United States Lime & Minerals, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three months ended March 31, 2013, filed May 1, 2013. The company operates two segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests. Lime and limestone plants and distribution facilities operate in Arkansas, Colorado, Louisiana, Oklahoma and Texas.
Financial performance and condition
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $31.6 million | $36.0 million | Down 12.3% |
| Gross profit | $6.3 million | $9.2 million | Down 31.6% |
| Gross margin | 19.9% | 25.5% | Down 5.6 percentage points |
| Operating profit | $4.1 million | $6.9 million | Down 40.2% |
| Net income | $2.8 million | $4.6 million | Down 40.4% |
| Diluted earnings per share | $0.50 | $0.75 | Down $0.25 |
| Cash flow from operations | $5.4 million | $7.1 million | Down 24.3% |
| Capital expenditures | $1.5 million | $2.3 million | Down 33.9% |
Lime and Limestone Operations revenue was $30.2 million, down 11.1%, and gross profit was $5.7 million, down 28.7%. Natural Gas Interests revenue was $1.4 million, down 32.6%, and gross profit was $624,000, down 50.2%.
At March 31, 2013, cash and cash equivalents were $33.5 million, compared with $29.8 million at December 31, 2012. Total assets were $177.9 million and stockholders' equity was $123.3 million. Total debt was $26.7 million, consisting of $16.7 million under the Term Loan and $10.0 million under the Draw Term Loan. The company had no Revolving Facility borrowings other than $637,000 of letters of credit.
The company had $65.8 million of current assets and $15.2 million of current liabilities. Management stated that cash on hand, operating cash flow and available revolving credit should be sufficient for operating needs, capital requirements and debt service for the next 12 months and the near future.
Material changes versus the prior comparable period
- Lime and limestone product sales volumes declined approximately 11.5%, primarily because of weaker demand from steel and oil and gas services customers. Construction volumes increased and average product prices rose approximately 0.4%.
- Natural gas production declined approximately 20.7%, to 261 thousand MCF from 341 thousand MCF. Average realized price declined to $5.49 per MCF from $6.23 per MCF, reflecting lower natural gas and natural gas liquids prices.
- Labor and other operating costs declined in absolute terms, but increased to 68.5% of revenue from 64.6%. Depreciation, depletion and amortization increased to $3.7 million from $3.6 million.
- SG&A declined 5.5% to $2.1 million, but increased to 6.8% of revenue from 6.3%.
- Interest expense declined to $489,000 from $576,000, primarily because of lower average debt. The effective tax rate was 25.4%, compared with 27.0%.
- Cash increased by $3.7 million during the quarter. Financing cash use was only $212,000, compared with $41.9 million in Q1 2012, when the company repurchased approximately $40.7 million of treasury shares.
Outlook, risks and unusual items
Management expects construction demand to increase in the second quarter compared with the prior year, while steel and oil and gas services demand is expected to remain lower. No new natural gas wells were drilled in the quarter, and management cannot predict whether additional wells will be drilled or their results.
The company has interest-rate hedges covering its outstanding term debt. The hedges fixed LIBOR at 4.695% on the Term Loan, 4.875% on 75% of the Draw Term Loan and 5.500% on 25% of the Draw Term Loan. The resulting stated current interest rates were 6.445%, 6.625% and 7.250%, respectively. The hedge liability was $2.3 million at March 31, 2013, and quarterly hedge settlement payments of $294,000 were included in interest expense.
Debt requires scheduled principal payments, with final $10.0 million and $6.7 million payments on the Term Loan and Draw Term Loan due December 31, 2015. The first-quarter $1.25 million term-loan repayment was made April 1, 2013 because March 31 was not a business day.
Key risks include cyclical demand and pricing for lime and limestone products; reduced steel, construction or oil and gas activity; declining natural gas production and prices; fuel, electricity, transportation and freight costs; weather, mine, plant, safety, IT and operational disruptions; regulatory and environmental requirements; debt service and interest-rate exposure; counterparty performance under hedges; and potential delays or cost overruns on development or modernization projects. The company reported no material open capital commitments outside current liabilities.
Important facts for investors to verify
- Whether construction demand offsets continuing weakness in steel and oil and gas services markets.
- Whether the 11.5% decline in lime and limestone volumes and lower operating margins persists.
- Natural gas production decline rates, commodity prices and the likelihood of additional drilling.
- Compliance with debt covenants and the company's ability to fund scheduled debt amortization and the 2015 final payments.
- The availability of the $30 million Revolving Facility, which is secured by company assets and currently supports $637,000 of letters of credit.
- Exposure to interest-rate hedge counterparty performance and the $2.3 million hedge liability.
- Mine safety, permitting, environmental and other regulatory matters disclosed in Exhibit 95.1 and the broader SEC filings.