United States Lime & Minerals, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 7, 2013. The filing reports two segments: Lime and Limestone Operations and Natural Gas Interests. The fourth quarter is seasonally weaker, with 2012 revenue of $31.9 million and net income of $3.8 million.
Business Context
- The company manufactures pulverized limestone, quicklime, hydrated lime and lime slurry for construction, metals, environmental, oil and gas services, industrial, roofing and agricultural customers.
- Operations are located in Arkansas, Colorado, Louisiana, Oklahoma and Texas. Natural gas interests comprise royalty and non-operating working interests in Barnett Shale properties in Johnson County, Texas.
- The company produced approximately 3 million tons of limestone in 2012 and operated its lime and limestone plants at approximately 60% aggregate capacity utilization.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $138.5 million | $142.6 million | Down 2.8% |
| Lime and limestone revenue | $131.4 million | $129.7 million | Up 1.3% |
| Natural gas revenue | $7.1 million | $12.9 million | Down 44.7% |
| Gross profit | $33.4 million | $41.3 million | Down 19.1% |
| Operating profit | $24.2 million | $32.5 million | Down 25.4% |
| Net income | $16.4 million | $22.2 million | Down 26.0% |
| Diluted EPS | $2.87 | $3.49 | Down 17.8% |
| Gross margin | 24.1% | 29.0% | Down 4.9 points |
| Operating margin | 17.5% | 22.8% | Down 5.3 points |
| Net margin | 11.9% | 15.6% | Down 3.7 points |
| Cash flow from operations | $31.7 million | $38.5 million | Down 17.7% |
| Capital expenditures | $8.3 million | $9.4 million | Down 12.3% |
| Cash and cash equivalents | $29.8 million | $53.4 million | Down $23.6 million |
| Total debt | $26.7 million | $32.9 million | Down $6.3 million |
Material Changes Versus Prior Comparable Period
- Lime and limestone pricing increased approximately 2.9%, but lower sales volumes to steel and oil and gas services customers limited revenue growth.
- Lime and limestone gross profit declined 8.2%, principally because of $2.6 million in outside contractor stripping costs incurred mainly in the second and third quarters; no comparable costs were incurred in 2011.
- Natural gas revenue declined because of approximately 26.8% lower prices, approximately 14.1% lower production volumes and normal well-production declines. Production fell to 1.2 BCF from 1.6 BCF, while the average sales price fell to $5.74 per MCF from $8.27.
- Natural gas gross profit declined 57.2% to $3.9 million. The 2011 results also included a $463 thousand benefit from resolving royalty ownership issues.
- SG&A increased 3.9% to $9.2 million, primarily from higher non-cash stock-based compensation.
- The company repurchased approximately 700,000 shares for $40.8 million in 2012, including a $40.6 million first-quarter repurchase at $58.00 per share.
Liquidity, Debt and Cash Flow
- Operating cash flow of $31.7 million funded $8.3 million of capital expenditures and $6.3 million of term-loan repayments, but substantial share repurchases reduced year-end cash to $29.8 million.
- Debt consisted of $16.7 million under the Term Loan and $10.0 million under the Draw Term Loan. The company had no cash borrowings under its $30 million revolving facility, with $637 thousand of letters of credit outstanding.
- Scheduled debt payments total $26.7 million, including $5.0 million in 2013 and $16.7 million in 2015. The revolving facility matures June 1, 2015; other debt has final maturity in 2015.
- Management stated that cash on hand, operating cash flow and available revolver capacity should fund 2013 operating needs, capital requirements and debt service.
- Interest-rate hedges produced a $2.6 million mark-to-market liability at year-end 2012 and required $1.3 million of settlement payments during the year.
Outlook, Risks and Unusual Items
- Management expected first-quarter 2013 demand from steel and oil and gas services customers to be lower than in the first quarter of 2012, although construction demand and customer diversification could partially offset the weakness.
- Normal recurring capital spending is expected to be $7 million to $9 million annually. Management anticipated funding 2013 capital needs and debt reduction from operating cash flow, absent a significant acquisition.
- Key risks include economic weakness, construction and steel demand, natural gas and natural gas liquids prices, fuel and freight costs, weather, equipment failures, labor matters, environmental compliance and operating-permit requirements.
- Greenhouse-gas, air-quality and hydraulic-fracturing regulation could increase capital, operating and compliance costs or limit future expansion.
- Natural gas reserves declined to 8.3 BCF from 10.3 BCF, and standardized discounted future cash flows declined to $12.8 million from $29.9 million, primarily reflecting lower prices, production and reserve estimates. No new wells were being drilled at year-end.
- The company recorded a $1.4 million asset-retirement obligation and had a $290 thousand unfunded pension obligation. Management stated that normal-course lawsuits and claims were not expected to have a material adverse effect.
- Grant Thornton issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded disclosure controls and internal controls were effective.
Investor Verification Checklist
- Verify whether lime and limestone volume trends, pricing and stripping costs improve after 2012.
- Monitor steel, construction and oil and gas services demand, together with fuel, electricity, transportation and freight costs.
- Assess natural gas production declines, commodity prices, reserve revisions and the operators’ future drilling or workover plans.
- Confirm the company’s ability to fund 2015 debt maturities while maintaining capital spending and any future share repurchases.
- Review the effect of environmental, greenhouse-gas and hydraulic-fracturing regulations on permits, costs and expansion plans.
- Reconcile cash utilization, including the $40.8 million share repurchase, with ongoing liquidity and covenant requirements.