the increased revenues discussed above, lower fuel costs, and increased operating efficiencies associated with our new, fuel-efficient kiln at our St. Clair facility, which began producing commercially salable quicklime in the second quarter 2019.

In the fourth quarter 2019, we recognized an impairment charge of $0.9 million ($0.7 million, net of tax) to adjust the carrying values of the long-lived assets related to our natural gas interests.  Prices for natural gas and natural gas liquids decreased substantially during 2019, compared to 2018, which led to the impairment of the assets.   

Interest expense remained flat at $0.2 million for each of 2019 and 2018.  Interest and other income, net, increased $0.1 million in 2019, or 4.9%, compared to 2018,  primarily due to increased interest rates received on our cash and cash equivalents balances in 2019.

Net income increased $6.4 million, or 32.4%, in 2019, compared to 2018.  Net income per fully diluted share increased to $4.64 in 2019, compared to $3.51 in 2018.

Our existing cash balances and cash flows from operations enabled us to make $27.1 million of capital investments and pay $33.1 million in dividends, including a $30.0 million special cash dividend, in 2019. Our cash balances decreased to  $54.3 million at December 31, 2019, compared to $67.2 million at December 31, 2018, principally reflecting payment of the special dividend in 2019.  At December 31, 2019, we had no debt outstanding.

Our new kiln at St. Clair began producing commercially salable quicklime in the second quarter 2019, delivering increased efficiencies in our production of quicklime.  Through December 31, 2019, we have spent $44.2 million on the kiln and the related modernization project at St. Clair.  In 2020, we expect to complete certain upgrades and enhancements to equipment related to the new kiln as part of the modernization project.  When fully completed, we anticipate the final cost of the project, including the kiln, will be approximately $50 million.

During the fourth quarter 2019, we paid a special cash dividend of $30.0 million, or $5.35 per share, on our common stock, in addition to our regular quarterly cash dividend of $0.135 (13.5 cents) per share.

On January 30,  2020, we announced that our Board of Directors had declared an increased regular quarterly cash dividend of $0.16  (16 cents) per share.  The dividend is payable on March 13,  2020 to shareholders of record on February 21, 2020.

Absent a significant acquisition opportunity arising during 2020, we anticipate funding our operating and capital needs and our increased quarterly cash dividend from our cash balances on hand and cash flows from operations.

Lime and Limestone Operations.

In our Lime and Limestone Operations, we produce and sell PLS, quicklime, hydrated lime and lime slurry. The principal factors affecting our success are the level of demand and prices for our products and whether we are able to maintain sufficient production levels and product quality while controlling costs.

Inclement weather conditions, such as winter ice and snow storms, cold weather, hurricanes, tornadoes and excessive rainfalls generally reduce the demand for lime and limestone products supplied to construction‑related customers that account for a significant amount of our revenues. Inclement weather also interferes with our open‑pit mining operations and can disrupt our plant production. In addition to weather, various maintenance, environmental, accident and other operational and construction issues can also disrupt our operations and increase our operating expenses.

Demand for our products in our market areas is also affected by general economic conditions, the pace of construction, the demand for steel, the level of oil and gas drilling in our markets, the level of governmental and private funding for highway construction and infrastructure and utility plant usage of coal for power generation. Demand for our lime and limestone products from our construction and environmental customers increased in 2019. Favorable weather conditions in Texas positively impacted demand from our construction customers in 2019, compared to 2018 when it

15

was adversely impacted by sustained rains throughout the months of September and October, although Texas weather has begun 2020 with above average rainfall.

In 2014 and 2015, Texas approved two constitutional amendments authorizing a portion of oil and gas tax revenues to be deposited into the State Highway Fund, for certain other sales and use tax revenues to be directed to the State Highway Fund and, beginning in Texas’ fiscal 2020, for certain state motor vehicle sales and rental tax revenues to be directed to the State Highway Fund.  With these State funding improvements, along with the $200 billion federal spending on infrastructure investment proposed by the current Administration, we would expect to see increases in demand from our construction customers, but the timing of any demand increase is uncertain and subject to weather and other factors.  

Our modernization and expansion and development projects in Texas,  Arkansas, and Oklahoma and our Texas slurry operations have positioned us to meet the demand for high‑quality lime and limestone products in our markets. Our modernization and expansion and development projects have also equipped us with up‑to‑date, fuel‑efficient plant facilities, which have resulted in lower production costs and greater operating efficiencies, thus enhancing our competitive position. All our rotary kilns are now fuel‑efficient preheater kilns.  The addition of the new kiln at St. Clair further increased the fuel efficiency of our fleet of kilns.

For our plants to operate at peak efficiency, we must meet operational challenges that arise from time to time, including bringing new facilities on-line and refurbishing and/or improving acquired facilities, as well as operating existing facilities efficiently. We also incur ongoing costs for maintenance and to remain in compliance with rapidly changing Environmental Laws and health and safety and other regulations.

Our primary variable cost is energy. Prices for coal, petroleum coke, diesel, natural gas, electricity, transportation and freight are volatile. In addition, our freight costs, including diesel prices, to deliver our products can be high relative to the value of our products. We have been able to mitigate to some degree the adverse impact of volatile energy costs by varying the mixes of fuel used in our kilns, and by passing on some of any increase in costs onto our customers, where possible, through higher prices and/or surcharges on certain products.  In addition, as noted above, we recently put a new, more fuel-efficient kiln in service at St. Clair, which should help us better manage our energy costs at that plant.  Finally, we have not engaged in any significant hedging activity in an effort to control our energy costs but may do so in the future.

We have financed our modernization and expansion and development projects and acquisitions through a combination of debt financing, which has now been repaid, and cash flows from operations. We must generate sufficient cash flows to cover ongoing capital requirements, including current and possible future modernization and expansion and development projects and acquisitions, or borrow sufficient funds to finance any shortfall in our liquidity needs.

For us to maintain or increase our profitability in our Lime and Limestone Operations in the face of reduced demand from some of our customers, competitive pressures and increased costs, we must maintain or increase our customer base, improve our revenues and control our operational and selling, general and administrative expenses. To maintain or improve our gross profit margins, we are focusing on maintaining, and increasing where possible, our lime and limestone prices to offset our increased costs, which is a challenging task with increased competition from other lime and limestone producers. In addition, we will continue to explore ways to increase the operating efficiency of our plants and other facilities and expand our production capacity through acquisitions as conditions warrant or opportunities arise.

We continue to believe the enhanced efficiency and production capacity resulting from our modernization and expansion and development projects at Texas,  Arkansas, and Oklahoma, our expanded slurry operations, our acquisitions and the operational strategies we have implemented have allowed us to increase our efficiency, grow production capacity, improve product quality, better serve existing customers, attract new customers and control costs. To date, however, demand and prices for our lime and limestone products have not been sufficient to fully utilize our additional production capacity.  In addition, there can be no assurance that our efficiency and production will not be adversely affected by weather, maintenance, environmental, accident, cyber-security, and other operational and construction issues; that we can successfully invest in improvements to our existing facilities; that our results will not be adversely affected by increases in fuel, natural gas, electricity, transportation and freight costs or new environmental, health and safety or

16

other regulatory requirements; or that, with increasing competition with other lime and limestone producers, our revenues, gross profit, net income and cash flows can be maintained or improved.

Other.

Revenues in 2019 included $1.3 million from our natural gas interests, compared to $2.5 million and $2.2 million in 2018 and 2017, respectively.   Gross profit (loss) in 2019 included a loss of $(0.4) million from our natural gas interests, compared to profit of $1.0 million and $0.7 million in 2018 and 2017, respectively. 

CRITICAL ACCOUNTING POLICIES.

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities, at the date of our financial statements. Actual results may differ from these estimates and judgments under different assumptions or conditions and historical trends.

Critical accounting policies are defined as those that are reflective of significant management judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. We believe the following critical accounting policies require the most significant management estimates and judgments used in the preparation of our consolidated financial statements.

Revenue recognition.  We recognize revenue for our 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.  Our returns and allowances are minimal.  External freight billed to customers included in revenues was $28.3 million, $25.6 million and $23.5 million for 2019, 2018 and 2017, respectively, which approximates the amount of external freight included in cost of revenues. Sales taxes billed to customers are not included in revenues.  For our natural gas interests, we recognize revenue in the month of production and delivery.

We operate our Lime and Limestone Operations within a single geographic region and derive all revenues from that segment from the sale of lime and limestone products.  See Note 11 for disaggregation of revenues by the Lime and Limestone Operations segment and Other, which we believe best depicts how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors.

Accounts receivable.  We estimate the collectability of our trade receivables. A considerable amount of judgment is required in assessing the ultimate realization of these receivables and determining our allowance for doubtful accounts. Uncollected trade receivables are charged‑off when identified by management to be unrecoverable. The majority of our trade receivables are unsecured. Payment terms for our trade receivables are based on underlying purchase orders, contracts or purchase agreements. Credit losses relating to these receivables have generally been within management expectations and historical trends.

Property, plant and equipment.    For major constructed assets, we include the costs for labor and materials plus interest and internal and external project management costs that are directly related to the constructed assets in the capitalized cost.  Depreciation of property, plant and equipment is being provided for by the straight‑line method over estimated useful lives.

Maintenance and repairs are charged to expense as incurred; renewals and betterments are capitalized. When units of property are retired or otherwise disposed of, their cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to income.

We expense all exploration costs as incurred as well as costs incurred at an operating quarry or mine, other than capital expenditures and inventory. Costs to acquire mineral reserves or mineral interests are capitalized upon acquisition.  Development costs incurred to develop new mineral reserves, to expand the capacity of a quarry or mine, or

17

to develop quarry or mine areas substantially in advance of current production are capitalized once proven and probable reserves exist and can be economically produced.  For each quarry or mine, capitalized costs to acquire and develop mineral reserves are depleted using the units‑of‑production method based on the proven and probable reserves for such quarry or mine.

We review long‑lived assets for impairment and, when events or circumstances indicate the carrying amount of an asset may not be recoverable, we determine if impairment of value exists. If the estimated undiscounted future net cash flows are less than the carrying amount of the asset, an impairment exists, and an impairment loss must be calculated and recorded. If an impairment exists, the impairment loss is calculated based on the excess of the carrying amount of the asset over the asset’s fair value. Any impairment loss is treated as a permanent reduction in the carrying value of the asset.  During 2019, we recognized an impairment charge of $0.9 million to adjust the carrying value of certain long-lived assets related to our natural gas interests.

Environmental costs and liabilities.  We record environmental accruals in other liabilities, based on studies and estimates, when it is probable we have incurred a reasonably estimable cost or liability. The accruals are adjusted when further information warrants an adjustment. Environmental expenditures that extend the life, increase the capacity or improve the safety or efficiency of Company‑owned assets or are incurred to mitigate or prevent future possible environmental issues are capitalized. Other environmental costs are expensed when incurred.

Contingencies.  We are party to proceedings, lawsuits and claims arising in the normal course of business relating to regulatory, labor, product and other matters. We are required to estimate the likelihood of any adverse judgments or outcomes with respect to these matters, as well as potential ranges of possible losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual matter, including coverage under our insurance policies. This determination may change in the future because of new information or developments.

Income taxes.  We utilize the asset and liability approach in reporting our income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. We establish valuation allowances when necessary to reduce deferred tax assets to the amount more likely than not to be realized. Income tax related interest and penalties are included in income tax expense.  We also assess individual tax positions to determine if they meet the criteria for some or all of the benefits of that position to be recognized in our financial statements and only recognize tax positions that meet the more‑likely‑than‑not recognition threshold.

Stock‑based compensation.  We expense all stock‑based payments to employees and directors, including grants of stock options and restricted stock, in our Consolidated Statements of Income based on their fair values. Compensation cost is recognized ratably over the vesting period for all stock‑based awards.

18

RESULTS OF OPERATIONS.

The following table sets forth certain financial information expressed as a percentage of revenues for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

Year Ended  December 31,

 

 

 

    

2019

    

2018

    

2017

 

 

Lime and limestone revenues

 

99.2

%  

98.3

%  

98.5

%

 

Other revenues

 

0.8

 

1.7

 

1.5

 

 

Total revenues

 

100.0

 

100.0

 

100.0

 

 

Cost of revenues

 

 

 

 

 

 

 

 

Labor and other operating expenses

 

(62.6)

 

(66.9)

 

(65.0)

 

 

Depreciation, depletion and amortization

 

(11.0)

 

(12.0)

 

(11.3)

 

 

Gross profit

 

26.4

 

21.1

 

23.7

 

 

Selling, general and administrative expenses

 

(7.3)

 

(7.3)

 

(7.0)

 

 

Impairment of long lived assets

 

(0.6)

 

 —

 

 —

 

 

Operating profit

 

18.5

 

13.8

 

16.7

 

 

Other (expense) income:

 

 

 

 

 

 

 

 

Interest expense

 

(0.1)

 

(0.2)

 

(0.2)

 

 

Interest and other income, net

 

1.2

 

1.3

 

0.7

 

 

Income tax (expense) benefit

 

(3.1)

 

(1.3)

 

1.5

 

 

Net income

 

16.5

%  

13.6

%  

18.7

%

 

2019 vs. 2018

Revenues for 2019 increased to $158.3 million from $144.4 million in 2018, an increase of $13.8 million, or 9.6%. Revenues from our Lime and Limestone Operations in 2019 increased $15.1 million, or 10.6%, to $157.0 million from $141.9 million in 2018. The increase in revenues from our Lime and Limestone Operations was primarily due to increased sales volumes of our lime and limestone products, principally to our construction and environmental customers. In addition, we realized a  2.0% average increase in prices for our lime and limestone products in 2019, compared to 2018.  Revenues also included $1.3 million and $2.5 million in 2019 and 2018, respectively, from our natural gas interests.

Our gross profit increased to $41.7 million for 2019 from $30.5 million for 2018, an increase of $11.2 million, or 36.7%. Gross profit from our Lime and Limestone Operations for 2019 was $42.0 million, compared to $29.5 million in 2018, an increase of $12.6 million, or 42.6%. The increase in gross profit in 2019, compared to 2018, resulted primarily from increased revenues discussed above, lower fuel costs and increased operating efficiencies associated 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 $(0.4) loss in 2019 and $1.0 million profit in 2018 from our natural gas interests.

Selling, general and administrative expenses (“SG&A”) increased to $11.5 million for 2019, an increase of $1.0 million, or 9.7%, compared to $10.5 million for 2018. As a percentage of revenues, SG&A was 7.3% in each of 2019 and 2018.  The increase in SG&A was primarily due to increased compensation-related and legal expenses in 2019, compared to 2018.

In the fourth quarter 2019, we recognized an impairment charge of $0.9 million ($0.7 million, net of tax) to adjust the carrying values of the long-lived assets related to our natural gas interests.  Prices for natural gas and natural gas liquids decreased substantially during 2019, compared to 2018, which led to the impairment of the assets.

Interest expense was $0.2 million in each of 2019 and 2018, as we had no outstanding debt during either 2019 or 2018.

19

Interest and other income, net was $1.9 million in 2019, compared to $1.8 million in 2018.  The increase in interest and other income, net in 2019, compared to 2018, was primarily due to increased interest rates received on cash and cash equivalents balances in 2019.

Income tax expense was $4.8 million in 2019, for an effective rate of 15.7%, compared to $1.9 million in 2018, for an effective rate of 8.7%, an increase of $3.0 million.  Our effective income tax rates for 2019 and 2018 were reduced from the statutory rate primarily due to research and development tax credits and statutory depletion in excess of cost depletion.

Net income increased to $26.1 million ($4.64 per share diluted) in 2019, compared to $19.7 million ($3.51 per share diluted) in 2018, an increase of $6.4 million, or 32.4%.

2018 vs. 2017

Revenues for 2018 decreased to $144.4 million from $144.8 million in 2017, a decrease of $0.4 million, or 0.3%. Revenues from our Lime and Limestone Operations in 2018 decreased $0.7 million, or 0.5%, to $141.9 million from $142.6 million in 2017. The decrease in revenues from our Lime and Limestone Operations was primarily due to decreased sales volumes of our lime and limestone products, principally to our construction and environmental customers, partially offset by increased sales volumes to our steel customers. In addition, we realized a  1.3% average increase in prices for our lime and limestone products in 2018, compared to 2017.  Revenues also included $2.5 million and $2.2 million in 2018 and 2017, respectively, from our natural gas interests.

Our gross profit decreased to $30.5 million for 2018 from $34.4 million for 2017, a decrease of $3.9 million, or 11.3%. Gross profit from our Lime and Limestone Operations for 2018 was $29.5 million, compared to $33.7 million in 2017, a decrease of $4.2 million, or 12.4%. The decrease in gross profit in 2018, compared to 2017, resulted primarily from increased quarrying and transportation costs.  Gross profit also included $1.0 million and $0.7 million in 2018 and 2017, respectively, from our natural gas interests.

SG&A increased to $10.5 million for 2018, an increase of $0.3 million, or 3.3%, compared to $10.2 million for 2017. As a percentage of revenues, SG&A increased to 7.3% in 2018 from 7.0% in 2017, due primarily to the decrease in revenues and an increase in compensation-related expenses in 2018.

Interest expense was $0.2 million in each of 2018 and 2017, as we had no outstanding debt during either 2018 or 2017.

Interest and other income, net was $1.8 million in 2018, compared to $1.0 million in 2017.  The increase in interest and other income, net in 2018, compared to 2017, was primarily due to increased interest rates received on cash and cash equivalents balances in 2018.

Income tax expense (benefit) was an expense of $1.9 million in 2018, for an effective rate of 8.7%, compared to a benefit of $2.2 million in 2017, for an effective rate of (8.8%), an increase in income tax expense of $4.1 million. The income tax benefit in 2017 included a benefit of $7.4 million ($1.33 per share diluted) due to a reduction in the enacted federal income tax rates in the United States as a result of the 2017 Tax Act and the one-time impact of the lower rates on our deferred tax liabilities, net. Our effective income tax rate for 2018 was reduced by research and development tax credits associated with the construction of the St. Clair kiln project.

Net income decreased to $19.7 million ($3.51 per share diluted) in 2018, compared to $27.1 million ($4.86 per share diluted) in 2017, a decrease of $7.5 million, or 27.5%.

FINANCIAL CONDITION.

Capital Requirements.  We require capital primarily for normal recurring capital and re‑equipping projects, modernization and expansion and development projects and acquisitions. Our capital needs are expected to be met principally from cash on hand, cash flows from operations and our $75.0 million revolving credit facility.

20

We expect to spend approximately $12.0 million per year over the next several years in our Lime and Limestone Operations for normal recurring capital and re‑equipping projects at our plants and facilities to maintain or improve efficiency, ensure compliance with Environmental Laws, meet customer needs and reduce costs. As of December 31, 2019, we had $2.1 million in open orders or contractual commitments for our Lime and Limestone Operations.

Liquidity and Capital Resources.  Net cash provided by operating activities was $47.0 million in 2019, compared to $38.7 million in 2018, an increase of $8.3 million, or 21.4%. Our net cash provided by operating activities is composed of net income, depreciation, depletion and amortization (“DD&A”), other non‑cash items included in net income and changes in working capital. In 2019, net cash provided by operating activities was principally composed of $26.1 million net income, $17.6 million DD&A,  $4.9 million increase in deferred income taxes, $0.9 million impairment of long-lived assets, and $1.5 million stock-based compensation, partially offset by a $4.4 million decrease from changes in working capital.  In 2019, the changes in working capital were principally composed of a $3.3 million increase in trade receivables, net.  In 2018, net cash provided by operating activities was principally composed of $19.7 million net income, $17.6 million DD&A, and $1.5 million stock‑based compensation, partially offset by a $0.7 million decrease from changes in working capital.  Changes in working capital in 2018 were primarily due to a $3.1 million increase in trade receivables, net and a $1.4 million decrease in prepaid expenses and other current assets.

Net cash used in investing activities was $26.5 million for 2019, compared to $53.2 million in 2018.  Net cash used in investing activities included $5.6 million and $26.2 million paid on the St. Clair kiln project in 2019 and 2018, respectively. Net cash used in investing activities in 2019 also included $8.0 million for specialized equipment at the Batesville Quarry and $2.8 million for a new slurry terminal in the Dallas-Fort Worth area.  Net cash used in investing activities in 2018 also included $9.4 million for land purchases in Texas, Arkansas and Oklahoma, $3.1 million for specialized equipment at the Batesville Quarry and $1.7 million for updating our fleet of slakers and trucks used in the production and transportation of our lime slurry products.  The balance of net cash used in investing activities in 2019 and 2018 was primarily for normal recurring capital and re‑equipping projects at our plants and facilities. 

Net cash used in financing activities primarily consisted of $33.1 million for dividend payments in 2019, including a special cash dividend of $30.0 million, compared to $3.0 million for dividend payments in 2018, and $0.4 million to repurchase shares of our common stock in each of 2019 and 2018.

Our cash and cash equivalents at December 31, 2019 decreased to $54.3 million from $67.2 million at December 31, 2018.

Banking Facilities and Debt.    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 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.  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 may purchase, redeem or otherwise acquire shares of our common stock so long as our pro forma Cash Flow Leverage

21

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 had no debt outstanding as of December 31, 2019 or 2018.  We had $0.4 million of letters of credit issued under the Revolving Facility as of December 31, 2019, which count as draws against the available commitment under the Revolving Facility.

Common Stock Buybacks.  We spent $0.4 million, $0.4 million and $0.3 million in 2019, 2018 and 2017, respectively, to repurchase treasury shares.

Contractual Obligations.  The following table sets forth our contractual obligations as of December 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due by Period

 

 

    

 

 

    

 

    

 

    

 

    

More Than

 

Contractual Obligations

 

Total

 

1 Year

 

2 - 3 Years

 

4 - 5 Years

 

5 Years

 

Debt

 

$

 —

 

 —

 

 

 

 

Operating leases(1)

 

$

3,322

 

1,327

 

1,545

 

361

 

90

 

Limestone mineral leases

 

$

1,493

 

71

 

143

 

142

 

1,137

 

Purchase obligations(2)(3)

 

$

7,928

 

4,550

 

2,102

 

1,276

 

 

Other liabilities

 

$

1,482

 

120

 

248

 

245

 

869

 

Total

 

$

14,225

 

6,068

 

4,038

 

2,024

 

2,096

 


(1)

Represents operating leases for railcars, corporate office space and some equipment that are either non‑cancelable or subject to significant penalty upon cancellation.

(2)

Of these obligations, $1,128 were recorded on the Consolidated Balance Sheet at December 31, 2019.

(3)

Purchase obligations includes enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities to be purchased, fixed-price provisions, and the approximate timing of the transaction, and are either non-cancelable or subject to significant penalty upon cancellation.

We believe that cash on hand and cash flows from operations will be sufficient to meet our operating needs, ongoing capital needs, including our current and possible future modernization and expansion and development projects, and liquidity needs and allow us to pay our regular cash dividends for the near future.

Off‑Balance Sheet Arrangements.  We do not utilize off‑balance sheet financing arrangements; however, we lease railcars, corporate office space and some equipment used in our operations under operating lease agreements that are either non‑cancelable or subject to significant penalty upon cancellation, and have various limestone mineral leases. As of December 31, 2019, the total future lease payments under our various operating and limestone mineral leases totaled $3.3 million and $1.5 million, respectively, and are due in payments as summarized in the table above.

ITEM 7A.  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 December 31, 2019.  Any future borrowings under the Revolving Facility would be subject to interest rate risk. See Note 3 of Notes to Consolidated Financial Statements.

FOREIGN EXCHANGE RISK.

We could be exposed to changes in the Euro to U.S. Dollar exchange rate for our 0.3 million Euros obligations for contracts related to the purchase and installation of equipment at December 31, 2019.  We entered into foreign exchange hedges to fix our U.S. Dollar liability at $0.4 million.  See Notes 1(f) and 10 of Notes to Consolidated Financial Statements.

22

23

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
United States Lime & Minerals, Inc.

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of United States Lime & Minerals, Inc. (a Texas Corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2020 expressed an unqualified opinion.

Change in accounting principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases on January 1, 2019 using the modified retrospective method due to the adoption of Accounting Standard Codification 842, “Leases”.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

24

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ GRANT THORNTON LLP

 

We have served as the Company’s auditor since 2005.

Dallas, Texas
February 28, 2020

25

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
United States Lime & Minerals, Inc.

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of United States Lime & Minerals, Inc. (a Texas corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report dated February 28, 2020 expressed an unqualified opinion on those financial statements.

Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

26

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

 

Dallas, Texas
February 28, 2020

 

 

 

 

 

27

 

United States Lime & Minerals, Inc.

Consolidated Balance Sheets

(dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

December 31,

 

December 31,

 

 

    

2019

    

2018

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,260

 

$

67,218

 

Trade receivables, net

 

 

22,948

 

 

19,602

 

Inventories, net

 

 

13,388

 

 

12,846

 

Prepaid expenses and other current assets

 

 

2,139

 

 

1,692

 

Total current assets

 

 

92,735

 

 

101,358

 

Property, plant and equipment

 

 

 

 

 

 

 

Mineral reserves and land

 

 

36,423

 

 

33,637

 

Proved natural gas properties, successful-efforts method

 

 

17,484

 

 

18,414

 

Buildings and building and leasehold improvements

 

 

7,251

 

 

5,814

 

Machinery and equipment

 

 

304,379

 

 

286,173

 

Furniture and fixtures

 

 

981

 

 

981

 

Automotive equipment

 

 

3,837

 

 

3,453

 

    Property, plant and equipment

 

 

370,355

 

 

348,472

 

  Less accumulated depreciation and depletion

 

 

(219,668)

 

 

(205,708)

 

Property, plant and equipment, net

 

 

150,687

 

 

142,764

 

Operating lease right-of-use assets

 

 

3,192

 

 

 —

 

Other assets, net

 

 

423

 

 

549

 

Total assets

 

$

247,037

 

$

244,671

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

4,430

 

$

4,570

 

Current portion of operating lease liabilities

 

 

1,294

 

 

 —

 

Accrued expenses

 

 

3,735

 

 

3,393

 

Total current liabilities

 

 

9,459

 

 

7,963

 

Deferred tax liabilities, net

 

 

17,218

 

 

12,365

 

Operating lease liabilities, excluding current portion

 

 

1,866

 

 

 —

 

Other liabilities

 

 

1,362

 

 

1,376

 

Total liabilities

 

 

29,905

 

 

21,704

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $5.00 par value; authorized 500,000 shares; none issued or outstanding

 

 

 —

 

 

 —

 

Common stock

 

 

663

 

 

661

 

Additional paid-in capital

 

 

27,464

 

 

25,867

 

Accumulated other comprehensive loss

 

 

(1)

 

 

(13)

 

Retained earnings

 

 

243,566

 

 

250,568

 

Less treasury stock, at cost

 

 

(54,560)

 

 

(54,116)

 

Total stockholders’ equity

 

 

217,132

 

 

222,967

 

Total liabilities and stockholders’ equity

 

$

247,037

 

$

244,671

 

The accompanying notes are an integral part of these consolidated financial statements.

28

 

United States Lime & Minerals, Inc.

Consolidated Statements of Income

(dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

    

2019

    

2018

    

2017

 

Revenues

 

$

158,277

 

$

144,435

 

$

144,844

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

Labor and other operating expenses

 

 

99,207

 

 

96,558

 

 

94,124

 

Depreciation, depletion and amortization

 

 

17,394

 

 

17,391

 

 

16,340

 

 

 

 

116,601

 

 

113,949

 

 

110,464

 

Gross profit

 

 

41,676

 

 

30,486

 

 

34,380

 

Selling, general and administrative expenses

 

 

11,500

 

 

10,484

 

 

10,153

 

Impairment of long-lived assets

 

 

930

 

 

 —

 

 

 —

 

Operating profit

 

 

29,246

 

 

20,002

 

 

24,227

 

Other expense (income)

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

244

 

 

243

 

 

241

 

Interest and other income, net

 

 

(1,898)

 

 

(1,809)

 

 

(957)

 

 

 

 

(1,654)

 

 

(1,566)

 

 

(716)

 

Income before income tax expense (benefit)

 

 

30,900

 

 

21,568

 

 

24,943

 

Income tax expense (benefit)

 

 

4,844

 

 

1,883

 

 

(2,205)

 

Net income

 

$

26,056

 

$

19,685

 

$

27,148

 

Net income per share of common stock

 

 

 

 

 

 

 

 

 

 

Basic

 

$

4.64

 

$

3.52

 

$

4.87

 

Diluted

 

$

4.64

 

$

3.51

 

$

4.86

 

The accompanying notes are an integral part of these consolidated financial statements.

 

29

United States Lime & Minerals, Inc.

Consolidated Statements of Comprehensive Income

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

2019

 

2018

 

2017

 

Net income

    

$

26,056

    

$

19,685

    

$

27,148

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

Mark to market of foreign exchange hedges, net of tax expense (benefit) of $4,  $(29) and $155 for 2019, 2018 and 2017, respectively

 

 

12

 

 

(99)

 

 

309

 

  Total other comprehensive income (loss)

 

 

12

 

 

(99)

 

 

309

 

Comprehensive income

 

$

26,068

 

$

19,586

 

$

27,457

 

The accompanying notes are an integral part of these consolidated financial statements.

 

30

United States Lime & Minerals, Inc.

Consolidated Statements of Stockholders’ Equity

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Other

 

 

 

 

 

 

 

 

 

 

 

    

Shares

    

 

 

    

Paid-In

    

Comprehensive

    

Retained

    

Treasury

    

 

 

 

 

 

Outstanding

 

Amount

 

Capital

 

(Loss) Income

 

Earnings

 

Stock

 

Total

 

Balances at December 31, 2016

 

5,574,140

 

$

657

 

 

22,831

 

 

(223)

 

 

209,770

 

 

(53,396)

 

 

179,639

 

Stock options exercised

 

2,000

 

 

 —

 

 

73

 

 

 —

 

 

 —

 

 

 —

 

 

73

 

Stock-based compensation

 

16,695

 

 

 2

 

 

1,403

 

 

 —

 

 

 —

 

 

 —

 

 

1,405

 

Treasury shares purchased

 

(4,014)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(309)

 

 

(309)

 

Cash dividends paid

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,013)

 

 

 —

 

 

(3,013)

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

27,148

 

 

 —

 

 

27,148

 

Mark to market of foreign exchange hedges, net of $155 tax expense

 

 —

 

 

 —

 

 

 —

 

 

309

 

 

 —

 

 

 —

 

 

309

 

Comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

309

 

 

27,148

 

 

 —

 

 

27,457

 

Balances at December 31, 2017

 

5,588,821

 

 

659

 

 

24,307

 

 

86

 

 

233,905

 

 

(53,705)

 

 

205,252

 

Stock options exercised

 

6,339

 

 

 —

 

 

73

 

 

 —

 

 

 —

 

 

 —

 

 

73

 

Stock-based compensation

 

17,626

 

 

 2

 

 

1,487

 

 

 —

 

 

 —

 

 

 —

 

 

1,489

 

Treasury shares purchased

 

(5,385)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(411)

 

 

(411)

 

Cash dividends paid

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,022)

 

 

 —

 

 

(3,022)

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

19,685

 

 

 —

 

 

19,685

 

Mark to market for foreign exchange hedges, net of $29 tax benefit

 

 —

 

 

 —

 

 

 —

 

 

(99)

 

 

 —

 

 

 —

 

 

(99)

 

Comprehensive (loss) income

 

 —

 

 

 —

 

 

 —

 

 

(99)

 

 

19,685

 

 

 —

 

 

19,586

 

Balances at December 31, 2018

 

5,607,401

 

 

661

 

 

25,867

 

 

(13)

 

 

250,568

 

 

(54,116)

 

 

222,967

 

Stock options exercised

 

2,000

 

 

 —

 

 

75

 

 

 —

 

 

 —

 

 

 —

 

 

75

 

Stock-based compensation

 

18,900

 

 

 2

 

 

1,522

 

 

 —

 

 

 —

 

 

 —

 

 

1,524

 

Treasury shares purchased

 

(5,475)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(444)

 

 

(444)

 

Cash dividends paid

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(33,058)

 

 

 —

 

 

(33,058)

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

26,056

 

 

 —

 

 

26,056

 

Mark to market for FX hedges, net of $4 tax expense

 

 —

 

 

 —

 

 

 —

 

 

12

 

 

 —

 

 

 —

 

 

12

 

Comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

12

 

 

26,056

 

 

 —

 

 

26,068

 

Balances at December 31, 2019

 

5,622,826

 

$

663

 

$

27,464

 

$

(1)

 

$

243,566

 

$

(54,560)

 

$

217,132

 

The accompanying notes are an integral part of these consolidated financial statements.

31

United States Lime & Minerals, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

2017

 

OPERATING ACTIVITIES:

    

 

 

    

 

 

    

 

 

 

Net income

 

$

26,056

 

$

19,685