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USLM > SEC Filings for USLM > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for UNITED STATES LIME & MINERALS INC


1-Nov-2013

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 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 modernization, expansion and development 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 and sell the increased production at acceptable prices; (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, road and housing related construction, steel, and oil and gas services, effects of government shutdowns, sequestrations, and budget, debt ceiling, and other legislative impasses, 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, suspension or termination 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, 2012.

Overview.

The Company has two operating segments: Lime and Limestone Operations and Natural Gas Interests. Revenues and gross profit are the primary items utilized to evaluate the operating results of the Company's segments and to allocate resources.

Through its Lime and Limestone Operations, the Company is a manufacturer of lime and limestone products, supplying primarily the construction (including highway, road and parking lot contractors), metals (including steel producers), environmental (including municipal sanitation and water treatment facilities and flue gas treatment), oil and gas services, industrial (including paper and glass manufacturers), roof shingle and agriculture (including poultry and cattle feed producers) industries. 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 in 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 9.0% in the third quarter 2013, compared to the third quarter 2012, primarily because of increased sales volumes of approximately 8.9% for the Company's lime and limestone products due to increased demand, principally from its construction and environmental customers, and average product price increases of approximately 0.1% realized for the Company's lime and limestone products in the third quarter 2013, compared to the third quarter 2012. For the nine months ended September 30, 2013, revenues from the Company's Lime and Limestone operations decreased 1.8%, compared to the comparable prior year period, primarily due to decreased sales volumes of approximately 2.6%, principally due to reduced demand from its steel customers due to the reduction in steel output in the United States and from its oil and gas services customers due to reduced oil and gas drilling activity in the Company's markets, partially offset by increased sales volumes to the Company's construction and environmental customers. The decreased sales volumes in the first nine months 2013 was partially offset by average product price increases of approximately 0.8% in the first nine months 2013, compared to the comparable 2012 period. While it is difficult to determine the impact of the recent partial FEDERAL government shutdown in the short term, the Company expects demand for its lime and limestone products from its construction and environmental customers to continue to increase moderately in the fourth quarter 2013, compared to last year's fourth quarter, while demand from its steel and oil and gas services customers is expected to be flat year over year.

The Company's gross profit from its Lime and Limestone Operations increased by 20.6% and 0.9% in the third quarter and first nine months 2013, compared to the comparable 2012 periods. The increased gross profit for the Company's Lime and Limestone Operations in the third quarter 2013 resulted primarily from the increase in revenues discussed above. The increase in gross profit for the first nine months 2013 resulted primarily from a decrease in outside contractor stripping costs to $1.5 million, compared $2.6 million in the comparable 2012 period, partially offset by the decrease in revenues discussed above. The timing and amount of 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 from the Company's Natural Gas Interests decreased 10.1% in the third quarter 2013, compared to the comparable 2012 quarter, due to lower production volumes (approximately 23.2%) resulting from the normal declines in production rates on the Company's existing natural gas wells, partially offset by higher prices for the Company's natural gas (approximately 13.1%). Revenues from Natural Gas Interests decreased 20.8% in the first nine months 2013, compared to the comparable 2012 period, resulting from lower production volumes (approximately 21.8%), partially offset by higher prices for the Company's natural gas (approximately 1.0%). The number of producing wells in 2013 remains at 39 wells. No new wells were drilled in the first nine months 2013 or are currently being 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 $24.2 million in the first nine months 2013, compared to $24.9 million in the comparable 2012 period, a decrease of $0.7 million, or 2.9%. 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 2013, cash provided by operating activities was principally composed of $12.2 million net income, $11.0 million DD&A and $1.3 million deferred income taxes, compared to $12.6 million net income, $11.2 million DD&A and $1.9 million deferred income taxes in the first nine months 2012. The most significant changes in working capital items in the first nine months 2013 were a net increase in trade receivables of $3.2 million and a $1.5 million increase in accounts payable and accrued expenses. The most significant changes in working capital items in the first nine months 2012 were net increases in inventories and trade receivables of $1.6 million and $0.7 million, respectively. The net increases in trade receivables in the 2013 and 2012 periods primarily resulted from increases in revenues in the third quarters 2013 and 2012, compared to the fourth quarters 2012 and 2011, respectively.


The Company had $6.7 million in capital expenditures in the first nine months 2013, compared to $6.5 million in the comparable period last year.

Net cash used in financing activities was $3.9 million and $44.5 million in the 2013 and 2012 first nine-month periods, respectively, consisting primarily of repayments of $3.8 million of term loan debt in each of the first nine months 2013 and 2012, and $0.2 million and $40.8 million for purchase of treasury shares in the first nine months 2013 and 2012, respectively. Cash and cash equivalents increased $13.6 million to $43.4 million at September 30, 2013 from $29.8 million at December 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 September 30, 2013, the Company had $0.6 million of letters of credit issued, which count as draws under the Revolving Facility. Pursuant to a security agreement, dated August 25, 2004, 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 $0.8 million, with a final principal payment of $10.0 million due on December 31, 2015. The Draw Term Loan requires quarterly principal payments of $0.4 million, with a final principal payment of $6.7 million due on December 31, 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 plus 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 hedges, with Wells Fargo Bank, N.A as the counterparty to the hedges, 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 upon the current LIBOR margin of 1.750%, the Company's current 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 (loss). The Company will be exposed to credit losses in the event of non-performance by the counterparty to the hedges. The Company's mark to market of its interest rate hedges, at September 30, 2013 and December 31, 2012, resulted in liabilities of $2.0 million and $2.6 million, respectively, which are included in accrued expenses ($1.0 million and $1.1 million, respectively) and other liabilities ($0.8 million and $1.5 million, respectively) on the Company's Condensed Consolidated Balance Sheets. The Company paid $0.3 million and $0.9 million in quarterly settlement payments pursuant to its hedges during the three- and nine-month periods ended September 30, 2013, respectively, compared to payments of $0.3 million and $1.0 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 for equipment. As of September 30, 2013, the Company had no material open orders or commitments that are not included in current liabilities on the September 30, 2013 Condensed Consolidated Balance Sheet.

As of September 30, 2013, the Company had $22.9 million in total debt outstanding and no draws on its $30 million Revolving Facility other than the $0.6 million 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 liquidity needs for the near future.

Results of Operations.

Revenues in the third quarter 2013 increased to $36.9 million from $34.1 million in the third quarter 2012, an increase of $2.8 million, or 8.2%. Revenues from the Company's Lime and Limestone operations in the third quarter 2013 increased $2.9 million, or 9.0%, to $35.5 million from $32.6 million in the comparable 2012 quarter, while revenues from its Natural Gas Interests decreased $157 thousand, or 10.1%, to $1.4 million from $1.6 million in the comparable prior year quarter. For the nine months ended September 30, 2013, revenues decreased to $103.7 million from $106.7 million in the comparable 2012 period, a decrease of $3.0 million, or 2.8%. Revenues from the Company's Lime and Limestone Operations in the first nine months 2013 decreased $1.9 million, or 1.8%, to $99.3 million from $101.2 million in the comparable 2012 period, while revenues from its Natural Gas Interests decreased $1.1 million, or 20.8%, to $4.3 million from $5.5 million in the comparable prior year period. As discussed above, the increase in Lime and Limestone Operations revenues in the third quarter 2013, compared to last year's third quarter, resulted primarily from increased sales volumes of the Company's lime and limestone products, while the decrease in Lime and Limestone Operations revenues in the first nine months 2013, compared to the comparable 2012 period, was caused primarily by the reduced sales volumes.

Production volumes from the Company's Natural Gas Interests for the third quarter 2013 totaled 239 thousand MCF, sold at an average price of $5.87 per MCF, compared to 303 thousand MCF, sold at an average price of $5.19 per MCF, in the comparable 2012 quarter. Production volumes for the first nine months 2013 from Natural Gas Interests totaled 751 thousand MCF, sold at an average price of $5.75 per MCF, compared to the first nine months 2012 when 957 thousand MCF was produced and sold at an average price of $5.69 per MCF. The Company's average prices per MCF exceeds average natural gas prices because the Company's natural gas contains liquids. The Company's average prices per MCF in the 2013 periods were higher than in the prior year's comparable periods due to the increases in natural gas prices, partially offset by lower prices for natural gas liquids.

The Company's gross profit was $9.1 million in the third quarter 2013, compared to $7.8 million in the comparable 2012 quarter, an increase of $1.4 million, or 17.4%. Gross profit in the first nine months 2013 was $24.4 million, a decrease of $950 thousand, or 3.8%, from $25.3 million in the first nine months 2012.

Included in gross profit for the third quarter and first nine months 2013 were $8.4 million and $22.4 million, respectively, from the Company's Lime and Limestone Operations, compared to $7.0 million and $22.2 million, respectively, in the comparable 2012 periods. The Company's gross profit margin as a percent of revenues from its Lime and Limestone Operations increased to 23.7% and 22.6% for the third quarter and first nine months 2013, from 21.4% and 22.0% in the third quarter and first nine months 2012. The increased gross profit and gross profit margin for the Company's Lime and Limestone Operations in the third quarter 2013 resulted primarily from the increased revenues discussed above. The increase in gross profit and gross profit margin for the first nine months 2013 resulted primarily from the reduction in outside contractor stripping costs in the 2013 period, partially offset by the decrease in revenues, discussed above.


Gross profit from the Company's Natural Gas Interests decreased to $701 thousand and $1.9 million for the third quarter and first nine months 2013, respectively, from $787 thousand and $3.1 million, respectively, in the comparable 2012 periods, primarily due to the decreases in revenues in the 2013 periods, compared to the prior year periods.

Selling, general and administrative expenses ("SG&A") were $2.2 million in the third quarter 2013, an increase of $133 thousand, or 6.4%, compared to $2.1 million in the third quarter 2012. As a percentage of revenues, SG&A decreased slightly to 6.0% in the 2013 quarter, compared to 6.1% in the comparable 2012 quarter. SG&A was $6.7 million in both the first nine months 2013 and 2012, As a percentage of revenues, SG&A in the first nine months 2013 increased slightly to 6.4%, compared to 6.3% in the comparable 2012 period. The 2013 increase in SG&A as a percentage of revenues in the first nine months 2013 was due principally to the decrease in revenues in the 2013 period, compared to the comparable 2012 period.

Interest expense in the third quarter 2013 decreased $88 thousand, or 16.3%, to $451 thousand from $539 thousand in the third quarter 2012. Interest expense decreased $252 thousand, or 15.2%, in the first nine months 2013 to $1.4 million from $1.7 million in the first nine months 2012. The decreases in interest expense in the 2013 periods resulted from decreased average outstanding debt in each period due to the repayment of debt since September 30, 2012. Interest expense included payments of $287 thousand and $873 thousand on the Company's interest rate hedges during the three- and nine-month periods ended September 30, 2013, respectively, compared to payments of $321 thousand and $1.0 million in the comparable prior year three- and nine-month periods, respectively.

Income tax expense increased to $1.6 million in the third quarter 2013 from $1.2 million in the third quarter 2012, an increase of $389 thousand, or 32.4%. For the first nine months 2013, income tax expense decreased to $4.1 million from $4.4 million in the comparable 2012 period, a decrease of $271 thousand, or 6.1%. The changes in income taxes in the 2013 periods were principally due to changes in the Company's income before income taxes.

The Company's net income was $4.8 million ($0.86 per share diluted) in the third quarter 2013, compared to net income of $3.9 million ($0.71 per share diluted) in the third quarter 2012, an increase of $842 thousand, or 21.3%. Net income in the first nine months 2013, which had fewer weighted-average shares outstanding compared to the comparable 2012 period, was $12.2 million ($2.19 per share diluted), a decrease of $460 thousand, or 3.6%, compared to the first nine months 2012 net income of $12.6 million ($2.19 per share diluted).


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