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USLM > SEC Filings for USLM > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for UNITED STATES LIME & MINERALS INC

Form 10-Q for UNITED STATES LIME & MINERALS INC


1-Nov-2012

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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


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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 capital 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, steel, and oil and gas services, 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 the reduction or suspension of drilling activities pursuant to the Company's O & G Lease and Drillsite Agreement, unitization of existing wells, inability to explore for new reserves, declines in production rates and plugging and abandoning of existing wells; (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


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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 decreased 8.7% in the third quarter 2012, compared to the third quarter 2011, primarily because of decreased sales volumes of approximately 10.6% for the Company's lime and limestone products, principally to its steel, oil and gas services and roof shingle customers. The decreased sales volumes were partially offset by average product price increases of approximately 1.9% realized for the Company's lime and limestone products in the third quarter 2012 compared to the comparable 2011 quarter. Revenues from the Company's Lime and Limestone Operations in the first nine months 2012 increased 2.0%, compared to the first nine months 2011, primarily due to average product price increases of approximately 2.9% in the 2012 period compared to the comparable 2011 period, partially offset by an approximately 0.9% decrease in sales volumes, principally due to decreased demand from its oil and gas services customers, in the first nine months 2012 compared to the comparable 2011 period. The Company expects demand from its steel, oil and gas services and roof shingle customers will continue to be lower in the fourth quarter 2012, compared to the fourth quarter 2011, although its diverse customer base for its lime and limestone products may provide opportunities to offset some of the anticipated reduced demand from those customers. 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 third quarter and first nine months 2012, compared to the third quarter and first nine months 2011, primarily because of the decrease in revenues in the third quarter 2012, compared to the comparable 2011 quarter, and because of outside contractor stripping costs of $1.0 million and $2.6 million incurred in the third quarter and first nine months 2012, respectively, compared to no such outside contractor stripping costs in the comparable 2011 periods. As part of its mining plan, the Company elected to contract for additional stripping at its two quarries, beyond the normal stripping performed by its own personnel, including some in areas with higher than historical overburdens. Although the Company has not contracted for any outside contractor stripping in the fourth quarter 2012, the Company plans to continue such contract stripping in the 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.

Revenues and gross profit from the Company's Natural Gas Interests decreased in the third quarter and first nine 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 first nine months 2011 also included $487 thousand from the final resolution of certain royalty ownership issues on unitized natural gas wells in the second quarter 2011. The 55.8% and 44.6% decreases in revenues from Natural Gas Interests in the third quarter and first nine months 2012, respectively, as compared to last year's comparable periods, resulted from price decreases (approximately 35.9% and 27.0% lower for the 2012 three- and nine-month periods, respectively, compared to the comparable 2011 periods), lower production volumes (approximately 19.9% and 12.6% lower for the 2012 three- and nine-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 first nine months 2011 (approximately 5.0% lower for the 2012 nine-month period, compared to the comparable 2011 period). The Company's gross profit from its Natural Gas Interests decreased for the third quarter and first nine months 2012, compared to the comparable 2011 periods, 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 first nine months 2011. Lower prices for natural gas and natural gas liquids and continued normal production


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declines from existing wells will, absent the drilling of new wells, cause gross profit from the Company's Natural Gas Interests to continue to decline. The number of producing wells in 2012 decreased to 39 compared to 40 in 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 $24.9 million in the nine months ended September 30, 2012, compared to $29.1 million in the comparable 2011 period, a decrease of $4.2 million, or 14.5%. 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 2012, cash provided by operating activities was principally composed of $12.6 million net income, $11.2 million DD&A and $1.9 million deferred income taxes, compared to $17.7 million net income, $10.4 million DD&A and $3.5 million deferred income taxes in the first nine months 2011. The most significant changes in working capital items in the first nine months 2012 were increases in inventories and trade receivables of $1.6 million and $734 thousand, respectively. The most significant changes in working capital in the first nine months 2011 were an increase in trade receivables of $4.9 million and a decrease of $1.1 million in inventories. The increases in trade receivables in both periods primarily resulted from an increase in revenues in the third quarter of each year compared to the fourth quarter of the corresponding prior year.

The Company invested $6.5 million and $7.1 million in capital expenditures in the first nine months 2012 and 2011, respectively. Included in capital expenditures during the first nine months 2012 and 2011 were 64 thousand and $1.5 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 $44.5 million and $12.0 million in the first nine months 2012 and 2011, respectively, including $3.8 million for repayments of term loan debt in each period. The Company also spent $40.8 million and $8.3 million in the 2012 and 2011 periods, respectively, to purchase treasury shares. Cash and cash equivalents decreased $26.0 million to $27.4 million at September 30, 2012 from $53.4 million at December 31, 2011, and increased $6.1 million during the third quarter 2012 from $21.3 million at June 30, 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 September 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


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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 interest rate hedges have been effective as defined under applicable accounting rules. Therefore, changes in fair value of the 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 September 30, 2012 and December 31, 2011 resulted in liabilities of $3.0 million and $3.5 million, respectively, which are included in accrued expenses ($1.2 and $1.3 million, respectively) and other liabilities ($1.8 million and $2.2 million, respectively) on the Company's Condensed Consolidated Balance Sheets. The Company paid $321 thousand and $1.0 million in quarterly settlement payments pursuant to its hedges during the three- and nine-month periods ended September 30, 2012, respectively, compared to payments of $399 thousand and $1.2 million in the comparable prior year three- and nine-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. 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% 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 September 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 September 30, 2012, the Company had $29.2 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 third quarter 2012 decreased to $34.1 million from $39.2 million in the comparable prior year quarter, a decrease of $5.1 million, or 12.9%. Revenues from the Company's Lime and Limestone Operations in the third quarter 2012 decreased $3.1 million, or 8.7%, to $32.6 million from $35.7 million in the comparable 2011 quarter, while revenues from its Natural Gas Interests decreased $2.0 million, or 55.8%, to $1.6 million from $3.5 million in the comparable prior year quarter. For the nine months ended September 30, 2012, revenues decreased to $106.6 million from $109.1 million in the comparable 2011 period, a decrease of $2.4 million, or 2.2%. Revenues from the Company's Lime and Limestone Operations in the first nine months 2012 increased $2.0


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million, or 2.0%, to $101.2 million from $99.2 million in the comparable 2011 period, while revenues from its Natural Gas Interests decreased $4.4 million, or 44.6%, to $5.5 million from $9.8 million in the comparable prior year period. As discussed above, the decrease in lime and limestone revenues in the third quarter 2012, compared to last year's comparable quarter, resulted primarily from decreased sales volumes of the Company's lime and limestone products, partially offset by an increase in prices realized for the Company's lime and limestone products, and the increase in lime and limestone revenues in the first nine months 2012, compared to the comparable 2011 period, resulted primarily from increased prices, partially offset by decreased sales volumes of the Company's lime and limestone products.

Production volumes from the Company's Natural Gas Interests for the third quarter 2012 totaled 303 thousand MCF, sold at an average price of $5.19 per MCF, compared to 435 thousand MCF, sold at an average price of $8.10 per MCF, in the comparable 2011 quarter. Production volumes for the first nine months 2012 from Natural Gas Interests totaled 957 thousand MCF sold at an average price of $5.69 per MCF, compared to the first nine months 2011 when 1.2 BCF was produced and sold at an average price of $8.37 per MCF. In the 2012 periods, the decrease in production volumes resulted from the normal declines in production rates on existing wells. Average price per MCF decreased in the 2012 periods compared to the comparable 2011 periods because of decreased prices for both natural gas and natural gas liquids contained in the Company's natural gas, which is attributable to the decrease in the price of crude oil over the same periods. Natural Gas Interests revenues for the first nine months 2011 also included $487 thousand from the final favorable resolution of certain royalty ownership issues on unitized natural gas wells in the second quarter 2011.

The Company's gross profit was $7.8 million for the third quarter 2012, compared to $12.5 million in the comparable 2011 quarter, a decrease of $4.8 million, or 38.1%. Gross profit for the first nine months 2012 was $25.3 million, a decrease of $7.0 million, or 21.7%, from $32.4 million in the first nine months 2011.

Included in gross profit for the third quarter and first nine months 2012 were $7.0 million and $22.2 million, respectively, from the Company's Lime and Limestone Operations, compared to $10.1 million and $25.4 million, respectively, in the comparable 2011 periods, reflecting decreases of $3.1 million, or 30.9%, and $3.2 million, or 12.6%, in the third quarter and first nine months 2012, respectively, compared to last year's comparable periods. The Company's gross profit margin as a percent of revenues for the Company's Lime and Limestone Operations decreased to 21.4% and 22.0% for the third quarter and first nine months 2012, respectively, from 28.3% and 25.6%, respectively, in last year's comparable periods. The reduced gross profits and gross profit margins in the third quarter and first nine months 2012, compared to the comparable 2011 periods, resulted primarily from the $1.0 million and $2.6 million in contract stripping costs incurred in the third quarter and first nine months 2012, respectively, at two of the Company's quarries, and, for the third quarter 2012 compared to the comparable 2011 quarter, reduced revenues.

Gross profit from the Company's Natural Gas Interests decreased to $0.8 million and $3.1 million for the third quarter and first nine months 2012, respectively, from $2.4 million and $6.9 million, respectively, in the comparable 2011 periods, due to the decreases in revenues compared to the comparable prior year periods and the fact that the first nine 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") was $2.1 million in the third quarter 2012, compared to $2.3 million in the third quarter 2011, a decrease of $207 thousand, or 9.0%. As a percentage of revenues, SG&A was 6.1% and 5.9% in the 2012 and 2011 quarters, respectively. SG&A was $6.7 million in the first nine months 2012, compared to $6.6 million in 2011, an increase of $121 thousand, or 1.8%. As a percentage of revenues, SG&A was 6.3% and 6.0% in the first nine months 2012 and 2011, respectively.


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Interest expense in the third quarter 2012 decreased $79 thousand, or 12.8%, to $539 thousand from $618 thousand in the third quarter 2011. Interest expense in the first nine months 2012 decreased to $1.7 million compared to $1.9 million in the comparable 2011 period, a decrease of $241 thousand, or 12.7%. The decrease in interest expense in the 2012 periods resulted from decreased average outstanding debt due to the repayment of $5.0 million of debt since September 30, 2011. Interest expense included payments of $321 thousand and $1.0 million that were made pursuant to the Company's interest rate hedges during the three- and nine-month periods ended September 30, 2012, respectively, compared to payments of $399 thousand and $1.2 million in the comparable prior year three- and nine-month periods, respectively.

Income tax expense decreased to $1.2 million in the third quarter 2012 from $2.6 million in the third quarter 2011, a decrease of $1.4 million, or 54.1%. For the first nine months 2012, income tax expense decreased to $4.4 million from $6.3 million in the comparable 2011 period, a decrease of $1.9 million, or 30.3%. The decreases in income tax expense in the 2012 periods compared to the comparable 2011 periods were due to the decreases in the Company's income before income taxes.

The Company's net income was $3.9 million ($0.71 per share diluted) in the third quarter 2012, compared to net income of $7.1 million ($1.11 per share diluted) in the third quarter 2011, a decrease of $3.1 million, or 44.1%. Net income in the first nine months 2012 was $12.6 million ($2.19 per share diluted), a decrease of $5.0 million, or 28.5%, compared to the first nine months 2011 net income of $17.7 million ($2.76 per share diluted). The third quarter and first nine months 2012 earnings per share diluted were favorably impacted by $0.09 and $0.29 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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