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| USLM > SEC Filings for USLM > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-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, aluminum, 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 nine months 2009, sales volumes of the Company's lime products
decreased as compared to the previous year period as a result of 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 lime sales volumes was partially
offset by average lime and limestone product price increases of 9.4%. 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 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 and gross
profit margins 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 drastic slowdown in the U.S. economy continues to present
challenges for the Company's Lime and Limestone Operations. 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 is 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 nine months 2009, principally due to the drastic
decline in natural gas prices and, to a lesser extent, the lower production
volumes. The number of producing wells was 30 in both the first nine months 2009
and 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 the
state of Texas or 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. The operator began drilling the first
of these wells in October and has informed the Company that it plans to drill
the remaining seven wells during the fourth quarter 2009 and first quarter 2010,
but not complete any of them until late 2010. The Company cannot predict the
number of wells that ultimately will be drilled or their results.
Liquidity and Capital Resources
In addition to repaying $8.4 million of debt in the first nine months of 2009,
the Company's cash and cash equivalents at September 30, 2009 increased
$10.9 million to $11.7 million from $836 thousand at December 31, 2008.
Net cash provided by operating activities was $24.1 million in the nine months
ended September 30, 2009, compared to $19.7 million in the comparable 2008
period, an increase of $4.5 million, or 22.7%. 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 2009, cash provided by
operating activities was principally composed of $10.6 million net income,
$10.3 million DD&A and $1.6 million deferred income taxes, compared to
$13.4 million net income, $10.0 million DD&A and $2.0 million deferred income
taxes in the first nine months 2008. The most significant change in working
capital items during the 2009 period was a net decrease in inventories of
$2.2 million, primarily resulting from the Company's reduced lime production and
sales volumes. 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 net increase in trade
receivables in 2008 primarily resulted from an increase in revenues in the third
quarter 2008, compared to the fourth quarter 2007.
The Company invested $5.2 million in capital expenditures in the first nine
months 2009, compared to $13.2 million in the comparable period last year. The
first nine months 2009 and 2008 included $1.3 million and $3.0 million,
respectively, for the quarry project at the Company's Arkansas facilities.
Included in capital expenditures during the first nine months 2009 and 2008 were
$71 thousand and $4.7 million, respectively, for drilling, completion and well
workover costs for the Company's working interests in natural gas wells.
Net cash used in financing activities was $8.3 million in the first nine months
2009, including repayment of $3.8 million of the Company's term loans and
$4.7 million of the Company's revolving credit facility. Net cash used in
financing activities was $7.3 million in the 2008 comparable period, including
$3.8 million for repayment of term loans and $3.6 million 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 September 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 September 30, 2009 and December 31, 2008, resulting in
liabilities of $3.9 million and $5.4 million, respectively, that are included in
accrued expenses ($1.8 million and $1.6 million, respectively) and other
liabilities ($2.1 million and $3.8 million, respectively) on the Company's
balance sheets. Pursuant to the interest rate hedges, the Company made payments
of $476 thousand and $356 thousand in the third quarter 2009 and 2008,
respectively, and $1.3 million and $748 thousand in the first nine months 2009
and 2008, respectively.
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 September 30, 2009, the Company had no material open
orders or commitments that are not included in current liabilities on the
September 30, 2009 Condensed Consolidated Balance Sheet.
As of September 30, 2009, the Company had $42.9 million in total debt
outstanding, compared to $51.4 million as of December 31, 2008.
Results of Operations
Revenues decreased to $31.6 million in the third quarter 2009 from $38.9 million
in the third quarter 2008, a decrease of $7.3 million, or 18.8%. Revenues from
the Company's Lime and Limestone Operations decreased $3.7 million, or 11.1%, to
$29.9 million in the third quarter 2009, compared to the Company's third quarter
2008 level of $33.6 million, while revenues from its Natural Gas Interests
decreased $3.6 million, or 67.3%, to $1.7 million in the third quarter 2009 from
$5.3 million in the comparable 2008 quarter. For the nine months ended
September 30, 2009, revenues decreased to $89.1 million from $113.3 million for
the comparable 2008 period, a decrease of $24.3 million, or 21.4%. Revenues from
the Company's Lime and Limestone Operations decreased $16.6 million, or 16.5%,
to $84.0 million in the first nine months 2009, compared to $100.6 million in
the comparable 2008 period, while revenues from its Natural Gas Interests
decreased $7.7 million, or 60.5%, to $5.0 million in the first nine months 2009
from $12.7 million in the comparable 2008 period. The decreases 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 11.0% and 9.4% in the third quarter and first nine
months 2009, respectively, compared to the comparable 2008 periods.
The Company's gross profit was $8.6 million for the third quarter 2009, compared
to $8.9 million for the comparable 2008 quarter, a decrease of $304 thousand, or
3.4%. Gross profit for the first nine months 2009 was $21.7 million, a decrease
of $5.2 million, or 19.3%, from $26.9 million for the first nine months 2008.
Included in gross profit for the third quarter and first nine months 2009 were
$7.5 million and $18.6 million, respectively, from the Company's Lime and
Limestone Operations, compared to $4.6 million and $16.3 million, respectively,
in the comparable 2008 periods. The improved gross profit and gross profit
margins for the Company's Lime and Limestone Operations in the 2009 periods
compared to the comparable 2008 periods were due to price increases for the
Company's lime and limestone products and reduced costs, partially offset by
continuing reduced construction and steel and other industrial demand for the
Company's lime products. The improvements in the Company's Lime and Limestone
operations resulted in increased overall gross profit margins for the 2009
periods compared to the prior year periods.
Gross profit from the Company's Natural Gas Interests declined to $1.2 million
and $3.1 million for the third quarter and first nine months 2009, respectively,
from $4.3 million and $10.5 million, respectively, in the comparable 2008
periods, primarily due to the drastic decline in natural gas prices and lower
production volumes. Production volumes from the Company's Natural Gas Interests
for the third quarter 2009 totaled 302 thousand MCF, sold at an average price of
$5.84 per MCF, compared to 448 thousand MCF, sold at an average price of $11.90
per MCF, in the comparable 2008 quarter. Production volumes for the first nine
months 2009 from Natural Gas Interests totaled 1.0 BCF sold at an average price
of $4.99 per MCF, compared to the first nine months 2008 when 1.1 BCF was
produced and sold at an average price of $11.93 per MCF.
Selling, general and administrative expenses ("SG&A") was $2.0 million for the
third quarters of both 2009 and 2008, and $5.9 million in the first nine months
of both 2009 and 2008. As a percentage of revenues, SG&A increased to 6.4% in
the third quarter 2009, compared to 5.2% in the third quarter 2008, and 6.6% in
the first nine months 2009, compared to 5.2% in the comparable 2008 period. The
increases in SG&A as a percentage of revenues were due to the decreases in
revenues in the 2009 periods compared to the comparable 2008 periods.
Interest expense in the third quarter 2009 decreased $127 thousand, or 15.2%, to
$707 thousand, compared to $834 thousand in the third quarter 2008. Interest
expense in the first nine months 2009 decreased to $2.2 million from
$2.7 million in the first nine months 2008, a decrease of $536 thousand, or
19.7%. The decrease in interest expense in the 2009 periods primarily resulted
from a decrease in average outstanding debt due to the repayment of $8.8 million
of debt since September 30, 2008.
Other, net in the 2008 periods included approximately $200 thousand for damages
to equipment and railcars located at a trans-loading site in Galveston, caused
by Hurricane Ike.
Income tax expense was $1.5 million in the third quarters of both 2009 and 2008.
For the first nine months 2009, income tax expense decreased to $3.1 million
from $4.7 million in the comparable 2008 period, a decrease of $1.6 million, or
33.8%. The decrease in income taxes in the first nine months 2009 compared to
the comparable 2008 period was primarily due to the decrease in income before
income taxes.
The Company's net income was $4.5 million ($0.70 per share diluted) in both the
third quarter 2009 and 2008. Net income for the first nine months 2009 was
$10.6 million ($1.67 per share diluted), a decrease of $2.7 million, or 20.5%,
compared to the first nine months 2008 net income of $13.4 million ($2.10 per
share diluted).
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