USLM

Business Context and Reporting Period

Company: United States Lime & Minerals, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company operates two segments: Lime and Limestone Operations (manufacturing for construction, steel, and industrial sectors) and Natural Gas Interests (royalty and working interests in the Barnett Shale Formation). The Company is a non-accelerated filer with 6,390,371 shares of common stock outstanding as of July 29, 2009.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 29.3% in Q2 2009 and 22.8% in the first six months of 2009 compared to the prior year.
  • Lime & Limestone: Revenues dropped 24.1% (Q2) and 19.2% (6-month) due to reduced sales volumes from construction and steel sectors, partially offset by price increases of approximately 8.6%.
  • Natural Gas: Revenues plummeted 68.6% (Q2) and 55.5% (6-month) driven by a drastic decline in natural gas prices (average price dropped from $13.27/MCF to $4.73/MCF in Q2) and unitization adjustments reducing revenue interests.
• Profitability: Net income decreased 43.8% in Q2 and 31.0% for the six-month period. Gross profit margins for Lime and Limestone operations improved slightly due to cost reduction initiatives and price hikes, despite volume declines.
• Debt Reduction: Total debt outstanding decreased from $51.35 million (Dec 31, 2008) to $44.17 million (June 30, 2009). The Company repaid $4.7 million of its revolving credit facility and $2.5 million of term loans during the first half of 2009.
• Working Capital: Cash provided by operating activities increased slightly to $11.7 million (6-month 2009) from $11.3 million (6-month 2008), primarily due to better management of inventory and receivables despite lower net income.

Outlook, Risks, and Management Commentary

• Management Commentary: Management cites the "unprecedented slowdown in the U.S. economy" as the primary driver for reduced demand. Cost-cutting measures, including employee layoffs and idling kilns, were implemented to mitigate the impact. The Company does not expect near-term improvements but anticipates future demand growth spurred by government stimulus and infrastructure projects.
• Natural Gas Outlook: Future drilling activity depends heavily on natural gas prices. Eight potential additional wells have been sited, but completion is uncertain. Unitization of existing wells has reduced the Company's revenue interest.
• Liquidity: The Company maintains a $30 million revolving credit facility (currently undrawn except for $322k in letters of credit) and term loans maturing in 2015. Interest rate hedges are in place to fix rates on term loans.
• Risks: Key risks include continued recessionary pressures in construction and steel, volatility in natural gas prices, fuel and transportation cost increases, and counterparty risk regarding interest rate hedges (Wells Fargo Bank).

Investor Verification Checklist

• Debt Covenants: Verify the Company's compliance with the "Cash Flow Leverage Ratio" (Total funded senior indebtedness to EBITDA) to ensure interest rate margins remain favorable and no default events are triggered.
• Natural Gas Unitization: Confirm the final impact of the unitization of 11 wells on long-term royalty and working interest percentages.
• Interest Rate Hedge Liability: Monitor the fair value of interest rate hedges, which created a $3.5 million liability on the balance sheet due to declining interest rates.
• Capital Expenditures: Review future capital plans, as the Company reduced CapEx significantly to $3.8 million (6-month 2009) from $7.1 million (6-month 2008), potentially impacting long-term capacity.
• Price vs. Volume Mix: Assess the sustainability of the 8.6% price increase in lime products against the backdrop of continued volume declines in the construction sector.