USLM

Business Context and Reporting Period

Company: United States Lime & Minerals, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Operations: The Company operates two primary segments: Lime and Limestone Operations (manufacturing pulverized limestone, quicklime, hydrated lime, and lime slurry) and Natural Gas Interests (royalty and working interests in the Barnett Shale Formation in Texas). The Company is headquartered in Dallas, Texas, with production facilities in Arkansas, Colorado, Louisiana, Oklahoma, and Texas.

Key Financial Metrics

Margins (2006): Gross Margin was 23.6%; Operating Margin was 17.7%; Net Income Margin was 10.7%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 46.4% to $118.7 million. Lime and Limestone revenues rose 40.7% to $114.1 million, driven by a 7.1% average price increase, volume growth, and the inclusion of St. Clair operations (acquired Dec 2005). Natural Gas revenues of $4.6 million were reported for the first time.
• Profitability: Net income increased 59.8% to $12.7 million. This growth was partially offset by a $550,000 charge (net of tax) for the cumulative effect of a change in accounting principle regarding stripping costs.
• Cost Structure: Cost of revenues increased due to higher fuel, electricity, and transportation costs. Depreciation, depletion, and amortization (DD&A) rose to $9.8 million from $7.9 million due to new assets and acquisitions.
• Debt Levels: Total debt increased 17.5% to $64.6 million, primarily to fund the third kiln construction project in Arkansas and the St. Clair acquisition.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Capacity Expansion: The third preheater kiln at the Arkansas facility began production in December 2006, increasing quicklime capacity by approximately 50%. Construction of ancillary structures was expected to complete in Q1 2007.
• Market Demand: Demand for pulverized limestone declined in the second half of 2006 due to reduced reroofing activity. Steel industry demand softened in late 2006 but showed signs of improvement in early 2007. Management expects strong demand for highway construction products due to federal funding (SAFETEA).
• Capital Needs: The Company anticipates spending $5.0 to $6.0 million annually on recurring capital and environmental compliance. It expects to increase debt in early 2007 due to seasonality and payables related to the third kiln project.

Risks and Contingencies:

• Environmental Regulation: Potential future restrictions on CO2 emissions and stricter ozone standards (NOx limits) could require substantial capital expenditures. The Company is subject to MACT regulations for hazardous air pollutants.
• Input Costs: The Company is sensitive to fluctuations in natural gas, coal, electricity, and freight costs. Freight costs are high relative to product value.
• Natural Gas Volatility: Revenues from natural gas interests are subject to volatile market prices and production volumes controlled by third-party operators (EOG Resources and XTO Energy).
• Weather: Inclement weather negatively impacts construction demand and open-pit mining operations.

Investor Verification Checklist

• Third Kiln Project Costs: Verify the final cost of the Arkansas third kiln project, which increased from an estimated $26 million to approximately $30.7 million due to seismic code changes and labor shortages.
• Debt Covenants: Confirm compliance with financial covenants (debt service coverage and leverage ratios) given the increased debt load of $64.6 million.
• Accounting Change Impact: Review the write-off of $740,000 in deferred stripping costs resulting from the adoption of EITF Issue No. 04-6.
• Natural Gas Reserves: Validate the proved natural gas reserves (7.871 million MCF) and the reliance on third-party operators for drilling and production decisions.
• Environmental Liabilities: Assess the adequacy of the $990,000 accrual for Asset Retirement Obligations (AROs) and potential future costs related to CO2 regulation.