Business Context and Reporting Period
United States Lime & Minerals, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The company operates two segments: Lime and Limestone Operations, its principal business, and Natural Gas Interests in the Barnett Shale. Its lime and limestone products serve construction, steel, municipal, oil and gas, industrial, and environmental markets.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $34.1 million | $39.2 million | $106.6 million | $109.1 million |
| Gross profit | $7.8 million | $12.5 million | $25.3 million | $32.4 million |
| Gross margin | 22.7% | 32.0% | 23.7% | 29.6% |
| Operating profit | $5.7 million | $10.2 million | $18.6 million | $25.8 million |
| Net income | $3.9 million | $7.1 million | $12.6 million | $17.7 million |
| Diluted EPS | $0.71 | $1.11 | $2.19 | $2.76 |
- Lime and limestone revenue was $32.6 million in Q3 and $101.2 million year to date. Natural Gas Interests revenue was $1.6 million in Q3 and $5.5 million year to date.
- Net cash provided by operating activities was $24.9 million for the first nine months, compared with $29.1 million in the prior-year period.
- Capital expenditures were $6.5 million, including $6.4 million for lime and limestone operations and $64,000 for natural gas interests.
- Cash and cash equivalents were $27.4 million at September 30, 2012, down from $53.4 million at December 31, 2011.
- Total debt was $29.2 million, consisting of $18.3 million under the Term Loan and $10.8 million under the Draw Term Loan. The company had no revolving borrowings other than $343,000 of letters of credit.
- Interest expense was $539,000 in Q3 and $1.7 million year to date. Interest-rate hedges produced liabilities of approximately $3.0 million at September 30, 2012.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 12.9%, while nine-month revenue declined 2.2%. Q3 lime and limestone volumes decreased approximately 10.6%, partly offset by a 1.9% average price increase. For the nine-month period, prices increased approximately 2.9%, partly offsetting a 0.9% volume decline.
- Natural Gas Interests revenue fell 55.8% in Q3 and 44.6% year to date, reflecting lower natural gas and liquids prices, declining production volumes, and the absence of a $487,000 royalty-related benefit recognized in the first nine months of 2011.
- Natural gas production was 303,000 MCF in Q3 at an average price of $5.19 per MCF, versus 435,000 MCF at $8.10 per MCF in Q3 2011. Year-to-date production was 957,000 MCF at $5.69 per MCF, versus approximately 1.2 BCF at $8.37 per MCF.
- Gross profit declined 38.1% in Q3 and 21.7% year to date. Lime and limestone margins were reduced by $1.0 million of outside contractor stripping costs in Q3 and $2.6 million year to date; no comparable costs were incurred in 2011.
- Net income declined 44.1% in Q3 and 28.5% year to date. Repurchases of 200,000 shares in Q3 2011 and 700,000 shares in Q1 2012 favorably affected diluted EPS by approximately $0.09 and $0.29, respectively.
- Financing cash outflows increased to $44.5 million from $12.0 million, primarily because treasury-share purchases increased to $40.8 million from $8.3 million.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects demand from steel, oil and gas services, and roof shingle customers to remain lower in Q4 2012 than in Q4 2011, although its diversified customer base may offset some weakness.
- The company expects to continue contract stripping in the future at somewhat reduced rates. The timing and cost will depend on contractor and equipment availability.
- Natural Gas Interests are expected to continue declining absent new drilling because of lower prices and normal production declines. One well was plugged and abandoned, leaving 39 producing wells; no new wells were currently being drilled or scheduled to management’s knowledge.
- Management stated that cash on hand, operating cash flow, and availability under the revolving facility should be sufficient for operating requirements, capital needs, and debt service for the next 12 months and the foreseeable future.
- Key risks include economic weakness affecting industrial demand, fuel and energy costs, operational interruptions, mining and regulatory requirements, capital-project overruns, debt and interest-rate exposure, counterparty performance under hedges, natural gas production and pricing, environmental and mine-safety matters, litigation, and permitting.
- The company had no material open orders or commitments outside current liabilities at September 30, 2012. Working-interest obligations could arise if the company elects, or is deemed to elect, to participate in future natural gas wells.
- Management concluded that disclosure controls and procedures were effective, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Verify the extent and duration of lower steel, oil and gas services, and roof shingle demand and the company’s ability to sustain product-price increases.
- Assess whether contractor stripping costs remain reduced as anticipated and how they affect future lime and limestone margins.
- Monitor natural gas prices, production declines, well-plugging activity, and any new drilling commitments.
- Review debt maturities, required principal payments, covenant compliance, revolving-facility availability, and interest-rate hedge obligations.
- Reconcile the $40.8 million treasury-share repurchase outflow with the decline in cash and evaluate the effect of reduced shares outstanding on per-share results.
- Review Exhibit 95.1 for the detailed mine-safety results; the filing text provided here does not include the specific citation, order, or penalty amounts.