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| USLM > SEC Filings for USLM > Form 10-Q on 5-Nov-2008 | All Recent SEC Filings |
5-Nov-2008
Quarterly Report
manage its growth; (iii) the Company's ability to meet short-term and long-term
liquidity demands, including servicing the Company's debt, conditions in the
credit markets, volatility in the equity markets, and changes in interest rates
on the Company's unhedged debt; (iv) inclement weather conditions; (v) increased
fuel, electricity and transportation costs; (vi) unanticipated delays,
difficulties in financing, or cost overruns in completing construction projects;
(vii) the Company's ability to expand its lime and limestone operations through
acquisitions, including obtaining financing for such acquisitions, and to
successfully integrate acquired operations; (viii) inadequate demand and/or
prices for the Company's lime and limestone products, including the additional
lime production from the Company's third kiln in Arkansas, due to the state of
the U.S. economy, recessionary pressures in particular industries, including
construction and steel, and inability to continue to increase prices for the
Company's products; (ix) the uncertainties of development, production and prices
with respect to the Company's natural gas interests including reduced drilling
activities pursuant to the Company's lease agreement and drillsite agreement and
declines in production; (x) on-going and possible new environmental and other
regulatory costs, taxes and limitations on operations, including those related
to climate change; and (xi) other risks and uncertainties set forth in this
Report or indicated from time to time in the Company's filings with the
Securities and Exchange Commission, including the Company's Form 10-K for the
fiscal year ended December 31, 2007.
Overview
The Company has two business segments: Lime and Limestone Operations and
Natural Gas Interests.
Through its Lime and Limestone Operations, the Company is a manufacturer of
lime and limestone products, supplying primarily the construction, steel,
municipal sanitation and water treatment, paper, roof shingle and agriculture
industries. The Company operates lime and limestone plants and distribution
facilities in Arkansas, Colorado, Louisiana, Oklahoma and Texas through its
wholly owned subsidiaries, Arkansas Lime Company, Colorado Lime Company, Texas
Lime Company, U.S. Lime Company, U.S. Lime Company - Shreveport, U.S. Lime
Company - St. Clair, and U.S. Lime Company - Transportation. The Lime and
Limestone Operations represent the Company's principal business.
The Company's Natural Gas Interests are held through its wholly owned
subsidiary, U.S. Lime Company - O & G, LLC, and consist of royalty and working
interests under a lease agreement and a drillsite agreement, with two separate
operators, related to the Company's Johnson County, Texas property, located in
the Barnett Shale Formation, on which Texas Lime Company conducts its lime and
limestone operations. The Company reported its first revenues and gross profit
for natural gas production from its Natural Gas Interests in the first quarter
2006.
During 2008, the Company had average price increases for its lime and
limestone products of 8.5% for the third quarter and 7.8% for the first nine
months compared to the prior year comparable periods. Sales of lime products to
the steel industry increased, while demand from the construction industry
decreased due to the weakening economy, during the third quarter and first nine
months 2008 compared to the comparable 2007 periods. The Company's costs for
fuel, electricity and transportation, including prices for coal and coke
delivered to the Company's plants, were higher in the third quarter and first
nine months 2008, compared to the comparable 2007 periods, resulting in reduced
gross profit margins as a percentage of revenues for its Lime and Limestone
Operations in 2008. The weakening economy remains a concern for demand for the
Company's lime and limestone products in the foreseeable future, including
continued softness in the construction industry and significantly reduced demand
by steel customers beginning in October 2008, while operating costs for the
Company's Lime and Limestone Operations continue to increase due to rising
prices for petroleum products and solid fuels. Given these challenging economic
conditions, the Company must continue to increase prices for its lime and
limestone products in order to improve its gross profit margins.
Revenues and gross profit from the Company's Natural Gas Interests increased
significantly in the third quarter and first nine months 2008, as the number of
producing wells expanded to 30 in the third quarter 2008, including five new
lease agreement wells that began production in the third quarter 2008, compared
to 15 wells in production in the third quarter 2007. Natural gas prices rose
during the first half 2008, peaking in early July, and have now fallen back to
approximately December 2007 levels. The Company cannot predict the number of
wells that ultimately will be drilled pursuant to either the lease agreement or
drillsite agreement. There are no new wells scheduled to be drilled in the
fourth quarter 2008. Based on discussions with the operators, only three
additional wells are currently scheduled to be drilled under the lease agreement
at a future date. With the current 30 wells, the Company anticipates substantial
cash flows from its Natural Gas Interests to continue even as production rates
decline over the life of the wells.
Liquidity and Capital Resources
Net cash provided by operating activities was $19.7 million in the nine
months ended September 30, 2008, compared to $16.8 million in the comparable
2007 period, an increase of $2.9 million, or 16.9%. Net cash provided by
operating activities is composed of net income, depreciation, depletion and
amortization ("DD&A"), deferred income taxes and other non-cash items included
in net income, and changes in working capital. In the first nine months 2008,
cash provided by operating activities was principally composed of $13.4 million
net income, $10.0 million DD&A and $2.0 million deferred income taxes, compared
to $8.4 million net income, $9.4 million DD&A and $1.2 million deferred income
taxes in the first nine months 2007. The most significant changes in working
capital in the first nine months 2008 were net increases in trade receivables
and inventories of $5.7 million and $1.9 million, respectively. The most
significant changes in working capital items during the 2007 period were a net
increase in trade receivables and inventories of $1.6 million and $1.3 million,
respectively.
The Company invested $13.2 million in capital expenditures in the first nine
months 2008, compared to $14.5 million in the comparable period last year.
Included in the capital expenditures during the first nine months 2008 and 2007
were approximately $4.7 million and $2.4 million, respectively, for drilling and
completion costs for the Company's working interests in natural gas wells. The
first nine months 2008 also included $3.0 million for the development of a new
quarry, including construction of a bridge, at the Company's Arkansas
facilities. The Company invested $5.5 million in the 2007 period for the third
kiln project at Arkansas.
Net cash used in financing activities was $7.3 million in the first nine
months 2008, including repayment of $3.8 million of the Company's term loans and
$3.6 million of the Company's revolving credit facility. Net cash used in
financing activities was $2.0 million in the 2007 comparable period, including
$3.8 million for repayment of term loans, partially offset by net proceeds of
$1.6 million from the Company's revolving credit facility.
The Company's credit agreement includes 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 Company had $252 thousand worth of
letters of credit issued and $3.8 million outstanding on the Revolving Facility
at September 30, 2008.
The Term Loan requires quarterly principal payments of $833 thousand, which
began on March 31, 2006, equating to a 12-year amortization, with a final
principal payment of $7.5 million due on December 31, 2015. The Draw Term Loan
requires quarterly principal payments of $417 thousand, which began on March 31,
2007, with a final principal payment of $5.4 million due on December 31, 2015.
Prior to the Amendment (defined below), the maturity date for the Revolving
Facility was October 20, 2010. The maturity of the Term Loan, the Draw Term Loan
and the Revolving Facility can be accelerated if any event of default, as
defined under the Credit Facilities, occurs.
As of March 31, 2007, the Company entered into an amendment of its Credit
Facilities (the "2007 Amendment"), primarily to reduce the interest rate margin
under the Credit Facilities and to extend the maturity date of the Revolving
Facility. The Credit Facilities now bear interest, at the Company's option, at
either LIBOR plus a margin of 1.125% (previously 1.25%) to 2.125% (previously
2.50%), or the Lender's Prime Rate plus a margin of minus 0.625% (previously
minus 0.50%) to plus 0.375% (previously plus 0.50%). The margins are determined
quarterly in accordance with a pricing grid based upon the ratio of the
Company's total funded senior indebtedness to earnings before interest, taxes,
depreciation, depletion and amortization ("EBITDA") for the 12 months ended on
the last day of the most recent calendar quarter. The pricing grid was also
revised in the Company's favor by the 2007 Amendment. For the third quarter
2008, the LIBOR and Lender's Prime Rate margins were reduced to 1.125% and minus
0.625%, respectively, pursuant to the pricing grid and will remain the same in
the fourth quarter 2008. The 2007 Amendment also extended the maturity date of
the Revolving Facility to April 2, 2012.
The Company has a hedge that fixes LIBOR at 4.695% on the outstanding balance
of the Term Loan for the period December 30, 2005 through its maturity date,
resulting in an interest rate of 5.82% based on the third quarter 2008 LIBOR
margin of 1.125%. Effective December 30, 2005, the Company also entered into a
hedge that fixes LIBOR at 4.875% on 75% of the outstanding balance on the Draw
Term Loan through its maturity date, resulting in an interest rate of 6.00%
based on the third quarter 2008 LIBOR margin of 1.125%. Effective June 30, 2006,
the Company entered into a third hedge that fixes LIBOR at 5.50% on the
remaining 25% of the outstanding balance of the Draw Term Loan through its
maturity date, resulting in an interest rate of 6.625% based on the third
quarter 2008 LIBOR margin of 1.125%. The Company designated all of the hedges as
cash flow hedges, and as such, changes in their fair market values are included
in other comprehensive (loss) income. The Company is exposed to credit losses in
the event of non-performance by the counterparty, Wells Fargo Bank, N.A., of the
hedges. As the Company has fixed the LIBOR interest rates on its Term Loans, the
recent spike in LIBOR had no impact on the Company's interest costs for such
Loans.
The Company is not contractually committed to any planned capital
expenditures for its Lime and Limestone Operations until actual orders are
placed for equipment. Under the Company's oil and gas lease agreement, and
pursuant to the Company's subsequent elections to participate as a 20% working
interest owner, unless, within five days after receiving an AFE (authorization
for expenditures) for a proposed well, the Company provides notice otherwise,
the Company is deemed to have elected to participate as a 20% working interest
owner. As a 20% working interest owner, the Company is responsible for 20% of
the costs to drill and complete the well. Pursuant to the drillsite agreement,
the Company, as a 12.5% working interest owner, is responsible for 12.5% of the
costs to drill and complete each well. There are no new wells scheduled to be
drilled in the fourth quarter 2008. As of September 30, 2008, the Company had an
open order with a remaining balance of approximately $1.7 million for the
construction of the bridge as part of its development of the new quarry in
Arkansas. The Company had no other material open orders or commitments that are
not included in current liabilities on the September 30, 2008 Condensed
Consolidated Balance Sheet.
As of September 30, 2008, the Company had $51.7 million in total debt
outstanding.
Results of Operations
Revenues increased to $38.9 million in the third quarter 2008 from
$32.9 million in the third quarter 2007, an increase of $6.0 million, or 18.2%.
Revenues from the Company's Lime and Limestone Operations increased
$2.5 million, or 8.1%, to $33.6 million in the third quarter 2008, compared to
the Company's third quarter 2007 level of $31.1 million, while revenues from its
Natural Gas Interests increased $3.4 million, or 184.6%, to $5.3 million in the
third quarter 2008 from $1.9 million in the comparable 2007 quarter. For the
nine months ended September 30, 2008, revenues increased to $113.3 million from
$94.6 million for the comparable 2007 period, an increase of $18.7
million, or 19.8%. Revenues from the Company's Lime and Limestone Operations
increased $12.1 million, or 13.7%, to $100.6 million in the first nine months
2008, compared to $88.5 million in the comparable 2007 period, while revenues
from its Natural Gas Interests increased $6.6 million, or 109.2%, to
$12.7 million in the first nine months 2008 from $6.1 million in the comparable
2007 period. The increase in lime and limestone revenues was driven primarily by
average price increases for the Company's lime and limestone products of
approximately 8.5% and 7.8% in the third quarter and first nine months 2008,
respectively, compared to the comparable 2007 periods, and increased demand from
the Company's steel customers. These increases were partially offset by reduced
construction demand during the 2008 periods compared to last year's comparable
periods.
Production volumes from the Company's Natural Gas Interests for the third
quarter 2008 totaled approximately 448 thousand MCF, sold at an average price of
approximately $11.90 per MCF, compared to approximately 257 thousand MCF, sold
at an average price of approximately $7.28 per MCF, in the comparable 2007
quarter. Production volumes for the first nine months 2008 from Natural Gas
Interests totaled approximately 1,068 thousand MCF, sold at an average price of
approximately $11.93 per MCF, compared to approximately 755 thousand MCF, sold
at an average price of approximately $8.06 per MCF, in the first nine months
2007. Thirty wells were producing during the third quarter 2008, compared to
fifteen wells in the third quarter 2007.
The Company's gross profit for the third quarter 2008 was $8.9 million,
compared to $7.3 million for the comparable 2007 quarter, a increase of
$1.7 million, or 22.9%. Gross profit for the first nine months 2008 was
$26.9 million, a increase of $6.8 million, or 33.8%, from $20.1 million for the
prior year comparable period. Included in gross profit for the third quarter and
first nine months 2008 were $4.6 million and $16.3 million, respectively, from
the Company's Lime and Limestone Operations, compared to $5.9 million and
$15.8 million, respectively, in the comparable 2007 periods. Gross profit for
the third quarter and first nine months 2008 included $4.3 million and
$10.5 million, respectively, from the Company's Natural Gas Interests, compared
to $1.3 million and $4.3 million, respectively, in the comparable 2007 periods.
The decrease in gross profit and gross profit margin from Lime and Limestone
Operations in the third quarter 2008 was primarily due to increased energy
costs, partially offset by increased revenues. Although gross profit from Lime
and Limestone Operations increased in the first nine months 2008, gross profit
margin declined primarily due to increased energy costs.
Selling, general and administrative expenses ("SG&A") increased to
$2.0 million in the third quarter 2008 from $1.9 million in the third quarter
2007, an increase of $104 thousand, or 5.4%. As a percentage of revenues, SG&A
decreased to 5.2% in the 2008 quarter, compared to 5.8% in the third quarter
2007. SG&A increased to $5.9 million in the first nine months 2008 from
$5.5 million in the comparable 2007 period, an increase of $462 thousand, or
8.4%. As a percentage of revenues, SG&A decreased in the first nine months of
2008 to 5.2%, compared to 5.8% in the comparable 2007 period. The increases in
SG&A in the 2008 periods were primarily attributable to the Company's increased
personnel costs, including a $25 thousand increase in non-cash stock-based
compensation, increased insurance costs and increased professional fees.
Interest expense in the third quarter 2008 decreased $247 thousand, or 22.8%,
to $834 thousand, compared to $1.1 million in the third quarter 2007. Interest
expense in the first nine months 2008 decreased to $2.7 million from
$3.3 million in the first nine months 2007, a decrease of $535 thousand, or
16.4%. The decrease in interest expense in the 2008 periods primarily resulted
from a decrease in average outstanding debt due to the repayment of
$11.8 million of debt since September 30, 2007 and reduced interest rates.
Other, net includes approximately $200 thousand for damages to equipment and
railcars located at a trans-loading site in Galveston, caused by Hurricane Ike.
There were no damages to the Company's other locations from Hurricane Ike.
Income tax expense increased to $1.4 million in the third quarter 2008 from
$1.1 million in the third quarter 2007, an increase of $333 thousand, or 30.1%.
For the first nine months 2008, income tax expense increased to $4.7 million
from $3.1 million in the comparable 2007 period, an increase of $1.7 million, or
54.2%. The increases in income taxes in the 2008 periods compared to the
comparable 2007 periods were primarily due to the increases in income before
income taxes
The Company's net income was $4.5 million ($0.70 per share diluted) during
the third quarter 2008, compared to net income of $3.2 million ($0.50 per share
diluted) during the third quarter 2007, an increase of $1.3 million, or 40.6%.
Net income for the first nine months 2008 was $13.4 million ($2.10 per share
diluted), an increase of $5.0 million, or 59.1%, compared to the first nine
months 2007 net income of $8.4 million ($1.33 per share diluted).
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