United States Lime & Minerals, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 1, 2012. The company operates two segments: Lime and Limestone Operations and Natural Gas Interests. The fourth quarter is seasonally weaker, with 2011 fourth-quarter revenue of $33.5 million and net income of $4.5 million.
Business context
The principal business manufactures and distributes pulverized limestone, quicklime, hydrated lime and lime slurry for construction, steel, municipal sanitation and water treatment, oil and gas services, paper, glass, agriculture and environmental applications. Operations are located in Arkansas, Colorado, Louisiana, Oklahoma and Texas. Natural gas interests consist of royalty and non-operating working interests in Barnett Shale wells in Johnson County, Texas.
Financial performance and position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $142.6 million | $132.6 million | 7.5% increase |
| Lime and limestone revenue | $129.7 million | $125.2 million | 3.6% increase |
| Natural gas revenue | $12.9 million | $7.4 million | 73.4% increase |
| Gross profit | $41.3 million | $36.0 million | 14.7% increase |
| Operating profit | $32.5 million | $27.7 million | 17.5% increase |
| Net income | $22.2 million | $18.0 million | 23.0% increase |
| Diluted EPS | $3.49 | $2.81 | 24.2% increase |
| Gross margin | 29.0% | 27.2% | Up 1.8 points |
| Net margin | 15.6% | 13.6% | Up 2.0 points |
| Cash flow from operations | $38.5 million | $34.2 million | 12.6% increase |
| Capital expenditures | $9.4 million | $9.3 million | Approximately flat |
Cash and equivalents increased to $53.4 million from $36.2 million. Total debt declined to $32.9 million from $36.7 million, consisting of term loans; the $30 million revolving facility had no cash borrowings, although $322 thousand of letters of credit were outstanding. Total assets were $202.6 million and stockholders’ equity was $143.0 million at year-end.
Material changes versus 2010
- Lime and limestone results improved modestly, driven by higher lime volumes, particularly to steel and highway construction customers, and approximately 2% price increases. Housing-related construction demand remained weak.
- Natural gas revenue and gross profit rose sharply due to production from seven wells completed in the second half of 2010 and three wells completed in June 2011, together with higher natural gas liquids prices. Production increased to 1.6 BCF from approximately 1.0 BCF.
- Gross margin expanded as cost-control measures, operating efficiencies and pricing more than offset higher labor, petroleum-based fuel and solid-fuel costs.
- The company repurchased approximately $8.3 million of common stock, including 200,000 shares acquired for $8.1 million in a privately negotiated transaction.
- Interest expense decreased to $2.5 million from $2.7 million as average debt declined. Interest-rate hedge settlement payments were $1.6 million.
Guidance, outlook and risks
- Management expects normal recurring capital spending of approximately $7 million to $9 million annually over the next several years.
- Absent a significant acquisition, management expects 2012 capital requirements and debt repayment to be funded by operating cash flow. Management believes cash, operating cash flow and available revolver capacity will satisfy near-term liquidity needs.
- The term loans and revolving facility mature in 2015, with $6.25 million of debt principal due in 2012 and $16.7 million due in 2015.
- Key risks include weak construction and steel demand, seasonal and weather-related disruptions, fuel, electricity, transportation and freight inflation, equipment failures, mine and plant safety incidents, competition and customer pricing pressure.
- Environmental permitting and compliance costs may increase, particularly for greenhouse gas, ozone, nitrogen oxide and sulfur dioxide regulation. Environmental capital expenditures were $407 thousand in 2011, and the asset retirement obligation was $1.5 million.
- Natural gas results remain exposed to volatile gas and liquids prices, production declines, operator-controlled drilling decisions, pipeline capacity, hydraulic-fracturing regulation and the depletion of proved reserves. No new wells were currently being drilled at year-end.
- The company reported a $3.5 million mark-to-market liability for interest-rate hedges and an unfunded defined-benefit pension obligation of $487 thousand.
Other notable items
Proved natural gas reserves declined to 10.3 BCF from 12.3 BCF, while natural gas liquids reserves increased to 1.5 million barrels from 1.2 million. The standardized measure of discounted future net cash flows increased to $29.9 million from $26.5 million, based on SEC-required 12-month average prices. The 2010 St. Clair plant accident resulted in a fatality and related accrued costs; management stated that pending lawsuits and claims were not expected to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Investor verification priorities
- Verify the sustainability of higher lime volumes and pricing while housing-related construction remains weak.
- Assess the sensitivity of cash flow and valuation to fuel, freight, environmental compliance and mine-safety costs.
- Review 2015 debt maturities, interest-rate hedge obligations and covenant requirements.
- Reconcile natural gas production, reserve depletion, operator drilling plans and commodity-price assumptions.
- Evaluate the effect of the $8.3 million share repurchase on liquidity, leverage and per-share results.
- Review environmental, reclamation, pension and mine-safety contingencies, including the St. Clair incident.