United States Lime & Minerals, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the period ended September 30, 2011. The company operates two U.S. segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests in the Barnett Shale formation. Lime and limestone products serve construction, steel, municipal, industrial, environmental and other markets.
Financial Performance and Position
| Metric | Q3 2011 | Q3 2010 | First 9 Months 2011 | First 9 Months 2010 |
|---|---|---|---|---|
| Revenue | $39.2 million | $31.9 million | $109.1 million | $103.4 million |
| Gross profit | $12.5 million | $8.9 million | $32.4 million | $28.9 million |
| Gross margin | 32.0% | 27.8% | 29.6% | 28.0% |
| Operating profit | $10.2 million | $7.0 million | $25.8 million | $22.8 million |
| Net income | $7.1 million | $4.5 million | $17.7 million | $14.9 million |
| Diluted EPS | $1.11 | $0.71 | $2.76 | $2.32 |
| Operating cash flow | Not separately provided | Not separately provided | $29.1 million | $27.3 million |
Q3 revenue increased 22.9% year over year, while nine-month revenue increased 5.5%. Q3 net income rose 55.4%; nine-month net income rose 18.8%. SG&A remained 5.9% of revenue in Q3 and 6.0% for the nine-month period.
Lime and limestone revenue was $35.7 million in Q3 and $99.2 million for nine months. Natural gas revenue was $3.5 million in Q3 and $9.8 million for nine months. Natural gas production increased to 435 thousand MCF from 40 wells in Q3, versus 220 thousand MCF from 32 wells in the prior-year quarter; the average realized price increased to $8.10 per MCF from $6.41.
At September 30, 2011, cash and cash equivalents were $46.4 million, compared with $36.2 million at December 31, 2010. Total debt was $32.9 million, including $5.0 million of current installments; no revolving-facility balance was outstanding, although $322 thousand of letters of credit reduced availability. Stockholders’ equity was $138.3 million, compared with $128.3 million at year-end 2010.
Nine-month capital expenditures were $7.1 million, substantially unchanged from the prior-year period. The company repaid $3.8 million of term debt and spent $8.3 million on treasury-share purchases. Net cash increased $10.2 million during the nine months.
Material Changes Versus the Prior Comparable Period
- Lime and limestone Q3 revenue increased $5.2 million, driven by higher sales volumes, particularly from highway construction and steel customers, and approximately 1.2% average price increases.
- Nine-month lime and limestone revenue increased $1.2 million, primarily from approximately 2.0% average product price increases. Management stated that the soft economy remains a challenge to maintaining or increasing prices.
- Natural gas revenue increased 149.8% in Q3 and 85.1% for nine months, reflecting new wells, higher production and improved prices. Seven wells were completed in the second half of 2010 and three in late June 2011.
- Nine-month natural gas gross profit included $463 thousand related to resolution of royalty ownership issues on unitized wells; the filing states that Q2 revenue included $487 thousand from this matter.
- Q3 and nine-month lime and limestone gross profit benefited from the absence of costs accrued after a St. Clair plant accident in Q2 2010.
- The company repurchased 200,000 shares in August 2011 for $40.65 per share, using approximately $8.1 million of cash. Management stated that the repurchase favorably affected diluted EPS by approximately $0.01 in both reported periods.
Outlook, Risks, Contingencies and Unusual Items
Management estimated a 2011 effective income tax rate of approximately 26.4%, below the 2010 rate of 28.0%, primarily because of increased statutory depletion. No new natural gas wells were then being drilled or scheduled to be drilled to the company’s knowledge, and future drilling and production levels remain uncertain.
The credit facilities are secured by the company’s assets. The company’s credit agreement permits stock repurchases only if the pro forma Cash Flow Leverage Ratio is below 3.00 to 1.00 and no default exists; the maximum permitted ratio is 3.25 to 1. The revolving facility maturity was extended to June 1, 2015. Term loans require scheduled payments, with substantial final payments due December 31, 2015.
Interest-rate hedges fixed LIBOR at rates ranging from 4.695% to 5.500% on the term loans. The hedges had a $3.8 million mark-to-market liability at September 30, 2011, and the company paid $1.2 million in hedge settlements during the first nine months. Risks include interest-rate exposure on future revolver borrowings, counterparty performance, debt service and liquidity, commodity prices and natural gas declines, construction and steel demand, fuel and freight costs, weather and operating disruptions, regulatory and mine-safety matters, litigation and environmental requirements.
The company had no material open orders or commitments outside current liabilities at September 30, 2011. Its non-operating working interests may require it to fund 20% of eligible costs under the O&G Lease and 12.5% under the Drillsite Agreement unless it timely declines participation.
Important Facts for Investors to Verify
- Whether natural gas production and pricing can offset normal production declines in existing wells, particularly with no additional drilling currently scheduled.
- The sustainability of lime and limestone demand, pricing and margins amid continuing weakness in the broader economy.
- Compliance with debt covenants and the timing of required debt amortization and final payments in 2015.
- The effect of interest-rate hedge settlements and the $3.8 million hedge liability on future cash flow and comprehensive income.
- The cash impact and authorization status of future share repurchases following the $8.3 million spent in the first nine months.
- Potential mine-safety citations, penalties, environmental obligations and other regulatory contingencies disclosed in the filing’s mine-safety exhibit and related SEC filings.