UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑K10-K
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(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, 20172022 |
OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 000‑4197000-04197
United States Lime & Minerals, Inc.
(Exact name of Registrant as specified in its charter)
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Texas
(State or other jurisdiction of
incorporation or organization) | 75‑078922675-0789226
(I.R.S. Employer
Identification Number)
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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(972) 991-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title of Each Classeach class | Trading Symbol(s) | Name of Each Exchangeeach exchange on Which Registeredwhich registered |
Common Stock,stock, $0.10 par value | USLM | The NASDAQNasdaq Stock Market LLC |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the Registrant is a well‑knownwell-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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑TS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment of this Form 10‑K. ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non‑accelerateda 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‑212b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | ☐ | | Accelerated filer ☒ |
| Non-accelerated filer | ☐ | | Smaller reporting company ☐☒ |
| (Do not check if a smaller reporting company)
| | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrantRegistrant 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b‑212b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of Common Stock held by non‑affiliatesnon-affiliates computed as of the last business day of the Registrant’s quarter ended June 30, 2017: $157,783,003.2022: $216,195,725.
Number of shares of Common Stock outstanding as of March 1, 2018: 5,590,743.February 22, 2023: 5,684,569.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant’s definitive Proxy Statement to be filed for its 20182023 Annual Meeting of Shareholders. Part IV incorporates certain exhibits by reference from the Registrant’s previous filings.
PART I
ITEM 1. BUSINESS.
BUSINESS.
General.
United States Lime & Minerals, Inc. (the “Company,” the “Registrant,” “We” or “Our”), which was incorporated in 1950, conducts its business primarily through two segments,its Lime and Limestone Operations and Natural Gas Interests.segment. The Company’s Other operations relate to its natural gas interests.
The Company’s principal corporate office is located at 5429 LBJ Freeway, Suite 230, Dallas, Texas 75240. The Company’s telephone number is (972) 991‑8400991-8400 and its internet address is www.uslm.com. The Company’s annual reports on Form 10‑K,10-K, quarterly reports on Form 10‑Q,10-Q, current reports on Form 8‑K8-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), metals (including steel producers), environmental (including municipal sanitation and water treatment facilities and flue gas treatment processes), metalsroof shingle manufacturers, agriculture (including steelpoultry producers), and oil and gas services roof shingle 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, Missouri, Oklahoma and Texas through its wholly owned subsidiaries, Arkansas Lime Company, ART Quarry TRS LLC (DBA Carthage Crushed Limestone), Colorado Lime Company, Mill Creek Dolomite, LLC, Texas Lime Company, U.S. Lime Company, U.S. Lime Company—Shreveport,Company-Shreveport, U.S. Lime Company—St.Company-St. Clair and U.S. Lime Company—Transportation.Company-Transportation.
The Company extracts high‑qualityhigh-quality limestone from its open‑pitopen-pit quarries and an underground minemines and then processes it for sale as pulverized limestone, aggregate, 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‑strippinganti-stripping agent, as a conditioning agent for oil and gas drilling mud in the production of chemicals and in the production of construction materials such as stucco, plaster and mortar.chemicals. Lime slurry is used primarily in soil stabilization for highway, road and building construction.
Product Sales. In 2017,2022, the Company sold almost all of its lime and limestone products in the states of Arkansas, Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Louisiana, Mississippi, Missouri, New Mexico, Oklahoma, Tennessee and Texas. Sales were made primarily by the Company’s nineten sales employees who call on current and potential customers and solicit orders, which are generally made on a purchase‑orderpurchase-order basis. The Company also receives orders in response to bids that it prepares and submits to current and potential customers.
metals producers (including steel producers), environmental customers (including municipal sanitation and water treatment facilities and flue gas treatment processes), metalsroof shingle manufacturers, poultry and cattle feed producers, (including steel producers),and oil and gas services companies, roof shingle manufacturers and poultry and cattle feed producers. During 2017, 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.companies.
Approximately 600650 customers accounted for the Company’s sales of lime and limestone products during 2017.2022. 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 towithin our geographic locationregion and by industry concentration. However, given the nature of the lime and limestone industry, the Company’s profits are very sensitive to changes in sales volumevolumes, prices, and prices.costs.
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 2017Company’s 2022 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‑relatedconstruction-related customers, as well as on the Company’s open‑pitopen-pit quarrying operations.
Limestone Mineral Resources and Reserves. The Company’s limestone mineral resources and reserves contain at least 96% calcium carbonate (CaCO3). The Company has twothree subsidiaries that extract limestone from open‑pitopen-pit quarries: Texas Lime Company (“Texas Lime”), which is located near Cleburne, Texas andTexas; Arkansas Lime Company (“Arkansas Lime”), which is located near Batesville, Arkansas.Arkansas; and Mill Creek Dolomite, LLC (“Mill Creek”), which the Company acquired on February 9, 2022, located near Mill Creek, Oklahoma. U.S. Lime Company—St.Company-St. Clair (“St. Clair”) extracts limestone from an underground mine located near Marble City, Oklahoma. Carthage Crushed Limestone (“Carthage”) extracts limestone from an underground mine located in Carthage, Missouri. Colorado Lime Company (“Colorado Lime”) owns property containing limestone deposits at Monarch Pass, located 15 miles west of Salida, Colorado. Existing crushed stone stockpiles on the property are being used to provide feedstock to the Company’s plantsplant in Salida and Delta, Colorado. Access to all properties is provided by paved roads and, in the case of Arkansas Lime, and St. Clair, Carthage, and Mill Creek, also by rail. The Company mined approximately 4 million tons of limestone from its quarries and mines during the year ended December 31, 2022, and approximately 3 million tons of limestone during each of the years ended December 31, 2021 and 2020.
Texas Lime operates a quarry, located on approximately 3,450 acresThe Company engaged SYB Group, LLC (“SYB”) to serve as the Qualified Person (“QP”) to prepare estimates of land that contains known high‑qualitythe 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 Limeresources and reserves, as of December 31, 2017,2021, at all of its properties except for Carthage, Mill Creek, and Colorado Lime. The QP was not retained to prepare estimates at those locations because the Company has not completed a drilling program sufficient to enable the QP to prepare estimates of the limestone mineral resources and reserves at those properties. As of December 31, 2022, the QP assessed the underlying material assumptions and information set forth in the technical report summaries for the Texas Lime Quarry, the Batesville Quarry, the Love Hollow Quarry, and the St. Clair Mine, including assumptions related to modifying factors, price estimates, and scientific and technical information. During 2022, no new drilling programs were instituted at the locations covered by the QP’s technical report summaries as of December 31, 2021. Resources and reserves were calculated using an $11.05 per ton price assumption based on the U.S. Geological Survey Mineral Commodity Summaries 2021. The U.S. Geological Survey Mineral Commodity Summaries 2022 increased the price to $12.70 per ton, but the QP has determined that the change in price did not have a material impact on the calculation of the reserves and resources and that all material assumptions and information remained current as of December 31, 2022.
Summaries of the Company’s total limestone mineral resources and reserves for all properties other than Carthage, Mill Creek, and Colorado Lime as of December 31, 2022 and 2021 are shown below. The terms “Mineral Resource”, “Measured Resources”, “Indicated Resources”, “Mineral Reserves”, “Proven Reserves” and “Probable Reserves” are defined in accordance with SEC Regulation S-K subpart 229.1300 governing disclosures by registrants engaged in mining operations. Limestone mineral reserves are included in limestone mineral resources, net of any mining loss factors.
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‑qualityhigh-quality calcium limestone and dolomite. Assuming
Internal Controls Over Limestone Mineral Resources and Reserves Estimates. Internal control procedures followed by the current levelCompany’s Quality Control/Quality Assurance Laboratories (“QC/QA Lab”) and its contract geologists when assessing properties for limestone mineral resources and reserves estimates are clearly defined. Core drilling is conducted under the direct supervision of productionthe geologists, and all core data is maintained,logged using a standard protocol. The geologists are responsible for examining the Company estimates thatcore and compiling an interval list for X-Ray Florescence (“XRF”) analysis. Splits of cores are bagged and labeled with the depth interval to be analyzed, with the remaining crushed stone stockpiles onsplit boxed and stored for reference. Bagged intervals are submitted to the property are sufficientCompany’s certified QC/QA Lab for XRF analysis, with any samples not destroyed by the testing process retained at the Company’s core storage facility. On an ongoing basis, the QC/QA Labs analyze production samples for cutoff grade consistency with expectations used in the estimates for limestone mineral resources and reserves.
When classifying limestone mineral resources and reserves, the Company’s contract geologists apply a fixed cutoff grade and set parameters of geologic confidence to supply its plants in Salidaclassify the respective resources and Delta, Coloradoreserves. Company management reviews the geologists’ assessments for approximately 15 years.reasonableness.
Quarrying and Mining. The Company extracts limestone by the open‑pitopen-pit method at its Texas, Batesville, Mill Creek, and Arkansas quarries.Love Hollow Quarries. The Monarch Pass Quarry is also an open‑pitopen-pit quarry but is not being mined at this time. The open‑pitopen-pit method consists of removing any overburden comprising soil and other substances, including inferior limestone, and then extracting the exposed high‑qualityhigh-quality limestone. The Company removes such overburden by utilizing both its own employees and equipment and those of outside contractors. Open‑pitOpen-pit mining is generally less expensive than underground mining. The principal disadvantage of the open‑pitopen-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 and Carthage underground mine,mines, the Company mines limestone using room and pillar mining. The Company hasWe have no knowledge of any recent changes in the physical quarrying or mining conditions on any of itsour properties that have materially affected its 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 fivefour plants, six lime slurry facilities and twothree terminal facilities. All of its plants and facilities are accessible by paved roads, and, in the case of the Arkansas Lime, and St. Clair and Carthage 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 Lime 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. The Arkansas Lime plant is approximately 21 miles from the Love Hollow Quarry, to which it is connected by railroad. Arkansas Lime’s PLS and hydrating facilities are situated on a tract of 290 acres located approximately two miles from the Batesville Quarry, to which it is connected by a Company‑ownedCompany-owned railroad. The PLS equipment, depending on the product mix, has the capacity to produce approximately 300 thousand tons of PLS annually.
The St. Clair plant has an annual capacity of approximately 180250 thousand tons of quicklime from twoone vertical kiln and one preheater rotary kilns, one of which is not a preheater kiln. The plant also has PLS equipment, which has the capacity to produce approximately 150 thousand tons of PLS annually. In
The Carthage plant has facilities located next to the fourth quarter 2013,mine that produce both aggregates and PLS. The equipment has the Company received the necessary air permit from the Oklahoma Department of Environmental Qualitycapacity to replace the non‑preheater kiln with the construction of a new, more fuel‑efficient vertical kiln. The Company has begun construction on the new kiln and related plant improvements, which it estimates will costproduce approximately $50 million. In October 2016, the Company entered into900 thousand tons annually.
initial commitments for construction ofThe Mill Creek plant has facilities located next to the new kiln and related plant improvements. Through December 31, 2017,mine that produces dolomitic PLS products. The equipment has the Company has incurredcapacity to produce approximately $14.3 million and had outstanding purchase obligations of approximately $14.7 million. The Company expects the new kiln should be completed near the end of 2018.300 thousand tons 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, and Mill Creek plants, to load railroad cars.
Colorado Lime operates a limestone grinding and bagging facility with an annual capacity of approximately 125 thousand tons, located on approximately three and one‑halfone-half acres of land in Delta, Colorado, and a limestone drying, grinding and bagging facility, with an annual capacity of approximately 40 thousand tons, located on eight acres of land in Salida, Colorado. The Salida property is leased from the Union Pacific Railroad for a five‑year term ending June 2019.
During 2017,2022, the Company’s utilization rate was approximately 63%70% of its aggregate approximate 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 threefour Houston area facilities, including a newtwo distribution terminal, which isterminals connected to a railroad, established in 2015 southwest of Houston, Texas,railroads, to serve the Greater Houston area construction market and threefour facilities to serve the Dallas‑Ft.Dallas-Ft. Worth Metroplex. The Company established U.S. Lime Company—TransportationCompany-Transportation (“Transportation”) primarily to deliver some of the Company’s products to its customers and facilities primarily in the Dallas‑Ft. Worth Metroplex. In December 2014, US Lime acquired the land and buildings, and Transportation acquired the trucks, trailers and other equipment, owned by a Houston, Texas trucking company operation that had exclusively delivered the Company’s products to its customers and slurry facilities. The land purchased included the site leased for one of US Lime’s Houston slurry facility. 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.Texas.
U.S. Lime Company—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.Human Capital Resources. The Company is committed to attracting and retaining the best and brightest talent to meet the current and future needs of its business. Attracting, retaining, motivating, and investing in the development of human capital resources is a critical part of the Company’s commitment to environmental, social, and governance (“ESG”) and sustainability issues.
At December 31, 2017,2022, the Company employed 318338 persons, and73 of whom were represented by unions. The Company is a party to two collective bargaining agreements. The collective bargaining agreement for the Texas facilities expires in November 2020.2023. The collective bargaining agreement for the Carthage facilities expires in May 2025. A collective bargaining agreement for the Arkansas facilities was renegotiatedset to expire in January 20182023; however, in November 2022, the Company received objective evidence that a majority of the bargaining unit employees at the Arkansas facilities no longer supported union representation, and expiresthe Company, therefore, withdrew recognition from the union. The withdrawal of recognition is pending a review in January 2023.Region 15 of the National Labor Relations Board. Overall, the Company believes that its employee relations are generally good.
Employee Retention and Incentivization. The Company has entered into an employment agreement with Timothy W. Byrne, its President and Chief Executive Officer. Mr. Byrne’s employment agreement became effective as of January 1, 2020 for a five-year term and will continue for successive one-year periods unless the Company or Mr. Byrne gives at least one-year’s prior written notice of intent not to renew. Under the employment agreement, in addition to the possibility of a discretionary cash bonus, Mr. Byrne is entitled each year to an EBITDA cash bonus opportunity under the United States Lime & Minerals, Inc. Amended and Restated 2001 Long-Term Incentive Plan (the “Plan”), and he is also entitled to grants of equity awards under the Plan.
Mr. Byrne’s employment agreement provides that Mr. Byrne is subject to certain forfeiture/clawback and share ownership provisions designed to align Mr. Byrne’s financial interests with those of the Company’s long-term shareholders, and to ensure that he is incentivized not to take actions that may benefit the Company and its shareholders in the short-term at the expense of long-term corporate value creation and sustainability. In particular, in entering into the employment agreement with Mr. Byrne, the Company’s Board of Directors and Compensation Committee were sensitive to how Mr. Byrne’s leadership and actions could further the Company’s various objectives, including human capital resources development and executive succession planning.
With respect to the Company’s broader employee base, certain employees are eligible to receive annual cash bonuses based on discretionary determinations. Except in the case of Mr. Byrne, the Company has not adopted a formal or informal annual bonus arrangement with pre-set performance goals. Rather, the determination to pay a cash bonus, if any, is made in December each year based on the past performance of the individual and the Company or on the attainment of non-quantified performance goals during the year. In either such case, the discretionary bonus may be based on the specific accomplishments of the individual and/or on the overall performance of the Company. The amounts of the discretionary bonuses for 2022 were based on each employee’s individual performance and accomplishments, as well as those of the Company, including productivity, sales, controlling costs, and contributions made to special projects.
In addition to cash bonuses, the Company makes equity awards to certain individuals under the Plan. The Company uses equity awards granted under the Plan as a means to attract, retain, and motivate the Company’s directors, officers, employees, and consultants. The Company views the use of equity awards under the Plan as an important means of aligning the interests of its employees with those of its shareholders.
Employee Health and Safety. The Company believes that it is responsible to its 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. In response to the COVID-19 pandemic, the Company is continuing to focus on the health and safety of its employees and other individuals at its facilities that produce lime and limestone products to the essential businesses and communities that it serves.
Employee Development and Training. The Company encourages and supports the growth and development of its employees. It advances continual learning and career development through ongoing performance and development conversations or evaluations with employees and internally and externally developed training programs. The Company also provides reimbursement for certain educational programs relating to the Company’s business.
Employee Diversity and Inclusion. The Company is committed to fostering a work environment that values and promotes diversity and inclusion. This commitment includes providing equal access to, and participation in, equal employment opportunities, programs, and services, without regard to a person’s gender, nationality, race, and ethnicity. The Company is focused on the development and fair treatment of its employees, including equal employment hiring practices and policies, anti-harassment, and anti-retaliation policies. The Company is continuing to invest in efforts to create a more diverse and inclusive workforce and workplace environment.
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‑qualityhigh-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‑effectivecost-effective production and distribution; clean air and anti‑pollutionanti-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‑qualitylong-term, high-quality limestone reservesresources and good locations and transportation relative to markets.
Lime producers tend to be concentrated on known high‑high-quality limestone formations where competition takes place principally on a regional basis. The industry as a whole has expanded its customer base, and whileWhile the steel industry and environmental‑relatedenvironmental-related users including utility plants, are the largest market sectors, itthe 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.
However, inIn recent years, the lime industry has experienced reduced demand from certain industries includingas they experience cyclical or secular downturns. For example, demand from the Company’s steel industry. 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 in some instances, choosing
These and similar rulemakings could increase the cost of future plant modifications or expansions, may make it difficult or impossible to obtain new authorizations and permits for new facilities, may require the Company to purchase emissions offsets as a condition of new authorizations and permits, and may increase compliance costs and have a material adverse effect on the Company’s financial condition, results of operations, cash flows and competitive position.
In January 2023, under Section 112 of the Clean Air Act, EPA proposed amendments to the National Emission Standards for Hazardous Air Pollutants (“NESHAPs”) for lime plants, which would revise their State Implementation Plansthe standards required to meet the maximum achievable control technology (“SIP”MACT”) within three years of the datelime industry. This proposed rule would establish stringent emission limitations for four hazardous air pollutants which will require additional pollution control equipment at our lime kilns subject to the rule. While the proposed rule is currently undergoing public comment, it is uncertain what limits the EPA designates nonattainment areas underwill ultimately impose on the new standard. The statutory deadline forlime industry and what emission controls may be required by the EPA to make initial nonattainment designations under the new standard passed in October 2017. In late 2017, the EPA notified states of the nonattainment areas it intends to designate, but as of February 2018, the EPA has yet to formally designate nonattainment areas. At this point, it is unclear what specific SIP revisions will be proposed.final MACT rule. It is possible,probable, however, that the final rule will incorporate more stringent standards than existing standards, which could require additional expenditures for designing, constructing, operating and maintaining pollution control equipment necessary for compliance.
EPA could adopt new SIP revisions that would result in increased compliance costs and liabilities and make permitting of major modifications more difficult. In 2010, the EPA adopted new NAAQS for sulfur dioxide and nitrogen dioxide. If the Company makes major modifications of any of its lime plants, the New Source Review (discussed below) permitting process may entail modeling and, potentially, installation of additional emission controls to demonstrate compliance with those new NAAQS.
As of January 1, 2010, the EPA requiredregulations 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 or possible taxes. On May 13, 2010,limits. The EPA and delegated states also regulate greenhouse gas emissions under the EPA issued a final rule “tailoring” its New Source Review permitting and Federal Operating Permit programs to apply tofor facilities with certain thresholds of greenhouse gas emissions. This “Tailoring Rule” was challenged in court, and on June 23, 2014, the United States Supreme Court struck down the Tailoring Rule in Utility Air Regulatory Group v. Environmental Protection Agency. In its decision, the Court held that the EPA may not impose permitting requirements on facilities based solely on their emissions of greenhouse gasses. But, the Court also held that the EPA may regulate greenhouse gas emissions if a facility isare otherwise subject to permitting based on thetheir 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. On December 19, 2014, the EPA issued guidance stating that the agency would exercise its enforcement discretion to not pursue enforcement of the terms and conditions of the portion of the permitting regulations struck down by the Supreme Court in Utility Air Regulatory Group.
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. In February 2021, the current Administration rejoined the Paris Agreement. The Agreement commits the United States to reduce greenhouse gas emissions by 26 to 28 percent below 2005 levels by 2025. Future rulemaking followingregulation related to the Utility Air Regulatory Group decisionParis Agreement or other greenhouse gas rulemakings could affect New Source Review permitting or other permitting programs 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 greenhouse gas emission limits, 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 thatrates. Such changes, if adopted, could have a material adverse effect on the Company’s financial condition, results of operations, cash flows and competitive position.
In the courts,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.impacts.
The lime industry is currently undergoing a revision to an EPA rulemaking process pursuant to a federal regulation that regulates air emissions by establishing national standards that meet the maximum achievable control technology (“MACT”) available within the industry. Also known as the “Lime MACT,” this rule is the second revision to the initial Lime MACT promulgated on January 5, 2004. It is expected that the rulemaking process may take 2-4 years before any new EPA standards would take effect. 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.discharges and must comply with the Clean Water Act and analogous state laws and regulations. Any failure to comply with these permits could result in fines or other penalties. Material changes to the terms of these permits or changes to regulations affecting water discharges in the future could also increase compliance costs.
The manufacturing of lime and hydrated lime requires significant volumes of 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 to pump groundwater. Any failure to comply with these permits could result in fines or other penalties and future changes that restrict the quantities of groundwater that may be pumped may increase compliance costs.
Map of United States Lime & Minerals, Inc. Operations/Interests.Lime and Limestone Operations.
Other.
Natural Gas Interests.
Interests.The Company,Company’s Other operations, consisting of its natural gas interests, are conducted through its wholly owned subsidiary, U.S. Lime Company—Company – O & G,&G, LLC (“U.S. Lime – O & G”&G”), has royalty interests ranging from 15.4% to 20% and consist principally of a 20% non‑operating working interestlease with respect to oil and gas rights on the Company’s approximately 3,800 acres of landCleburne, Texas property, located in Johnson County, Texas, in the Barnett Shale Formation. ThesePursuant to the lease, U.S. Lime – O&G has royalty interests are derivedranging from the Company’s May 200415.4% to 20% in oil and gas lease agreement (the “O & G Lease”) with EOG Resources, Inc. (“EOG”) with respectproduced 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, 2022, the overall average interest under the oil and gas rights lease was 34.7% on its Texas Lime property that will continue on currently33 producing wells so long as EOG, or its successors or assigns, is producing natural gas from
such wells as set forth in the O & G Lease. Affilliated companies of Enervest, Ltd. have purchased EOG’s interests in the O & G Lease, and an affiliate of Enervest, Ltd. is now the successor operator of the wells drilled under the O & G Lease.wells.
During the fourth quarter 2005, drilling of the first natural gas well under the O & G Lease was completed, and natural gas production began in February 2006. A total of 34 wells have been drilled under the O & G Lease, but one of the wells ceased production in 2011 and has been plugged and abandoned. The Company’s overall average revenue interest is 34.7% in the 33 wells currently producing under the O & G Lease.
In November 2006, through U.S. Lime – O & G, the Company&G has also entered into a drillsite and production facility lease agreement and subsurface easement (the “Drillsite Agreement”) with XTO Energy Inc. (“XTO”), whichan operator that has an oil and gas lease covering approximately 538 acres of land contiguous to the Company’sour Johnson County, Texas property. Pursuant to the Drillsite Agreement, the Company receivesdrillsite agreement, U.S. Lime – O&G has a 3% royalty interest and a 12.5% non-operatingnon-operated working interest. At December 31, 2022, U.S. Lime – O&G had a combined 12.4% royalty and non-operated working interest resulting in a 12.4% revenue interest, in the six XTOon 6 active wells drilled fromon a padsite located on the Company’sJohnson County, Texas property.
U.S. Lime O & G has no direct employees and is not the operator of any wells drilled on the properties subject to either the O & G Lease or the Drillsite Agreement (the “O & G Properties”). The only decision that the Company has the right to make is whether to participate as a non‑operating working interest owner and pay its proportionate share of the costs of drilling, completing, working over and operating a well.
No wells have been completed on the O & G Properties since 2011. Given current market prices for natural gas and natural gas liquids, there are no present plans to drill additional wells on the O & G Properties. The Company cannot predict if any additional wells will be drilled on the O & G Properties, or their results.
Regulation. Many aspects of the production, pricing and marketing of natural gas are regulated by federal and state agencies. Legislation and rulemaking affecting the natural gas industry are under constant review for amendment or expansion, which in the past has increased the regulatory burden on affected members of the industry.
Oil and gas development and production operations are subject to various types of regulation at the federal, state and local levels that may impact the Company’s royalty and non‑operating working interests. Such regulation includes:
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| | requiring permits for the drilling of wells;
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| | numerous federal and state safety requirements;
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| | environmental requirements;
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| | property taxes and severance taxes; and
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| | specific state and federal income tax provisions.
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The TCEQ has adopted regulations limiting air emissions from oil and natural gas production in the Barnett Shale, where the O & G Properties are located. The EPA has adopted greenhouse gas monitoring and reporting regulations applicable to the petroleum and natural gas industry that require persons that hold state drilling permits that will result in annual greenhouse gas emissions of 25,000 metric tons or more to report annually those emissions from certain sources. The EPA has indicated that it will use data collected through the reporting rules to decide whether to promulgate future greenhouse gas emission limits. Future changes to greenhouse gas regulations could affect the relative competitiveness of, and therefore the demand for, natural gas and other fossil fuels.
Hydraulic fracturing is a technique used to produce oil and natural gas from shale, including the Barnett Shale Formation. The drilling on the Company’s O & G Properties has involved hydraulic fracturing. On April 18, 2012, the EPA issued new final regulations under the New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants. Since January 2015, these regulations have required owners and operators of newly hydraulically fractured wells to use so-called “green completion” technology to reduce methane and volatile organic compound emissions during completion activities. In May 2016, the EPA issued a final rule establishing standards for the reduction of methane, volatile organic compounds, and other emissions from new and existing sources in the oil and
gas sector. These and other similar regulations could increase the costs of oil and gas exploration and production activities.
Hydraulic fracturing has historically been regulated by state oil and natural gas commissions. However, the EPA has asserted federal regulatory authority over certain hydraulic fracturing activities involving diesel under the Safe Drinking Water Act (“SDWA”). In February 2014, the EPA issued permitting guidance for oil and gas hydraulic fracturing activities using diesel fuels, which included a broad definition of diesel covering a variety of oils that are not diesel but that have similar carbon-chain molecules. In June 2016, the EPA issued a final rule establishing a zero discharge limitation for the discharge of wastewater from hydraulic fracturing to publicly owned treatment works. In addition, certain other governmental reviews have been conducted or are underway that focus on environmental aspects of hydraulic fracturing practices, including a four-year study by the EPA that concluded in 2016. Other agencies, including the Department of Energy, the Council on Environmental Quality, the Energy Information Administration and the Department of the Interior, have also conducted hydraulic fracturing studies. These completed and ongoing reviews, depending on their scope and results, could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory programs.
Additionally, the Congress, the EPA and various states have proposed or adopted legislation or regulations regulating or requiring disclosure regarding hydraulic fracturing in connection with drilling operations. For example, pursuant to legislation adopted by the State of Texas in June 2011, the Texas Railroad Commission enacted a rule in December 2011 requiring disclosure of certain information regarding additives, chemical ingredients, concentrations and water volumes used in hydraulic fracturing.New laws or regulations affecting hydraulic fracturing could adversely affect the cost of drilling and production from the O & G Properties.
Customers and Pricing. The pricing of natural gas sales is primarily determined by supply and demand in the marketplace and can fluctuate considerably. As the Company is not the operator of the wells drilled on the O & G Properties, it has limited access to timely information, involvement and operational control over the volumes of natural gas produced and sold and the terms and conditions, including price, on which such volumes are marketed and sold, all of which is controlled by the operators. Although the Company has the right to take its portion of natural gas production in kind, it currently has elected to have its natural gas production marketed by the operators.
The prices that the Company receives for its natural gas production is also affected by the amount of natural gas liquids included in the natural gas and the prices for those liquids. There has been a general decline in prices for natural gas and natural gas liquids in recent years due principally to increased supply, although this longer-term trend for natural gas liquids reversed somewhat in 2017.
Drilling Activity.No new wells have been completed since 2011, and there are no present plans to drill additional wells onunder either the O & G Properties. The Company cannot predict the number of additional wells that ultimately will be drilled, if any, or their results.
Production Activity. The number of gross and net producing wells and production activity for the years ended December 31, 2017, 2016 and 2015 are as follows:
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| | 2017 | | 2016 | | 2015 | |
| | Gross | | Net(2) | | Gross | | Net(2) | | Gross | | Net(2) | |
Producing wells(1) | | | | | | | | | | | | | | | | |
O & G Lease | | | 33 | | 6.6 | | | 33 | | 6.6 | | | 33 | | 6.6 | |
Drillsite Agreement | | | 6 | | 0.8 | | | 6 | | 0.8 | | | 6 | | 0.8 | |
Total | | | 39 | | 7.4 | | | 39 | | 7.4 | | | 39 | | 7.4 | |
Natural gas production volume (BCF) | | | 0.6 | | | | | 0.6 | | | | | 0.7 | | | |
Average sales price per MCF(3) | | $ | 3.99 | | | | $ | 3.35 | | | | $ | 3.41 | | | |
Total cost of revenues per MCF(4) | | $ | 2.69 | | | | $ | 3.25 | | | | $ | 2.97 | | | |
| (1)
| | Although a total of 34 wells have been drilled under the O & G Lease, one well ceased production in 2011 and has been plugged and abandoned.
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| (2)
| | The number of net wells is requiredoil and gas lease or the drillsite agreement. The carrying values of the long-lived assets related to be calculated based on the Company’s non-operating working interests percentages multiplied by the number of gross wells and does not consider the Company’s royalty interests percentages in each well.
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| (3)
| | Average sales price per MCF includes sales prices of natural gas liquids contained in the natural gas.
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| (4)
| | Includes taxes other than income taxes.
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Delivery Commitments. There are no delivery commitments for the Company’s natural gas production to which U.S. Lime O & G is a party.
Internal Controls Over Reserves Estimates. The Company’s policies regarding internal controls over the recording of reserve estimates require reserves to be in compliance with the SEC definitions and guidance and prepared in accordance with generally accepted petroleum engineering principles. In 2017, the Company retained LaRoche Petroleum Consultants, Ltd., independent third-party petroleum engineers, to perform appraisals of 100% of its proved reserves in compliance with these standards. In each of the years 2016 and 2015, the Company retained DeGolyer and MacNaughton, independent third‑party petroleum engineers, to perform appraisals of 100% of its proved reserves in compliance with these standards.
Reserves. The following table reflects the proved developed, proved undeveloped and total proved reserves (all of which are located in Johnson County, Texas), future estimated net revenues and standardized measure at December 31, 2017, 2016 and 2015. The reserves and future estimated net revenues are based on the reports prepared by LaRoche Petroleum Consultants, Ltd.interests were $0.9 million as of December 31, 2017 and DeGolyer and MacNaughton as of December 31, 2016 and 2015. Proved developed reserves included 39 producing wells at each of December 31, 2017, 2016 and 2015, respectively. The Company’s proved reserves have not been filed with, or included in, any reports to any federal agency, other than those filed with the SEC.2022.
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| | 2017(2) | | 2016(2) | | 2015(2) | |
| | Developed | | Undeveloped | | Total | | Developed | | Undeveloped | | Total | | Developed | | Undeveloped | | Total | |
Proved natural gas reserves (BCF) | | | 4.6 | | | — | | | 4.6 | | | 3.9 | | | — | | | 3.9 | | | 5.3 | | | — | | | 5.3 | |
Proved natural gas liquids and condensate reserves (MMBBLS) | | | 0.7 | | | — | | | 0.7 | | | 0.5 | | | — | | | 0.5 | | | 0.7 | | | — | | | 0.7 | |
Future estimated net revenues (in thousands) | | $ | 15,616 | | $ | — | | $ | 15,616 | | $ | 9,506 | | $ | — | | $ | 9,506 | | $ | 13,897 | | $ | — | | $ | 13,897 | |
Standardized measure(1) (in thousands) | | $ | 6,576 | | $ | — | | $ | 6,576 | | $ | 4,197 | | $ | — | | $ | 4,197 | | $ | 5,286 | | $ | — | | $ | 5,286 | |
| (1)
| | This present value data should not be construed as representative of fair market value, since such data is based upon projected cash flows, which do not provide for escalation or reduction of natural gas or natural gas liquids prices or for escalation or reduction of expenses and capital costs.
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| (2)
| | The reserve estimates as of December 31, 2017, 2016 and 2015 utilized 12‑month average pricing, as required by accounting principles generally accepted in the United States of America, of $2.81, $2.65 and $2.80 per MCF of natural gas and $20.23, $16.61 and $14.92 per BBL of natural gas liquids, respectively.
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Undeveloped Acreage. Since the Company is not the operator, it has limited information regarding undeveloped acreage and does not know how many acres the operators classify as undeveloped acreage, if any, or the number of wells that ultimately will be drilled on the O & G Properties.
Glossary of Certain Oil and Gas Terms. The definitions set forth below shall apply to the indicated terms as used in this Report. All volumes of natural gas referred to herein are stated at the legal pressure base of the state or area where the reserves exist and at 60 degrees Fahrenheit and in most instances are rounded to the nearest major multiple.
“BBL” means a standard barrel containing 42 United States gallons.
“BCF” means one billion cubic feet under prescribed conditions of pressure and temperature and represents a basic unit for measuring the production of natural gas.
“Depletion” means (i) the volume of hydrocarbons extracted from a formation over a given period of time, (ii) the rate of hydrocarbon extraction over a given period of time expressed as a percentage of the reserves existing at the beginning of such period, or (iii) the amount of cost basis at the beginning of a period attributable to the volume of hydrocarbons extracted during such period.
“Formation” means a distinct geologic interval, sometimes referred to as the strata, which has characteristics (such as permeability, porosity and hydrocarbon saturations) that distinguish it from surrounding intervals.
“Future estimated net revenues” means the result of applying current prices of oil and natural gas to future estimated production from oil and natural gas proved reserves, reduced by future estimated expenditures, based on current costs to be incurred, in developing and producing the proved reserves, excluding overhead.
“MCF” means one thousand cubic feet under prescribed conditions of pressure and temperature and represents a basic unit for measuring the production of natural gas.
“MMBBLS” means one million BBLS.
“Operator” means the individual or company responsible for the exploration, development and production of an oil or natural gas well or lease.
“Proved oil and gas reserves” are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
| (i)
| | The area of the reservoir considered as proved includes: (A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.
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| (ii)
| | In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.
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| (iii)
| | Where direct observation from well penetrations has defined a highest known oil elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.
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| (iv)
| | Reserves that can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities.
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| (v)
| | Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12‑month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the
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first‑day‑of‑the‑month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
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“Royalty” means an interest in an oil and gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage.
“Severance tax” means an amount of tax, surcharge or levy recovered by governmental agencies from the gross proceeds of oil and natural gas sales. Severance tax may be determined as a percentage of proceeds or as a specific amount per volumetric unit of sales. Severance tax is usually withheld from the gross proceeds of oil and natural gas sales by the first purchaser (e.g., pipeline or refinery) of production.
“Standardized measure of discounted future net cash flows” (also referred to as “standardized measure”) means the value of future estimated net revenues, calculated in accordance with SEC guidelines, to be generated from the production of proved reserves net of estimated production and future development costs, using prices and costs at the date of estimation, without future escalation, and estimated income taxes, and without giving effect to non‑property related expenses such as general and administrative expenses, debt service and depreciation, depletion and amortization, and discounted using an annual discount rate of 10%.
“Undeveloped acreage” means acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves.
“Working interest” means a real property interest entitling the owner to receive a specified percentage of the proceeds of the sale of oil and natural gas production or a percentage of the production, but requires the owner of the working interest to bear the cost to explore for, develop and produce such oil and natural gas.
ITEM 1A. RISK FACTORS.
FACTORS.
General.Industry Risks
Both of our business segmentsOur 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 economic conditions in the United States and specific economic conditions in recent years haveparticular industries.
General and industry specific economic conditions in the United States could lead to reduced demand for our lime and limestone products. Specifically, demand from our steel and utility customers has decreased in recent years. Our steel customers have reduced their purchase volumes due to the ongoing difficult economic conditions in that industry. Demand from our utility customers has decreased due to the continuing trend in the United States to retire coal-fired utility plants. TheOur steel and oil and gas services customers reduce their purchase volumes, at times, due to cyclical economic conditions in their industries. Any overall reduction in demand for lime and limestone products has also resultedcould result in increased competitive pressures, including pricing pressures,pressure and competition for certain customer accounts, from other lime producers.
Reduced prices for natural gas and natural gas liquids over the past several years have resulted in reduced revenues from our Natural Gas Interests. However, we have generally benefited from lower energy costs in our Lime and Limestone Operations segment. In 2017, prices of natural gas and natural gas liquids recovered somewhat.
We are also in a period of regulatory uncertainty. While various 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, possible trade wars 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.
We may be adversely affected by any disruption in, or failure of, our information technology systems, including due to cybersecurity risks and incidents.
We rely upon the capacity, reliability and security of our information technology (“IT”) systems for our 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 may remain vulnerable to intrusion and damage despite our implementation of security measures that we feel protect our IT systems. 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 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 can increase and our reputation, business, results of operations and financial condition could be materially adversely affected.
Lime and Limestone Operations.
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 the product output from the shaft kiln technology being deployed at the St. Clair facility, including our ability to sell our increased lime capacity 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 recent Department of Transportation rules reduce the availability of rail cars and trucks 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.
We quote 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 and legislative impasses 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 and legislative impasses may adversely impact our financial condition and results of operations in various ways, including possibly reduced funding for transportation programs 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 costs13
The lime and liabilities, including capital, maintenancelimestone industry is highly regionalized and operating costs,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 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. Even with the current period of regulatory uncertainty that could result in deregulation in certain areas, we expect these costs and liabilities to continue or increase, including possible new costs, taxes and limitations on operations such as those related to possible climate change initiatives, including regulation of greenhouse gas emissions. Similar environmental costs and liabilities may also be faced by our customers.
The rate of change of Environmental Laws has been rapid over the last decade, andany key competitive factor, we may face possible new uncertainties, costs and liabilities, taxes and limitations on operations, including those relatedfind it difficult to climate change initiatives. Even with the current period of regulatory uncertainty that could result in deregulation in certain areas, we expectincrease or maintain our expenditure requirements for future environmental compliance, including complying with the new nitrogen dioxide, sulfur dioxide 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-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, that 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 may switch from coal to natural gas or renewable sources for power generation for environmental 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, 2017 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 or certainty that we will be able to continue or renew our operating permits,prices or to successfully secure new permits in connection with our modernizationretain certain customer accounts, 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 could be materially adversely affected.
Business and Financial Risks
In the normal course of our Lime and Limestone Operations, we face various business and financial risks, including inflationary pressures, 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 and acquisition strategies, the uncertainty of our ability to sell our increased production capacity 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 energy 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 changes to Department of Transportation rules and regulations can reduce the availability of trucks, truck drivers and rail cars to deliver solid fuels to our plants and deliver our products to our customers. Recent events, such as the ongoing conflict between Russia and Ukraine, and the sanctions and other actions resulting therefrom, could further increase our energy costs. Additionally, recent railroad delivery issues have prevented us from receiving contractual levels of coal and petroleum coke on a timely basis. If we are unable to continue to pass along our increasing costs to customers through higher prices or surcharges, or unable to timely receive contracted supplies of solid fuel to run our plants, our financial condition, results of operations, cash flows and competitive position could be materially adversely affected.
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.
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 have currently undertaken our new kiln project at St. Clair. Wein the past, and may in the future, undertake additional modernization and expansion and development projects and acquisitions. Such projects and acquisitions may require that we incur additionalsubstantial 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,generally kept up with inflation, we have experienced periods of pricing competition has increasedand pressures in recent years. We are unable to predict future demand and prices, given the current economic and regulatory uncertainties in the U.S.United States 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.
TheWe may be limited in our ability to insure against certain risk of our operations.
Mining limestone and producing lime industry is highly regionalized and competitive.limestone products involves risks which could result in damage to our facilities, personal injury, and environmental damage. Although we maintain insurance in an amount that we consider adequate, liabilities might exceed policy limits, in which event we could incur significant costs that could adversely affect our financial position, results of operations, cash flows and competitive position. Additionally, the risks inherent in mining limestone and the production of lime and limestone products may significantly increase the cost of obtaining adequate insurance coverage, or make some coverage unavailable.
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 competitorsIT systems security measures are predominately large private companies. The primary competitive factorsfocused 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, ransomware, or technological failure. Any failure, accident or security breach involving our IT systems could result in disruption to our operations. A material breach in the lime industry are price, quality, ability to meet customer demandssecurity of our IT systems could negatively impact our mining and specifications, proximity tomanufacturing operations, sales or financial and administrative functions or result in the compromise of personal information of our employees, customers personal relationships and timeliness of deliveries, with varying emphasis on these factors depending upon the specific product application.or suppliers. To the extent that oneany such failure, accident or moresecurity breach results in disruption to our operations or sales or loss or disclosure of, or damage to, our competitors becomes more successfuldata or confidential information, our costs could increase, and our reputation, business, results of operations, competitive position, 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 respect to any key competitive factor, ourregulatory actions.
COVID-19 Risks
Our financial condition, results of operations, cash flows, and competitive position could be materially adversely affected.impacted by pandemics, epidemics, or disease outbreaks, such as the COVID-19 pandemic.
Disruptions caused by pandemics, epidemics or disease outbreaks, such as COVID-19, could materially adversely impact our financial condition, results of operations, cash flows, and competitive position. The ongoing COVID-19 pandemic continues to impact our business, particularly as it relates to rising costs and supply chain delays and disruptions, which may be amplified by new variants of the COVID-19 virus and governmental responses to any outbreaks of infections. The extent to which the pandemic will continue to impact our business results and operations remains uncertain considering the rapidly evolving environment, duration and severity of the spread of COVID-19, and emerging variants.
The continued impact of COVID-19 may limit our ability to produce, sell and deliver our lime and limestone products to our customers; cause key management and plant-level employees not to be available to us; result in mine and
Natural Gas Interests.
Our natural gas reserves are depleting assets,plant shutdowns due to contagion, in which case we may not be able to shift production to our other mines and we have noplants; cause delays and disruptions to our supply chain as it relates to our suppliers, as well as delay and disrupt the supply chains of our customers; impede our ability to explore for new reserves, nor at current market prices are there any present plans to drill additional wells on the O&G Properties.
Revenues frommaintain and repair our Natural Gas Interests depend in large part on the quantity of natural gasplants and natural gas liquids produced from the O & G Properties. Our 39 producing wells will naturally experience declines in production rates due to depletion of their natural gas reserves,equipment; negatively impact our modernization, expansion, and the operators may determine to temporarily shut in or to plug and abandon a producing well if they believe that it is no longer economical to continue production from the well. We have nodevelopment plans; negatively impact our ability to explore for new reserves,integrate acquisitions; as well as adversely impact demand and at current market prices for natural gasour lime and natural gas liquids, therelimestone products and increase our costs. Although we cannot predict future developments, which are no present plans to drill additional wells onhighly uncertain, including the O & G Properties, thus limiting our Natural Gas Interests revenues to production from our existing wells.
Historically,scope and duration of the markets for natural gaspandemic, and natural gas liquids have been volatile and may continue to be volatile inactions taken by governmental authorities, including mandated vaccination programs, the future.
Various factors that are beyond our control will affect the demand for, and prices of, natural gas and natural gas liquids. The natural gas industry is cyclical in nature and tends to reflect general economic and gas supply and demand conditions. Recent technological advances, such as hydraulic fracturing, have enabled the industry to access additional reserves and have greatly increased the current supply of natural gas and natural gas liquids in the United States and elsewhere, generally resulting in lower natural gas and natural gas liquids prices. Lower natural gas and natural gas liquids prices may reduce the amount of natural gas and natural gas liquids that is economical for our operators to produce on the O & G Properties, or cause them to shut in wells for extended periods of time or to plug and abandon wells. Reduced prices and production could further reduce our revenues and cash flows from our Natural Gas Interests, while at the same time also increasing the rate at which we record non-cash depletion expense on our wells, and thusCOVID-19 pandemic could have ana material adverse effect on our gross profit fromfinancial condition, results of operations, cash flows and competitive position.
Governmental, Legal and Regulatory Risks
Our Lime and Limestone Operations are subject to general and industry specific regulations. Changes to the regulatory environment could increase our Natural Gas Interests.
We do not control production operations on the O & G Properties, which couldcost of compliance and adversely impact our Natural Gas Interests.financial condition, results of operations, cash flows and competitive position.
AsWe are in a period of regulatory uncertainty, which has been heightened by the ownercurrent divides in the branches of royaltythe United States federal government. The Administration and non‑Congress may initiate actions to increase regulation of certain industries, including the lime industry, and may take other steps to restrict oil and gas drilling, reduce the use of coal or regulate domestic manufacturing. There can be no assurance that any of these actions, if adopted, will not increase the costs for our customers or increase the Company’s cost of compliance with Environmental Laws. In addition, a variety of factors, including uncertainty with respect to governmental fiscal and budgetary constraints, including the timing and amount of construction and infrastructure spending, changes to tax laws, legislative impasses, extended government shutdowns, fallout from a potential U.S. government default on its obligations, pandemics, trade wars, tariffs, social unrest, international incidents, and increased inflationary pressures and interest rates, could have a material adverse effect on our financial condition, results of operations, cash flows and competitive position.
We incur environmental compliance costs and liabilities in our Lime and Limestone Operations, including capital, maintenance and operating working interests,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 abilitycompliance with Environmental Laws. We expect these costs and liabilities to influence production fromcontinue or increase, such as 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 O & G Properties is severely limited. All decisionslast decade, and we may face possible new uncertainties, costs and liabilities, taxes and limitations on operations, including those related to production on the O & G Properties will be madeclimate change initiatives. Changes in policy or political leadership may affect how Environmental Laws are interpreted or enforced by the operatorsEPA and maystate governmental agencies. The current Administration has signaled its intent to increase regulation under Environmental Laws and has issued multiple executive orders reversing prior deregulation. We expect our expenditure requirements for future environmental compliance, including complying with nitrogen dioxide, sulfur dioxide, ozone and particulate matter emission 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 us and some of our customers. In February 2021, the current Administration rejoined the Paris Agreement, under which the United States committed to reduce greenhouse gas emissions. There is no assurance that changes in the law or regulations will not be influenced by factors beyondadopted, such as the imposition of a carbon tax, a cap-and-trade program requiring companies to purchase carbon credits, the imposition of greenhouse gas emission limits 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 our control,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 our customers, including but not limitedcoal-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 naturalregulatory as well as cost reasons, thus reducing demand for our lime and limestone products for flue gas liquids prices, pipeline capacities, interest rates, budgetary considerationstreatment processes.
We intend to comply with all Environmental Laws and general industrybelieve our accrual for environmental costs and economic conditions.
The occurrence of an operational risk or uncertainty that materially impacts the operationsliabilities at December 31, 2022, is reasonable. Because many of the operators of the O & G Properties could have an adverse effect on the amountrequirements 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 receivewill be able to successfully secure new permits in connection with our interests in production fromfuture modernization and expansion and development projects, and it is not possible to accurately predict the O & G Properties, which could have an adverseaggregate future costs and liabilities relating to environmental compliance and their effect on our gross profit from our Natural Gas Interests.financial condition, results of operations, cash flows and competitive position.
Our natural gas gross profit is affected by productionlime and other costs, some of which are outside of our control, and possible unitizations.
The Natural Gas Interests gross profit that comes from our non-operating working interests, and to a lesser extent our royalty interests, is directly affected by increases in production and other costs, including depletion expense, as well as unitizations of existing wells. Some of these costs are outside our control, including production costs, costs of regulatory compliance and severance and other similar taxes. Other expenditures are dictated by business necessity, such as working over existing wells to increase recovery rates.
Governmental policies, laws and regulations could have an adverse impact on the O & G Properties and our natural gas business.
The O & G Properties and our natural gas businesslimestone operations are subject to complex federal, state and local laws and regulationsvarious regulatory risks, including those relating to mine safety, and reclamation and remediation obligations.
Our mining operations are subject to mine safety regulation under the oilMine Act. The Mine Act has been construed as authorizing MSHA to issue citations and natural gas industry,orders pursuant to the legal doctrine of strict liability, or liability without fault. Citations and orders can be contested before the Commission, and as well as regulations relating to health and safety matters. Future developments regarding the regulationpart of the oil and gas industrythat process, are difficult to predict. Both current and potential future changes to laws and regulations can have a significant impact on the costsoften reduced in severity and amount, of our production.and are sometimes vacated.
Environmental costsWe also have legal reclamation and liabilities and changing environmental regulationremediation obligations associated with the O & G Properties could adversely affect our gross profit from our Natural Gas Interests.
As with other companies engaged inretirement of AROs. Over time, the ownershipliability for AROs is recorded at its present value each period through accretion expense, and production of natural gas, we expect to have some risk of exposure to environmental costs and liabilities. The costs and liabilities associated with environmental compliance or remediation could reduce the gross profits we would receive from our Natural Gas Interests. The O & G Properties continue to be subject to extensive federal, state and local regulatory requirements relating to environmental affairs, health and safety and waste management.
Any increased regulation of natural gas production could increase our production costs oncapitalized cost is amortized over the O & G Properties and adversely affect our gross profit from our Natural Gas Interests. Third parties could also pursue legal actions to enforce compliance or assert claims for damages. Further, under certain environmental laws and regulations, the operators and ownersuseful life of the underlying properties could alsorelated asset. Upon settlement of the liability, we either settle the ARO for its recorded amount or recognize a gain or loss. We believe our accrual for AROs is reasonable, but there can be subjectno assurance that any amounts accrued will be sufficient to jointmeet our reclamation and several, strict liability for the removal or remediation of released materials or property contamination from drilling, including hydraulic fracturing, or waste disposal, regardless of whether the operators or owners were responsible for the release or contamination or if the operations wereobligations at any point in compliancetime.
We intend to comply with all applicable laws. Future Environmental Law developments,mining regulations and all of our reclamation and remediation obligations. If we fail to comply with such as stricter laws, regulations or enforcement policies, including climate change legislation mandating reductions in greenhouse gas emissions, could significantly increase the costsand obligations, such noncompliance may adversely impact our financial condition, results of production from the O & G Propertiesoperations, cash flows and adversely affect our gross profit from our Natural Gas Interests.competitive position.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
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 reservesresources are subject to encumbrances to secure the Company’s loans.any Company loans under its credit agreement.
ITEM 3. LEGAL PROCEEDINGS.
PROCEEDINGS.
Information regarding any legal proceedings is set forth in Note 98 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‑FrankDodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S‑K,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.MSHA. The required information regarding certain mining safety and health matters, broken down by mining complex, for the year ended December 31, 20172022 is presented in Exhibit 95.1 to this Report.Report on Form 10-K.
TheAs discussed in Item 1 above, 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,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 March 1, 2018,February 22, 2023, the Company had approximately 350 shareholders of record.
As of March 1, 2018,February 22, 2023, the Company had 500,000 shares of $5.00 par value preferred stock authorized; however, none has been issued.
The low and high sales prices for the Company’s common stock for the periods indicated were:
| | | | | | | | | | | | | |
| | 2017 | | 2016 | |
| | Low | | High | | Low | | High | |
First Quarter | | $ | 71.61 | | $ | 79.50 | | $ | 49.77 | | $ | 60.01 | |
Second Quarter | | $ | 75.75 | | $ | 81.99 | | $ | 50.90 | | $ | 58.99 | |
Third Quarter | | $ | 75.60 | | $ | 85.08 | | $ | 58.61 | | $ | 66.00 | |
Fourth Quarter | | $ | 71.93 | | $ | 101.40 | | $ | 65.00 | | $ | 77.50 | |
The Company declared and paid a cash dividend of $0.135 (13.5 cents) per share of common stock in each of the 2017 quarters. The Company declared and paid a cash dividend of $0.125 (12.5 cents) per share of common stock in each of the 2016 quarters. On January 30, 2018, the Company declared a quarterly cash dividend of $0.135 (13.5 cents) per share of common stock payable on March 16, 2018 to shareholders of record at the close of business on February 23, 2018.
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 consisting of Eagle Materials, Inc., Monarch Cement Co.Mineral Technologies, Inc., U.S. Concrete, Inc. and Martin MariettaSummit Materials Inc. The graph assumes that the value of the investment in the Company’s common stock and each index was $100 on December 31, 2012,2017, and that all cash dividends, have been reinvested.
| | | | | | | | | | | | | |
| | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | |
U.S. LIME & MINERALS, INC. | | 100 | | 129.82 | | 155.88 | | 118.62 | | 164.89 | | 168.97 | |
NASDAQ COMPOSITE INDEX | | 100 | | 141.58 | | 162.13 | | 173.35 | | 187.34 | | 242.49 | |
PEER GROUP | | 100 | | 120.05 | | 127.95 | | 143.73 | | 231.89 | | 245.45 | |
ISSUER PURCHASES OF EQUITY SECURITIES
In December 2015,including the Company commenced a publicly announced share repurchase program to repurchase up to $10,000,000 of its common stock. On November 17, 2017, the Company announced a 12-month extension of the repurchase program through November 30, 2018 to repurchase up to the $7,151,226 of its common stock remaining under the program. No additional shares have been repurchased to date.
The following table sets forth, for the periods indicated, the Company’s share repurchase activityspecial cash dividend paid in the fourth quarter 2017 under this program:
| | | | | | | | | | | |
| | | | | | | Total Number of | | | | |
| | | | | | | Shares Purchased | | Maximum | |
| | | | | | | as Part of Publicly | | Remaining | |
| | Total Number of | | Average Price | | Announced | | Amount Available | |
Period | | Shares Purchased | | Paid Per Share | | Program | | Under the Program | |
October 1 – 31, 2017 | | — | | | — | | — | | $ | 7,151,226 | |
November 1 – 30, 2017 | | — | | | — | | — | | $ | 7,151,226 | |
December 1 – 31, 2017 | | — | | | — | | — | | $ | 7,151,226 | |
Total | | — | | | — | | — | | $ | 7,151,226 | |
2019, have been reinvested.
In addition, the
| | | | | | | | | | | | | |
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | |
U.S. LIME & MINERALS, INC. | | 100.00 | | 92.74 | | 125.27 | | 159.30 | | 181.12 | | 198.94 | |
NASDAQ COMPOSITE INDEX | | 100.00 | | 97.16 | | 132.81 | | 192.47 | | 235.15 | | 158.65 | |
PEER GROUP | | 100.00 | | 54.00 | | 80.14 | | 81.94 | | 133.30 | | 104.04 | |
The Company’s Amended and Restated 2001 Long‑TermLong-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 1,5044,918 shares at a price of $77.10$140.76 per share, the fair market value of one share on the date they were tendered to the Company, in the fourth quarter 20172022 for payment of tax withholding liability upon the lapse of restrictions on restricted stock.
ITEM 6. SELECTED FINANCIAL DATA.
| | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | |
| | (dollars in thousands, except per share amounts) | |
Operating results | | | | | | | | | | | | |
Lime and limestone revenues | | $ | 142,612 | | 137,190 | | 128,390 | | 144,567 | | 128,003 | |
Natural gas revenues | | | 2,232 | | 2,092 | | 2,447 | | 5,274 | | 5,762 | |
Total revenues | | $ | 144,844 | | 139,282 | | 130,837 | | 149,841 | | 133,765 | |
Gross profit | | $ | 34,380 | | 33,092 | | 28,714 | | 36,791 | | 30,800 | |
Operating profit | | $ | 24,227 | | 23,480 | | 19,086 | | 27,322 | | 21,651 | |
Income before income tax (benefit) expense | | $ | 24,943 | | 23,618 | | 17,481 | | 25,922 | | 19,833 | |
Net income | | $ | 27,148 | | 17,754 | | 12,886 | | 19,367 | | 14,800 | |
Net income per share of common stock: | | | | | | | | | | | | |
Basic | | $ | 4.87 | | 3.19 | | 2.30 | | 3.47 | | 2.66 | |
Diluted | | $ | 4.86 | | 3.19 | | 2.30 | | 3.47 | | 2.66 | |
| | | | | | | | | | | | |
| | As of December 31, | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | |
Total assets | | $ | 228,447 | | 210,159 | | 196,499 | | 199,986 | | 187,526 | |
Current installments of debt | | $ | — | | — | | — | | 16,667 | | 5,000 | |
Debt, excluding current installments | | $ | — | | — | | — | | — | | 16,667 | |
Stockholders’ equity per outstanding common share | | $ | 36.73 | | 32.23 | | 29.72 | | 27.65 | | 24.54 | |
Employees | | | 318 | | 321 | | 323 | | 313 | | 297 | |
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD‑LOOKINGFORWARD-LOOKING STATEMENTS.
Any statements contained in this Report that are not statements of historical fact are forward‑lookingforward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward‑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‑lookingforward-looking statements. The Company cautions that forward‑lookingforward-looking statements involve risks and uncertainties that could cause actual results to differ materially from expectations, including without limitation the following: (i) the Company’s plans, strategies, objectives, expectations, and intentions are subject to change at any time at the Company’s discretion; (ii) the Company’s plans and results of operations will be affected by its ability to maintain and increase its revenues and manage its growth; (iii) the Company’s ability to meet short‑termshort-term and long‑termlong-term liquidity demands, including meeting the Company’s operating and capital needs, including for the modernization and expansion and development project at St. Clair and 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, including more severe and frequent weather events resulting from climate change, natural disasters, accidents, IT systems failures or disruptions, including due to cybersecuritycyber-security incidents or ransomware attacks, utility disruptions, supply chain delays and disruptions, labor shortages and disruptions, or regulatory requirements; (v) volatile coal, petroleum coke, diesel, natural gas, electricity, transportation and freighttransportation 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;basis at competitive prices; (vi) unanticipated delays or cost overruns in completing modernization and expansion and development projects, including the Company’s St. Clair kiln project that is estimated to cost approximately $50 million in total; (vii) the Company’s ability to expand its Limelime and Limestone Operationslimestone operations through projects and acquisitions of businesses with related or similar operations including obtainingand the Company’s ability to obtain any required financing for such projects and acquisitions, to integrate the projects and acquisitions into the Company’s overall operations, and to sell any resulting increased production at acceptable prices; (viii)(vii) inadequate demand and/or prices for the Company’s lime and limestone products due to increased competition from competitors, increasing competition for certain customer accounts, conditions in the U.S. economy, recessionary pressures in, and the impact of government policies on, particular industries, including construction, steel, industrial and oil and gas services, reduced demand from utility plants, increased competition from competitors,steel, construction, and industrial, effects of governmental fiscal and budgetary constraints, including the level of highway construction and infrastructure funding, the impact ofchanges to tax reform,laws, legislative impasses, extended governmental shutdowns, default on U.S. government obligations, trade wars, tariffs, international incidents, including the Russian conflict with Ukraine, oil cartel production and supply actions, sanctions, economic and regulatory uncertainties under state governments and the United States Administration and Congress, inflation, Federal Reserve responses to inflationary concerns, including increased interest rates, and inability to continue to maintain or increase prices for the Company’s products; (ix) uncertaintiesproducts, including passing through the increased costs of pricesenergy, transportation, labor, and regulations with respect to the Company’s Natural Gas Interests, including the absence of drilling activities on the Company’s O & G Properties, the change in the operator of the wells drilled on the O&G Properties, inability to explore for new reserves, unitization of existing wells, declines in production rates and plugging and abandoning of existing wells; (x)services; (viii) ongoing and possible new regulations, investigations, enforcement actions and costs, legal expenses, penalties, fines, assessments, litigation, judgments and settlements, taxes and disruptions and limitations of operations, including those related to climate change, and health and safety, human capital, diversity, and other ESG and sustainability considerations, and those that could impact the Company’s ability to continue or renew its operating permits or successfully secure new permits in connection with its modernization and expansion and development projects; (ix) estimates of reserves and remaining lives of reserves; (x) the impact of future variants of the novel coronavirus (“COVID-19”) or other potential global pandemics and governmental responses thereto, including decreased demand, lower prices, tightened labor and other markets, and increased costs, and the risk of non-compliance with health and safety protocols, social distancing and mask guidelines, and vaccination mandates, on the Company’s financial condition, results of operations, cash flows, and competitive position; (xi) the impact of social or political unrest; (xii) risks relating to mine safety and reclamation and remediation; and (xiii) other risks and uncertainties set forth in this Report or indicated from time to time in the Company’s filings with the SEC,Securities and Exchange Commission (the “SEC”), including the Company’s Quarterly Reports on Form 10‑Q.10-Q.
Our gross profit increased 18.7% in 20172022 compared to 2016.
Revenues from our Natural Gas Interests increased 6.7% in 2017 compared to 2016 due to an increase in average prices for natural gas and natural gas liquids of approximately 19.3%, partially offset by a decrease in production volumes of approximately 12.6%, resulting from the normal declines in production rates on the Company’s existing natural gas wells.
Gross profit increased 3.9% in 2017 compared to 2016.2021. Gross profit from our Lime and Limestone Operations in 20172022 increased 1.9%17.6%, compared to 2016,2021, primarily due to the increased revenues discussed above. Gross profitabove, partially offset by increased lime and limestone production costs, principally from our Natural Gas Interestshigher transportation, energy, labor, and supplies costs.
Our net income increased 1,113.3%$8.4 million, or 22.6%, in 20172022, compared to 2016, primarily due2021. Net income per fully diluted share increased to lower depletion and lease operating expenses and the increase$8.00 in revenues discussed above.
Interest expense remained flat at $0.2 million for each of 2017 and 2016. Interest and other income, net, in 2017 increased $0.6 million, or 149.2%2022, compared to 2016, due to higher average cash and cash equivalent balances.$6.54 in 2021.
Income tax benefit was $2.2 million in 2017, compared to income tax expense of $5.9 million in 2016. Income tax benefit in 2017 included a $7.4 million reduction of our deferred tax liabilities, net, due to the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), which was signed into law on December 22, 2017. The 2017 Tax Act reduced the enacted federal income tax rate for corporations from 35% to 21% beginning in 2018. Applying the lower federal income tax rate to the Company’s deferred tax items resulted in a one-time reduction to the Company’s deferred tax liabilities, net, recorded as a tax benefit in the Consolidated Statements of Income in 2017. The Company estimates that the 2017 Tax Act will result in a reduction of its future effective income tax rates by approximately 8 to 10 percentage points, compared to what it would have expected before the 2017 Tax Act was enacted.
Net income increased $9.4 million, or 52.9%, in 2017 compared to 2016. Cash flows from operations during 2017 enabled us to make $21.3$32.4 million of capital investments in 2022, including the acquisition of Mill Creek. It also enabled us to pay $3.0$4.5 million in dividends in 2022 and increase our cash balances to $85.0$133.3 million atas of December 31, 2017,2022, compared to $74.7$105.4 million atas of December 31, 2016. We2021. As of December 31, 2022 and 2021, we had no debt outstanding at December 31, 2017.
In December 2015, we commenced a publicly announced share repurchase program to repurchase up to $10 million of our common stock. Pursuant to that program, we repurchased 3,086 shares in December 2015 at a weighted-average price of $54.79 per share. In 2016, we repurchased 50,068 shares at a weighted-average price of $53.52 per share. In November 2017, we announced a 12-month extension of the repurchase program to repurchase up to approximately $7.2 million of our common stock remaining under the program through November 30, 2018. No additional shares have been repurchased to date.
On January 30, 2018, we announced that our Board of Directors had declared a regular quarterly cash dividend of $0.135 (13.5 cents). outstanding.
Absent a significant acquisition opportunity arising during 2018,2023, we anticipate funding our operating and capital needs, including modernization and expansion and development projects, such as our new kiln project at St. Clair,
ourquarterly cash dividend and the remainder of our share repurchase program 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, aggregate, 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 the winter ice and snow storms, cold weather, hurricanes, tornadoes and excessive rainfalls generally reduce the demand for lime and limestone products supplied to construction‑relatedconstruction-related customers that account for a significant amount of our revenues. Inclement weather also interferes with our open‑pitopen-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 lime and limestone 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, oil and gas services, and industrialsteel customers increased in 2017. However, demand for2022.
In 2022, we experienced rising costs, especially transportation, energy, labor, and supplies costs, and supply chain delays and disruptions as the global economy came out of restrictions related to the COVID-19 pandemic. We continue to monitor and assess the impact of the COVID-19 pandemic, including the emergence of new variants of the virus, implementation of new or enhanced pandemic-related restrictions, and the possibility of additional wide-spread or localized outbreaks of infections, any of which could have an adverse effect on our limefinancial condition, results of operations, cash flows and limestone products from our environmental customers declined during 2017. Oilcompetitive position.
In 2014 and natural gas prices rose from their 2016 lows throughout 2017, which resulted in increased drilling activities in 2017 and higher demand from our oil and gas services customers. At the same time, higher oil and gas prices impacted our Lime and Limestone Operations through higher transportation, freight and fuel costs during 2017. The current Administration has announced that they will impose a 25% tariff on imported steel which should be beneficial to future demand for domestic steel.
On December 4, 2015, the President signed into law the Fixing America’s Surface Transportation Act (the “FAST Act”), the first multi‑year transportation authorization enacted in over ten years. The FAST Act authorizes $305 billion over fiscal years 2016 through 2020 that provides long-term funding certainty for surface transportation projects. Its enactment should allow states and local governments to move forward with critical transportation projects, like new highways, with confidence that the Highway Trust Fund will meet its obligations through 2020. In addition, 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 beginning in Texas’ fiscal 2018 to be directed to the State Highway Fund and, beginning in Texas’ fiscal 2020, for certain state motor vehicle sales and rental tax revenuerevenues to be directed to the State Highway Fund. In its fiscal 2022, Texas transferred approximately $4.5 billion of such tax revenues to the State Highway Fund from these two amendments, with almost $23 billion transferred since 2015. In 2021, the United States Congress passed the Infrastructure Investment and Jobs Act, which is estimated to apportion approximately $26.9 billion to Texas for federal-aid highway programs, of which $5.2 billion was for Texas’ fiscal 2022 and the remainder is estimated for fiscal 2023 through fiscal 2026. With these funding improvements, along with additional infrastructure spending proposed by the current Administration,sources, we would expect to see increases instrong continued demand from our construction customers, but the timing and amount of theany increase in demand is uncertain.uncertain and subject to weather, political, and other factors.
Our modernization and expansion and development projects and acquisitions in Texas, Arkansas, Oklahoma and Arkansas, and our current modernization of U. S. Lime Company—St. ClairMissouri and our Texas slurry operations have positioned us to meet the demand for high‑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
up-to-date, fuel-efficient plant facilities, which hashave resulted in lower production costs and greater operating efficiencies, thus enhancing our competitive position. All of our rotary kilns are fuel‑efficientnow fuel-efficient preheater kilns, except for onekilns. The addition of the vertical kiln at St. Clair which will be replaced with a new, more fuel-efficient vertical kiln that should be completed in 2018.2019 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 lineon-line and refurbishing and/or improving acquired facilities, suchincluding the facilities acquired as St. Clair, which we acquired with the intentiona result of modernizingour recent acquisitions of Carthage and expanding,Mill Creek, 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, and have generallyour energy costs increased over the past several years.substantially in 2022. In addition, our freight costs, including the cost of diesel, prices, to deliver our products can be high relative to the value of our products and have generally increased in the past several years. Weproducts.
Historically, 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 to our customers,
where possible, through higher prices and/or surcharges on certain products. In addition, as noted above, we are also proceeding with the construction ofput a new, more fuel-efficient vertical kiln in service at St. Clair, which should help usand we continually look for other ways to better manage our energy costs at that plant.our plants. 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 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 atin Texas, Arkansas, and Arkansas,Oklahoma, our new kiln project at St. Clair,expanded slurry operations, our acquisitions, including the recent acquisitions of Carthage and Mill Creek, 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,However, there can be no assurance that demand and prices for our lime and limestone products have not been sufficientwill enable us to fully utilize our additional production capacity. In addition, there can be no assurancecapacity, nor 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;facilities and acquisitions; that our results will not be adversely affected by increases in fuel, natural gas, electricity, transportation and freight costs, taxes or new environmental, health and safety or 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.
Natural Gas Interests.Other.
In 2004, we entered into the O & G Lease with EOG with respect to oil and gas rights onRevenues in 2022 included $2.7 million from our Cleburne, Texas property, located in the Barnett Shale Formation. Pursuant to the O & G 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‑operating working interest owner. Our overall average revenue interest is 34.7% in the 33 wells drilled under the O & G Lease that are currently producing. Affiliated companies of Enervest, Ltd. purchased EOG’s interests in the O & G Lease, and an affiliate of Enervest, Ltd. is now the successor operator of the wells drilled under the O & G Lease.
In November 2006, we also entered into a Drillsite Agreement with XTO that has an oil and gas lease covering approximately 538 acres of land contiguous to our Johnson County, Texas property. Pursuant to this Agreement, we have a 3% royalty interest and an optional 12.5% non‑operating working interest, resulting in a 12.4% interest in revenues in the six XTO wells drilled and producing from a padsite located on our property.
No new wells have been completed since 2011, and there are no present plans to drill additional wells on the O&G Properties. We cannot predict the number of additional wells that ultimately will be drilled on the O & G Properties, if any, or their results.
The pricing of natural gas sales is primarily determined by supply and demandinterests, compared to $1.9 million in the marketplace and can fluctuate considerably. The prices that the Company receives for its2021. Gross profit in 2022 included $1.4 million from our natural gas production is also affected by the amount of natural gas liquids includedinterests, compared to $0.6 million in the natural gas, and the prices for those liquids is also subject to supply and demand factors. Although they recovered somewhat in 2017, prices of both natural gas and natural gas liquids have generally declined over the past several years, principally due to increased supply. In addition, if estimates of our proved oil and
gas reserves decline due to further declines in prices for natural gas and natural gas liquids or other reasons, the rate at which we record depletion expense would increase.2021.
CRITICAL ACCOUNTING POLICIES.POLICIES AND ESTIMATES.
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
RESULTS OF OPERATIONS.
The following table sets forth certain financial information expressed as a percentage of revenues for the periods indicated:three years ended December 31, 2022:
| | | | | | | | | |
| | Year Ended December 31, | | | |
| | 2017 | | 2016 | | 2015 | | | |
Lime and Limestone Operations | | 98.5 | % | 98.5 | % | 98.1 | % | | |
Natural Gas Interests | | 1.5 | | 1.5 | | 1.9 | | | |
| | | | | | | | | |
| | | Year Ended December 31, | | |
| | | 2022 | | 2021 | | 2020 | | |
Lime and limestone revenues | | | 98.8 | % | 99.0 | % | 99.4 | % | |
Other revenues | | | 1.2 | | 1.0 | | 0.6 | | |
Total revenues | | 100.0 | % | 100.0 | % | 100.0 | % | | | 100.0 | | 100.0 | | 100.0 | | |
Cost of revenues | | | | | | | | | | | | | | | | |
Labor and other operating expenses | | (65.0) | | (64.8) | | (66.0) | | | | (60.9) | | (57.8) | | (58.3) | | |
Depreciation, depletion and amortization | | (11.3) | | (11.4) | | (12.1) | | | | (9.3) | | (10.9) | | (12.1) | | |
Gross profit | | 23.7 | | 23.8 | | 21.9 | | | | 29.8 | | 31.3 | | 29.6 | | |
Selling, general and administrative expenses | | (7.0) | | (6.9) | | (7.4) | | | | (6.6) | | (6.8) | | (7.6) | | |
Impairment of long-lived assets | | | — | | — | | (1.0) | | |
Operating profit | | 16.7 | | 16.9 | | 14.5 | | | | 23.2 | | 24.5 | | 21.1 | | |
Other (expense) income: | | | | | | | | | | | | | | | | |
Interest expense | | (0.2) | | (0.2) | | (0.8) | | | | (0.1) | | (0.1) | | (0.2) | | |
Interest and other income (expense), net | | 0.7 | | 0.2 | | (0.4) | | | |
Income tax benefit (expense) | | 1.5 | | (4.2) | | (3.5) | | | |
Interest and other income, net | | | 0.8 | | 0.2 | | 0.3 | | |
Income tax expense | | | (4.7) | | (5.0) | | (3.6) | | |
Net income | | 18.7 | % | 12.7 | % | 9.8 | % | | | 19.2 | % | 19.6 | % | 17.6 | % | |
20172022 vs. 20162021
RevenuesOur revenues for 20172022 increased to $144.8$236.2 million from $139.3$189.3 million in 2016,2021, an increase of $5.6$46.9 million, or 4.0%24.8%. Revenues from our Lime and Limestone Operations in 20172022 increased $5.4$46.1 million, or 4.0%24.6%, to $142.6 $233.4 million from $137.2$187.4 million in 2016.2021. The increase in revenues from our Lime and Limestone Operations was primarily due to increaseda 14.0% increase in sales volumes of our lime and limestone products, principally to our construction, oil and gas services, and industrial customers, partially offset by decreased sales volumes to our environmentalsteel customers. In addition, we realized a slight10.6% average increase in prices for our lime and limestone products in 2017,2022, compared to 2016.
Revenues2021. Other revenues included $2.7 million and $1.9 million in 2022 and 2021, respectively, from our Natural Gas Interests for 2017 increased $0.1 million, or 6.7%, to $2.2 million from $2.1 million in the prior year. The increase in revenues from our Natural Gas Interests resulted from higher average price per MCF in 2017, compared to 2016, partially offset by the normal declines in production rates on existing wells.natural gas interests.
Our gross profit increased to $34.4$70.3 million for 20172022 from $33.1$59.3 million for 2016,2021, an increase of $1.3 million,$11.1million, or 3.9%18.7%. Gross profit from our Lime and Limestone Operations for 20172022 was $33.7$69.0 million, compared to $33.0 $58.7 million in
2016, 2021, an increase of $0.6$10.3 million, or 1.9%17.6%. The increase in gross profit in 20172022, compared to 20162021, resulted primarily from the increased revenues discussed above, partially offset by increased strippinglime and limestone production costs, at the Batesville Quarry, which has continued into 2018.
principally from higher transportation, energy, labor, and supplies costs. Gross profit for 2017 also included $0.7$1.4 million and $0.6 million in 2022 and 2021, respectively, from our Natural Gas Interests, compared to $0.1 million in 2016, an increase of $0.7 million or 1,113.3%. The increase in gross profit from our Natural Gas Interests in 2017, compared to 2016, was primarily due to lower depletion and lease operating expenses and price increases in 2017, compared to 2016. Production volumes for 2017 from our Natural Gas Interests totaled 0.6 BCF, sold at an average price per MCF of $3.99, compared to 2016 when 0.6 BCF was produced and sold at an average price of $3.35 per MCF.natural gas interests.
Selling, general and administrative expenses (“SG&A”) increased to $10.2$15.6 million for 2017,2022, an increase of $0.5$2.7 million, or 5.6%21.1%, compared to $9.6$12.8 million for 2016.2021. As a percentage of revenues, SG&A increasedwas 6.6% in 2022, compared to 7.0%6.8% in 2017 from 6.9% in 2016, due primarily to an2021. The increase in stock-based compensation in 2017, principallySG&A was primarily due to higher prices for our common stock.increased personnel expenses in 2022, compared to 2021.
Interest expense was $0.2$0.3 million in each of 20172022 and 2016, as we2021. We had no outstanding debt during either 20172022 or 2016.2021.
Interest and other (income) expense,income, net was $1.0$2.0 million in 2017,2022, compared to $0.4 million in 2016. Interest and other (income) expense, net consisted primarily2021, an increase of interest income earned on cash and cash equivalents balances in each of 2017 and 2016.$1.7 million, or 479.2%. The increase in interest and other (income) expense,income, net in 2017,2022 compared to 2016,2021 was due to higher interest rates on higher average balances in our cash and cash equivalents.
Income tax expense was $11.1 million in 2022, for an effective rate of 19.7%, compared to $9.5 million in 2021, for an effective rate of 20.4%, an increase of $1.7 million, primarily due to higher average balances of cash and cash equivalents.
Income tax (benefit) expense was a benefit of $2.2 millionthe increase in 2017,income before taxes in 2022, compared to expense of $5.9 million in 2016, a decrease in income tax expense of $8.1 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 and the one-time impact of the lower rate on our deferred tax liabilities, net.2021. Our effective income tax rates for 2022 and 2021 were reduced from the statutory rate for 2017 was also reduced by research and development tax credits associated with the ongoing constructionprimarily due to statutory depletion in excess of the St. Clair kiln project which were not significant in 2016.cost depletion.
Net income increased to $27.1$45.4 million ($4.868.00 per share diluted) in 2017,2022, compared to $17.8$37.0 million ($3.196.54 per share diluted) in 2016, an increase of $9.4 million, or 52.9%.
2016 vs. 2015
Revenues for 2016 increased to $139.3 million from $130.8 million in 2015,2021, an increase of $8.4 million, or 6.5%22.6%.
2021 vs. 2020
Our revenues for 2021 increased to $189.3 million from $160.7 million in 2020, an increase of $28.6 million, or 17.8%. Revenues from our Lime and Limestone Operations in 20162021 increased $8.8$27.7 million, or 6.9%17.3%, to $137.2 $187.4 million from $128.4$159.7 million in 2015.2020. The increase in revenues from our Lime and Limestone Operations was primarily due to increaseda 16.4% increase in sales volumes of our lime and limestone products principally to our construction, steel, environmental, industrial, roofing, and environmental customers, partially offset by decreased sales volumes toagriculture customers. In 2020, the COVID-19 pandemic and related restrictions on business activities resulted in a general economic slowdown, which disproportionately impacted certain industries that purchase our oillime and gas services customers.limestone products. In addition, we realized a slight decrease0.9% average increase in prices for our lime and limestone products in 2016,2021, compared to 2015.
Revenues2020. Other revenues included $1.9 million and $1.0 million in 2021 and 2020, respectively, from our Natural Gas Interests for 2016 decreased $0.4 million, or 14.5%, to $2.1 million from $2.4 million in the prior year. The decrease in revenues from our Natural Gas Interests resulted from the normal declines in production rates on existing wells and lower prices.natural gas interests.
Our gross profit increased to $33.1$59.3 million for 20162021 from $28.7$47.6 million for 2015,2020, an increase of $4.4$11.7 million, or 15.2%24.5%. Gross profit from our Lime and Limestone Operations for 20162021 was $33.0$58.7 million, compared to $28.4 $48.0 million in 2015,2020, an increase of $4.6$10.7 million, or 16.3%22.2%. The increase in gross profit in 20162021, compared to 20152020, resulted primarily from the increased revenues discussed above.
above and increased operating efficiencies, partially offset by higher energy costs. Gross profit for 2016 also included $0.1a $0.6 million profit in 2021 and a $(0.4) million loss in 2020 from our Natural Gas Interests,natural gas interests.
SG&A increased to $12.8 million for 2021, an increase of $0.7 million, or 5.5%, compared to $0.3$12.2 million in 2015, a decrease of $0.3 million or 80.9%. Production volumes for 2016 from our Natural Gas Interests totaled 0.6 BCF, sold at an average price per MCF of $3.35, compared to 2015 when 0.7 BCF was produced and sold at an average price of $3.41 per MCF.
Selling general and administrative expenses (“SG&A”) was $9.6 million in each of 2016 and 2015.2020. As a percentage of revenues, SG&A decreasedwas 6.8% in 2021, compared to 6.9%7.6% in 2016 from 7.4%2020. The increase in 2015SG&A was primarily due to increased personnel expenses in 2021, compared to 2020.
In the increase in revenues in 2016.fourth quarter 2020, we recognized an impairment charge of $1.6 million ($1.2 million, net of tax) to adjust the carrying values of the long-lived assets related to our natural gas interests. At December 31, 2021, the long-lived assets related to our natural gas interests had a carrying value of $1.5 million.
Interest expense was $0.3 million in 2016 decreased2021, compared to $0.2 million from $1.0 million in 2015, a decrease of $0.8 million,2020. We had no outstanding debt during either 2021 or 76.3%. Interest expense in 2015 included $0.2 million paid in quarterly settlement payments pursuant to our interest rate hedges and $0.5 million payment to repurchase our interest hedges in the second quarter 2015. The decrease in interest expense in 2016 resulted from the repayment of our debt in the second quarter 2015.2020.
Interest and other (income) expense,income, net was income of $0.4 million in 2016,2021, compared to an expense of $0.6$0.5 million in 2015. The net change of $1.0 million income primarily resulted from the $0.9 million expense in 2015 for the termination of the Corson Lime Company defined benefit plan.2020.
Income tax (benefit) expense increased to $5.9was $9.5 million in 2016 from $4.62021, for an effective rate of 20.4%, compared to $5.8 million in 2015,2020, for an effective rate of 17.2%, an increase of $1.3$3.6 million, or 27.6%. The increase in income tax expense in 2016 compared to 2015 was primarily due to the increase in our income before taxes.taxes in 2021, compared to 2020. Our effective income tax raterates for 2016 decreased to 24.8% compared to our 20152021 and 2020 were reduced from the statutory rate of 26.2%, primarily due to an increasestatutory depletion in state income taxes, netexcess of federal income tax benefits, in 2015 as a result of the full realization of the Company’s net operating loss carryforwards in one state.cost depletion.
Net income increased to $17.8$37.0 million ($3.196.54 per share diluted) in 2016,2021, compared to $12.9$28.2 million ($2.305.00 per share diluted) in 2015,2020, an increase of $4.9$8.8 million, or 37.8%31.3%.
offset by a $2.8 million increase in accounts payable, accrued expenses and other liabilities. In 2021, net cash provided by operating activities in 2017, compared to 2016, decreased primarily due to a $7.6was principally composed of $37.0 million decrease in deferrednet income, taxes principally caused by the reduction in the enacted United States federal income tax rate, compared to a $0.6$20.9 million DD&A, $1.5 million increase in deferred income taxes, in 2016. Additionally, prepaid expenses and other current assets and inventories, net increased by $1.6$2.2 million and $1.1 million, respectively, in 2017, compared to decreases of $0.3 million and $2.3 million, respectively, in 2016. These changes werestock-based compensation, partially offset by a $0.3$6.0 million decrease from changes in trade receivables, networking capital. In 2021, the changes in 2017, compared toworking capital were principally composed of a $0.9$3.7 million increase in 2016. The increase in trade receivables, net, in 2016 resulted from the $2.9 million increase in revenuesprimarily as a result of increased sales in the fourth quarter 20162021, compared to the fourth quarter 2015.2020, a $1.4 million decrease in accounts payable, accrued expense and other liabilities, and a $1.0 million increase in prepaid expenses and other assets.
Net cash used in investing activities was $20.7$31.2 million for 2017,2022, compared to $17.5 $29.6 million in 2016.for 2021. Net cash used in investing activities for 2022 included approximately $9.7$5.6 million for the acquisition of Mill Creek and $2.8an additional $3.5 million paid oncapital investments in the St. Clair kiln projectMill Creek facility, $4.1 million for real property purchases, and $3.0 million for development of the Love Hollow Quarry and its connection to the Batesville plant. During 2022, we experienced increased costs associated with our normal recurring capital and re-equipping projects at our plants and facilities, as part of the current overall inflationary environment. We expect that the increase in 2017 and 2016, respectively.these capital costs will result in increased DD&A expense in future periods. Net cash used in investing activities in 2016 also2021 included approximately $2.7$14.0 million for two significant projects at our Texas facilitythe development of the Love Hollow Quarry and its connection to overhaul the primary crushing systemBatesville plant and upgrade the burner management system on one of our kilns, and approximately $1.0$2.3 million to take advantage of cost-effective opportunities
to replace certain mobile equipment at our Arkansas facility.for other real property purchases. The balance of net cash used in investing activities in 2022 and 2021 was primarily for normal recurring capital and re‑equippingre-equipping projects at our plants and facilities.
Net cash used in financing activities primarily consisted of $3.0 million and $2.8$4.5 million for dividend payments in 2017 and 2016, respectively, and $0.3 million and $2.9$0.8 million to repurchase shares of our common stock in 2017 and 2016, respectively. In 2016, such share repurchases included $2.7 for repurchases pursuant2022, compared to the Company’s December 2015 publicly announced $10 million share repurchase program, which was extended for 12 months in November 2017, leaving up to approximately $7.2$3.6 million for such repurchases through November 30, 2018. There were no share repurchases under thedividend payments and $0.7 million to repurchase programshares of our common stock in 2017.2021.
Our cash and cash equivalents at December 31, 20172022 increased to $85.0$133.4 million from $74.7$105.4 million at December 31, 2016.2021.
Banking Facilities and Debt. On May 7, 2015, we amended our Our credit agreement with Wells Fargo Bank, N.A. (the “Lender”) to, among other things, provide, as amended as of May 2, 2019 and November 21, 2019, provides for a $75 million revolving credit facility (the “New Revolving“Revolving Facility”) and reduced interest rate margins and commitment fees (the “Amendment”). The Amendment also provides for 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 terms of the Amendment providecredit agreement also provides for a final maturity$10 million letter of credit sublimit under the NewRevolving Facility. The Revolving Facility and any incremental loanloans mature on May 7, 2020; interest2, 2024.
Interest rates on the Revolving Facility are, at our option, of LIBOR plus a margin of 1.000% (previously 1.750%) to 2.000% (previously 2.750%), or the Lender’s Prime Rate plus a margin of 0.000% to plus 1.000%; and a commitment fee range of 0.200% (previously 0.250%) to 0.350% (previously 0.400%) on the undrawn portion of the New Revolving Facility. The New Revolving Facility interest rate margins and commitment fee are determined quarterly in accordance with a pricing grid based upon the Company’sour 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 New Revolving Facility is secured by the Company’s existing and hereafter acquired tangible assets, intangible assets and real property. The maturity of the New 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 (previously 3.25 to 1). As of October 27, 2016, we amended our credit agreement to increase the letter of credit sublimit under the New Revolving Facility from $5 million to $10 million. 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 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.
Prior to the Amendment, our credit agreement included a ten‑year $40 million term loan (the “Term Loan”), a ten‑year $20 million multiple draw term loan (the “Draw Term Loan”) and a $30 million revolving credit facility (the “Revolving Facility”) (collectively, the “Credit Facilities”). The Term Loan required quarterly principal paymentsWe had no debt outstanding as of $0.8 million, with a final principal payment of $7.5 million due on December 31, 2015. The Draw Term Loan required quarterly principal payments of $0.4 million, with a final principal payment of $5.4 million due on December 31, 2015. The Revolving Facility was scheduled to mature on June 1, 2015. The maturity of the Term Loan, the Draw Term Loan and the Revolving Facility could have been accelerated if any event of default, as defined under the Credit Facilities, had occurred.
2022 or 2021. We had interest rate hedges, with the Lender as the counterparty to the hedges that fixed LIBOR through maturity at 4.695%, 4.875% and 5.500% on the outstanding balance of the Term Loan, 75% of the outstanding balance of the Draw Term Loan and 25% of the outstanding balance of the Draw Term Loan, respectively. Based on our LIBOR margin of 1.750% prior to the Amendment, our interest rates had been: 6.445% on the outstanding balance of the Term Loan; 6.625% on 75% of the outstanding balance of the Draw Term Loan; and 7.250% on 25% of the outstanding balance of the Draw Term Loan.
The hedges had been effective as defined under applicable accounting rules. Therefore, changes in fair value of the interest rate hedges were reflected in comprehensive income. We would have been exposed to credit losses in the
event of non‑performance by the counterparty to the hedges. We paid $0.2 million in aggregate quarterly settlement payments pursuant to the hedges in 2015. These payments were included in interest expense in our Consolidated Statements of Income.
We had $7.1$0.3 million of letters of credit issued under the New Revolving Facility as of December 31, 2017, including approximately $6.6 million related to the St. Clair kiln project, but no cash draws. Our letters of credit2022, which count as draws against the available commitment under the New Revolving Facility.