UNITED STATES LIME & MINERALS INC - Quarter Report: 2004 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

(Mark One)

For the quarterly period ended June 30, 2004

OR

For the transition period from ........ to ........

Commission file number is 000-4197

UNITED STATES LIME & MINERALS, INC.

(972) 991-8400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Yes [X] No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Yes [   ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 2, 2004, 5,843,530 shares of common stock, $0.10 par value, were outstanding.

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Table of Contents

UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share data)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

     Presentation. The condensed consolidated financial statements included herein have been prepared by the Company without independent audit. In the opinion of the Company’s management, all adjustments of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2003. The results of operations for the three and six-month periods ended June 30, 2004 are not necessarily indicative of operating results for the full year.

     Stock-Based Compensation. The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Stock-based compensation expense associated with option grants was not recognized in the net income for the quarters ended March 31 and June 30, 2004 and 2003, as all options granted have had exercise prices equal to the market value of the underlying common stock on the dates of grant. The following table illustrates the effect on net income and income per common share if the Company had applied the fair-value-based recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share amounts):

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     The following table sets forth the computation of basic and diluted income (loss) per common share:

     Inventories consisted of the following at:

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     As of May 28, 2004, the Company entered into an oil and gas lease agreement with EOG Resources, Inc. with respect to oil and gas rights on its Cleburne, Texas property. Pursuant to the lease, the Company received a lease bonus payment of $1,192,000 which is reflected in other income for the quarter ended June 30, 2004. In addition, the Company retained a royalty interest in oil and gas produced from any successful wells drilled on the leased property.

     On April 22, 1999, the Company entered into a credit agreement with a consortium of commercial banks for a $50,000,000 Senior Secured Term Loan (the “Loan”). The Loan is repayable over a period of approximately eight years, maturing on March 30, 2007, and requires monthly principal payments of $278,000, which began April 30, 2000, with a final principal payment of $26,944,000 on March 30, 2007, which equates to a 15-year amortization. The Company paid a fee equivalent to 2.50% of the Loan value to the placement agent.

     The interest rate on the first $30,000,000 of the Loan is 8.875%. The subsequent installments bear interest from the date they were funded at 3.52% above the secondary market yield of the United States Treasury obligation maturing May 15, 2005. The blended rate for the additional $20,000,000 is 9.84%.

     The Loan is secured by a first lien on substantially all of the Company’s assets, with the exception of accounts receivable and inventories which secure the Company’s $6,000,000 revolving credit facility. The Loan agreement contains covenants that restrict the incurrence of debt, guaranties and liens, and places certain restrictions on the payment of dividends and the sale of significant assets. The Company is also required to meet minimum debt service coverage ratios on an ongoing basis and maintain a minimum level of tangible net worth.

     On March 3, 2003, the Company entered into a Loan and Security Agreement with one of its banks for a $5,000,000 revolving credit facility to replace a prior facility. In addition, the Company obtained a new $2,000,000 equipment line of credit (available for financing or leasing large mobile equipment used in its operations) from the same bank. The revolving credit facility is secured by the Company’s accounts receivable and inventories, provides for an interest rate of LIBOR plus 2.75% and originally matured on March 1, 2004. On December 29, 2003, the Loan and Security Agreement was amended to increase the revolving credit facility to $6,000,000 and extend the maturity to April 1, 2005. As of July 31, 2004, the Company had an outstanding balance of $1,250,000 on the revolving credit facility and had entered into approximately $1,100,000 of operating leases for mobile equipment under the $2,000,000 equipment line.

     In April 2003, the Company engaged Frost Securities, Inc. (“Frost”) to advise it on possible financing alternatives for the Phase II expansion of the Company’s Arkansas facilities. Frost contacted potential sources of financing and obtained several term sheet proposals for a subordinated debt placement from outside investors. In conjunction with the review of the proposals and further negotiations, Frost and the Company renewed discussions with the Company’s two largest shareholders and a third party to determine whether they would be interested in the investment on terms more favorable to the Company than those then available from other potential outside investors.

     On August 5, 2003, the Company sold $14,000,000 of unsecured subordinated notes (the “Sub Notes”) in a private placement under Section 4(2) of the Securities Act of 1933 to three accredited investors, one of which is an affiliate of Inberdon Enterprises Ltd., the Company’s majority shareholder (“Inberdon”), and another of which is an affiliate of Robert S. Beall, who owns

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approximately 11% of the Company’s outstanding shares. The Company believes that the terms of the private placement are more favorable to the Company than the proposals previously received. Frost provided an opinion to the Company’s Board of Directors that, from a financial point of view, the private placement was fair to the unaffiliated holders of the Company’s common stock in relation to other potential subordinated debt transactions then available to the Company. The Company paid Frost an aggregate of $381,000 for its advice, placement services and opinion.

     The net proceeds of approximately $13,450,000 from the private placement were primarily used to fund the Phase II expansion of the Company’s Arkansas facilities. Terms of the Sub Notes include: a maturity date of August 5, 2008, subject to acceleration upon a change in control; no mandatory principal payments prior to maturity; an interest rate of 14% (12% paid in cash and 2% paid in cash or in kind at the Company’s option); and, except as discussed below, no optional prepayment prior to August 5, 2005 and a 4% prepayment penalty if repaid before maturity. The terms of the Sub Notes are identical to one another, except that the Sub Note for the affiliate of Inberdon does not prohibit prepayment prior to August 5, 2005 and does not require a prepayment penalty if repaid before maturity, resulting in a weighted average prepayment penalty of approximately 2.4% if the Sub Notes are repaid before maturity. The Sub Notes include covenants similar to the covenants for the Loan.

     The private placement also included six-year detachable warrants, providing the Sub Note investors the right to purchase an aggregate of 162,000 shares of the Company’s common stock, at 110% of the average closing price of one share of common stock for the trailing 30 trading days prior to closing, or $3.84. The fair value of the warrants was recorded as a reduction of the carrying value of the Sub Notes and is being accreted over the term of the Sub Notes, resulting in an effective annual interest rate of 14.44%. After August 5, 2008, or upon an earlier change in control, the investors may require the Company to repurchase any or all shares acquired through exercise of the warrants (the “Warrant Shares”). The repurchase price for each Warrant Share will equal the average closing price of one share of the Company’s common stock for the 30 trading days preceding the date the Warrant Shares are put back to the Company. Changes in the repurchase price for each Warrant Share are accreted or decreted over the five-year period from the date of issuance to August 5, 2008. The investors are also entitled to certain registration rights for the resale of their Warrant Shares.

     As a result of negotiations with the Company’s existing bank lenders, the Loan and the revolving credit facility were amended to approve the terms of the Sub Notes. As part of these amendments, the Company is prohibited from paying any dividends in cash through June 30, 2005 without the prior written consent of the bank lenders.

     A summary of outstanding debt at the dates indicated is as follows:

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     The Company made a $3,000,000 principal prepayment on the Sub Notes on May 7, 2004. Pursuant to the terms of the Sub Notes, a $30,000 prepayment penalty was also paid on $1,500,000 of the principal prepayment. On July 29, 2004, the Company made another $3,000,000 principal prepayment on the Sub Notes. No prepayment penalty was required for the July payment.

Forward-Looking Statements. Any statements contained in this Report that are not statements of historical fact are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this Report, including without limitation statements relating to the Company’s plans, strategies, objectives, expectations, intentions, and adequacy of resources, are identified by such words as “will,” “could,” “should,” “believe,” “expect,” “intend,” “plan,” “schedule,” “estimate,” “anticipate,” and “project.” The Company undertakes no obligation to publicly update or revise any forward-looking statements. The Company cautions that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from expectations, including without limitation the following: (i) the Company’s plans, strategies, objectives, expectations, and intentions are subject to change at any time in the Company’s discretion; (ii) the Company’s plans and results of operations will be affected by its ability to manage its growth; (iii) the Company’s ability to meet short-term and long-term liquidity demands, including servicing the Company’s debt; (iv) inclement weather conditions; (v) increased fuel costs; (vi) unanticipated delays or cost overruns in completing current or planned construction projects; (vii) reduced demand for the Company’s products; and (viii) other risks and uncertainties set forth below or indicated from time to time in the Company’s filings with the Securities and Exchange Commission, including the Company’s Form 10-K for the fiscal year ended December 31, 2003.

Liquidity and Capital Resources

     Net cash provided by operations was $6,642,000 for the six months ended June 30, 2004, compared to $2,335,000 for the six months ended June 30, 2003. The $4,307,000 increase was primarily the result of the $1,741,000 increase in net income in the 2004 period compared to the same period in 2003, a $459,000 increase in depreciation, $768,000 of deferred tax expense, and a $1,000,000 net increase from changes in operating assets and liabilities in the 2004 period compared to the 2003 period. The most significant change in operating assets and liabilities was a $746,000 increase in prepaid expenses and other current assets in the first six months 2003, primarily due to the accrual of $813,000 of embezzlement-related recoveries, compared to a $373,000 decrease in the comparable 2004 period primarily resulting from amortization of prepaid insurance expense.

     The Company invested $7,474,000 in capital expenditures in the first six months 2004, $4,912,000 of which related to the Phase II expansion of the Company’s Arkansas facilities, compared to $2,395,000 in the same period last year.

     Financing activities used $4,610,000 net cash in the first six months 2004, primarily for repayment of debt. Net cash provided by financing activities was $244,000 in the first six months 2003, primarily from $2,201,000 of draws on the Company’s revolving credit facility, partially offset by $1,667,000 repayment of debt and $290,000 payment of cash dividends.

     On March 3, 2003, the Company entered into a Loan and Security Agreement with one of its banks for a $5,000,000 revolving credit facility to replace a prior facility. In addition, the Company obtained a new $2,000,000 equipment line of credit (available for financing or leasing large mobile equipment used in its operations) from the same bank. The revolving credit facility is secured by the Company’s accounts receivable and inventories, provides for an interest rate of LIBOR plus 2.75% and originally

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matured on March 1, 2004. On December 29, 2003, the Loan and Security Agreement was amended to increase the revolving credit facility to $6,000,000 and extend the maturity to April 1, 2005. As of July 31, 2004, the Company had an outstanding balance of $1,250,000 on the revolving credit facility and has entered into approximately $1,100,000 of operating leases for mobile equipment under the $2,000,000 equipment line.

     In April 2003, the Company engaged Frost Securities, Inc. (“Frost”) to advise it on possible financing alternatives for the Phase II expansion of the Company’s Arkansas facilities. Frost contacted potential sources of financing and obtained several term sheet proposals for a subordinated debt placement from outside investors. In conjunction with the review of the proposals and further negotiations, Frost and the Company renewed discussions with the Company’s two largest shareholders and a third party to determine whether they would be interested in the investment on terms more favorable to the Company than those then available from other potential outside investors.

     On August 5, 2003, the Company sold $14,000,000 of unsecured subordinated notes (the “Sub Notes”) in a private placement under Section 4(2) of the Securities Act of 1933 to three accredited investors, one of which is an affiliate of Inberdon Enterprises Ltd., the Company’s majority shareholder (“Inberdon”), and another of which is an affiliate of Robert S. Beall, who owns approximately 11% of the Company’s outstanding shares. The Company believes that the terms of the private placement are more favorable to the Company than the proposals previously received. Frost provided an opinion to the Company’s Board of Directors that, from a financial point of view, the private placement was fair to the unaffiliated holders of the Company’s common stock in relation to other potential subordinated debt transactions then available to the Company. The Company paid Frost an aggregate of $381,000 for its advice, placement services and opinion.

     The net proceeds of approximately $13,450,000 from the private placement were primarily used to fund the Phase II expansion of the Company’s Arkansas facilities. Terms of the Sub Notes include: a maturity date of August 5, 2008, subject to acceleration upon a change in control; no mandatory principal payments prior to maturity; an interest rate of 14% (12% paid in cash and 2% paid in cash or in kind at the Company’s option); and, except as discussed below, no optional prepayment prior to August 5, 2005 and a 4% prepayment penalty if repaid before maturity. The terms of the Sub Notes are identical to one another, except that the Sub Note for the affiliate of Inberdon does not prohibit prepayment prior to August 5, 2005 and does not require a prepayment penalty if repaid before maturity, resulting in a weighted average prepayment penalty of approximately 2.4% if the Sub Notes are repaid before maturity. The Sub Notes include covenants similar to the covenants for the Loan.

     The private placement also included six-year detachable warrants, providing the Sub Note investors the right to purchase an aggregate of 162,000 shares of the Company’s common stock, at 110% of the average closing price of one share of common stock for the trailing 30 trading days prior to closing, or $3.84. The fair value of the warrants was recorded as a reduction of the carrying value of the Sub Notes and is being accreted over the term of the Sub Notes, resulting in an effective annual interest rate of 14.44%. After August 5, 2008, or upon an earlier change in control, the investors may require the Company to repurchase any or all shares acquired through exercise of the warrants (the “Warrant Shares”). The repurchase price for each Warrant Share will equal the average closing price of one share of the Company’s common stock for the 30 trading days preceding the date the Warrant Shares are put back to the Company. Changes in the repurchase price for each Warrant Share are accreted or decreted over the five-year period from the date of issuance to August 5, 2008. The investors are also entitled to certain registration rights for the resale of their Warrant Shares.

     As a result of certain negotiations with the Company’s existing bank lenders, the Loan and the revolving credit facility were amended to approve the terms of the Sub Notes. As part of these

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amendments, the Company is prohibited from paying any dividends in cash through June 30, 2005 without the prior written consent of the bank lenders.

     The Arkansas modernization and expansion project began in the fourth quarter 1999 and was expected to be completed in two phases. Phase I involved the redevelopment of the quarry plant, rebuilding of the railroad to standard gauge, the purchase of a facility to establish an out-of-state terminal in Shreveport, Louisiana, the installation of a rotary kiln with preheater and increased product storage and loading capacity. The Company completed Phase I in the second quarter 2001.

     The total cost of Phase I of the Arkansas project was approximately $33,000,000. The $33,000,000 included approximately $1,800,000 of costs associated with the pre-building of certain facilities for Phase II of the project and the purchase of, but not all of the improvements to, the out-of-state terminal in Shreveport, Louisiana.

     The Phase II expansion has doubled the Arkansas plant’s quicklime production capacity through the installation of a second preheater rotary kiln and additional storage capacity substantially identical to the kiln system built in Phase I. Construction of the second kiln system commenced in the third quarter 2003 and was completed with lime production from the new kiln beginning in late February 2004. The plans for Phase II also include the rehabilitation of the distribution terminal in Shreveport, Louisiana, currently expected to be completed in 2004. The estimated total cost to complete Phase II is approximately $16,000,000, of which approximately $13,400,000, including capitalized interest, has been spent through June 30, 2004. The Company plans to finance the completion of the Phase II expansion principally through cash flows from operations.

     In March 2004, the Company incorporated a new Texas subsidiary, U. S. Lime – Houston (“Houston”), to conduct lime slurry operations in Houston, Texas.

     The Company is not contractually committed to any planned capital expenditures until actual orders are placed for equipment. As of June 30, 2004, the Company had no material open orders.

     The Company made a $3,000,000 principal prepayment on the Sub Notes on May 7, 2004. Pursuant to the terms of the Sub Notes, a $30,000 prepayment penalty was also paid on $1,500,000 of the principal prepayment. On July 29, 2004, the Company made another $3,000,000 prepayment on the Sub Notes, reducing the outstanding principal balance to $8,000,000. No prepayment penalty was required for the July payment. As of July 31, 2004, the Company has $43,358,000 in total debt outstanding.

Results of Operations

     Revenues increased to $14,752,000 in the second quarter 2004 from $11,529,000 in the second quarter 2003, an increase of $3,223,000, or 28.0%. Prices remained firm and the increases in revenues for the second quarter 2004 primarily resulted from increased sales resulting from lime production from the new kiln at the Company’s Arkansas plant which came on line in late February 2004. The Company’s revenues increased in the second quarter 2004 in spite of near record levels of rainfall in the quarter that reduced construction demand for products from the Company’s Texas plant. In the first half 2004, revenues increased to $26,827,000 from $21,085,000 in the first half 2003, an increase of $5,742,000, or 27.2%, primarily resulting from sales of the increased lime production from the new Arkansas kiln.

     Due in part to continuing temporary lime shortages, principally in the states east of the Arkansas plant, the Company sold most of the increased lime production at Arkansas during the quarter. These shortages were primarily due to increased consumption of lime for steel-related uses, closing of three lime plants in the Midwest, and production difficulties at some competitors’ plants.

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     The Company’s gross profit increased to $4,605,000 for the second quarter 2004 from $3,459,000 for the second quarter 2003, an increase of $1,146,000, or 33.1%. Compared to the 2003 quarter, gross profit margin as a percentage of revenues and gross profit increased in the 2004 quarter primarily due to the increase in lime sales volume, partially offset by a $353,000 increase in depreciation that was primarily attributable to depreciation of the new kiln in the 2004 quarter. For the first half 2004, the Company’s gross profit increased to $8,020,000 from $5,208,000 for the comparable 2003 period, an increase of $2,812,000, or 54.0%. Gross profit margin and gross profit increased in the first half 2004, compared to the same period last year, primarily due to the increase in lime sales volume resulting from the new Arkansas kiln, partially offset by a $464,000 increase in depreciation primarily resulting from placing the new kiln in service in late February 2004.

     Natural gas prices remain high and solid fuel costs are also increasing. In addition, the Company has experienced delays in rail delivery of some of its coal due to the problems a major rail carrier is experiencing with its rail system. This has resulted in the Company’s having to purchase higher priced coal from sources other than its normal provider. The Company is currently reviewing various alternatives to ensure long-term supplies for solid fuels, but expects its fuel costs to continue to increase.

     Selling, general and administrative expenses (“SG&A”) increased to $1,214,000 in the second quarter 2004 from $987,000 in the second quarter 2003, an increase of $227,000, or 22.9%. As a percentage of sales, SG&A declined to 8.2% in the second quarter 2004 from 8.6% in the 2003 quarter. SG&A increased to $2,402,000 in the first six months 2004 from $2,047,000 in the comparable 2003 period, an increase of $355,000, or 17.4%. As a percentage of sales, SG&A declined to 9.0% in the first six months 2004 from 9.7% in 2003. The increase in SG&A in 2004 was primarily attributable to increases in salaries, employee bonuses and benefits, increased reserves for bad debts and audit and professional fees along with expenses associated with the startup of slurry operations in Houston.

     Interest expense in the second quarter 2004 increased to $1,579,000 from $1,038,000 in the second quarter 2003, an increase of $541,000, or 52.1%. Interest expense in the first six months 2004 increased to $2,786,000 from $2,059,000 in the first six months 2003, an increase of $727,000, or 35.3%. The increase in interest expense in 2004 primarily resulted from the private placement of the Sub Notes, partially offset by the $3,333,000 in repayments on the Loan and $3,401,000 in repayment of the Company’s revolving Credit Facility over the last 12 months. Approximately $334,000 of interest was capitalized in the first half 2004 as part of the Arkansas Phase II expansion project.

     Other, net was $1,252,000 income in the second quarter 2004, as compared to $699,000 income in the second quarter 2003. In the second quarter 2004, the receipt of an oil and gas lease bonus payment of $1,192,000 ($954,000, or $0.16 per share, net of income taxes) for the lease of the Company’s oil and gas rights on its Cleburne, Texas property was the primary other income. Other, net in the 2003 quarter consisted of interest, other income and $813,000 ($691,000, or $0.12 per share, net of income taxes) of embezzlement-related recoveries, partially offset by $105,000 of embezzlement-related costs. In the first six months 2004, other, net was $1,270,000 income as compared to $711,000 income in the comparable 2003 period. In the first half 2004, the $1,192,000 oil and gas lease bonus was the primary other income. Other, net in the 2003 period consisted of interest, other income and $913,000 of embezzlement-related recoveries, partially offset by $186,000 of embezzlement-related costs.

     Income tax expense increased to $612,000 in the second quarter from $320,000 in the second quarter 2003, an increase of $292,000. For the first six months 2004, income tax expense increased to $820,000 from $272,000 in the comparable 2003 period, an increase of $548,000.

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     The Company’s net income increased to $2,452,000 ($0.42 per share) during the second quarter 2004 from net income of $1,813,000 ($0.31 per share) during the second quarter 2003, an increase of $639,000, or 35.2%. For the first six months 2004, the Company’s net income increased to $3,282,000 ($0.56 per share) compared to net income of $1,541,000 ($0.27 per share) during the comparable 2003 period, an increase of $1,741,000, or 113.0%.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     Not Applicable.

ITEM 4: CONTROLS AND PROCEDURES

     The Company’s management, with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report were effective.

     No change in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 4: SUBMISISON OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Annual Meeting of Shareholders was held May 5, 2004 in Dallas, Texas. The table below shows the proposal submitted to shareholders in the Company’s Proxy Statement, dated April 5, 2004:

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits:

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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UNITED STATES LIME & MINERALS, INC.

Quarterly Report on Form 10-Q
Quarter Ended
June 30, 2004

Index to Exhibits