USLM

Business Context and Reporting Period

Company: United States Lime & Minerals, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2004
Business Overview: The Company extracts high-quality limestone and processes it into pulverized limestone, quicklime, hydrated lime, and lime slurry. Operations are conducted through five wholly-owned subsidiaries in Texas, Arkansas, Colorado, and Louisiana. The Company serves construction, steel, municipal sanitation, paper, and agriculture industries.

Key Financial Metrics (Year Ended Dec 31, 2004)

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 23.0% to $55.7 million, driven primarily by increased sales volume from the new Arkansas kiln (operational since late February 2004) and a 2.5% average price increase.
• Profitability: Net income rose 64.0% to $6.3 million. Gross profit margin improved to 30.6% due to volume leverage spreading fixed costs, despite a $1.3 million increase in depreciation.
• Debt Reduction: Total debt decreased by $7.5 million (14.6%) due to a $7.0 million prepayment of subordinated notes and refinancing of bank debt which lowered the weighted average interest rate from ~9.25% to ~5.62%.
• Unusual Items: "Other income" included $1.328 million in oil and gas lease bonus payments from EOG Resources, Inc. regarding rights on the Cleburne, Texas property.
• Capital Expenditures: Increased to $13.6 million in 2004 from $12.0 million in 2003, largely due to the completion of the Arkansas Phase II expansion and a new kiln baghouse in Texas.

Guidance, Outlook, Risks, and Contingencies

• Outlook: Management expects strong demand for highway construction products due to anticipated federal funding bills. The Company believes cash flows and its $30 million revolving credit facility are sufficient to meet 2005 needs and refinance debt maturing in 2008-2009.
• Energy Costs: Natural gas and solid fuel costs remain high. The Company has entered into forward purchase contracts for natural gas and pricing agreements for coal/petroleum coke for 2005, which include price increases averaging 20%.
• Environmental Risks: Compliance with EPA "MACT" regulations (effective Jan 2008) will require additional performance testing and monitoring. CO2 emission reduction commitments remain a potential risk if legislation becomes mandatory.
• Contingencies:
  • Warrant Put Liability: Subordinated note holders have the right to require the Company to repurchase up to 162,000 shares after August 2008. The fair value of this liability was estimated at $1.126 million as of Dec 31, 2004.
  • Pension Plan: The Corson Plan remains underfunded with a projected benefit obligation of $1.702 million against plan assets of $1.432 million (unfunded status of $270,000).
• Accounting Changes: The Company plans to adopt SFAS 123(R) regarding stock-based compensation on July 1, 2005, which may impact future operating results.

Investor Verification Checklist

• Debt Maturity Profile: Verify the Company's ability to refinance or repay the $28.7 million in debt due between 2008 and 2009, given the current leverage ratio.
• Energy Cost Pass-Through: Assess the Company's ability to pass on the anticipated 20% increase in coal and petroleum coke costs to customers without losing volume.
• Arkansas Expansion ROI: Confirm that the new Arkansas kiln continues to operate at full capacity and that the increased depreciation ($7.4 million total) is being offset by sustained volume growth.
• Oil & Gas Lease Status: Monitor the status of the EOG Resources lease; the $1.3 million bonus was a one-time gain, and future royalty income depends on successful drilling which has not yet commenced.
• Environmental Compliance Costs: Review future capital requirements for meeting the 2008 MACT regulations and potential CO2 emission mandates.