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| USLM > SEC Filings for USLM > Form 10-Q on 2-Aug-2012 | All Recent SEC Filings |
2-Aug-2012
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 and
meeting the Company's operating and capital needs, conditions in the credit and
equity markets, and changes in interest rates on the Company's debt, including
the ability of the Company's customers and the counterparty to the Company's
interest rate hedges to meet their obligations; (iv) interruptions to
operations and increased expenses at its facilities resulting from changes in
mining methods or conditions, inclement weather conditions, natural disasters,
accidents, IT systems failures or disruptions or regulatory requirements; (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 of businesses with related or similar
operations, 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 highway
and housing related construction and steel, and inability to continue to
increase or maintain prices for the Company's products; (ix) uncertainties of
development, production, pipeline capacity and prices with respect to the
Company's Natural Gas Interests, including reduced drilling activities pursuant
to the Company's O & G Lease and Drillsite Agreement, unitization of existing
wells, inability to explore for new reserves and declines in production rates;
(x) ongoing and possible new regulations, investigations, enforcement actions
and costs, legal expenses, penalties, fines, assessments, litigation, judgments
and settlements, taxes and disruptions and limitations of operations, including
those related to climate change and health and safety and those that could
impact the Company's ability to continue or renew its operating permits; 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 (the "SEC"), including the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2011.
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, oil and gas services, aluminum, paper, glass, roof shingle and agriculture industries and utilities and other industries requiring scrubbing of emissions for environmental purposes. The Company is headquartered in Dallas, Texas and operates lime and limestone plants and distribution facilities in Arkansas, Colorado, Louisiana, Oklahoma and Texas through its wholly owned subsidiaries, Arkansas Lime Company, Colorado Lime Company, Texas Lime Company, U.S. Lime Company, U.S. Lime Company - Shreveport, U.S. Lime Company - St. Clair, and U.S. Lime Company - Transportation. The 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 non-operating working interests under the O & G Lease with EOG Resources, Inc. and the Drillsite Agreement with XTO Energy Inc. 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.
Revenues from the Company's Lime and Limestone Operations increased 4.0% and 7.9% in the second quarter and first six months 2012 periods, respectively, as compared to last year's comparable periods, because of average product price increases of approximately 2.3% and 4.0% for the Company's lime and limestone products in the second quarter and first six months 2012, respectively, compared to the comparable 2011 periods, and increased sales volumes of the Company's lime and limestone products, principally to its construction customers in the second quarter 2012 and, for the first six months 2012, to its steel customers, which accounted for revenue increases of approximately 1.7% and 3.9% for the 2012 three- and six-month periods, respectively, compared to the comparable 2011 periods. The ongoing economic uncertainty both impacts demand for the Company's lime and limestone products, particularly from its industrial customers, and presents a challenge to maintain or increase prices for its lime and limestone products.
The Company's gross profit from its Lime and Limestone Operations decreased in the second quarter and first six months 2012, compared to the comparable 2011 periods, primarily because of outside contractor stripping costs of $1.4 million incurred in the second quarter 2012 and $1.6 million incurred in first six months 2012, compared to no such outside contractor stripping costs in the comparable 2011 periods. As part of its mining plan, the Company has elected to contract for additional stripping at two of its quarries, beyond the normal stripping performed by its own personnel, including some in areas with higher than historical overburdens. The Company plans to continue such contract stripping for the foreseeable future, but at somewhat reduced rates. The timing and amount of such contract stripping costs in future periods will depend upon, among other things, the availability and cost-effective utilization of the contractors and their equipment. The decreases in gross profit from the Company's Lime and Limestone Operations resulting from the increased contract stripping costs in the second quarter and first six months 2012 were partially offset by the increases in revenues for the periods discussed above.
Revenues and gross profit from the Company's Natural Gas Interests decreased in the second quarter and first six months 2012 due to lower prices for both natural gas and natural gas liquids, compared to the comparable 2011 periods, as well as decreased production volumes resulting from the normal declines in production rates on the Company's existing natural gas wells. In addition, revenues for the second quarter and first six months 2011 also included $487 thousand from the final resolution of certain royalty ownership issues on unitized natural gas wells. The 48.8% and 38.4% decreases in revenues from Natural Gas Interests in the second quarter and first six months 2012, respectively, as compared to last year's comparable periods, resulted from price decreases (approximately 30.5% and 22.4% for the 2012 three- and six-month periods, respectively, compared to the comparable 2011 periods), lower production volumes (approximately 4.1% and 8.3% for the 2012 three- and six-month periods, respectively, compared to the comparable 2011 periods) and the $487 thousand of revenues related to the resolution of certain royalty ownership issues in the second quarter 2011 (approximately 14.2% and 7.7% for the 2012 three- and six-month periods, respectively, compared to the comparable 2011 periods). The Company's gross profit from its Natural Gas Interests decreased for the second quarter and first six months 2012, compared to the comparable 2011 periods, primarily because of the decreases in revenues for the 2012 periods and the fact that the resolution of the royalty ownership issues in the second quarter 2011 contributed $463 thousand to gross profit in the second quarter and first six months 2011. Lower prices for natural gas and natural gas liquids and continued normal production declines from existing wells will, absent the drilling of new wells, cause gross profit from the Company's Natural Gas Interests to continue to be below 2011 levels. The number of producing wells in 2012 decreased to 39 compared to 40 in the second quarter 2011, as one well drilled pursuant to the O&G Lease has been plugged and abandoned by the operator. No new wells are currently being drilled, or scheduled to be drilled to the Company's knowledge. 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 $15.9 million in the six months ended June 30, 2012, compared to $16.5 million in the comparable 2011 period, a decrease of $603 thousand, or 3.7%. 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 six months 2012, cash provided by operating activities was principally composed of $8.7 million net income, $7.4 million DD&A and $1.0 million deferred income taxes, compared to $10.6 million net income, $6.8 million DD&A and $1.3 million deferred income taxes in the first six months 2011. The most significant changes in working capital items in the first six months 2012 were net increases in trade receivables, inventories and accounts payable and accrued expenses of $1.1 million, $438 thousand and $419 thousand, respectively. The most significant changes in working capital in the first six months 2011 were a net increase in trade receivables of $4.3 million and decreases of $908 thousand and $508 thousand in inventories and prepaid expenses and other current assets, respectively. The net increases in trade receivables in the 2012 and 2011 periods primarily resulted from increases in revenues in the second quarters 2012 and 2011, compared to the fourth quarters 2011 and 2010, respectively.
The Company invested $4.8 million in capital expenditures in the first six months 2012, compared to $3.9 million in the same period last year. Included in capital expenditures during the first six months 2012 and 2011 were $28 thousand and $1.0 million, respectively, for drilling, completion and workover costs for the Company's non-operating working interests in natural gas wells.
Net cash used in financing activities was $43.2 million and $2.6 million in the 2012 and 2011 first six-month periods, respectively, primarily consisting of $40.8 million and $126 thousand for purchase of treasury shares in the first six months 2012 and 2011, respectively, and repayment of $2.5 million of term loan debt in each year's period. Cash and cash equivalents decreased $32.1 million to $21.3 million at June 30, 2012 from $53.4 million at December 31, 2011, and increased $5.0 million during the second quarter 2012 from $16.3 million at March 31, 2012.
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, 2012, the Company had $343 thousand of letters of credit issued, which count as draws under the Revolving Facility. Pursuant to a security agreement, the Credit Facilities are secured by the Company's existing and hereafter acquired tangible assets, intangible assets and real property.
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 $10.0 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 of $6.7 million due on December 31, 2015. The Revolving Facility matures June 1, 2015. 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 Revolving Facility commitment fee ranges from 0.250% to 0.400%. The Credit Facilities bear interest, at the Company's option, at either LIBOR plus a margin of 1.750% to 2.750%, or the Lender's Prime Rate plus a margin of 0.000% to 1.000%. The Revolving Facility commitment fee and the interest rate margins are determined quarterly in accordance with a pricing grid based upon the Company's Cash Flow Leverage Ratio, defined as 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, plus pro forma EBITDA from any businesses acquired during the period.
The Company has entered into hedges with Wells Fargo Bank, N.A that fix 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 the current LIBOR margin of 1.750%, the Company's interest rates are: 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 have been effective as defined under applicable accounting rules. Therefore, changes in fair value of the interest rate hedges are reflected in comprehensive income. The Company will be exposed to credit losses in the event of non-performance by the counterparty to the hedges. Due to interest rate declines, the Company's mark-to-market of its interest rate hedges, at June 30, 2012 and December 31, 2011, resulted in liabilities of $3.1 million and $3.5 million, respectively, which are included in accrued expenses ($1.2 and $1.3 million, respectively) and other liabilities ($1.9 million and $2.2 million, respectively) on the Company's Condensed Consolidated Balance Sheets. The Company paid $335 thousand and $674 thousand in quarterly settlement payments pursuant to its hedges during the three- and six-month periods ended June 30, 2012, respectively, compared to payments of $404 thousand and $818 thousand in the comparable prior year three- and six-month periods, respectively. These payments were included in interest expense in the Condensed Consolidated Statements of Operations.
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 O & G Lease, and pursuant to the Company's subsequent elections to participate as a 20% non-operating 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% non-operating working interest owner. As a 20% non-operating working interest owner, the Company is responsible for 20% of the costs to drill, complete and workover the well. Pursuant to the Drillsite Agreement, the Company, as a 12.5% non-operating working interest owner, is responsible for 12.5% of the costs to drill, complete and workover each well. As of June 30, 2012, the Company had no material open orders or commitments that are not included in current liabilities on the Company's Condensed Consolidated Balance Sheet.
As of June 30, 2012, the Company had $30.4 million in total debt outstanding and no draws on its $30 million Revolving Facility other than the $343 thousand of letters of credit. The Company believes that cash on hand, cash generated from operations and funds available under the Revolving Facility will be sufficient to meet the Company's operating needs, ongoing capital needs and debt service for the next 12 months and its liquidity needs for the near future.
Results of Operations.
Revenues in the second quarter 2012 decreased to $36.5 million from $36.8 million in the comparable prior year quarter, a decrease of $342 thousand, or 0.9%. Revenues from the Company's Lime and Limestone Operations in the second quarter 2012 increased $1.3 million, or 4.0%, to $34.7 million from $33.4 million in the comparable 2011 quarter, while revenues from its Natural Gas Interests decreased $1.7 million, or 48.8%, to $1.8 million from $3.5 million in the comparable prior year quarter. For the six months ended June 30, 2012, revenues increased to $72.5 million from $69.9 million in the comparable 2011 period, an increase of $2.6 million, or 3.7%. Revenues from the Company's Lime and Limestone Operations in the first six months 2012 increased $5.1 million, or 7.9%, to $68.6 million from $63.6 million in the comparable 2011 period, while revenues from its Natural Gas Interests decreased $2.4 million, or 38.4%, to $3.9 million from $6.3 million in the comparable prior year period. The increases in lime and limestone revenues in the 2012 periods as compared to last year's comparable periods resulted from increased prices realized for the Company's lime and limestone products and increased sales volumes of the Company's lime and limestone
products as discussed above. Production volumes from the Company's Natural Gas Interests for the second quarter 2012 totaled 314 thousand MCF, sold at an average price of $5.64 per MCF, compared to 340 thousand MCF, sold at an average price of $8.75 per MCF, in the comparable 2011 quarter. Production volumes for the first six months 2012 from Natural Gas Interests totaled 655 thousand MCF sold at an average price of $5.94 per MCF, compared to the first six months 2011 when 743 thousand MCF was produced and sold at an average price of $7.85 per MCF. The Company's average price per MCF exceeds natural gas prices because its natural gas contains liquids, for which prices normally follow crude oil prices. Average price per MCF decreased in the 2012 periods compared to the comparable 2011 periods because of lower natural gas prices as well as decreased prices for natural gas liquids, which generally is attributable to the decrease in the price of crude oil over the same periods. Revenues for the second quarter and first six months 2011 also included $487 thousand from the final resolution of certain royalty ownership issues on unitized natural gas wells.
The Company's gross profit was $8.4 million for the second quarter 2012, compared to $10.4 million in the comparable 2011 quarter, a decrease of $2.0 million, or 19.7%. Gross profit for the first six months 2012 was $17.6 million, a decrease of $2.3 million, or 11.4%, from $19.8 million in the first six months 2011.
Included in gross profit for the second quarter and first six months 2012 were $7.3 million and $15.3 million, respectively, from the Company's Lime and Limestone Operations, compared to $7.8 million and $15.4 million, respectively, in the comparable 2011 periods, reflecting decreases of $490 thousand, or 6.3%, and $81 thousand, or 0.1%, in the second quarter and first six months 2012, respectively, compared to last year's comparable periods. The Company's gross profit margin from its Lime and Limestone Operations decreased to 21.1% and 22.3% for the second quarter and first six months 2012, respectively, from 23.4% and 24.1%, respectively, in last year's comparable periods. The reduced gross profits and gross profit margins as a percent of revenues for the Company's Lime and Limestone Operations in the second quarter and first six months 2012 resulted primarily from the $1.4 million and $1.6 million in contract stripping costs incurred in the second quarter and first six months 2012, respectively, at two of the Company's quarries, partially offset by the increased revenues for the 2012 periods discussed above.
Gross profit from the Company's Natural Gas Interests decreased to $1.0 million and $2.3 million for the second quarter and first six months 2012, respectively, from $2.6 million and $4.5 million, respectively, in the comparable 2011 periods, primarily due to the decreases in revenues compared to the prior year periods and the fact that the second quarter and first six months 2011 included a $463 thousand contribution to gross profit from the resolution of the royalty ownership issues on unitized natural gas wells.
Selling, general and administrative expenses ("SG&A") were $2.3 million and $2.1 million in the second quarters 2012 and 2011, respectively, an increase of $246 thousand, or 11.8%. As a percentage of revenues, SG&A increased to 6.4% in the 2012 quarter, compared to 5.6% in the comparable 2011 quarter. SG&A was $4.6 million and $4.3 million in the first six months 2012 and 2011, respectively, an increase of $328 thousand, or 7.7%. As a percentage of revenues, SG&A in the first six months 2012 increased to 6.3%, compared to 6.1% in the comparable 2011 period. The primary reasons for the increases in SG&A in the 2012 periods were an increase in the Company's allowance for doubtful accounts in the second quarter 2012 compared to no increase in the second quarter 2011, principally related to the bankruptcy filing by one of its customers during the 2012 quarter, and 38.4% and 34.0% increases in non-cash stock-based compensation during the second quarter and first six months 2012, respectively, compared to the comparable 2011 periods due to the increases in the price per share of the Company's common stock on the most recent grant dates, compared to the prices per share on previous grant dates.
Interest expense in the second quarter 2012 decreased $85 thousand, or 13.6%, to $542 thousand from $627 thousand in the second quarter 2011. Interest expense decreased $162 thousand,
or 12.7%, in the first six months 2012 to $1.1 million from $1.3 million in the first six months 2011. The decrease in interest expense in the 2012 periods resulted from decreased average outstanding debt due to the repayment of debt since June 30, 2011. Interest expense included payments of $335 thousand and $674 thousand that were made pursuant to the Company's interest rate hedges during the three- and six-month periods ended June 30, 2012, respectively, compared to payments of $404 thousand and $818 thousand in the comparable prior year three- and six-month periods, respectively.
Income tax expense decreased to $1.5 million in the second quarter 2012 from $1.9 million in the second quarter 2011, a decrease of $437 thousand, or 22.5%. For the first six months 2012, income tax expense decreased to $3.2 million from $3.7 million in the comparable 2011 period, a decrease of $508 thousand, or 13.7%. The decreases in income tax expense in the 2012 periods compared to the comparable 2011 periods were primarily due to the decreases in the Company's income before income taxes.
The Company's net income was $4.1 million ($0.73 per share diluted) in the second quarter 2012, compared to net income of $5.8 million ($0.90 per share diluted) in the second quarter 2011, a decrease of $1.7 million, or 29.9%. Net income in the first six months 2012 was $8.7 million ($1.48 per share diluted), a decrease of $1.9 million, or 18.1%, compared to the first six months 2011 net income of $10.6 million ($1.65 per share diluted). Second quarter and first six months 2012 earnings per share were favorably impacted by $0.10 and $0.14 per share, respectively, by the Company's repurchase of 200,000 shares of its common stock during the third quarter 2011 and 700,000 shares of common stock in the first quarter 2012.
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