United States Lime & Minerals, Inc. — Q2 2011 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 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 in Texas.
Financial performance and condition
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $36.8 million, down 2.9% | $69.9 million, down 2.3% |
| Gross profit | $10.4 million; 28.2% margin | $19.8 million; 28.3% margin |
| Operating profit | $8.3 million; 22.6% margin | $15.5 million; 22.2% margin |
| Net income | $5.8 million, up 2.3% | $10.6 million, up 2.8% |
| Diluted earnings per share | $0.90 | $1.65 |
| Operating cash flow | Not separately provided | $16.5 million, up 5.7% |
- Lime and Limestone revenue declined 7.7% in the quarter and 6.0% year to date, primarily because of lower sales volumes and weaker demand from highway construction, oil and gas services, and steel customers. Average product prices increased approximately 2.0% in the first half.
- Natural Gas revenue increased 94.8% in the quarter and 61.7% year to date, supported by seven wells completed in the second half of 2010, higher production, and improved second-quarter pricing.
- At June 30, 2011, cash and cash equivalents were $46.3 million, compared with $36.2 million at December 31, 2010. Total debt was $34.2 million, including $5.0 million due within one year. The revolving facility had no outstanding borrowings, although $322,000 of letters of credit were issued.
- Capital expenditures were $3.9 million in the first half, compared with $5.1 million in the prior-year period. Financing cash outflows included $2.5 million of term-loan repayments and $126,000 of treasury-share purchases.
Material changes versus the prior comparable period
- Net income increased despite lower consolidated revenue, primarily because of higher Natural Gas Interests results and lower income tax expense.
- Lime and Limestone gross profit decreased to $7.8 million for the quarter and $15.4 million for the first half, reflecting lower volumes, increased labor and benefits costs, and higher fuel and petroleum-related costs.
- Natural Gas gross profit increased to $2.6 million for the quarter and $4.5 million for the first half. Production was 340 thousand MCF from 37 wells in the quarter versus 229 thousand MCF from 30 wells in the prior-year quarter.
- SG&A increased 7.0% in the quarter to $2.1 million but was essentially unchanged at $4.3 million for the first half. Interest expense declined modestly as debt repayments offset higher borrowing margins.
- The company repaid $2.5 million of term debt during the first half, reducing total debt from $36.7 million at year-end 2010 to $34.2 million.
Guidance, outlook, risks and unusual items
- The company did not provide formal revenue or earnings guidance. Management stated that steel demand improved in the second quarter and highway-construction demand began improving in July 2011.
- Three additional natural-gas wells completed at the end of June were expected to increase producing wells to 40 in the third quarter. The company cannot predict future drilling activity or well results.
- Management estimated an approximately 26.0% effective tax rate for 2011, below the 28.0% rate in 2010, primarily because of increased statutory depletion.
- The credit facilities mature or require significant final principal payments in 2015. They are secured by company assets and impose a maximum Cash Flow Leverage Ratio of 3.25 to 1. The company’s interest-rate hedges produced liabilities of $3.5 million at June 30, 2011 and require fixed-rate settlement payments.
- Principal risks include weak demand in construction, steel and oil and gas markets; fuel, electricity and freight costs; weather, accidents and regulatory interruptions; natural-gas production declines and commodity-price volatility; financing and liquidity requirements; interest-rate and hedge-counterparty exposure; and MSHA, environmental and other regulatory matters.
- A fatal accident occurred at the St. Clair plant in the second quarter of 2010. Related matters were substantially resolved except for proposed MSHA assessments, which management considered immaterial and was contesting. The 2010 results also included accident-related costs.
- The filing states that management’s disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the sustainability of lower Lime and Limestone volumes and whether the reported July highway-construction improvement continued.
- Assess the durability of Natural Gas production growth, the contribution from new wells, commodity prices, and the reported royalty-ownership resolution.
- Review debt-amortization requirements, 2015 maturities, covenant compliance, secured collateral, and the effect of hedge settlements on cash interest costs.
- Reconcile the filing’s references to the second-quarter royalty-ownership resolution: the MD&A cites $487,000 received, while another passage states that gross profit included $463,000.
- Review the detailed MSHA mine-safety disclosures in Exhibit 99.1 and the status of the contested assessments.