USLM

Business Context and Reporting Period

Company: United States Lime & Minerals, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: The Company operates two primary segments: Lime and Limestone Operations (manufacturing for construction, steel, and environmental industries) and Natural Gas Interests (royalty and working interests in the Barnett Shale Formation). The Company is headquartered in Dallas, Texas.

Key Financial Metrics

Margins: Gross margin was 28.5% in Q1 2011 compared to 28.3% in Q1 2010. Operating margin was 21.9% in Q1 2011 compared to 21.3% in Q1 2010.

Material Changes vs. Prior Period

• Revenue: Total revenue decreased 1.6% to $33.1 million. Lime and limestone revenues declined 4.1% due to reduced sales volumes from steel and oil/gas customers, partially offset by a 1.8% price increase and improved highway construction demand. Conversely, natural gas revenues increased 15.9% due to higher production volumes from seven new wells completed in late 2010, despite lower natural gas prices.
• Profitability: Net income increased 3.2% to $4.8 million. This was driven by a 7.6% reduction in Selling, General, and Administrative (SG&A) expenses, largely due to a lower allowance for doubtful accounts compared to the prior year and decreased insurance costs.
• Cash Flow: Operating cash flow decreased 7.4% to $5.4 million, primarily due to a net increase in trade receivables of $4.6 million. Investing cash outflows decreased significantly to $1.7 million from $2.8 million as capital expenditures were reduced.
• Debt: Total debt decreased to $35.4 million from $36.7 million due to scheduled principal repayments. The Company has no outstanding balance on its Revolving Facility, though $322,000 in letters of credit were issued.

Guidance, Outlook, and Risks

Management Commentary: Management notes that the soft economy continues to impact demand for lime and limestone products, presenting challenges in maintaining price increases. However, the natural gas segment remains robust with increased production. The Company expects three additional wells to be completed in the second half of 2011.

Debt and Liquidity: The Company amended its credit facilities in June 2010, extending the Revolving Facility maturity to June 2015 and removing certain restrictions on capital expenditures and acquisitions. However, the amendment increased interest rate margins and commitment fees. The maximum Cash Flow Leverage Ratio was reduced to 3.25 to 1.00.

Risks and Contingencies:

• Market Risk: The Company is exposed to floating interest rates, though it has hedged all outstanding indebtedness ($35.4 million) via interest rate swaps. Mark-to-market adjustments on these hedges resulted in a liability of $3.3 million.
• Operational Risk: A fatality occurred at the St. Clair plant in Q2 2010; the Company accrued costs for potential MSHA penalties and continues to cooperate with investigations.
• Regulatory Risk: Operations are subject to MSHA regulations, with increasing enforcement and penalties noted in recent years.

Investor Verification Checklist

• Debt Covenants: Verify the Company's compliance with the reduced Cash Flow Leverage Ratio (3.25:1) following the June 2010 credit facility amendment.
• Interest Rate Exposure: Confirm the effectiveness of interest rate hedges and the impact of the increased LIBOR margins on future interest expense.
• Receivables Quality: Review the $18.4 million trade receivables balance and the rationale for the reduced allowance for doubtful accounts compared to the prior year.
• Natural Gas Production: Monitor the completion status of the three additional wells expected in H2 2011 and the sustainability of production volumes given declining well rates.
• Regulatory Penalties: Track the resolution of the MSHA investigation regarding the 2010 St. Clair plant accident and any associated financial liabilities.