United States Lime & Minerals, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The filing was signed August 2, 2012. Financial statements are unaudited and prepared under U.S. GAAP. The company operates two segments: Lime and Limestone Operations and Natural Gas Interests.
Financial Results and Position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $36.5 million | $36.8 million | $72.5 million | $69.9 million |
| Gross profit | $8.4 million | $10.4 million | $17.6 million | $19.8 million |
| Gross margin | 22.9% | 28.2% | 24.2% | 28.3% |
| Operating profit | $6.0 million | $8.3 million | $13.0 million | $15.5 million |
| Net income | $4.1 million | $5.8 million | $8.7 million | $10.6 million |
| Diluted EPS | $0.73 | $0.90 | $1.48 | $1.65 |
- Segment revenue: Lime and Limestone revenue increased 4.0% in the quarter and 7.9% year to date, to $34.7 million and $68.6 million. Natural Gas revenue declined 48.8% and 38.4%, to $1.8 million and $3.9 million.
- Cash flow: Six-month operating cash flow was $15.9 million versus $16.5 million in the prior year. Capital expenditures were $4.8 million versus $3.9 million.
- Liquidity: Cash declined to $21.3 million at June 30, 2012 from $53.4 million at December 31, 2011, primarily due to $40.8 million of treasury-share repurchases and $2.5 million of debt repayments.
- Debt: Total debt was $30.4 million, including $6.25 million of current installments. There were no revolving-facility borrowings apart from $343,000 of letters of credit. The revolving facility provides $30 million of additional capacity, subject to its terms.
- Balance sheet: Total assets were $169.1 million and stockholders’ equity was $111.8 million at June 30, 2012. Treasury stock increased to $49.5 million from $8.7 million at year-end 2011.
- Interest and taxes: Interest expense declined to $542,000 in the quarter and $1.1 million year to date. Management estimated a 2012 effective tax rate of approximately 27.0%, primarily benefiting from statutory depletion.
Material Changes Versus the Prior Comparable Period
- Consolidated quarterly revenue decreased 0.9%, while six-month revenue increased 3.7%, as stronger lime and limestone sales offset sharply lower natural gas revenue.
- Quarterly and year-to-date net income declined 29.9% and 18.1%, respectively. Diluted EPS declined despite a lower share count; share repurchases favorably affected reported EPS by approximately $0.10 in the quarter and $0.14 year to date.
- Lime and limestone gross profit declined primarily because of $1.4 million of outside contractor stripping costs in the quarter and $1.6 million year to date. Corresponding costs were not incurred in the prior-year periods. Management expects contract stripping to continue at somewhat reduced rates.
- Natural gas revenue and gross profit declined because of lower commodity prices, normal production declines, and the absence of a $487,000 prior-year royalty-issue resolution benefit. Natural gas production fell to 314 thousand MCF in the quarter from 340 thousand MCF, while average realized price declined to $5.64 per MCF from $8.75.
- SG&A increased 11.8% in the quarter and 7.7% year to date, partly due to a customer bankruptcy-related allowance for doubtful accounts and higher stock-based compensation.
- The company repurchased $40.8 million of common stock during the first six months, compared with $126,000 in the prior-year period.
Outlook, Risks, and Unusual Items
- Management believes cash on hand, operating cash flow, and available revolving-facility capacity will fund operating requirements, capital needs, and debt service for the next 12 months and near-term liquidity needs.
- Economic uncertainty may reduce demand for lime and limestone products, particularly from industrial, construction, highway, housing, and steel customers, and may constrain pricing.
- Future lime and limestone margins remain exposed to contract stripping costs, fuel, electricity, transportation, freight, labor, quarry conditions, weather, accidents, regulatory requirements, and project cost overruns.
- Natural gas results are expected to remain below 2011 levels absent new drilling because of lower prices and declining production. Producing wells decreased to 39 from 40, and no new wells were currently being drilled or scheduled to management’s knowledge.
- Debt bears floating rates, although interest-rate hedges fix LIBOR components through maturity. Hedge liabilities were $3.1 million at June 30, 2012, and the company remains exposed to counterparty performance and future revolver borrowing costs.
- Credit facilities are secured by company assets and may be accelerated following an event of default. Term loans require scheduled amortization, with significant final principal payments due December 31, 2015.
- Other risks include liquidity and credit-market conditions, customer credit exposure, mine-safety and environmental regulation, operating permits, litigation, climate-related requirements, and possible obligations for non-operating working interests in future wells.
- No material open orders or commitments outside current liabilities were reported at June 30, 2012. The filing does not provide a formal earnings or revenue forecast.
Investor Verification Items
- Verify the sustainability and timing of contract stripping costs and their effect on lime and limestone margins.
- Monitor lime and limestone pricing, volumes, and end-market demand, particularly construction and steel activity.
- Track natural gas prices, production declines, producing-well counts, and any new drilling commitments.
- Reconcile the $40.8 million treasury-stock repurchase with remaining cash, debt-amortization requirements, and future capital needs.
- Review debt covenants, scheduled 2015 maturities, interest-rate hedge terms, and the company’s available revolver capacity.
- Assess customer credit exposure, including the bankruptcy-related allowance for doubtful accounts.
- Review the Mine Safety Disclosures exhibit and any related MSHA citations, penalties, or operational impacts.