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| USLM > SEC Filings for USLM > Form 10-Q on 30-Jul-2009 | All Recent SEC Filings |
30-Jul-2009
Quarterly Report
Forward-Looking Statements. Any statements contained in this Report that are not
statements of historical fact are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements in
this Report, including without limitation statements relating to the Company's
plans, strategies, objectives, expectations, intentions, and adequacy of
resources, are identified by such words as "will," "could," "should," "would,"
"believe," "expect," "intend," "plan," "schedule," "estimate," "anticipate," and
"project." The Company undertakes no obligation to publicly update or revise any
forward-looking statements. The Company cautions that forward-looking statements
involve risks and uncertainties that could cause actual results to differ
materially from expectations, including without limitation the following:
(i) the Company's plans, strategies, objectives, expectations, and intentions
are subject to change at any time at the Company's discretion; (ii) the
Company's plans and results of operations will be affected by its ability to
maintain and 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 debt, including the ability of the
counterparty to the Company's interest rate hedges to meet its obligations;
(iv) inclement weather conditions; (v) increased fuel, electricity,
transportation and freight 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 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,
unitization of existing wells, inability to explore for new reserves and
declines in production rates; (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, 2008.
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, glass, 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 the first six months 2009, sales volumes of the Company's lime products
decreased as compared to the previous year period due to significantly reduced
demand for the Company's lime products, principally from its construction and
steel and other industrial customers due to the weakened economy. The reduction
in revenues from reduced sales volumes was partially offset by average product
price increases of 8.6%. Because of the weakening economy, the Company initiated
steps to reduce its operating expenses beginning in the fourth quarter 2008. Due
to the continuing weak demand, during the second quarter 2009 the Company
further reduced costs, including additional employee layoffs. The price
increases for the Company's lime and limestone products and the reduced costs
resulted in improved gross profit margins as a percentage of revenues in the
2009 periods compared to 2008 for its Lime and Limestone Operations. While the
Company's costs for solid fuels remain high, management continues to seek to
mitigate these costs by varying the mixes of fuel used in the kilns as well as
idling several kilns that are not needed to meet current levels of demand. The
unprecedented slowdown in the U.S. economy continues to present challenges for
the Company's Lime and Limestone Operations in 2009. Although the Company does
not expect to see improvements in the near term, it continues to believe that
demand for its lime and limestone products used in construction and steel and
other industrial production could increase in the future spurred by the effects
of the government's stimulus efforts, the increasing reliance on toll roads and,
hopefully, improved economic conditions, most of which are not within the
Company's control. During the slowdown, management continues to strive to
control costs, introduce additional efficiencies, pay down debt and position the
Company for the hoped-for recovery.
Revenues and gross profit from the Company's Natural Gas Interests decreased
significantly in the first half 2009, principally due to the drastic decline in
natural gas prices and, to a lesser extent, the normal decline in production
rates. The number of producing wells was 30 in the first half 2009 compared to
25 wells in the first half 2008. During the first half 2009, the Company was
notified that 11 of its wells under the Lease Agreement, which were completed in
2007 and 2008, had been unitized as the operator determined that these wells
included production from oil and gas interests that were, or potentially were,
partially owned by others. The unitizations reduced the Company's royalty
interests in the 11 wells, reducing the Company's revenue interests in these
wells to an average of 32.7% from 36% and resulting in an overall average
revenue interest of 34.6% in all 26 wells under the Lease Agreement. Based on
discussions with the Lease Agreement operator, eight potential additional wells
have been sited on the Company's property. It is possible that one or more of
these wells could be drilled but not completed during the second half 2009,
depending on the price for natural gas when the wells are drilled. The Company
cannot predict the number of additional wells that ultimately will be drilled,
if any, or their results.
Liquidity and Capital Resources.
Net cash provided by operating activities was $11.7 million in the six months
ended June 30, 2009, compared to $11.3 million in the comparable 2008 period, an
increase of $382 thousand, or 3.4%. 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 half 2009, cash provided by operating
activities was principally composed of $6.1 million net income, $1.2 million
deferred income taxes and $6.9 million DD&A, compared to $8.9 million net
income, $1.5 million deferred income taxes and $6.5 million DD&A in the first
half 2008. The most significant change in working capital items in the first
half 2009 were a net increase in trade receivables of $1.3 million and net
decreases in accounts payable and accrued expenses, inventories and other
liabilities of $1.9 million, $1.3 million and $1.0 million, respectively. The
most significant changes in working capital in the first half 2008 were a net
increase in trade receivables, inventories and accounts payable and accrued
expenses of $6.6 million, $1.6 million and $1.8 million, respectively. The net
increases in trade receivables primarily resulted from an increase in revenues
in the second quarters 2009 and 2008, compared to the fourth quarters 2008 and
2007, respectively.
The Company invested $3.8 million in capital expenditures in the first half
2009, compared to $7.1 million in the same period last year. The first half 2009
and 2008 included $1.0 million and $1.3 million, respectively, for the quarry
project at the Company's Arkansas facilities. Included in capital expenditures
during the first half 2009 and 2008 was $34 thousand and $2.5 million,
respectively, for drilling and completion costs for the Company's working
interests in natural gas wells.
Net cash used in financing activities was $7.1 million in the first half 2009,
including $2.5 million for repayment of term loan debt and $4.7 million
repayment of the Company's revolving credit facility. Net cash used in financing
activities was $4.4 million in the first half 2008, including $2.5 million for
repayment of term loan debt and $1.9 million repayment of 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"). At June 30, 2009, the Company had $322
thousand of letters of credit issued, which count as draws under the Revolving
Facility.
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, based on a 12-year
amortization, which began on March 31, 2007, with a final principal payment on
December 31, 2015 equal to any remaining principal then outstanding. The
Revolving Facility is scheduled to mature on April 2, 2012. 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.
The Credit Facilities bear interest, at the Company's option, at either LIBOR
plus a margin of 1.125% to 2.125%, or the Lender's Prime Rate plus a margin of
minus 0.625% to plus 0.375%. 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 "Cash Flow Leverage Ratio"). Since July 30, 2008,
based on the Company's quarterly Cash Flow Leverage Ratios, the LIBOR margin and
the Lender's Prime Rate margin have been, and continue to be, plus 1.125% and
minus 0.625%, respectively.
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 current 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
current 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 current LIBOR margin of 1.125%. The
hedges have been effective as defined under applicable accounting rules.
Therefore, changes in fair value of the interest rate hedges are reflected in
comprehensive income (loss). The Company will be exposed to credit losses in the
event of non-performance by the counterparty, Wells Fargo Bank, N.A., to the
hedges. Due to interest rate declines, the Company marked its interest rate
hedges to market at June 30, 2009 and December 31, 2008, resulting in
liabilities of $3.5 million and $5.4 million, respectively, that are included in
accrued expenses ($1.7 million and $1.6 million, respectively) and other
liabilities ($1.8 million and $3.8 million, respectively) on the Company's
balance sheets.
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. As of June 30, 2009, the Company had no material open orders
or commitments that are not included in current liabilities on the June 30, 2009
Condensed Consolidated Balance Sheet.
As of June 30, 2009, the Company had $44.2 million in total debt outstanding.
Results of Operations.
Revenues in the second quarter 2009 decreased to $29.1 million from $41.2 in the
comparable prior year quarter, a decrease of $12.1 million, or 29.3%. Revenues
from the Company's Lime and Limestone Operations in the second quarter 2009
decreased $8.8 million, or 24.1%, to $27.6 million from $36.4 million in the
comparable 2008 quarter, while revenues from its Natural Gas Interests decreased
$3.3 million, or 68.6%, to $1.5 million from $4.8 million in the comparable
prior year quarter. For the six months ended June 30, 2009, revenues decreased
to $57.4 million from $74.4 million in the comparable 2008 period, a decrease of
$17.0 million, or 22.8%. Revenues from the Company's Lime and Limestone
Operations in the first six months 2009 decreased $12.8 million, or 19.2%, to
$54.2 million from $67.0 million in the comparable 2008 period, while revenues
from its Natural Gas Interests decreased $4.1 million, or 55.5%, to $3.3 million
from $7.4 million in the comparable prior year period. The decrease in lime and
limestone revenues primarily resulted from decreased lime sales volumes,
partially offset by average price increases for the Company's lime and limestone
products of approximately 8.0% and 8.6% in the second quarter and first half
2009, respectively, compared to the comparable 2008 periods.
The Company's gross profit was $6.8 million for the second quarter 2009,
compared to $11.2 million in the comparable 2008 quarter, a decrease of
$4.4 million, or 39.0%. Gross profit for the first six months 2009 was
$13.0 million, a decrease of $4.9 million, or 27.3%, from $17.9 million in the
first six months 2008. Included in gross profit for the second quarter and first
half 2009 were $5.9 million and $11.1 million, respectively, from the Company's
Lime and Limestone Operations, compared to $7.1 million and $11.7 million,
respectively, in the comparable 2008 periods. The decreases in gross profit from
Lime and Limestone Operations were primarily due to decreased revenues,
principally due to reduced construction and steel and other industrial demand,
partially offset by reduced costs.
Gross profit from the Company's Natural Gas Interests declined to $863 thousand
and $1.9 million for the second quarter and first half 2009, respectively, from
$4.0 million and $6.2 million, respectively, in the comparable 2008 periods,
primarily due to the decline in natural gas prices. Production volumes from the
Company's Natural Gas Interests for the second quarter 2009 totaled 343 thousand
MCF from 30 wells, sold at an average price of $4.73 per MCF, compared to 359
thousand MCF from 25 wells, sold at an average price of $13.27 per MCF, in the
comparable 2008 quarter. Production volumes for the first half 2009 from Natural
Gas Interests totaled 707 thousand MCF at an average price of $5.24 per MCF,
compared to the first half 2008 when 620 thousand MCF was produced and sold at
an average price of $11.95 per MCF. The unitization of 11 natural gas wells
during the first half 2009 also resulted in retroactive net adjustments of
approximately $125 thousand and $375 thousand that further reduced gross profit
for the second quarter and first half 2009, respectively.
Selling, general and administrative expenses ("SG&A") decreased to $1.9 million
in the second quarter 2009 from $2.0 million in the second quarter 2008, a
decrease of $79 thousand, or 4.0%. As a percentage of revenues, SG&A increased
to 6.6% in the 2009 quarter compared to 4.9% in the comparable 2008 quarter.
SG&A decreased to $3.8 million in the first six months 2009 from $3.9 million in
the comparable 2008 period, a decrease of $74 thousand, or 1.9%. As a percentage
of revenues, SG&A in the first six months 2009 increased to 6.7% , compared to
5.3% in the comparable 2008 period.
Interest expense in the second quarter 2009 decreased $180 thousand, or 19.8%,
to $731 thousand from $911 thousand in the second quarter 2008. Interest expense
in the first six months 2009 decreased to $1.5 million from $1.9 million in the
first six months 2008, a decrease of $409 thousand, or 21.6%. The decrease in
interest expense in the 2009 periods primarily resulted from decreased average
outstanding debt due to the repayment of $10.4 million of debt since June 30,
2008.
Income tax expense decreased to $863 thousand in the second quarter 2009 from
$2.2 million in the second quarter 2008, a decrease of $1.4 million, or 61.5%.
For the first six months 2009, income tax expense decreased to $1.7 million from
$3.3 million in the comparable 2008 period, a decrease of $1.6 million, or
49.1%. The decreases in income taxes in the 2009 periods compared to the
comparable 2008 periods was primarily due to the decreases in income before
income taxes.
The Company's net income was $3.4 million ($0.53 per share diluted) in the
second quarter 2009, compared to net income of $6.1 million ($0.95 per share
diluted) in the second quarter 2008, a decrease of $2.7 million, or 43.8%. Net
income in the first half 2009 was $6.1 million, a decrease of $2.8 million, or
31.0%, compared to the first half 2008 net income of $8.9 million.
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