USLM

Business Context and Reporting Period

Company: United States Lime & Minerals, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: The Company operates two primary 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 headquartered in Dallas, Texas.

Key Financial Metrics

Note: Working Capital calculated as Current Assets ($36,730) minus Current Liabilities ($15,069).

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 18.8% ($7.3 million) in Q3 2009 compared to Q3 2008, and 21.4% ($24.3 million) for the nine-month period.
  • Lime & Limestone: Revenues dropped 11.1% in Q3 due to reduced sales volumes from construction and steel sectors, partially offset by a 9.4% average price increase.
  • Natural Gas: Revenues plummeted 67.3% in Q3 due to a drastic decline in natural gas prices (average $5.84/MCF vs. $11.90/MCF in 2008) and lower production volumes.
• Profitability: Despite revenue declines, Net Income remained flat in Q3 ($4.495 million vs. $4.475 million) due to cost reduction initiatives and price increases in the lime segment. Nine-month Net Income decreased 20.5% to $10.6 million.
• Liquidity Improvement: Cash and cash equivalents increased significantly from $836,000 at year-end 2008 to $11.7 million at September 30, 2009, driven by strong operating cash flows ($24.1 million for the nine months).
• Debt Reduction: Total debt outstanding decreased from $51.4 million (Dec 31, 2008) to $42.9 million (Sep 30, 2009), with $8.4 million repaid in the first nine months of 2009.

Outlook, Risks, and Management Commentary

• Market Conditions: Management cites a "drastic slowdown" in the U.S. economy, specifically impacting construction and steel demand. No near-term improvement is expected, though government stimulus and toll road reliance may spur future demand.
• Cost Management: The Company has implemented employee layoffs and is idling kilns to match reduced demand. Fuel costs remain high, but the Company is varying fuel mixes to mitigate expenses.
• Natural Gas Risks: Production volumes are constrained by unitization of 11 wells, which reduced the Company's revenue interest. Eight potential new wells are sited, with drilling planned for late 2009/early 2010, but completion is not expected until late 2010.
• Interest Rate Risk: The Company has hedged floating rates on its Term Loans and Draw Term Loans. However, the Revolving Facility (currently unused except for letters of credit) remains subject to interest rate risk.
• Contingencies: The Company faces potential credit loss exposure if the counterparty to its interest rate hedges (Wells Fargo Bank) fails to perform. The fair value of these hedges resulted in a liability of $3.9 million.

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 triggers are active.
• Gas Price Sensitivity: Assess the impact of continued low natural gas prices on the Natural Gas segment, which contributed significantly less to gross profit in 2009 compared to 2008.
• Capital Expenditures: Confirm the status of the 8 planned natural gas wells and the associated capital commitments, as these are contingent on operator decisions and market conditions.
• Inventory Levels: Review the $2.2 million decrease in inventories to ensure it reflects strategic drawdowns rather than obsolescence or demand destruction.
• Hedge Counterparty Risk: Evaluate the creditworthiness of Wells Fargo Bank regarding the $3.9 million interest rate hedge liability.