United States Lime & Minerals, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The financial statements are unaudited and prepared under condensed U.S. GAAP. The company operates two U.S. segments: Lime and Limestone Operations and Natural Gas Interests.
Business Context and Reporting Period
The principal business manufactures and distributes lime and limestone products serving construction, environmental, metals, oil and gas services, industrial, roofing and agricultural customers. Natural Gas Interests consist of royalty and non-operating working interests in producing Barnett Shale wells in Texas. There were 39 producing wells, with no new wells drilled during the first nine months of 2013.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $36.9 million | $34.1 million | $103.7 million | $106.6 million |
| Gross profit | $9.1 million | $7.8 million | $24.4 million | $25.3 million |
| Gross margin | 24.7% | 22.7% | 23.5% | 23.7% |
| Operating profit | $6.9 million | $5.7 million | $17.7 million | $18.6 million |
| Operating margin | 18.7% | 16.6% | 17.0% | 17.4% |
| Net income | $4.8 million | $3.9 million | $12.2 million | $12.6 million |
| Diluted EPS | $0.86 | $0.71 | $2.19 | $2.19 |
| Cash flow from operations | Not separately provided | Not separately provided | $24.2 million | $24.9 million |
- Liquidity: Cash and cash equivalents were $43.4 million at September 30, 2013, compared with $29.8 million at December 31, 2012.
- Capital expenditures: $6.7 million for the first nine months, compared with $6.5 million in the prior-year period.
- Debt: Total debt was $22.9 million, including $5.0 million of current installments, versus $26.7 million at December 31, 2012. The revolving facility had no borrowings, other than approximately $0.6 million of letters of credit.
- Working capital: Current assets were $76.3 million and current liabilities were $14.9 million at September 30, 2013.
- Shareholders’ equity: $133.6 million at September 30, 2013, compared with $120.4 million at year-end 2012.
- Tax rate: Management estimated a 2013 effective income tax rate of approximately 25.4%, principally reflecting statutory depletion deductions.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 8.2%, driven by a 9.0% increase in Lime and Limestone revenue. Product sales volumes increased approximately 8.9%, primarily from construction and environmental customers; average product prices increased approximately 0.1%.
- Nine-month revenue declined 2.8%. Lime and Limestone volume decreased approximately 2.6%, reflecting weaker demand from steel and oil and gas services customers, partly offset by construction and environmental demand and approximately 0.8% average price increases.
- Natural Gas revenue declined 10.1% in the quarter and 20.8% for the nine months. Production volumes fell 23.2% and 21.8%, respectively, due to normal well declines; higher gas prices partly offset the production reductions.
- Third-quarter gross profit increased 17.4%, and gross margin improved to 24.7%, primarily because of higher Lime and Limestone revenue. Nine-month gross profit decreased 3.8%, although Lime and Limestone gross profit increased 0.9%, helped by lower outside contractor stripping costs of $1.5 million versus $2.6 million.
- Net income increased 21.3% in the third quarter but decreased 3.6% for the nine months. Interest expense declined 16.3% in the quarter and 15.2% year to date due to lower average debt.
- Operating cash flow declined 2.9% year to date, while cash increased by $13.6 million. Financing cash usage was substantially lower because 2013 treasury-share purchases were $0.2 million versus $40.8 million in 2012.
Guidance, Outlook, Risks and Unusual Items
- Management expected Lime and Limestone demand from construction and environmental customers to increase moderately in the fourth quarter versus the prior year; steel and oil and gas services demand was expected to be flat. The company noted uncertainty regarding the short-term effect of the partial federal government shutdown.
- Management stated that cash on hand, operating cash flow and available revolver capacity should be sufficient for operating needs, capital requirements and debt service for the next 12 months and the near future.
- The term loan and draw term loan require scheduled repayments and have final principal payments due December 31, 2015. The credit facilities are secured by company assets and may be accelerated upon an event of default.
- Interest-rate hedges fix LIBOR-related rates through maturity. The company remains exposed to counterparty performance risk and to interest-rate risk on future revolver borrowings.
- Key risks include construction, steel and oil and gas demand; pricing pressure; fuel, electricity, transportation and freight costs; weather, mining, operational and IT disruptions; project delays or cost overruns; regulatory, environmental, mine-safety and permitting matters; natural gas production declines and pricing; liquidity and debt-service requirements; and customer or hedge-counterparty credit risk.
- The filing states that management’s disclosure controls and procedures were effective as of September 30, 2013, with no material change in internal control over financial reporting during the quarter.
- The condensed financial statements were not independently audited, and the filing cautions that interim results are not necessarily indicative of full-year results.
Important Facts for Investors to Verify
- Confirm the sustainability of the third-quarter Lime and Limestone volume recovery and whether construction and environmental demand offsets weakness in steel and oil and gas services.
- Monitor continued declines in natural gas production, the absence of new drilling, well economics and future drilling decisions.
- Review debt maturities, required repayments through December 2015, covenant compliance and the availability of the $30 million revolving facility.
- Reconcile the filing’s interest-rate hedge liability disclosures: the financial-statement note reports $1.8 million at September 30, 2013, while the MD&A text refers to $2.0 million.
- Assess the impact of contractor stripping costs, capital expenditures, energy and freight costs on future Lime and Limestone margins.
- Review Exhibit 95.1 for mine-safety citations, orders, penalties and related disclosures, which are not detailed in the provided filing text.