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EAGLE MATERIALS INC - Quarter Report: 2015 December (Form 10-Q)

]\ 

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended

December 31, 2015

Commission File Number 1-12984

 

Eagle Materials Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

75-2520779

(I.R.S. Employer Identification No.)

3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219

(Address of principal executive offices)

(214) 432-2000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes  ¨    No  x

As of January 27, 2016, the number of outstanding shares of common stock was:

 

Class

 

Outstanding Shares

Common Stock, $.01 Par Value

 

49,309,781

 

 

 


Eagle Materials Inc. and Subsidiaries

Form 10-Q

December 31, 2015

Table of Contents

PART I. FINANCIAL INFORMATION (unaudited)

 

 

 

 

 

Page

Item 1.

 

Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Statements of Earnings for the Three and Nine Months Ended December 31, 2015 and 2014

 

3

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Earnings for the Three and Nine Months Ended December 31, 2015 and 2014

 

4

 

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2015 and March 31, 2015

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2015 and 2014

 

6

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

26

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

42

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

42

 

 

 

 

 

Item 1a.

 

Risk Factors

 

44

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

52

 

 

 

 

 

Item 4.

 

Mine Safety Information

 

52

 

 

 

 

 

Item 6.

 

Exhibits

 

53

 

 

 

 

 

SIGNATURES

 

54

 

 

 


 

Eagle Materials Inc. and Subsidiaries

Consolidated Statements of Earnings

(dollars in thousands, except share data)

(unaudited)

 

 

 

For the Three Months
Ended December 31,

 

 

For the Nine Months
Ended December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues

 

$

277,409

 

 

$

291,529

 

 

$

891,360

 

 

$

842,588

 

 

Cost of Goods Sold

 

 

208,544

 

 

 

212,380

 

 

 

717,104

 

 

 

631,977

 

 

Gross Profit

 

 

68,865

 

 

 

79,149

 

 

 

174,256

 

 

 

210,611

 

 

Equity in Earnings of Unconsolidated Joint Venture

 

 

10,483

 

 

 

12,423

 

 

 

29,993

 

 

 

34,274

 

Corporate General and Administrative

 

 

(8,304

)

 

 

(9,371

)

 

 

(26,659

)

 

 

(23,827

)

Acquisition and Litigation Expense

 

 

-

 

 

 

(722

)

 

 

-

 

 

 

(2,825

)

Other Income

 

 

1,163

 

 

 

488

 

 

 

2,170

 

 

 

2,050

 

Interest Expense, Net

 

 

(4,002

)

 

 

(4,101

)

 

 

(12,830

)

 

 

(12,054

)

 

Earnings Before Income Taxes

 

 

68,205

 

 

 

77,866

 

 

 

166,930

 

 

 

208,229

 

 

Income Tax Expense

 

 

(22,357

)

 

 

(25,836

)

 

 

(53,501

)

 

 

(68,170

)

 

Net Earnings

 

$

45,848

 

 

$

52,030

 

 

$

113,429

 

 

$

140,059

 

 

EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.93

 

 

$

1.05

 

 

$

2.29

 

 

$

2.82

 

Diluted

 

$

0.92

 

 

$

1.03

 

 

$

2.26

 

 

$

2.78

 

AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

49,187,738

 

 

 

49,655,405

 

 

 

49,593,821

 

 

 

49,583,210

 

Diluted

 

 

49,770,020

 

 

 

50,411,147

 

 

 

50,230,091

 

 

 

50,375,619

 

 

CASH DIVIDENDS PER SHARE:

 

$

0.10

 

 

$

0.10

 

 

$

0.30

 

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements.

 

3


 

Eagle Materials Inc. and Subsidiaries

Consolidated Statements of Comprehensive Earnings

(unaudited – dollars in thousands)

 

 

 

For the Three Months
Ended December 31,

 

 

For the Nine Months
Ended December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net Earnings

 

$

45,848

 

 

$

52,030

 

 

$

113,429

 

 

$

140,059

 

 

Change in Funded Status of Defined Benefit Plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Net Actuarial Loss

 

 

506

 

 

 

163

 

 

 

1,522

 

 

 

489

 

Tax Expense

 

 

(188

)

 

 

(57

)

 

 

(564

)

 

 

(171

)

 

Comprehensive Earnings

 

$

46,166

 

 

$

52,136

 

 

$

114,387

 

 

$

140,377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements.

 

4


 

Eagle Materials Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands)

 

 

 

December 31,

 

 

March 31,

 

 

 

2015

 

 

2015

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets -

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

15,756

 

 

$

7,514

 

Accounts and Notes Receivable

 

 

103,859

 

 

 

113,577

 

Inventories

 

 

232,447

 

 

 

235,464

 

Income Tax Receivable

 

 

5,319

 

 

 

-

 

Prepaid and Other Assets

 

 

8,013

 

 

 

10,080

 

Total Current Assets

 

 

365,394

 

 

 

366,635

 

Property, Plant and Equipment -

 

 

2,065,745

 

 

 

1,962,215

 

Less: Accumulated Depreciation

 

 

(799,494

)

 

 

(740,396

)

Property, Plant and Equipment, net

 

 

1,266,251

 

 

 

1,221,819

 

Notes Receivable

 

 

2,716

 

 

 

2,847

 

Investment in Joint Venture

 

 

50,372

 

 

 

47,614

 

Goodwill and Intangible Assets

 

 

174,916

 

 

 

211,167

 

Other Assets

 

 

28,921

 

 

 

32,509

 

 

 

$

1,888,570

 

 

$

1,882,591

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities -

 

 

 

 

 

 

 

 

Accounts Payable

 

$

61,327

 

 

$

77,749

 

Accrued Liabilities

 

 

46,750

 

 

 

46,830

 

Income Taxes Payable

 

 

-

 

 

 

2,952

 

Current Portion of Long-term Debt

 

 

8,000

 

 

 

57,045

 

Total Current Liabilities

 

 

116,077

 

 

 

184,576

 

Long-term Debt

 

 

492,714

 

 

 

455,714

 

Other Long-term Liabilities

 

 

70,673

 

 

 

69,055

 

Deferred Income Taxes

 

 

159,790

 

 

 

162,653

 

Total Liabilities

 

 

839,254

 

 

 

871,998

 

 

Stockholders’ Equity -

 

 

 

 

 

 

 

 

Preferred Stock, Par Value $0.01; Authorized 5,000,000 Shares; None Issued

 

 

-

 

 

 

-

 

Common Stock, Par Value $0.01; Authorized 100,000,000 Shares; Issued and Outstanding 49,305,408 and 50,245,364 Shares, respectively

 

 

493

 

 

 

502

 

Capital in Excess of Par Value

 

 

211,781

 

 

 

272,441

 

Accumulated Other Comprehensive Losses

 

 

(11,109

)

 

 

(12,067

)

Retained Earnings

 

 

848,151

 

 

 

749,717

 

Total Stockholders’ Equity

 

 

1,049,316

 

 

 

1,010,593

 

 

 

$

1,888,570

 

 

$

1,882,591

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the unaudited consolidated financial statements.

 

5


 

Eagle Materials Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited – dollars in thousands)

 

 

 

For the Nine Months Ended
December 31,

 

 

 

2015

 

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net Earnings

 

$

113,429

 

 

$

140,059

 

Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities -

 

 

 

 

 

 

 

 

Depreciation, Depletion and Amortization

 

 

74,245

 

 

 

54,552

 

Impairment of Intangible Assets

 

 

28,354

 

 

 

-

 

Deferred Income Tax Provision

 

 

(6,478

)

 

 

1,172

 

Stock Compensation Expense

 

 

12,293

 

 

 

9,807

 

Excess Tax Benefits from Share Based Payment Arrangements

 

 

(2,504

)

 

 

(3,493

)

Equity in Earnings of Unconsolidated Joint Venture

 

 

(29,993

)

 

 

(34,274

)

Distributions from Joint Venture

 

 

27,250

 

 

 

30,125

 

Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

 

 

Accounts and Notes Receivable

 

 

11,765

 

 

 

(19,093

)

Inventories

 

 

5,408

 

 

 

(10,279

)

Accounts Payable and Accrued Liabilities

 

 

(10,228

)

 

 

6,352

 

Other Assets

 

 

(1,484

)

 

 

3,916

 

Income Taxes Payable

 

 

(5,767

)

 

 

4,299

 

Net Cash Provided by Operating Activities

 

 

216,290

 

 

 

183,143

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Property, Plant and Equipment Additions

 

 

(75,536

)

 

 

(64,959

)

Acquisition Spending

 

 

(32,427

)

 

 

(237,171

)

Net Cash Used in Investing Activities

 

 

(107,963

)

 

 

(302,130

)

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Increase in Credit Facility

 

 

45,000

 

 

 

146,000

 

Repayment of Senior Notes

 

 

(57,045

)

 

 

(9,500

)

Dividends Paid to Stockholders

 

 

(15,078

)

 

 

(15,044

)

Payment of Debt Acquisition Costs

 

 

-

 

 

 

(1,661

)

Shares Redeemed to Settle Employee Taxes on Stock Compensation

 

 

(1,815

)

 

 

(1,356

)

Purchase and Retirement of Common Stock

 

 

(76,231

)

 

 

-

 

Proceeds from Stock Option Exercises

 

 

2,580

 

 

 

4,270

 

Excess Tax Benefits from Share Based Payment Arrangements

 

 

2,504

 

 

 

3,493

 

Net Cash Used in Financing Activities

 

 

(100,085

)

 

 

126,202

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

8,242

 

 

 

7,215

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

7,514

 

 

 

6,482

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

15,756

 

 

$

13,697

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the unaudited consolidated financial statements.

 

 

6


 

Eagle Materials Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

December 31, 2015

 

(A) BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements as of and for the three and nine month periods ended December 31, 2015 include the accounts of Eagle Materials Inc. and its majority-owned subsidiaries (the “Company”, “us” or “we”) and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 22, 2015.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. In our opinion, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the information in the following unaudited consolidated financial statements of the Company have been included. The results of operations for interim periods are not necessarily indicative of the results for the full year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB delayed the implementation of this standard by one year.  The standard will now be effective for us in the first quarter of fiscal 2019, with early adoption not permitted. There are two transition methods available under the new standard, either modified or full retrospective. We are currently evaluating the impact of this ASU and have not yet selected a transition method.

In April 2015, the Financial Accounting Standards Board issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 830-30)”.  This Standard requires that discounts, premiums or debt issue costs related to borrowings be reported in the balance sheet as a direct reduction of the associated borrowing.  The standard will be effective for us in the first quarter of fiscal 2017, and earlier application is permitted for financial statements that have not been previously issued.  This impact of adopting this ASU is not expected to be material.

In November 2015, the Financial Accounting Standards Board issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes (Topic 740)”.  This standard simplifies the presentation of deferred taxes by requiring all deferred tax assets and liabilities, as well as any related valuation allowance, be classified as noncurrent on the balance sheet, resulting in each tax jurisdiction having only one net noncurrent deferred asset or liability. The standard will be effective for us in the first quarter of fiscal 2017, with early adoption permitted at the beginning of an interim or annual reporting period.  This guidance may be applied prospectively or retrospectively by reclassifying the comparative balance sheet.  The impact of adopting this ASU will not have a material impact on our financial position.

 

7


 

In July 2015, the Financial Accounting Standards Board issued ASU 2015-11, “Simplifying the Measurement of Inventory”.  This standard requires inventory to be measured at the lower of cost or net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  The standard will be effective for us in the first quarter of fiscal 2017, with early adoption permitted at the beginning of an annual or interim reporting period.  Prospective application is required.  This impact of adopting this ASU is not expected to be material.

In September 2015, the Financial Accounting Standards Board issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”.  This standard eliminates the requirement to restate prior period financial statements for measurement period adjustments.  The cumulative impact of measurement period adjustments, including those in prior periods, will now be recognized in the reporting period in which the adjustment is made.  The cumulative adjustment should be reflected in the financial statements within the respective line items impacted.  Additionally, companies must present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the adjustment recorded in the current period earnings by line item that would have been recorded in previous periods if the adjustment to the provisional amounts had been recognized on the acquisition date.  This standard is effective for annual periods beginning after December 15, 2016 and interim periods beginning after December 31, 2017.  Early adoption is permitted for all entities.  We adopted this standard on October 1, 2015, with no material impact to our results of operations or financial position.

 

 

(B) GOODWILL AND INTANGIBLE ASSETS

Goodwill: We perform our annual test of impairment on goodwill during the fourth quarter of our fiscal year. If business conditions in the operating units containing goodwill change substantially during the fiscal year, and we are unable to conclude that an impairment loss is not likely to occur, we will perform impairment tests for those business units during our quarterly periods. At December 31, 2015, we determined that impairment losses are not likely to occur; therefore, no impairment tests were performed during the quarter.

Intangible Assets: Intangible assets are currently being amortized over their expected lives.  During calendar 2015, the continued decline in oil prices adversely impacted oil and gas drilling activity, leading to further reductions in demand and pricing for proppants.  This reduction in demand adversely impacted performance under our customer contracts, resulting in the amendment of certain of these contracts.  Based on the reduced demand for proppants and the executed and pending amendments to our customer contracts, we concluded that long-lived asset impairment indicators were present during the quarter ended September 30, 2015 for our customer contract intangible assets.  We performed a recovery test to determine if any of the customer contract intangible assets related to our oil and gas proppants business unit were impaired at September 30, 2015.  Based on our analysis of the undiscounted cash flows for each of our customer contract intangibles related to our oil and gas proppants business, we concluded that the carrying value of certain customer contract intangible assets exceeded the undiscounted cash flows for the related assets.   For those contracts whose carrying value exceeded the undiscounted cash flows, we calculated the fair value of each contract using the weighted-average probable cash flows related to each contract (level 3 inputs), discounted using a weighted-average cost of capital (“WACC”).  The WACC was determined from relevant market comparisons, and adjusted for specific risks.  This analysis resulted in an impairment loss of approximately $28.4 million, which is included in cost of goods sold in the unaudited Consolidated Statement of Earnings for the nine months ended December 31, 2015.  We reviewed customer activity for the remaining customer contract intangible assets and determined that there was no indication of additional impairment at December 31, 2015.

 

8


 

Intangible assets, including the impact of the impairment charge discussed above, consist of the following:

 

 

 

Cost at
December 31,
2015

 

 

Amortization for
Nine Months ended
December 31,
2015

 

 

Impairment

 

 

Accumulated
Amortization

 

 

Net

 

 

 

 

(dollars in thousands)

 

Goodwill and Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Contracts and Relationships

 

$

63,260

 

 

$

9,480

 

 

$

28,354

 

 

$

(43,828

)

 

$

19,432

 

Sales Contracts

 

 

2,500

 

 

 

468

 

 

 

-

 

 

 

(1,926

)

 

$

574

 

Permits

 

 

27,440

 

 

 

519

 

 

 

-

 

 

 

(6,415

)

 

$

21,025

 

Goodwill

 

 

133,885

 

 

 

-

 

 

 

-

 

 

 

-

 

 

$

133,885

 

Total Goodwill and Intangible Assets

 

$

227,085

 

 

$

10,467

 

 

$

28,354

 

 

$

(52,169

)

 

$

174,916

 

 

At December 31, 2015, approximately $14.3 million of Customer Contracts and Relationships was related to our oil and gas proppants business.  Under the terms of one of the customer contracts, the customer prepaid $15.0 million for sand.  At December 31, 2015, approximately $12.5 million of this prepaid is still available to the customer. This prepayment is included in Other Long-term Liabilities on the unaudited Consolidated Balance Sheet.   

 

 

 

March 31, 2015

 

 

 

Amortization

Period

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

 

 

(dollars in thousands)

 

Goodwill and Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer contracts and relationships

 

 

5-15 years

 

 

$

62,060

 

 

$

(5,994

)

 

$

56,066

 

Sales contracts

 

 

4 years

 

 

 

2,500

 

 

 

(1,458

)

 

 

1,042

 

Permits

 

 

40 years

 

 

 

27,440

 

 

 

(5,896

)

 

 

21,544

 

Goodwill

 

 

 

 

 

 

132,515

 

 

 

-

 

 

 

132,515

 

Total Goodwill and Intangible Assets

 

 

 

 

 

$

224,515

 

 

$

(13,348

)

 

$

211,167

 

 

During July 2015, goodwill increased approximately $1.4 million and customer contracts and relationships increased $1.2 million in connection with the Skyway Acquisition.

Amortization expense of intangibles was $5.7 million the year ended March 31, 2015.  After the impairment discussed above, amortization expense is expected to be approximately $2.5 million for the remainder of fiscal 2016, $9.2 million for fiscal year 2017, and $3.2 million for fiscal years 2018 and 2019, $2.2 million for fiscal year 2020 and $1.3 million for fiscal year 2021.

 

(C) ACQUISITIONS

 

CRS Acquisition

On November 14, 2014, we acquired all of the outstanding equity interest in CRS Holdco LLC, CRS Proppants LLC, Great Northern Sand LLC and related entities (collectively “CRS Proppants”) (such acquisition, the “CRS Acquisition”).  CRS Proppants is a supplier of frac sand to the energy industry, and its business currently consists of a frac sand mine in New Auburn, Wisconsin, and a trans-load network into Texas and southwest Oklahoma.  

Purchase Price: The purchase price (the “CRS Purchase Price”) of the CRS Acquisition was approximately $236.1 million, including approximately $8.9 million of in-process capital expenditures paid as of the closing date. We funded the payment of the CRS Purchase Price at closing and expenses incurred in connection with the CRS Acquisition through borrowings under our bank credit facility, which was amended and restated on October 30, 2014.  See Footnote (M) to the Unaudited Consolidated Financial Statements for more information about our bank credit facility.

 

9


 

We previously reported the estimated CRS Purchase Price in our Form 10-K as approximately $237.2 million.  During the quarter ended June 30, 2015, we finalized the amount of working capital acquired at the closing, which resulted in a reduction in the CRS Purchase Price of approximately $1.1 million.  

Recording of assets acquired and liabilities assumed: The CRS Acquisition has been accounted for using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. We engaged a third-party to perform an appraisal valuation to support our preliminary estimate of the fair value of certain assets acquired in the CRS Acquisition.  Included in the assets acquired, and liabilities assumed, are two long-term sales agreements that included prepayments for future sales under such agreements, with such prepayments classified as liabilities.  Additionally, one of the agreements is with a customer that is currently in bankruptcy, and is not expected to fulfill its obligations under the agreement.  We have been indemnified by the former owner against any loss related to this agreement, and such indemnity has been valued at fair value and recorded as an asset at the date of the CRS Acquisition.

During the quarter ended December 31, 2015, we received the information related to the tax structure of the acquired entities, enabling us to finalize the percentage of carryover ownership in CRS Proppants.  The application of the final carryover ownership percentage resulted in an increase in deferred tax liabilities and taxes payable of approximately $3.0 million and $1.5 million, respectively, and an increase in property and equipment of approximately $4.5 million.  

The preparation of the valuation of the assets acquired and liabilities assumed in the CRS Acquisition requires the use of significant assumptions and estimates.  Critical estimates include, but are not limited to, future expected cash flows, including projected revenues and expenses, and applicable discount rates.  These estimates are based on assumptions that we believe to be reasonable.  However, actual results may differ from these estimates.

The following table summarizes the allocation of the CRS Purchase Price to assets acquired and liabilities assumed as of the acquisition date:

 

Purchase price allocation (in thousands)

 

As of

November 14, 2014

 

Cash and cash equivalents

 

$

219

 

Accounts Receivable

 

 

14,640

 

Inventories

 

 

9,627

 

Prepaid and Other Assets

 

 

753

 

Property and Equipment

 

 

197,238

 

Intangible Assets

 

 

56,200

 

Indemnity under Sales Agreement

 

 

14,810

 

Accounts Payable and Accrued Liabilities

 

 

(8,428

)

Obligations under Long-term Sales Agreements

 

 

(28,131

)

Asset Retirement Obligation

 

 

(4,112

)

Deferred Taxes

 

 

(16,765

)

Total Net Assets

 

 

236,051

 

Goodwill

 

 

-

 

Total Estimated Purchase Price

 

$

236,051

 

 

 

 

 

 

 

Intangible Assets:  The following table is a summary of the preliminary fair value estimates of the identifiable intangible assets (in thousands) and their weighted-average useful lives:

 

 

 

Weighted

Average Life

 

 

Estimated

Fair Value

 

Customer Relationships

 

 

4

 

 

 

56,000

 

Permits

 

 

40

 

 

 

200

 

Total Intangible Assets

 

 

 

 

 

$

56,200

 

 

 

 

 

 

 

 

 

 

 

10


 

During the quarter ended September 30, 2015, the above customer relationships were tested for impairment. See Footnote (B) to the unaudited Consolidated Financial Statements for discussion of the impairment testing of these assets.

Actual and pro forma impact of the CRS Acquisition:  The following table presents the net sales and operating loss of CRS Proppants that have been included in our consolidated statement of earnings from April 1, 2015 through December 31, 2015:

 

 

 

For the Three Months
Ended December 31,

 

 

For the Nine Months
Ended December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Revenues

 

$

7,864

 

 

$

9,452

 

 

$

39,088

 

 

$

9,452

 

Operating Income (Loss)

 

$

(5,765

)

 

$

223

 

 

$

(51,406

)

 

$

223

 

 

Operating loss shown above for the three months ended December 31, 2015 has been impacted by approximately $5.4 million of depreciation and amortization.  Non cash charges and inventory write-offs totaling approximately $55.0 million adversely impacted operating loss for the nine months ended December 31, 2015.  These charges were approximately $16.7 million, $28.4 million, $9.4 million and $0.5 million and related to depreciation and amortization, impairments, write-down of raw sand inventory and the recording of acquired inventory at fair value, respectively.

The unaudited pro forma results presented below include the effects of the CRS Acquisition as if it had been consummated as of April 1, 2014. The pro forma results include the amortization associated with an estimate for acquired intangible assets and interest expense associated with debt used to fund the Acquisition and depreciation from the fair value adjustments for property and equipment. To better reflect the combined operating results, material nonrecurring charges incurred by the Company directly related to the CRS Acquisition of $2.1 million have been excluded from pro forma net income for the three and nine months ended December 31, 2014.  

 

 

 

Three Months Ended December 31,
2014

 

 

Nine Months Ended December 31,
2014

 

 

 

(dollars in thousands)

 

Revenues

 

$

303,043

 

 

$

900,975

 

Net Income

 

$

53,142

 

 

$

145,010

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

 

$

1.07

 

 

$

2.92

 

Earnings per share - diluted

 

$

1.05

 

 

$

2.88

 

 

The pro forma results do not include any anticipated synergies or other expected benefits of the CRS Acquisition.   Accordingly, the unaudited pro forma results are not necessarily indicative of either future results of operations or results that might have been achieved had the CRS Acquisition been consummated as of April 1, 2014.

Skyway Acquisition

On July 10, 2015, we completed the acquisition of a 600,000 ton per year Granulated Ground Blast Furnace Slag (“GGBFS”) plant in South Chicago (the “Skyway Plant”) from Holcim (US) Inc. (the “Skyway Acquisition”).  Among other applications, GGBFS is used in conjunction with Portland cement to make durable concrete structures.  The Skyway Plant purchases its primary raw material, slag, pursuant to a long term supply agreement with a third party.  

The purchase price (the “Skyway Purchase Price”) for the Skyway Acquisition was approximately $29.9 million, net of $2.5 million which will be refunded by the seller.  We received $1.5 million of the expected refund in January 2016, and we expect to receive the remaining $1.0 million in January 2017. We funded the payment of

 

11


 

the Skyway Purchase Price and expenses incurred in connection with the Skyway Acquisition through operating cash flow and borrowings under our bank credit facility.  We also assumed certain liabilities, including contractual obligations, related to the Skyway Plant.  The purchase price was allocated as follows: $1.9 million to accounts and notes receivable; $2.3 million to inventories; $24.6 million to property, plant and equipment; $1.2 million to intangible assets; $1.4 million to goodwill; and $1.0 million to other assets.  See Note (M) in the Notes to the Unaudited Financial Statements for more information about our bank credit facility.  

 

 

(D) CASH FLOW INFORMATION—SUPPLEMENTAL

Cash payments made for interest were $15.0 million and $13.6 million for the nine months ended December 31, 2015 and 2014, respectively. Net payments made for federal and state income taxes during the nine months ended December 31, 2015 and 2014, were $64.8 million and $60.0 million, respectively.

 

 

(E) ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable have been shown net of the allowance for doubtful accounts of $9.2 million and $7.1 million at December 31, 2015 and March 31, 2015, respectively. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral from our customers. The allowance for non-collection of receivables is based upon analysis of economic trends in the construction and oil and gas industries, detailed analysis of the expected collectability of accounts receivable that are past due and the expected collectability of overall receivables. Based on this analysis, we increased our allowance for doubtful accounts approximately $2.0 million in recognition of the downturn in our oil and gas proppants business and potential financial impact of this downturn to our customers during the September 2015 quarter.  We have no significant credit risk concentration among our diversified customer base.

We had notes receivable totaling approximately $3.2 million at December 31, 2015, of which approximately $0.5 million has been classified as current and presented with accounts receivable on the balance sheet. We lend funds to certain companies in the ordinary course of business, and the notes bear interest, on average, at LIBOR plus 3.5%. Remaining unpaid amounts, plus accrued interest, mature on various dates through 2017. The notes are collateralized by certain assets of the borrowers, namely property and equipment, and are generally payable monthly. We monitor the credit risk of each borrower by focusing on the timeliness of payments, review of credit history and credit metrics and interaction with the borrowers.

 

 

 

12


 

(F) STOCKHOLDERS’ EQUITY

A summary of changes in stockholders’ equity follows:

 

 

 

For the Nine Months

Ended December 31, 2015

 

 

 

(dollars in thousands)

 

Common Stock –

 

 

 

 

Balance at Beginning of Period

 

$

502

 

Share Repurchase and Retirement

 

 

(12

)

Stock Option Exercises and Restricted Share Vesting

 

 

3

 

 

Balance at End of Period

 

 

493

 

 

Capital in Excess of Par Value –

 

 

 

 

Balance at Beginning of Period

 

 

272,441

 

Stock Compensation Expense

  

 

12,292

 

Shares Redeemed to Settle Employee Taxes

 

 

(1,815

)

Stock Option Exercises

 

 

5,082

 

Share Repurchases and Retirement

 

 

(76,219

)

 

Balance at End of Period

 

 

211,781

 

 

Retained Earnings –

 

 

 

 

Balance at Beginning of Period

 

 

749,717

 

Dividends Declared to Stockholders

 

 

(14,995

)

Net Earnings

 

 

113,429

 

 

Balance at End of Period

 

 

848,151

 

 

Accumulated Other Comprehensive Loss -

 

 

 

 

Balance at Beginning of Period

 

 

(12,067

)

Change in Funded Status of Pension Plan, net of tax

 

 

958

 

Balance at End of Period

 

 

(11,109

)

 

Total Stockholders’ Equity

 

$

1,049,316

 

 

On August 10, 2015, the Company announced that the Board of Directors had authorized the Company to repurchase up to an additional 6,782,700 shares, for a total outstanding authorization of 7,500,000 shares.  During the nine months ended December 31, 2015, we repurchased 1,124,000 shares at an average price of $67.84. At December 31, 2015, we have authorization to purchase an additional 6,376,000 shares.  

 

 

13


 

(G) INVENTORIES

Inventories are stated at the lower of average cost (including applicable material, labor, depreciation, and plant overhead) or market, and consist of the following:

 

 

 

As of

 

 

 

December 31,
2015

 

 

March 31,
2015

 

 

 

(dollars in thousands)

 

Raw Materials and Material-in-Progress

 

$

111,401

 

 

$

115,345

 

Finished Cement

 

 

19,022

 

 

 

20,508

 

Gypsum Wallboard

 

 

7,064

 

 

 

7,741

 

Finished Frac Sand

 

 

4,925

 

 

 

4,928

 

Aggregates

 

 

10,721

 

 

 

11,131

 

Paperboard

 

 

6,889

 

 

 

8,493

 

Repair Parts and Supplies

 

 

66,116

 

 

 

62,121

 

Fuel and Coal

 

 

6,309

 

 

 

5,197

 

 

 

$

232,447

 

 

$

235,464

 

 

 

(H) ACCRUED EXPENSES

Accrued expenses consist of the following:

 

 

 

As of

 

 

 

December 31,
2015

 

 

March 31,
2015

 

 

 

(dollars in thousands)

 

Payroll and Incentive Compensation

 

$

21,155

 

 

$

19,082

 

Benefits

 

 

9,935

 

 

 

9,951

 

Interest

 

 

1,490

 

 

 

4,524

 

Property Taxes

 

 

2,639

 

 

 

3,189

 

Power and Fuel

 

 

1,217

 

 

 

1,619

 

Sales and Use Tax

 

 

536

 

 

 

523

 

Legal

 

 

1,793

 

 

 

1,673

 

Other

 

 

7,985

 

 

 

6,269

 

 

 

$

46,750

 

 

$

46,830

 

 

 

(I) Share-BASED EMPLOYEE COMPENSATION

On August 7, 2013 our stockholders approved the Eagle Materials Inc. Amended and Restated Incentive Plan (the “Plan”), which increased the shares we are authorized to issue as awards by 3,000,000 (1,500,000 of which may be stock awards). Under the terms of the Plan, we can issue equity awards, including stock options, restricted stock units (“RSUs”), restricted stock and stock appreciation rights to employees of the Company and members of the Board of Directors. Awards that were already outstanding prior to the approval of the Plan on August 7, 2013 remain outstanding. The Compensation Committee of our Board of Directors specifies the terms for grants of equity awards under the Plan.

Long-Term Compensation Plans -

Options. In June 2015, the Compensation Committee approved an equity award of an aggregate of 268,571 stock options pursuant to the Plan to certain officers and key employees that vest ratably over a three year period (the “Fiscal 2016 Employee Stock Option Grant”).  The stock options have a term of ten years from the date of grant. The Fiscal 2016 Employee Stock Option Grant was valued at the grant date using the Black-Scholes option pricing model. In August 2015, we granted 17,501 options to members of the Board of Directors (the “Fiscal 2016 Board of Directors Stock Option Grant”).  Options granted under the Fiscal 2016 Board of Directors Stock Option

 

14


 

Grant vest immediately and can be exercised from the date of grant until their expiration on the tenth anniversary of the date of grant.

The weighted-average assumptions used in the Black-Scholes model to value the option awards in fiscal 2016 are as follows:

 

 

  

Fiscal 2016

Dividend Yield

  

 

2.0%

Expected Volatility

  

 

36.5%

Risk Free Interest Rate

  

 

1.7%

Expected Life

  

 

6.0 years

 

Stock option expense for all outstanding stock option awards totaled approximately $1.9 million and $6.1 million for the three and nine months ended December 31, 2015, respectively and approximately $1.4 million and $4.8 million for the three and nine months ended December 31, 2014, respectively. At December 31, 2015, there was approximately $11.8 million of unrecognized compensation cost related to outstanding stock options, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.2 years.

The following table represents stock option activity for the nine months ended December 31, 2015:

 

 

 

Number
of
Shares

 

 

Weighted-
Average
Exercise Price

 

Outstanding Options at Beginning of Period

 

 

1,665,565

 

 

$

46.37

 

Granted

 

 

293,572

 

 

$

81.48

 

Exercised

 

 

(97,410

)

 

$

26.47

 

Cancelled

 

 

(21,000

)

 

$

86.35

 

Outstanding Options at End of Period

 

 

1,840,727

 

 

$

52.57

 

Options Exercisable at End of Period

 

 

1,270,961

 

 

$

40.81

 

Weighted-Average Fair Value of Options Granted during the Period

 

$

24.76

 

 

 

 

 

 

The following table summarizes information about stock options outstanding at December 31, 2015:

 

 

 

Outstanding Options

 

 

Exercisable Options

 

Range of Exercise Prices

 

Number of
Shares
Outstanding

 

 

Weighted -
Average
Remaining
Contractual
Life

 

 

Weighted -
Average
Exercise
Price

 

 

Number of
Shares
Outstanding

 

 

Weighted -
Average
Exercise
Price

 

$23.17 – $ 30.74

 

 

504,200

 

 

 

4.11

 

 

$

26.65

 

 

 

502,200

 

 

$

26.64

 

$33.08 – $ 37.95

 

 

478,868

 

 

 

6.16

 

 

$

33.96

 

 

 

458,868

 

 

$

33.92

 

$53.22 – $ 74.10

 

 

282,936

 

 

 

7.07

 

 

$

66.60

 

 

 

194,325

 

 

$

66.63

 

$79.73 – $ 93.56

 

 

574,723

 

 

 

9.00

 

 

$

83.90

 

 

 

115,568

 

 

$

86.33

 

 

 

 

1,840,727

 

 

 

6.63

 

 

$

52.57

 

 

 

1,270,961

 

 

$

40.81

 

 

At December 31, 2015, the aggregate intrinsic value for outstanding and exercisable options was approximately $14.5 million and $24.9 million, respectively. The total intrinsic value of options exercised during the nine months ended December 31, 2015 was approximately $5.2 million.

Restricted Stock. In June 2015, the Compensation Committee approved the granting of an aggregate of 93,782 shares of restricted stock to certain officers and key employees that will be earned if certain performance conditions are satisfied (the “Fiscal 2016 Employee Restricted Stock Award”). The performance criterion for the Fiscal 2016 Employee Restricted Stock Award is based upon the achievement of certain levels of return on equity, ranging from 12.5% to 17.5%, for fiscal year ending March 31, 2016. All restricted shares will be earned if the return on equity is 17.5% or greater, and the percentage of shares earned will be reduced proportionately to

 

15


 

approximately 75% if the return on equity is 12.5%.   If the Company does not achieve a return on equity of at least 12.5%, all awards will be forfeited.  If the criteria are met, the award may be reduced by the Compensation Committee based on individual performance goals. Following any such reduction, restrictions on the earned shares will lapse ratably over five years, with the first fifth lapsing promptly following the determination date, and the remaining restrictions lapsing on March 31, 2017 through 2020. The value of the Fiscal 2016 Employee Restricted Stock Award, net of estimated forfeitures, is being expensed over a five year period.  In August 2015, we awarded 15,139 shares of restricted stock to members of the Board of Directors (the “Board of Directors Fiscal 2016 Restricted Stock Award”).  Awards issued under the Board of Directors Fiscal 2016 Restricted Stock Award do not fully vest until the retirement of each director, in accordance with our director retirement policy.

Expense related to restricted shares was approximately $2.1 million and $6.3 million for the three and nine months ended December 31, 2015, respectively, and approximately $1.7 million and $5.0 million for the three and nine months ended December 31, 2014, respectively. At December 31, 2015, there was approximately $18.0 million of unearned compensation from restricted stock, net of estimated forfeitures, which will be recognized over a weighted-average period of 2.4 years.

The number of shares available for future grants of stock options, restricted stock units, stock appreciation rights and restricted stock under the Plan was 4,548,204 at December 31, 2015.

 

 

(J) COMPUTATION OF EARNINGS PER SHARE

The calculation of basic and diluted common shares outstanding is as follows:

 

 

 

For the Three Months
Ended December 31,

 

 

For the Nine Months
Ended December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Weighted-Average Shares of Common Stock Outstanding

 

 

49,187,738

 

 

 

49,655,405

 

 

 

49,593,821

 

 

 

49,583,210

 

Common Equivalent Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assumed Exercise of Outstanding Dilutive Options

 

 

1,017,117

 

 

 

1,349,997

 

 

 

1,208,130

 

 

 

1,418,957

 

Less: Shares Repurchased from Assumed Proceeds of Assumed Exercised Options

 

 

(669,209

)

 

 

(893,874

)

 

 

(803,972

)

 

 

(920,113

)

Restricted Shares

 

 

234,374

 

 

 

299,619

 

 

 

232,112

 

 

 

293,565

 

Weighted-Average Common and Common Equivalent Shares Outstanding

 

 

49,770,020

 

 

 

50,411,147

 

 

 

50,230,091

 

 

 

50,375,619

 

Shares Excluded Due to Anti-dilution Effects

 

 

826,610

 

 

 

279,651

 

 

 

627,090

 

 

 

206,702

 

 

 

(K) PENSION AND EMPLOYEE BENEFIT PLANS

We sponsor several defined benefit and defined contribution pension plans which together cover substantially all our employees. Benefits paid under the defined benefit plans covering certain hourly employees are based on years of service and the employee’s qualifying compensation over the last few years of employment.

 

16


 

The following table shows the components of net periodic cost for our plans:

 

 

 

For the Three Months Ended
December 31,

 

 

For the Nine Months ended
December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

(dollars in thousands)

 

 

 

(dollars in thousands)

 

Service Cost – Benefits Earned During the Period

 

$

257

 

 

$

224

 

 

$

745

 

 

$

696

 

Interest Cost of Benefit Obligations

 

 

377

 

 

 

324

 

 

 

1,135

 

 

 

954

 

Expected Return on Plan Assets

 

 

(439

)

 

 

(426

)

 

 

(1,308

)

 

 

(1,254

)

Recognized Net Actuarial Loss

 

 

427

 

 

 

150

 

 

 

1,286

 

 

 

460

 

Amortization of Prior-Service Cost

 

 

75

 

 

 

3

 

 

 

225

 

 

 

9

 

Net Periodic Pension Cost

 

$

697

 

 

$

275

 

 

$

2,083

 

 

$

865

 

 

 

(L) INCOME TAXES

Income taxes for the interim period presented have been included in the accompanying financial statements on the basis of an estimated annual effective tax rate. In addition to the amount of tax resulting from applying the estimated annual effective tax rate to pre-tax income, we will, when appropriate, include certain items treated as discrete events to arrive at an estimated overall tax amount. The effective tax rate for the nine months ended December 31, 2015 was approximately 32%, compared to an effective tax rate for the nine months ended December 31, 2014 of 33%.

 

(M) LONG-TERM DEBT

Long-term debt consists of the following:

 

 

 

As of

 

 

 

December 31,

2015

 

 

March 31,

2015

 

 

 

(dollars in thousands)

 

Credit Facility

 

$

375,000

 

 

$

330,000

 

Senior Notes

 

 

125,714

 

 

 

182,759

 

Total Debt

 

 

500,714

 

 

 

512,759

 

Less: Current Portion of Long-term Debt

 

 

(8,000

)

 

 

(57,045

)

Total Long-term Debt

 

$

492,714

 

 

$

455,714

 

 

Credit Facility –

We have a $500.0 million revolving credit facility (the “Credit Facility”), including a swingline loan sublimit of $25.0 million, which is scheduled to expire on October 30, 2019.  Borrowings under the Credit Facility are guaranteed by substantially all of the Company’s subsidiaries. At the option of the Company, outstanding principal amounts on the Credit Facility bear interest at a variable rate equal to (i) LIBOR, plus an agreed margin (ranging from 100 to 225 basis points), which is to be established quarterly based upon the Company’s ratio of consolidated EBITDA, defined as earnings before interest, taxes, depreciation and amortization, to the Company’s consolidated indebtedness (the “Leverage Ratio”), or (ii) an alternative base rate which is the higher of (a) the prime rate or (b) the federal funds rate plus  12% per annum plus an agreed margin (ranging from 0 to 125 basis points). Interest payments are payable, in the case of loans bearing interest at a rate based on the federal funds rate, quarterly, or in the case of loans bearing interest at a rate based on LIBOR, at the end of the LIBOR advance periods, which can be a period of up to nine months at the option of the Company. The Company is also required to pay a commitment fee on unused available borrowings under the Credit Facility ranging from 10 to 35 basis points depending upon the Leverage Ratio. The Credit Facility contains customary covenants that restrict our ability to incur additional debt, encumber our assets, sell assets, make or enter into certain investments, loans or guaranties and enter into sale and leaseback arrangements. The Credit Facility also requires us to maintain a consolidated indebtedness ratio (calculated as consolidated indebtedness to consolidated earnings before interest, taxes, depreciation, amortization, certain transaction-related deductions and other non-

 

17


 

cash deductions) of 3.5:1.0 or less and an interest coverage ratio (consolidated earnings before interest, taxes, depreciation, amortization, certain transaction-related deductions and other non-cash deductions to consolidated interest expense) of at least 2.5:1.0.  We had $375.0 million of borrowings outstanding at December 31, 2015. Based on our Leverage Ratio, we had $116.0 million of available borrowings, net of the outstanding letters of credit, at December 31, 2015.

The Credit Facility has a $50.0 million letter of credit facility. Under the letter of credit facility, the Company pays a fee at a per annum rate equal to the applicable margin for Eurodollar loans in effect from time to time plus a one-time letter of credit fee in an amount equal to 0.125% of the initial stated amount. At December 31, 2015, we had $9.0 million of letters of credit outstanding.

Senior Notes -

We entered into a Note Purchase Agreement on November 15, 2005 (the “2005 Note Purchase Agreement”) related to our sale of $200 million of senior, unsecured notes, designated as Series 2005A Senior Notes (the “Series 2005A Senior Notes”) in a private placement transaction. The Series 2005A Senior Notes, which are guaranteed by substantially all of our subsidiaries, were sold at par and issued in three tranches on November 15, 2005. Since entering into the 2005 Note Purchase Agreement, we have repurchased $81.1 million in principal of the Series 2005A Senior Notes (in periods prior to the fiscal year ended March 31, 2013). During November 2012, Tranche A of the Series 2005A Senior Notes matured and we retired the remaining $4.7 million in notes from this Tranche, and during November 2015 Tranche B of the Series 2005A Senior Notes matured and we retired the remaining $57.0 million from this Tranche. Following these repurchases and maturities, the amounts outstanding for each of the remaining tranches are as follows:

 

 

 

Principal

 

 

Maturity Date

 

 

Interest Rate

 

Tranche C

 

$

57.2 million

 

 

 

November 15, 2017

 

 

 

5.48%

 

 

Interest for each tranche of Notes is payable semi-annually on the 15th day of May and the 15th day of November of each year until all principal is paid for the respective tranche.

We also entered into an additional Note Purchase Agreement on October 2, 2007 (the “2007 Note Purchase Agreement”) related to our sale of $200 million of senior, unsecured notes, designated as Series 2007A Senior Notes (the “Series 2007A Senior Notes”) in a private placement transaction. The Series 2007A Senior Notes, which are guaranteed by substantially all of our subsidiaries, were sold at par and issued in four tranches on October 2, 2007. Since entering into the 2007 Note Purchase Agreement, we have repurchased $122.0 million in principal of the Series 2007A Senior Notes (in periods prior to the fiscal year ended March 31, 2013). During October 2014, Tranche A of the Series 2007A Senior Notes matured and we retired the remaining $9.5 million in notes from this Tranche. Following the repurchase, the amounts outstanding for each of the four tranches are as follows:

 

 

 

Principal

 

 

Maturity Date

 

 

Interest Rate

 

Tranche B

 

$

8.0 million

 

 

 

October 2, 2016

 

 

 

6.27%

 

Tranche C

 

$

24.0 million

 

 

 

October 2, 2017

 

 

 

6.36%

 

Tranche D

 

$

36.5 million

 

 

 

October 2, 2019

 

 

 

6.48%

 

 

Interest for each tranche of Notes is payable semi-annually on the second day of April and the second day of October of each year until all principal is paid for the respective tranche.

Our obligations under the 2005 Note Purchase Agreement and the 2007 Note Purchase Agreement (collectively referred to as the “Note Purchase Agreements”) and the Series 2005A Senior Notes and the Series 2007A Senior Notes (collectively referred to as “the Senior Notes”) are equal in right of payment with all other senior, unsecured debt of the Company, including our debt under the Credit Facility. The Note Purchase Agreements contain customary restrictive covenants, including covenants that place limits on our ability to encumber our assets, to incur additional debt, to sell assets, or to merge or consolidate with third parties, as well

 

18


 

as certain cross covenants with the Credit Facility. We were in compliance with all financial ratios and tests at December 31, 2015.

Pursuant to a Subsidiary Guaranty Agreement, substantially all of our subsidiaries have guaranteed the punctual payment of all principal, interest, and Make-Whole Amounts (as defined in the Note Purchase Agreements) on the Senior Notes and the other payment and performance obligations of the Company contained in the Senior Notes and in the Note Purchase Agreements. We are permitted, at our option and without penalty, to prepay from time to time at least 10% of the original aggregate principal amount of the Senior Notes at 100% of the principal amount to be prepaid, together with interest accrued on such amount to be prepaid to the date of payment, plus a Make-Whole Amount. The Make-Whole Amount is computed by discounting the remaining scheduled payments of interest and principal of the Senior Notes being prepaid at a discount rate equal to the sum of 50 basis points and the yield to maturity of U.S. treasury securities having a maturity equal to the remaining average life of the Senior Notes being prepaid.

We are leasing one of our cement plants from the city of Sugar Creek, Missouri. The city of Sugar Creek issued industrial revenue bonds to partly finance improvements to the cement plant. The lease payments due to the city of Sugar Creek under the cement plant lease, which was entered into upon the sale of the industrial revenue bonds, are equal in amount to the payments required to be made by the city of Sugar Creek to the holders of the industrial revenue bonds. Because we are the holder of all of the outstanding industrial revenue bonds, no debt is reflected on our financial statements in connection with our lease of the cement plant. At the conclusion of the lease in fiscal 2021, we have the option to purchase the cement plant for a nominal amount.

 

 

(N) SEGMENT INFORMATION

Operating segments are defined as components of an enterprise that engage in business activities that earn revenues, incur expenses and prepare separate financial information that is evaluated regularly by our chief operating decision maker in order to allocate resources and assess performance.

We operate in five business segments: Cement, Gypsum Wallboard, Recycled Paperboard, Oil and Gas Proppants and Concrete and Aggregates. These operations are conducted in the U.S. and include the mining of limestone and the manufacture, production, distribution and sale of Portland cement (a basic construction material which is the essential binding ingredient in concrete), the mining of gypsum and the manufacture and sale of gypsum wallboard, the manufacture and sale of recycled paperboard to the gypsum wallboard industry and other paperboard converters, the sale of readymix concrete and the mining and sale of aggregates (crushed stone, sand and gravel) and sand used in hydraulic fracturing (“frac sand”). The products that we manufacture, distribute and sell are basic materials used with broad application as construction products, building materials, and basic materials used for oil and natural gas extraction.  Our construction products are used in residential, industrial, commercial and infrastructure construction and include cement, concrete and aggregates.  Our building materials are sold into similar markets and include gypsum wallboard.  Our basic materials used for oil and natural gas extraction include frac sand and oil well cement.

We operate six cement plants, one slag grinding facility, sixteen cement distribution terminals, five gypsum wallboard plants, including the plant idled in Bernalillo, N.M., a gypsum wallboard distribution center, a recycled paperboard mill, seventeen readymix concrete batch plant locations, three aggregates processing plant locations, three frac sand processing facilities, three frac sand drying facilities and six frac sand trans-load locations. The principal markets for our cement products are Texas, northern Illinois (including Chicago), the central plains, the Rocky Mountains, northern Nevada, and northern California. Gypsum wallboard and recycled paperboard are distributed throughout the continental U.S, with the exception of the northeast. Concrete and aggregates are sold to local readymix producers and paving contractors in the Austin, Texas area, north of Sacramento, California and the greater Kansas City, Missouri area, while frac sand is currently sold into shale deposit zones across the United States.   During July 2015, we completed the Skyway Acquisition, which is operated by Illinois Cement Company, and its operations are included in the Cement segment.

 

19


 

We conduct one of our six cement plant operations, Texas Lehigh Cement Company LP in Buda, Texas, through a Joint Venture. For segment reporting purposes only, we proportionately consolidate our 50% share of the Joint Venture’s revenues and operating earnings, which is consistent with the way management reports the segments within the Company for making operating decisions and assessing performance.

We account for intersegment sales at market prices. The following table sets forth certain financial information relating to our operations by segment:

 

 

 

For the Three Months

 

 

For the Nine Months

 

 

 

Ended December 31,

 

 

Ended December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Revenues -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cement

 

$

135,419

 

 

$

124,048

 

 

$

428,385

 

 

$

397,845

 

Gypsum Wallboard

 

 

108,907

 

 

 

118,573

 

 

 

343,660

 

 

 

342,905

 

Paperboard

 

 

36,822

 

 

 

39,936

 

 

 

111,285

 

 

 

112,994

 

Oil and Gas Proppants

 

 

8,476

 

 

 

31,731

 

 

 

49,608

 

 

 

53,325

 

Concrete and Aggregates

 

 

31,779

 

 

 

27,116

 

 

 

96,982

 

 

 

85,239

 

Sub-total

 

 

321,403

 

 

 

341,404

 

 

 

1,029,920

 

 

 

992,308

 

Less: Intersegment Revenues

 

 

(17,986

)

 

 

(16,968

)

 

 

(56,005

)

 

 

(51,096

)

Net Revenues, including Joint Venture

 

 

303,417

 

 

 

324,436

 

 

 

973,915

 

 

 

941,212

 

Less: Joint Venture

 

 

(26,008

)

 

 

(32,907

)

 

 

(82,555

)

 

 

(98,624

)

Net Revenues

 

$

277,409

 

 

$

291,529

 

 

$

891,360

 

 

$

842,588

 

 

 

 

For the Three Months

 

 

For the Nine Months

 

 

 

Ended December 31,

 

 

Ended December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Intersegment Revenues -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cement

 

$

3,714

 

 

$

2,489

 

 

$

11,072

 

 

$

7,760

 

Paperboard

 

 

14,069

 

 

 

14,305

 

 

 

44,216

 

 

 

42,645

 

Concrete and Aggregates

 

 

203

 

 

 

174

 

 

 

717

 

 

 

691

 

 

 

$

17,986

 

 

$

16,968

 

 

$

56,005

 

 

$

51,096

 

Cement Sales Volume (in thousands of tons) -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly –owned Operations

 

 

999

 

 

 

935

 

 

 

3,238

 

 

 

3,135

 

Joint Venture

 

 

213

 

 

 

270

 

 

 

661

 

 

 

837

 

 

 

 

1,212

 

 

 

1,205

 

 

 

3,899

 

 

 

3,972

 


 

20


 

 

 

 

For the Three Months

 

 

For the Nine Months

 

 

 

Ended December 31,

 

 

Ended December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Operating Earnings -

 

 

 

 

 

 

 

 

Cement

 

$

41,768

 

 

$

37,578

 

 

$

116,058

 

 

$

96,535

 

Gypsum Wallboard

 

 

37,289

 

 

 

40,013

 

 

 

118,185

 

 

 

114,443

 

Paperboard

 

 

7,923

 

 

 

9,102

 

 

 

22,091

 

 

 

24,633

 

Oil and Gas Proppants

 

 

(9,153

)

 

 

3,241

 

 

 

(59,389

)

 

 

3,315

 

Concrete and Aggregates

 

 

1,521

 

 

 

1,638

 

 

 

7,304

 

 

 

5,959

 

Other, net

 

 

1,163

 

 

 

488

 

 

 

2,170

 

 

 

2,050

 

Sub-total

 

 

80,511

 

 

 

92,060

 

 

 

206,419

 

 

 

246,935

 

Corporate General and Administrative

 

 

(8,304

)

 

 

(9,371

)

 

 

(26,659

)

 

 

(23,827

)

Acquisition and Litigation Expense

 

 

-

 

 

 

(722

)

 

 

-

 

 

 

(2,825

)

Earnings Before Interest and Income Taxes

 

 

72,207

 

 

 

81,967

 

 

 

179,760

 

 

 

220,283

 

Interest Expense, net

 

 

(4,002

)

 

 

(4,101

)

 

 

(12,830

)

 

 

(12,054

)

Earnings Before Income Taxes

 

$

68,205

 

 

$

77,866

 

 

$

166,930

 

 

$

208,229

 

 

Cement Operating Earnings -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly–owned Operations

 

$

31,285

 

 

$

25,155

 

 

$

86,065

 

 

$

62,261

 

Joint Venture

 

 

10,483

 

 

 

12,423

 

 

 

29,993

 

 

 

34,274

 

 

 

$

41,768

 

 

$

37,578

 

 

$

116,058

 

 

$

96,535

 

 

Capital Expenditures -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cement

 

$

3,206

 

 

$

3,890

 

 

$

16,705

 

 

$

16,886

 

Gypsum Wallboard

 

 

1,131

 

 

 

1,154

 

 

 

2,831

 

 

 

4,947

 

Paperboard

 

 

650

 

 

 

303

 

 

 

3,918

 

 

 

1,452

 

Oil and Gas Proppants

 

 

5,619

 

 

 

18,421

 

 

 

38,330

 

 

 

32,023

 

Concrete and Aggregates

 

 

9,061

 

 

 

1,128

 

 

 

13,752

 

 

 

9,477

 

Other

 

 

-

 

 

 

24

 

 

 

-

 

 

 

174

 

 

 

$

19,667

 

 

$

24,920

 

 

$

75,536

 

 

$

64,959

 

 

Depreciation, Depletion and Amortization -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cement

 

$

8,390

 

 

$

8,089

 

 

$

24,885

 

 

$

23,959

 

Gypsum Wallboard

 

 

5,445

 

 

 

4,967

 

 

 

15,050

 

 

 

15,096

 

Paperboard

 

 

2,093

 

 

 

2,069

 

 

 

6,209

 

 

 

6,196

 

Oil and Gas Proppants

 

 

7,210

 

 

 

2,673

 

 

 

21,974

 

 

 

3,926

 

Concrete and Aggregates

 

 

1,597

 

 

 

1,465

 

 

 

4,667

 

 

 

4,058

 

Other, net

 

 

476

 

 

 

425

 

 

 

1,460

 

 

 

1,317

 

 

 

$

25,211

 

 

$

19,688

 

 

$

74,245

 

 

$

54,552

 

 

 

 

As of

 

 

 

December 31,
2015

 

 

March 31,
2015

 

 

 

(dollars in thousands)

 

Identifiable Assets -

 

 

 

 

 

 

 

 

Cement

 

$

814,769

 

 

$

777,956

 

Gypsum Wallboard

 

 

382,081

 

 

 

403,279

 

Paperboard

 

 

121,640

 

 

 

123,519

 

Oil and Gas Proppants

 

 

425,128

 

 

 

455,572

 

Concrete and Aggregates

 

 

107,458

 

 

 

96,610

 

Corporate and Other

 

 

37,494

 

 

 

25,655

 

 

 

$

1,888,570

 

 

$

1,882,591

 

 

 

21


 

Segment operating earnings, including the proportionately consolidated 50% interest in the revenues and expenses of the Joint Venture, represent revenues, less direct operating expenses, segment depreciation, and segment selling, general and administrative expenses. Corporate assets consist primarily of cash and cash equivalents, general office assets, miscellaneous other assets and unrecognized tax benefits. The segment breakdown of goodwill is as follows:

 

 

 

As of

 

 

 

December 31,

 

 

March 31,

 

 

 

2015

 

 

2015

 

 

 

(dollars in thousands)

 

Cement

 

$

9,729

 

 

$

8,359

 

Gypsum Wallboard

 

 

116,618

 

 

 

116,618

 

Paperboard

 

 

7,538

 

 

 

7,538

 

 

 

$

133,885

 

 

$

132,515

 

 

Summarized financial information for the Joint Venture that is not consolidated is set out below (this summarized financial information includes the total amount for the Joint Venture and not our 50% interest in those amounts):

 

 

 

For the Three Months
Ended December 31,

 

 

For the Nine Months
Ended December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Revenues

 

$

52,016

 

 

$

65,815

 

 

$

165,110

 

 

$

197,249

 

Gross Margin

 

$

22,388

 

 

$

26,445

 

 

$

64,593

 

 

$

72,282

 

Earnings Before Income Taxes

 

$

20,967

 

 

$

24,846

 

 

$

59,987

 

 

$

68,548

 

 

 

 

As of

 

 

 

December 31,
2015

 

 

March 31,
2015

 

 

 

(dollars in thousands)

 

Current Assets

 

$

73,037

 

 

$

68,399

 

Non-Current Assets

 

$

41,695

 

 

$

42,765

 

Current Liabilities

 

$

17,019

 

 

$

19,723

 

 

 


 

22


 

(O) INTEREST EXPENSE

The following components are included in interest expense, net:

 

 

 

For the Three Months
Ended December 31,

 

 

For the Nine Months
Ended December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Interest (Income)

 

$

(2

)

 

$

(2

)

 

$

(4

)

 

$

(5

)

Interest Expense

 

 

3,833

 

 

 

3,730

 

 

 

12,289

 

 

 

10,901

 

Interest Expense – Income Taxes

 

 

-

 

 

 

174

 

 

 

-

 

 

 

522

 

Other Expenses

 

 

171

 

 

 

199

 

 

 

545

 

 

 

636

 

Interest Expense, net

 

$

4,002

 

 

$

4,101

 

 

$

12,830

 

 

$

12,054

 

 

Interest income includes interest on investments of excess cash. Components of interest expense include interest associated with the Senior Notes, the Credit Facility and commitment fees based on the unused portion of the Credit Facility. Other expenses include amortization of debt issuance costs, and credit facility costs.

 

 

(P) COMMITMENTS AND CONTINGENCIES

 

We have certain deductible limits under our workers’ compensation and liability insurance policies for which reserves are established based on the undiscounted estimated costs of known and anticipated claims.  We have entered into standby letter of credit agreements relating to workers’ compensation and auto and general liability self-insurance.  At December 31, 2015, we had contingent liabilities under these outstanding letters of credit of approximately $9.0 million.

 

In the ordinary course of business, we execute contracts involving indemnifications that are standard in the industry and indemnifications specific to a transaction such as sale of a business.  These indemnifications may include claims relating to any of the following: environmental and tax matters; intellectual property rights; governmental regulations and employment-related matters; customer, supplier, and other commercial contractual relationships; construction contracts and financial matters.  While the maximum amount to which the Company may be exposed under such agreements cannot be estimated, it is the opinion of management that these indemnifications are not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.  We currently have no outstanding guarantees.

 

We are currently contingently liable for performance under $13.6 million in performance bonds required by certain states and municipalities, and their related agencies.  The bonds are principally for certain reclamation obligations and mining permits.  We have indemnified the underwriting insurance company against any exposure under the performance bonds.  In our past experience, no material claims have been made against these financial instruments.

EPA Notice of Violation

On October 5, 2010, Region IX of the EPA issued a Notice of Violation and Finding of Violation (“NOV”) alleging violations by our subsidiary, Nevada Cement Company (“NCC”), of the Clean Air Act (“CAA”). The NOV alleges that NCC made certain physical changes to its facility in the 1990s without first obtaining permits required by the Prevention of Significant Deterioration requirements and Title V permit requirements of the CAA. The EPA also alleges that NCC has failed to submit to the EPA since 2002 certain reports required by the National Emissions Standard for Hazardous Air Pollutants General Provisions and the Portland Cement Manufacturing Industry Standards. On March 12, 2014, the EPA Region IX issued a second NOV to NCC. The second NOV is materially similar to the 2010 NOV except that it alleges violations of the new source performance standards (“NSPS”) for Portland cement plants. The NOVs state that the EPA may seek penalties although it does not propose or assess any specific level of penalties or specify what relief the EPA will seek for the alleged violations. NCC believes it has meritorious defenses to the allegations in the NOVs. NCC met with the

 

23


 

EPA in December 2010, September 2012 and May 2014 to present its defenses and to discuss a resolution of the alleged violations. The EPA and NCC remain in discussions regarding the alleged violations. If a negotiated settlement cannot be reached, NCC intends to vigorously defend these matters in any enforcement action that may be pursued by the EPA. As a part of a settlement, or should NCC fail in its defense in any enforcement action, NCC could be required to make substantial capital expenditures to modify its facility and incur increased operating costs. NCC could also be required to pay significant civil penalties. Additionally, an enforcement action could take many years to resolve the underlying issues alleged in the NOV. We are currently unable to determine the final outcome of this matter or the impact of an unfavorable determination upon our financial position or results of operations.

Domestic Wallboard Antitrust Litigation

Since late December 2012, several purported class action lawsuits were filed in various United States District Courts, including the Eastern District of Pennsylvania, Western District of North Carolina and the Northern District of Illinois, against the Company’s subsidiary, American Gypsum Company LLC (“American Gypsum”), alleging that American Gypsum conspired with other wallboard manufacturers to fix the price for drywall sold in the United States in violation of federal antitrust laws and, in some cases related provisions of state law. The complaints allege that the defendant wallboard manufacturers conspired to increase prices through the announcement and implementation of coordinated price increases, output restrictions, and other restraints of trade, including the elimination of individual “job quote” pricing. In addition to American Gypsum, the defendants in these lawsuits include CertainTeed Corp., USG Corporation and United States Gypsum (together “USG”), New NGC, Inc., Lafarge North America, Temple Inland Inc. (“TIN”) and PABCO Building Products LLC. On April 8, 2013, the Judicial Panel on Multidistrict Litigation (“JPML”) transferred and consolidated all related cases to the Eastern District of Pennsylvania for coordinated pretrial proceedings.

On June 24, 2013, the direct and indirect purchaser plaintiffs filed consolidated amended class action complaints. The direct purchasers’ complaint added the Company as a defendant. The plaintiffs in the consolidated class action lawsuits bring claims on behalf of purported classes of direct or indirect purchasers of wallboard from January 1, 2012 to the present for unspecified monetary damages (including treble damages) and in some cases injunctive relief. On July 29, 2013, the Company and American Gypsum answered the complaints, denying all allegations that they conspired to increase the price of drywall and asserting affirmative defenses to the plaintiffs’ claims.

In 2014, USG and TIN entered into agreements with counsel representing the direct and indirect purchaser classes pursuant to which they agreed to settle all claims against them.  On August 20, 2015, the court granted final approval of USG and TIN’s settlements with the direct and indirect purchaser plaintiffs.  Initial discovery in this litigation is complete.  American Gypsum denies the allegations in these lawsuits and will vigorously defend itself against these claims. At this stage we are unable to estimate the amount of any reasonably possible loss or range of reasonably possible losses associated with these lawsuits.  Defendants’ motions for summary judgement were filed in the class actions in the first quarter of fiscal 2016 and a hearing on the motion occurred on November 23, 2015.  The judge has not yet made a ruling on the motion for summary judgement.

On March 17, 2015, a group of homebuilders filed a complaint against the defendants, including American Gypsum, based upon the same conduct alleged in the consolidated class action complaints.  On March 24, 2015, the JPML transferred this action to the multidistrict litigation already pending in the Eastern District of Pennsylvania.

In June 2015, American Gypsum and an employee received grand jury subpoenas from the United States District Court for the Western District of North Carolina seeking information regarding an investigation of the gypsum drywall industry by the Antitrust Division of the Department of Justice.  We believe the investigation, although a separate proceeding, is related to the same subject matter at issue in the litigation described above and we intend to fully cooperate with government officials.  Given its preliminary nature, we are currently unable to determine the ultimate outcome of such investigation.

 

24


 

 

(Q) FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of our long-term debt has been estimated based upon our current incremental borrowing rates for similar types of borrowing arrangements. The fair value of our Senior Notes at December 31, 2015 is as follows:

 

 

 

Fair Value

 

 

(dollars in thousands)

Series 2005A Tranche C

 

$

59,467

Series 2007A Tranche B

 

 

8,203

Series 2007A Tranche C

 

 

25,264

Series 2007A Tranche D

 

  

39,828

 

The estimated fair value of our long-term debt was based on quoted prices of similar debt instruments with similar terms that are publicly traded (level 2 input). The carrying values of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities approximate their fair values at December 31, 2015 due to the short-term maturities of these assets and liabilities. The fair value of our Credit Facility also approximates its carrying value at December 31, 2015.

 

 

25


 

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

EXECUTIVE SUMMARY

Eagle Materials Inc. is a diversified producer of basic construction products and building materials used in residential, industrial, commercial and infrastructure construction and products used in oil and natural gas extraction. Information presented for the three and nine months ended December 31, 2015 and 2014, respectively, reflects the Company’s business segments, consisting of Cement, Gypsum Wallboard, Recycled Paperboard, Oil and Gas Proppants and Concrete and Aggregates. These operations are conducted in the U.S. and include the mining of limestone and the manufacture, production, distribution and sale of Portland cement (a basic construction material which is the essential binding ingredient in concrete) as well as specialty oil well cement; the mining of gypsum and the manufacture and sale of gypsum wallboard; the manufacture and sale of recycled paperboard to the gypsum wallboard industry and other paperboard converters; the sale of readymix concrete, the mining and sale of aggregates (crushed stone, sand and gravel) and the mining and sale of sand used in hydraulic fracturing (“frac sand”). The products that we manufacture, distribute and sell are basic materials with broad application as construction products, building materials and basic materials used for oil and natural gas extraction.  Our construction products are used in residential, industrial, commercial and infrastructure construction and include cement, concrete and aggregates. Our building materials are sold into similar markets and include gypsum wallboard.  Our basic materials used for oil and gas extraction include frac sand and oil well cement.  Certain information for each of Concrete and Aggregates is broken out separately in the segment discussions.

On November 14, 2014, we acquired all of the outstanding equity interests of CRS Holdco LLC, CRS Proppants LLC, Great Northern Sand LLC, and related entities (collectively, “CRS Proppants”) (such acquisition, the “CRS Acquisition”). CRS Proppants is a supplier of frac sand to the energy industry, and its business currently consists of a frac sand mine in New Auburn, Wisconsin, and a trans-load network into Texas and southwest Oklahoma. The purchase price (the “CRS Purchase Price”) paid by the Company for the CRS Acquisition was approximately $236.1 million in cash, including approximately $8.9 million for in-process capital expenditures paid through the closing date, and estimated working capital and other estimated closing amounts. The CRS Purchase Price was funded through borrowings under the Company’s Credit Facility. CRS Proppants was in the process of expanding its frac sand mine in New Auburn, Wisconsin at the time of purchase. This expansion was completed during the first quarter of fiscal 2016, at a cost of approximately $8.0 million.

The decline in oil prices throughout calendar 2015 adversely impacted U.S. oil and gas drilling activity leading to further reductions in demand and pricing for proppants.  As a result, we recorded impairments to several intangible assets originally booked in connection with our acquisition of CRS Proppants and revalued downward certain raw sand inventory values associated with the downward revaluation of raw sand inventory that CRS Proppants purchased from a third party pursuant to a purchase contract entered into in connection with the plant expansion. We have fulfilled our obligations under this purchase contract.  The impairments and inventory revaluation charges totaled approximately $37.8 million (pre-tax) and were recorded within our Oil and Gas Proppants segment during the three months ended September 30, 2015.  

On July 10, 2015, we completed the acquisition of a 600,000 ton per year Granulated Ground Blast Furnace Slag (“GGBFS”) plant in South Chicago (the “Skyway Plant”) from Holcim (US) Inc. (the “Skyway Acquisition”).  Among other applications, GGBFS is used in conjunction with Portland cement to make durable concrete structures.  The Skyway Plant purchases its primary raw material, slag, pursuant to a long term supply agreement with a third party.

The purchase price (the “Skyway Purchase Price”) for the Skyway Acquisition was approximately $29.9 million, net of $2.5 million which will be refunded by the seller.  We received $1.5 million of the expected refund in January 2016, and we expect to receive the remaining $1.0 million in January 2017. We funded the payment of the Skyway Purchase Price and expenses incurred in connection with the Skyway Acquisition through operating cash flow.  We also assumed certain liabilities, including contractual obligations, related to the Skyway Plant. 

 

26


 

We operate in cyclical commodity businesses that are affected by changes in market conditions and the overall construction environment. Our operations, depending on each business segment, range from local in nature to national businesses. We have operations in a variety of geographic markets, which subject us to the economic conditions in those geographic markets as well as economic conditions in the national market. General economic downturns or localized downturns in the regions where we have operations may have a material adverse effect on our business, financial condition and results of operations. Our Cement companies focus on the U.S. heartland in Texas, Oklahoma, Missouri, Colorado, Wyoming and Nevada, as well as the Chicago, Illinois metropolitan area. Due to the low value-to-weight ratio of cement, it is usually shipped within a 150 mile radius of the plants by truck and up to 300 miles by rail. Concrete and Aggregates are even more regional as our operations serve the areas immediately surrounding Austin, Texas, north of Sacramento, California and the greater Kansas City, Missouri area, while frac sand is currently sold into shale deposit zones across the United States. Cement, concrete and aggregates and frac sand demand may fluctuate more widely because local and regional markets and economies may be more sensitive to changes than the national markets. Our Wallboard and Paperboard operations are more national in scope and shipments are made throughout most of the continental United States, except for the northeast.

We conduct one of our cement operations through a joint venture, Texas Lehigh Cement Company LP, which is located in Buda, Texas (the “Joint Venture”). We own a 50% interest in the Joint Venture and account for our interest under the equity method of accounting. We proportionately consolidate our 50% share of the Joint Venture’s revenues and operating earnings in the presentation of our cement segment, which is the way management organizes the segments within the Company for making operating decisions and assessing performance.

RESULTS OF OPERATIONS

Consolidated Results

 

 

 

For the Three Months Ended

December 31,

 

 

 

 

 

 

For the Nine Months Ended

December 31,

 

 

 

 

 

 

 

2015

 

 

2014

 

 

Change

 

 

2015

 

 

2014

 

 

Change

 

 

 

(In thousands except per share)

 

 

 

 

 

 

(In thousands except per share)

 

 

 

 

 

Revenues

 

$

277,409

 

 

$

291,529

 

 

 

(5%)

 

 

$

891,360

 

 

$

842,588

 

 

 

  6%

 

Cost of Goods Sold

 

 

(208,544

)

 

 

(212,380

)

 

 

(2%)

 

 

 

(717,104

)

 

 

(631,977

)

 

 

13%

 

Gross Profit

 

 

68,865

 

 

 

79,149

 

 

 

(13%)

 

 

 

174,256

 

 

 

210,611

 

 

 

(17%)

 

Equity in Earnings of Unconsolidated Joint Venture

 

 

10,483

 

 

 

12,423

 

 

 

(16%)

 

 

 

29,993

 

 

 

34,274

 

 

 

(12%)

 

Corporate General and Administrative

 

 

(8,304

)

 

 

(9,371

)

 

 

(11%)

 

 

 

(26,659

)

 

 

(23,827

)

 

 

  12%

 

Acquisition and Litigation Expense

 

 

-

 

 

 

(722

)

 

 

(100%)

 

 

 

-

 

 

 

(2,825

)

 

 

(100%)

 

Other Income

 

 

1,163

 

 

 

488

 

 

 

138%

 

 

 

2,170

 

 

 

2,050

 

 

 

6%

 

Interest Expense, net

 

 

(4,002

)

 

 

(4,101

)

 

 

(2%)

 

 

 

(12,830

)

 

 

(12,054

)

 

 

6%

 

Earnings Before Income Taxes

 

 

68,205

 

 

 

77,866

 

 

 

(12%)

 

 

 

166,930

 

 

 

208,229

 

 

 

(20%)

 

Income Tax Expense

 

 

(22,357

)

 

 

(25,836

)

 

 

(13%)

 

 

 

(53,501

)

 

 

(68,170

)

 

 

(22%)

 

Net Earnings

 

$

45,848

 

 

$

52,030

 

 

 

(12%)

 

 

$

113,429

 

 

$

140,059

 

 

 

(19%)

 

Diluted Earnings per Share

 

$

0.92

 

 

$

1.03

 

 

 

(11%)

 

 

$

2.26

 

 

$

2.78

 

 

 

(19%)

 

 

Revenues. Revenues were $277.4 million and $291.5 million for the three months ended December 31, 2015 and 2014, respectively. Revenues from the Skyway Acquisition positively impacted revenues by approximately $7.8 million, while revenues from the CRS Acquisition were relatively consistent for both the three months ended December 31, 2015 and December 31, 2014.  The decrease in revenues was due primarily to decreased sales volumes for our gypsum wallboard, recycled paperboard and oil and gas proppants segments, and a decline in the average net sales price for our gypsum wallboard segment, partially offset by increased sales volumes in our cement and concrete and aggregates businesses, and increased average net sales prices in our cement, recycled paperboard and concrete and aggregates segments. The reduction in revenues from our legacy oil and gas proppants business was due primarily to reduced sales volumes. Excluding revenues from the CRS and Skyway

 

27


 

Acquisitions, the reduction in sales volumes negatively impacted net revenue during the quarter ended December 31, 2015, by approximately $25.4 million, partially offset by increased average net sales prices, which positively impacted net revenue by approximately $3.4 million.  

Revenues were $891.4 million and $842.6 million for the nine months ended December 31, 2015 and 2014, respectively. Revenues from the CRS and Skyway Acquisitions positively impacted revenues by approximately $29.6 million and $17.1 million, respectively.  Revenues increased in all of our segments except our legacy oil and gas proppants and recycled paperboard segments.  The increase in revenues was due primarily to increased average net sales prices in our cement and concrete and aggregates segments and increased sales volumes in our gypsum wallboard and concrete segments, partially offset by decreased sales volumes in our cement, recycled paperboard and aggregates segments. The reduction in revenues from our legacy oil and gas proppants business was due primarily to reduced sales volumes. Excluding revenues from the CRS and Skyway Acquisitions, increased average net sales prices positively impacted net revenue during the nine months ended December 31, 2015, by approximately $20.3 million, partially offset by reduced sales volumes, which adversely impacted net revenue by approximately $18.2 million.  

Cost of Goods Sold. Cost of goods sold was $208.5 million and $212.4 million during the three months ended December 31, 2015 and 2014, respectively. Excluding cost of goods sold of $10.1 million related to the CRS and Skyway Acquisitions, cost of goods sold declined approximately $14.0 million during the three months ended December 31, 2015 compared to the three months ended December 31, 2014.  The decrease in cost of goods sold was related to decreased sales volume which impacted cost of sales by $16.2 million, partially offset by increased operating costs, which increased cost of goods sold by approximately $2.2 million. The decrease in cost of goods sold related to sales volumes in the three months ended December 31, 2015, compared to December 31, 2014, was primarily related to our oil and gas proppants and gypsum wallboard segments, and was approximately $15.3 million and $5.4 million, respectively, partially offset by increased sales volumes in our cement segment of approximately $4.3 million.  The increase in operating costs in the three months ended December 31, 2015, compared to December 31, 2014, was primarily related to our cement and concrete and aggregates businesses and was approximately $0.9 million and $2.3 million, respectively, partially offset by decreased operating costs in our gypsum wallboard business of approximately $1.5 million.   

Cost of goods sold was $717.1 million and $632.0 million during the nine months ended December 31, 2015 and 2014, respectively.  Excluding cost of goods sold of $93.9 million related to the CRS and Skyway Acquisitions, cost of goods sold declined approximately $8.8 million during the nine months ended December 31, 2015 compared to the three months ended December 31, 2014.  The decrease in cost of goods sold was related to decreased sales volumes, which decreased cost of sales by approximately $9.5 million, partially offset by increased operating costs, which increased cost of goods sold by approximately $0.7 million.  The decrease in cost of goods sold related to sales volumes in the nine months ended December 31, 2015 compared to the nine months ended December 31, 2014, was primarily related to our oil and gas proppants business, and was approximately $22.5 million, partially offset by increased sales volumes in our cement, wallboard and concrete and aggregates businesses of approximately $7.5 million, 2.4 million and $4.7 million, respectively. Operating costs for the nine months ended December 31, 2015, compared to December 31, 2014, increased for our concrete and aggregates businesses by approximately $5.7 million, partially offset by decreased operating costs in our gypsum wallboard business of approximately $5.3 million. Cost of goods sold includes an impairment charge of $28.4 million of intangible assets (customer contracts) generated from the CRS Acquisition and a write-down of $9.4 million in raw sand inventory values associated primarily with downward revaluation of raw sand inventory that CRS Proppants purchased from a third party pursuant to a purchase contract entered into in connection with the plant expansion.  We have fulfilled our obligations under this purchase contract.  Both of these charges were recorded in the quarter ended September 30, 2015.

Gross Profit. Gross profit was $68.9 million and $79.1 million during the three months ended December 31, 2015 and 2014, respectively. The 13% decrease in gross profit was due to decreased operating earnings in our oil and gas proppants, recycled paperboard and gypsum wallboard segments, which was primarily due to reduced sales volumes in these segments.  The gross profit margin decreased to 25% during the three months ended

 

28


 

December 31, 2015, compared to 27% during the three months ended December 31, 2014, primarily due to the operating loss in our oil and gas proppants business.

Gross profit was $174.3 million and $210.6 million during the nine months ended December 31, 2015 and 2014, respectively. The 17% decrease in gross profit was due to decreased operating earnings in our oil and gas proppants and recycled paperboard segments, which was primarily due to reduced sales volumes and increased operating costs in these segments.  The gross margin for the nine months ended December 31, 2015 declined to 20%, compared to 25% for the nine months ended December 31, 2014, primarily due to the operating loss in our oil and gas proppants business, which included an $28.4 million impairment of customer contract intangibles and the write-down of $9.4 million in raw sand inventory in the quarter ended September 30, 2015.  Excluding this expense, the gross margin for the nine months ended December 31, 2015 would have been 23%, which is relatively consistent with the gross margin for the nine months ended December 31, 2014.

Equity in Earnings of Joint Venture. Equity in earnings of our unconsolidated joint venture decreased $2.0 million, or 16%, for the three months ended December 31, 2015, compared to the similar period in 2014. The decrease is primarily due to a 21% decrease in sales volumes, partially offset by a decrease in operating costs. The sales volume decline was driven by heavy rainfall in Texas during October and December, and reduced demand for oil well cement.  The impact of the decrease in sales volumes on equity in earnings of our unconsolidated joint venture during the three months ended December 31, 2015, compared to the three months ended December 31, 2014, was approximately $2.6 million, partially offset by a decrease in operating costs of approximately $0.6 million.  The decrease in operating costs was primarily related to maintenance, which decreased by approximately $0.3 million.

Equity in earnings of our unconsolidated joint venture decreased $4.3 million, or 12%, for the nine months ended December 31, 2015, compared to the similar period in 2014. The decrease is primarily due to a 21% decrease in sales volumes and an increase in operating costs, partially offset by a 6% increase in average net sales price. The decrease in sales volumes during the nine months ended December 31, 2015, compared to the nine months ended December 31, 2014, was due primarily to unseasonably high rainfall during the first and third fiscal quarters, and reduced demand for oil well cement.  The impact of the decrease in sales volumes and increase in operating cost on equity in earnings of our unconsolidated joint venture during the nine months ended December 31, 2015, compared to the nine months ended December 31, 2014, was approximately $7.2 million and $1.7 million, respectively, partially offset by an increase in average net sales price of approximately $4.6 million. The increase in operating costs was primarily due to an increase in maintenance costs of approximately $1.7 million.

Corporate General and Administrative. Corporate general and administrative expenses decreased 11% for the three months ended December 31, 2015, compared to the similar periods in 2014. The approximately $1.1 million decrease in corporate general and administrative expenses for the three months ended December 31, 2015, respectively, compared to 2014, is due primarily to a decrease in professional fees, which consist of legal, audit and investor related fees, of approximately $0.8 million. These fees decreased in the three months ended December 31, 2015, compared to December 31, 2014, primarily due to amounts spent during the prior fiscal quarter related to the CRS Acquisition and integration.

Corporate general and administrative expenses increased 12% for the nine months ended December 31, 2015, compared to the similar periods in 2014. The approximately $2.8 million increase in corporate general and administrative expenses for the three months ended December 31, 2015, respectively, compared to 2014, is due primarily to an increase in equity incentive compensation and legal expense, which increased approximately $2.4 million and $0.3 million during the nine months ended December 31, 2015, compared to the similar period in 2014. The increase in equity incentive compensation was primarily due to the Fiscal 2016 Employee Restricted Stock Awards, while the increase in legal expense during the nine months ended December 31, 2015, compared to the similar period in 2014, was primarily due to the legal issues discussed in Footnote (P) to the Unaudited Consolidated Financial Statements.

 

29


 

Acquisition and Litigation Expense. Acquisition and litigation expense for the three and nine months ended December 31, 2014 consists primarily of approximately $0.1 million and $1.8 million, respectively, of litigation expenses related to our lawsuit against the IRS.  This lawsuit was settled in January 2015.  The remaining expense consists of expenses related to the CRS Acquisition, which closed in November 2014, and were $0.4 million and $1.1 million of the three and nine months ended December 31, 2014, respectively.

Other Income. Other income consists of a variety of items that are non-segment operating in nature and includes non-inventoried aggregates income, gypsum wallboard distribution center income, asset sales and other miscellaneous income and cost items.

Interest Expense, Net. Interest expense, net, decreased approximately $0.1 million during the three months ended December 31, 2015, compared to the three months ended December 31, 2014. The 2% decrease in interest expense, net for the three months ended December 31, 2015, compared to the similar three months in the prior fiscal year, is due primarily to the reduction in interest from our Senior Notes and interest due to the IRS in connection with our lawsuit, which was settled in January 2015, partially offset by increased interest related to our Credit Facility. The decrease in interest in our Senior Notes is due to note maturities during the last twelve months, while the increase in interest from our Credit Facility is due to increased average borrowings under the Credit Facility, some of which were related to the repayment of the Senior Notes.  

Interest expense increased approximately $0.7 million for the nine months ended December 31, 2015, compared to the nine months ended December 31, 2014, primarily due to increased interest expense from our Credit Facility, partially offset by decreased interest from our Senior Notes and interest due to the IRS in connection with our lawsuit, which was settled in January 2015. The increase in interest expense from our Credit Facility is due to greater outstanding balances during the nine months ended December 31, 2015, compared to the nine months ended December 31, 2014, as a result of borrowings made to finance the CRS Acquisition in November 2014, the Skyway Acquisition in July 2015 and maturities of our Senior Notes in October 2014 and November 2015. Because of the increased borrowings, we expect interest expense to increase during fiscal 2016 compared to fiscal 2015.  

Earnings Before Income Taxes. Earnings before income taxes were $68.2 million and $77.9 million during the three months ended December 31, 2015 and 2014, respectively. The decrease was primarily due to an approximately $10.3 million decrease in gross profit, an approximately $1.9 million decrease in equity in earnings of unconsolidated joint venture, partially offset by a decrease in interest expense, net of approximately $0.1 million and a decrease of approximately $1.1 million in corporate general and administrative expenses.

Earnings before income taxes were $166.9 million and $208.2 million during the nine months ended December 31, 2015 and 2014, respectively. The decrease was primarily due to an approximately $36.4 million decrease in gross profit, an approximate $4.3 million decrease in equity in earnings of unconsolidated joint venture, an increase in interest expense, net of approximately $0.7 million and an increase of approximately $2.8 million in corporate general and administrative expenses.

Income Taxes. Income tax expense was $53.5 million and $68.2 million for the nine months ended December 31, 2015 and 2014, respectively. The estimated effective tax rate for fiscal 2016, compared to fiscal 2015, remained consistent at approximately 32%.

Net Earnings and Diluted Earnings per Share. Net earnings for the quarter ended December 31, 2015 of approximately $45.8 million decreased 12% compared to net earnings for the quarter ended December 31, 2014 of approximately $52.0 million; while net earnings of $113.4 million decreased 19% compared to net earnings for the nine months ended December 31, 2014 of $140.1 million. Diluted earnings per share for the three and nine months ended December 31, 2015 were $0.92 and $2.26, respectively, compared to diluted earnings per share of $1.03 and $2.78 for the three and nine months ended December 31, 2014.

 

30


 

The following table highlights certain operating information related to our five business segments:

 

 

 

For the Three Months
Ended December 31,

 

 

 

 

 

For the Nine Months
Ended December 31,

 

 

 

 

 

2015

 

 

2014

 

 

Percentage

 

 

2015

 

 

2014

 

 

Percentage

 

 

(In thousands except per unit)

 

 

Change

 

 

(In thousands except per unit)

 

 

Change

Revenues (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cement (2)

 

$

135,419

 

 

$

124,048

 

 

 

9%

 

 

$

428,385

 

 

$

397,845

 

 

 

8%

Gypsum Wallboard

 

 

108,907

 

 

 

118,573

 

 

 

(8%)

 

 

 

343,660

 

 

 

342,905

 

 

 

-

Recycled Paperboard

 

 

36,822

 

 

 

39,936

 

 

 

(8%)

 

 

 

111,285

 

 

 

112,994

 

 

 

(2%)

Oil and Gas Proppants

 

 

8,476

 

 

 

31,731

 

 

 

(73%)

 

 

 

49,608

 

 

 

53,325

 

 

 

(7%)

Concrete and Aggregates

 

 

31,779

 

 

 

27,116

 

 

 

17%

 

 

 

96,982

 

 

 

85,239

 

 

 

14%

Gross Revenues

 

 

321,403

 

 

 

341,404

 

 

 

(6%)

 

 

 

1,029,920

 

 

 

992,308

 

 

 

4%

Less: Intersegment Revenues

 

 

(17,986

)

 

 

(16,766

)

 

 

7%

 

 

 

(56,005

)

 

 

(51,096

)

 

 

10%

Less: Joint Venture Revenues

 

 

(26,008

)

 

 

(32,907

)

 

 

(21%)

 

 

 

(82,555

)

 

 

(98,624

)

 

 

(16%)

 

 

$

277,409

 

 

$

291,731

 

 

 

(5%)

 

 

$

891,360

 

 

$

842,588

 

 

 

6%

 

Sales Volume

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cement (M Tons) (2)

 

 

1,212

 

 

 

1,205

 

 

 

1%

 

 

 

3,899

 

 

 

3,972

 

 

 

(2%)

Gypsum Wallboard (MMSF)

 

 

568

 

 

 

610

 

 

 

(7%)

 

 

 

1,764

 

 

 

1,746

 

 

 

1%

Recycled Paperboard (M Tons)

 

 

71

 

 

 

77

 

 

 

(8%)

 

 

 

215

 

 

 

219

 

 

 

(2%)

Concrete (M Yards)

 

 

266

 

 

 

246

 

 

 

8%

 

 

 

839

 

 

 

767

 

 

 

9%

Aggregates (M Tons)

 

 

792

 

 

 

682

 

 

 

16%

 

 

 

2,223

 

 

 

2,372

 

 

 

(6%)

 

Average Net Sales Prices (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cement (2)

 

$

97.10

 

 

$

93.76

 

 

 

4%

 

 

$

97.54

 

 

$

91.43

 

 

 

7%

Gypsum Wallboard

 

 

157.99

 

 

 

158.95

 

 

 

(1%)

 

 

 

159.74

 

 

 

160.23

 

 

 

-

Recycled Paperboard

 

 

510.38

 

 

 

504.30

 

 

 

1%

 

 

 

506.42

 

 

 

505.09

 

 

 

-

Concrete

 

 

93.56

 

 

 

89.00

 

 

 

5%

 

 

 

92.54

 

 

 

86.77

 

 

 

7%

Aggregates

 

 

8.34

 

 

 

7.36

 

 

 

13%

 

 

 

8.28

 

 

 

7.54

 

 

 

10%

 

Operating Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cement (2)

 

$

41,768

 

 

$

37,578

 

 

 

11%

 

 

$

116,058

 

 

$

96,535

 

 

 

20%

Gypsum Wallboard

 

 

37,289

 

 

 

40,013

 

 

 

(7%)

 

 

 

118,185

 

 

 

114,443

 

 

 

3%

Recycled Paperboard

 

 

7,923

 

 

 

9,102

 

 

 

(13%)

 

 

 

22,091

 

 

 

24,633

 

 

 

(10%)

Oil and Gas Proppants

 

 

(9,153

)

 

 

3,241

 

 

 

(382%)

 

 

 

(59,389

)

 

 

3,315

 

 

 

(1892%)

Concrete and Aggregates

 

 

1,521

 

 

 

1,638

 

 

 

(7%)

 

 

 

7,304

 

 

 

5,959

 

 

 

23%

Other, net

 

 

1,163

 

 

 

488

 

 

 

138%

 

 

 

2,170

 

 

 

2,050

 

 

 

6%

Net Operating Earnings

 

$

80,511

 

 

$

92,060

 

 

 

(13%)

 

 

$

206,419

 

 

$

246,935

 

 

 

(16%)

(1)

Gross revenue, before freight and delivery costs.

(2)

Includes proportionate share of our Joint Venture.

(3)

Net of freight and delivery costs.

Cement Operations. Cement revenues were $135.4 million for the three months ended December 31, 2015, which is a 9% increase over revenues of $124.0 million for the three months ended December 31, 2014. Approximately $7.8 million of the increase in revenues for the three months ended December 31, 2015, compared to the three months ended December 31, 2014, was related to the Skyway Acquisition. The remaining increase in revenues during the three months ended December 31, 2015, compared to the three months ended December 31, 2014, is primarily due to a 4% increase in average net sales prices and a 1% increase in sales volumes.  The increase in average net sales prices and sales volumes during the three months ended December 31, 2015, compared to the three months ended December 31, 2014 positively impacted cement revenues by approximately $3.2 million and $0.4 million, respectively.  Sales volumes in our Texas and Oklahoma markets were negatively impacted by wet weather in October and December.  In Texas, demand for construction grade cement continues to offset much of the impact from lower oil well cement demand.

Cement operating earnings increased 11% to $41.8 million from $37.6 million for the three months ended December 31, 2015 and 2014, respectively. Approximately $2.2 million of the increase in operating earnings for

 

31


 

the three months ended December 31, 2015, compared to the three months ended December 31, 2014, was related to the Skyway Acquisition.  The remaining increase in operating earnings was due primarily to increased average net sales prices, which positively impacted operating earnings by approximately $3.2 million, partially offset by increased operating costs of approximately $1.2 million. The increase in operating costs in the three months ended December 31, 2015, compared to December 31, 2014, is primarily related to maintenance, purchased raw materials and labor costs, which negatively impacted operating margin by approximately $1.0 million, $1.1 million and 1.0 million, respectively. The increase in operating costs was partially offset by reduction in the percentage of purchased cement sold during the three months ended December 31, 2015, compared to the three months ended December 31, 2014.  The percentage of purchased cement sold declined approximately 3% from purchased cement sold during December 31, 2014, which positively impacted our operating earnings by approximately $2.0 million.  The operating margin increased to 31% for the third quarter of fiscal 2016, compared to 30% for the third quarter of fiscal 2015, primarily due to increased sales prices and a reduction in the percentage of sales of lower margin purchased cement.

Cement revenues were $428.4 million for the nine months ended December 31, 2015, which is an 8% increase over revenues of $397.8 million for the nine months ended December 31, 2014. Approximately $17.1 million of the increase in revenues for the nine months ended December 31, 2015, compared to the nine months ended December 31, 2014, was related to the Skyway Acquisition. The remaining increase in revenue during the nine months ended December 31, 2015 compared to the nine months ended December 31, 2014, is primarily due to a 7% increase in average net sales prices, partially offset by a 2% decrease in sales volumes.  The increase in average net sales prices during the nine months ended December 31, 2015, compared to the nine months ended December 31, 2014 positively impacted cement revenues by approximately $21.2 million, while the decrease in sales volumes negatively impacted cement revenues by approximately $7.9 million.  The decrease in sales volumes during the nine months ended December 31, 2015, compared to the nine months ended December 31, 2014 was primarily related to above average rainfall during April and May 2015 in our Texas, Oklahoma and Colorado markets, as well as wet weather in our Texas and Oklahoma markets during October and November. In Texas, demand for construction grade cement continues to offset much of the impact from lower oil well cement demand.  

Cement operating earnings increased 20% to $116.1 million from $96.5 million for the nine months ended December 31, 2015 and 2014, respectively. Approximately $4.9 million of the increase in operating earnings for the nine months ended December 31, 2015, compared to the nine months ended December 31, 2014, was related to the Skyway Acquisition.  The remaining increase in operating earnings was due primarily to increased average net sales prices, which positively impacted operating earnings by approximately $21.3 million, partially offset by decreased sales volumes and increased operating costs of approximately $5.2 million and $1.5 million. The increase in operating costs in the nine months ended December 31, 2015, compared to December 31, 2014, is primarily related to increased maintenance and purchased raw materials, which adversely impacted operating earnings by approximately $5.5 million and $1.3 million, respectively, partially offset by decreased energy costs of approximately $2.6 million.  Additionally, the percentage of purchased cement sold during the nine months ended December 31, 2015, declined approximately 3% compared to the percentage of purchased cement sold for the three months ended December 31, 2014, which positively impacted our operating costs by approximately $2.8 million.  The increase in maintenance costs was due primarily to a shift in the timing of some of our annual maintenance outages, which adversely impacted operating earnings by approximately $3.0 million during the first quarter of fiscal 2016, compared to the first quarter of fiscal 2015. The operating margin increased to 27% for the nine months ended December 31, 2015, compared to 24% for the nine months ended December 31, 2014, primarily due to increased sales prices and a reduction in the percentage of sales of lower margin purchased cement.

Gypsum Wallboard Operations. Sales revenues decreased 8% to $108.9 million for the three months ended December 31, 2015, from $118.6 million for the three months ended December 31, 2014, primarily due to a 7% decrease in sales volumes and a 1% decrease in average net sales price. The decrease in sales volumes and average net sales price negatively impacted revenues by approximately $8.2 million and $1.5 million, respectively. The decrease in sales volumes is primarily due to our benefiting in prior years from pre buying

 

32


 

activity in advance of our price increase.  During fiscal 2016, there was a shift in the timing of our price increase from January 1st to March 31st.  Our market share was essentially unchanged during the last year.

Operating earnings decreased to $37.3 million for the three months ended December 31, 2015, compared to $40.0 million for the three months ended December 31, 2014, primarily due to the decrease in our sales volumes and average net sales prices, which adversely impacted operating earnings by approximately $2.7 million and $1.5 million, respectively, partially offset by reduced operating costs, which positively impacted operating earnings by approximately $1.5 million. The decrease in operating costs during the three months ended December 31, 2015, compared to the three months ended December 31, 2014, was primarily due to reduced freight, natural gas and electricity, which positively impacted operating earnings by approximately $0.9 million, $1.6 million and $0.3 million, respectively, partially offset by increased maintenance and paper costs of approximately $0.8 million and $0.3 million, respectively. Our operating margin remained flat at 34% for both of the three months ended December 31, 2015, and 2014. Fixed costs are not a significant part of the overall cost of wallboard; therefore, changes in utilization have a relatively minor impact on our operating cost per unit.

Sales revenues increased to $343.7 million for the nine months ended December 31, 2015, from $342.9 million for the nine months ended December 31, 2014, primarily due to a 1% increase in sales volumes. The increase in sales volumes positively impacted revenues by approximately $3.5 million, partially offset by a decline in average net sales prices, which adversely impacted revenues by approximately $2.7 million.  The increased sales volumes are primarily due to increased construction activity in fiscal 2016, compared to fiscal 2015. Our market share was essentially unchanged during the last year.

Operating earnings increased to $118.2 million for the nine months ended December 31, 2015, compared to $114.4 million for the nine months ended December 31, 2014, primarily due to the increase in our sales volumes and reduced operating costs, which positively impacted operating earnings by approximately $1.2 million and $5.3 million, respectively, partially offset by reduced average net sales prices, which adversely impacted operating earnings by approximately $2.7 million. The decrease in operating costs during the nine months ended December 31, 2015, compared to the nine months ended December 31, 2014, was primarily due to reduced freight, natural gas and other raw materials costs, which positively impacted operating earnings by $1.8 million, $4.4 million and $1.4 million, respectively, partially offset by increased maintenance costs of approximately $2.4 million. Our operating margin increased to 34% for the nine months ended December 31, 2015, compared to 33% for the nine months ended December 31, 2014, primarily due to the reduction in operating costs. Fixed costs are not a significant part of the overall cost of wallboard; therefore, changes in utilization have a relatively minor impact on our operating cost per unit.

Recycled Paperboard Operations. Revenues decreased 8% to $36.8 million during the three months ended December 31, 2015, compared to $39.9 million for the three months ended December 31, 2014. The decrease in revenues during the quarter ended December 31, 2015 compared to December 31, 2014, is due primarily to an 8% decrease in sales volumes, which adversely impacted revenues by approximately $3.1 million, partially offset by the increase in average net sales prices which positively impacted revenues by approximately $0.1 million.  The decrease in sales volumes was related to lower sales volumes in the gypsum wallboard industry, as noted above.  

Operating earnings decreased to $7.9 million for the third quarter of fiscal 2016, compared to $9.1 million for the third quarter of fiscal 2015. The decrease in operating earnings is primarily due to decreased sales volumes and increased operating costs, which adversely impacted operating earnings by approximately $0.8 million and $0.4 million, respectively. The increase in operating costs is primarily related to increased annual maintenance costs, which negatively impacted operating earnings by approximately $0.8 million, partially offset by lower natural gas costs, which positively impacted operating earnings by approximately $0.5 million, respectively. The operating margin decreased to approximately 22% during the third quarter of fiscal 2016, from approximately 23% during the third quarter of fiscal 2015, primarily due to increased operating costs.

Revenues decreased 2% to $111.3 million during the nine months ended December 31, 2015, compared to $113.0 million for the nine months ended December 31, 2014. The decrease in revenues during the nine months

 

33


 

ended December 31, 2015 compared to December 31, 2014, is due primarily to a 2% decrease in sales volumes, which adversely impacted revenues by approximately $2.1 million, partially offset by an increase in average net sales prices that positively impacted revenues by approximately $0.4 million.  The decrease in sales volumes was related to lower sales volumes in the gypsum wallboard industry, as noted above.  

Operating earnings decreased to $22.1 million for the nine months ended December 31, 2015, compared to $24.6 million for the nine months ended December 31, 2014. The decrease in operating earnings is primarily due to increased operating costs and decreased sales volumes, which negatively impacted operating earnings by approximately $2.3 million and $0.4 million, respectively, partially offset by increased sales volumes, which positively impacted operating earnings by $0.4 million. The increase in operating costs is primarily related to increased recycled fiber and annual maintenance costs, which negatively impacted operating earnings by approximately $1.6 million and $1.3 million, respectively, partially offset by lower natural gas costs, which positively impacted operating earnings by approximately $1.2 million. The increase in operating costs was the primary reason operating margin decreased to 20% during the nine months ended December 31, 2015, compared to 22% during the nine months ended December 31, 2014.

Concrete and Aggregates Operations. Concrete and aggregates revenues increased 17% to $31.8 million for the three months ended December 31, 2015, compared to $27.1 million for the three months ended December 31, 2014. The primary reason for the increase in revenue for the third quarter of fiscal 2016, compared to the third quarter of fiscal 2015, was the 5% and 13% increase in average net sales prices for concrete and aggregates, respectively, which positively impacted revenues by approximately $2.1 million.  Additionally, sales volumes for our concrete and aggregates businesses increased 8% and 16%, respectively, during the three months ended December 31, 2015, compared to December 31, 2014, positively impacting revenue by approximately $2.6 million.  Increases in sales volumes were primarily in our greater Kansas City market.

Operating earnings decreased 7% to approximately $1.5 million for the three months ended December 31, 2015, compared to $1.6 million for the three months ended December 31, 2014. Operating earnings during the three months ended December 31, 2015, compared to the three months ended December 31, 2014, were adversely impacted by increased operating costs, which decreased operating earnings by approximately $2.3 million, partially offset by increased average net sales prices, which positively impacted operating earnings by approximately $2.1 million. The increase in operating costs during the three months ended December 31, 2015, compared to the three months ended December 31, 2014, was primarily related to purchased materials and maintenance, which adversely impacted operating earnings by approximately $1.4 million and $0.6 million, respectively.

Concrete and aggregates revenues increased 14% to $97.0 million for the nine months ended December 31, 2015, compared to $85.2 million for the nine months ended December 31, 2014. The primary reason for the increase in revenue for the nine months ended December 31, 2015, compared to the nine months ended December 31, 2014, was the 7% and 10% increase in average net sales prices for concrete and aggregates, respectively, which positively impacted revenues by approximately $6.6 million.  The increase in sales volumes by our concrete business was partially offset by lower sales volumes in our aggregates during the nine months ended December 31, 2015, compared to December 31, 2014, and positively impacted revenues by approximately $5.2 million.  

Operating earnings increased 23% to approximately $7.3 million for the nine months ended December 31, 2015, compared to $6.0 million for the nine months ended December 31, 2014. Operating earnings were positively impacted by increased average net sales prices and sales volumes, which positively impacted operating earnings by approximately $6.6 million and $0.4 million, respectively, partially offset by increased operating costs of approximately $5.7 million during the nine months ended December 31, 2015, compared to the nine months ended December 31, 2014. The increase in operating costs during the nine months ended December 31, 2015, compared to the nine months ended December 31, 2014, was primarily related to purchased materials and maintenance, which adversely impacted operating earnings by approximately $4.5 million and $0.7 million, respectively.

 

34


 

Oil and Gas Proppants. Revenues for our oil and gas proppants segment decreased to $8.5 million for the three months ended December 31, 2015, compared to $31.7 million for the three months ended December 31, 2014.  Revenues from our CRS Acquisition were positively impacted by approximately $7.8 million and $9.5 million for the three months ended December 31, 2015 and 2014, respectively.  The remaining decrease in revenues was due to a decline in sales volumes at our legacy facility in Corpus Christi which adversely impacted revenues by approximately $21.5 million.  

Operating loss for the three months ended December 31, 2015 was approximately $9.2 million, compared to operating income of approximately $3.2 million during the three months ended December 31, 2014. The operating loss was primarily due to decreased average net sales prices and sales volumes that impacted operating loss by $3.5 million and $8.9 million, respectively. The decrease in average net sales price and sales volumes are due to the reduced price of crude oil, which has sharply reduced demand for oil well services.

Revenues for our oil and gas proppants segment decreased to $49.6 million for the nine months ended December 31, 2015, compared to $53.3 million for the nine months ended December 31, 2014.  Revenues from our CRS Acquisition were positively impacted by approximately $39.1 million and $9.5 million for the three months ended December 31, 2015 and 2014, respectively.  The remaining decrease in revenues was due to a decline in sales volumes and average net sales prices at our legacy facility in Corpus Christi which adversely impacted revenues by approximately $32.2 million and $1.1 million, respectively.  

Operating loss for the nine months ended December 31, 2015 was approximately $59.4 million, compared to operating income of approximately $3.3 million during the nine months ended December 31, 2014. The increased operating loss was primarily due to increased operating costs and reduced average net sales prices that increased the operating loss by $50.2 million and $13.1 million, respectively. Operating loss for the nine months ended December 31, 2015 includes an impairment charge of $28.4 million of intangible assets (customer contracts) generated from the CRS Acquisition and a write-down of $9.4 million in raw sand inventory values associated primarily with downward revaluation of raw sand inventory that CRS Proppants purchased from a third party pursuant to a purchase contract entered into in connection with the plant expansion.  We have fulfilled our obligations under this purchase contract.

GENERAL OUTLOOK

The drivers of construction products demand continue to improve incrementally, supporting the notion that a cyclic recovery is underway.  The recovery continues to hinge on the pace of growth in the U.S. economy. In December 2015, the Fixing America’s Surface Transportation Act, or “FAST Act” was signed into law.  This is the first significant transportation act enacted in ten years.  The FAST Act is a five year legislation to improve the nation’s surface transportation infrastructure, including roads, bridges, transit systems and rail transportation network.  Increased infrastructure spending in the future should positively impact both our cement and concrete and aggregates businesses.  

Our cement sales network stretches across the central U.S., both east to west and north to south. While we anticipate construction grade cement consumption to continue to increase during calendar 2016, each region will increase at a different pace. Cement markets are affected by infrastructure spending, industrial construction and residential building activity. We expect volume and pricing improvements to vary in each of our cement markets.

We do not necessarily anticipate significant increases in concrete and aggregate sales volumes in northern California. We are experiencing a recovery in both volume and price in our Austin, Texas markets, and expect price and volumes to continue to improve throughout calendar 2016. Demand in the greater Kansas City area is expected to improve during calendar 2016, compared to calendar 2015.

Wallboard demand is heavily influenced by new residential housing construction as well as repair and remodeling.  Most forecasts point to a continued pick-up in demand in both of these areas throughout calendar 2016. Industry shipments of gypsum wallboard were approximately 22.1 billion square feet in calendar 2015, and we anticipate demand to improve by approximately 5% in calendar 2016. 

 

35


 

We anticipate increased demand for gypsum wallboard to positively impact our recycled paperboard business as sales of higher priced gypsum paper are expected to continue to increase during calendar 2016 both in gross tons and as a percentage of total sales volumes.

The decline in oil and gas rig count and well completion activity has adversely impacted oil and gas activity, leading to reduced demand and pricing for proppants.  We anticipate these conditions to persist throughout calendar 2016; however, we remain focused on strengthening our low-cost position and taking this opportunity to continue to build out our low delivered cost position to targeted shale plays.  

We will continue to consider the impact reduced oil prices and rig counts have on the operating performance of our oil and gas proppants business and, if necessary, determine whether these trends indicate additional impairment in the value of the tangible and intangible assets of this business.  If market conditions continue to deteriorate, both in terms of oil pricing and reduced rig counts, we will perform impairment tests to determine if any actual impairment has occurred.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare our financial statements. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

Information regarding our “Critical Accounting Policies and Estimates” can be found in our Annual Report. The five critical accounting policies that we believe either require the use of the most judgment, or the selection or application of alternative accounting policies, and are material to our financial statements, are those relating to long-lived assets, goodwill, environmental liabilities, accounts receivable and income taxes. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm. In addition, Note (A) to the financial statements in our Annual Report contains a summary of our significant accounting policies.

Recent Accounting Pronouncements

Refer to Note (A) in the Notes to Unaudited Consolidated Financial Statements of the Form 10-Q for information regarding recently issued accounting pronouncements that may affect our financial statements.

 

36


 

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow.

The following table provides a summary of our cash flows:

 

 

 

For the Nine Months
Ended December 31,

 

 

 

2015

 

 

2014

 

 

 

(dollars in thousands)

Net Cash Provided by Operating Activities

 

$

216,290

 

 

$

183,143

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital Expenditures

 

 

(75,536

)

 

 

(64,959

)

Acquisitions

 

 

(32,427

)

 

 

(237,171

)

Net Cash Used in Investing Activities

 

 

(107,963

)

 

 

(302,130

)

Financing Activities:

 

 

 

 

 

 

 

 

Increase (Decrease) in Long-Term Debt

 

 

(12,045

)

 

 

136,500

 

Dividends Paid

 

 

(15,078

)

 

 

(15,044

)

Shares Repurchased and Retired

 

 

(76,231

)

 

 

-

 

Shares Repurchased to Settle Employee Taxes on RSUs

 

 

(1,815

)

 

 

(1,356

)

Payment of Debt Acquisition Costs

 

 

-

 

 

 

(1,661

)

Proceeds from Stock Option Exercises

 

 

2,580

 

 

 

4,270

 

Excess Tax Benefits from Share Based Payment Arrangements

 

 

2,504

 

 

 

3,493

 

Net Cash Provided by (Used In) Financing Activities

 

 

(100,085

)

 

 

126,202

 

Net Increase in Cash

 

$

8,242

 

 

$

7,215

 

 

Cash flows from operating activities increased to $216.3 million during the nine months ended December 31, 2015, compared to $183.1 million during the similar period in 2014. This increase was largely attributable to increased cash flows from changes in operating assets and liabilities and reduced distributions from Joint Venture.  Excluding the impact of inventory purchased in the Skyway Acquisition, cash flows from operations were positively impacted during the nine months ended December 31, 2015 by decreases in accounts and notes receivable and inventories of approximately $11.8 million and $5.4 million, respectively, partially offset by a decrease in accounts payable and accrued liabilities and federal income taxes payable of approximately $10.2 million and $5.7 million, respectively.  Excluding the impact of the CRS Acquisition, cash flows from operations during the nine months ended December 31, 2014, were negatively impacted by increased accounts and notes receivable and inventories of approximately $19.1 million and $10.3 million, respectively, partially offset by increases in accounts payable and accrued liabilities and income taxes payable of approximately $6.4 million and $4.3 million, respectively, and a decrease in other assets of approximately $3.9 million.

Working capital increased to $249.3 million at December 31, 2015, compared to $182.1 million at March 31, 2015, primarily due to increased income taxes receivable and decreased accounts payable and accrued liabilities and repayment of the current portion of long term debt of approximately $8.3 million, $16.4 million, and $49.0 million, respectively, partially offset by decreased accounts receivable and inventories of approximately $9.7 million and $3.0 million, respectively.  The decrease in accounts receivable is due primarily to improved collection times and a reduction in sales in our oil and gas proppants business, which generally had longer payment terms, during the three months ended December 31, 2015, compared to the three months ended March 31, 2015.  The decrease in accounts payable and accrued liabilities is primarily due to increased accruals at year end for expected cement plant outages as well as certain construction payables related to our plant expansion in New Auburn, Wisconsin. Working capital related to the Skyway Acquisition increased working capital at December 31, 2015 by approximately $1.5 million, and primarily consisted of accounts receivable and inventory, partially offset by accounts payable and accrued liabilities.

The decrease in accounts and notes receivable at December 31, 2015, compared to March 31, 2015, is due primarily to improved collection times and a reduction in sales in our oil and gas proppants business, which generally had longer payment terms, during the three months ended December 31, 2015, compared to the three

 

37


 

months ended March 31, 2015.  As a result of the improved collection times  and reduction in sales in our oil and gas proppants segment, accounts and notes receivable declined to 37% of quarterly revenues at December 31, 2015, down from 51% of quarterly sales at March 31, 2015. Management measures the change in accounts receivable by monitoring the days sales outstanding on a monthly basis to determine if any deterioration has occurred in the collectability of the accounts receivable. No significant deterioration in the collectability of our accounts receivable in our construction products and building materials businesses was identified at December 31, 2015; however, during the quarter ended September 30, 2015 we increased our allowance for doubtful accounts approximately $2.0 million in recognition of the downturn in our oil and gas proppants business, and potential financial impact of this downturn on our customers. Notes receivable are monitored on an individual basis, and no significant deterioration in the collectability of notes receivable was identified at December 31, 2015.

Our inventory balance at December 31, 2015 declined approximately $3.0 million from our inventory balance at March 31, 2015. Within our inventory, raw materials and materials-in-progress, finished cement and paperboard inventory decreased approximately $3.9 million, $1.5 million and $1.6 million, respectively, partially offset by an increase in repair parts and supplies of approximately $4.0 million. The decrease in raw materials and materials-in-progress was due to the conversion of clinker inventory to meet sales demand and the write-down of $9.4 million in raw sand inventory values at September 30, 2015 associated primarily with downward revaluation of raw sand inventory that CRS Proppants purchased from a third party pursuant to a purchase contract entered into in connection with the plant expansion, partially offset by increased raw sand tonnage at December 31, 2015, compared to March 31, 2015.  The decline in finished cement is consistent with our business cycle as we generally build inventory over the winter to meet the seasonal demand increases in the spring and summer.  The decline in paperboard inventory was due primarily to timing and maintenance downtime during the three months ended December 31, 2015.  The largest individual balance in our inventory is our repair parts. The increase in repair parts and supplies was due primarily to the buildup of inventory for our expected outages during the early spring of 2016.  These parts are necessary given the size and complexity of our manufacturing plants, as well as the age of certain of our plants, which creates the need to stock a high level of repair parts inventory. We believe all of these repair parts are necessary and we perform semi-annual analyses to identify obsolete parts. We have less than one year’s sales of all product inventories with the exception of raw frac sand inventory, and our inventories have a low risk of obsolescence due to our products being basic construction materials or sand used in hydraulic fracturing. During the quarter ended September 30, 2015, we recorded a $9.4 million write-down of raw sand inventory values.  We believe no additional revision is necessary at December 31, 2015.

Net cash used in investing activities during the nine months ended December 31, 2015 was approximately $108.0 million, compared to net cash used in investing activities of approximately $302.1 million during the similar period in 2014, a decrease of $194.1 million. The decrease in net cash used in investing activities is primarily related to the CRS Acquisition in November 2014, partially offset by the Skyway Acquisition and additional capital expenditures in our oil and gas proppants segment during the nine months ended December 31, 2015.  We anticipate spending between $20.0 million and $25.0 million on sustaining capital expenditures for all of our businesses during fiscal 2016, which is consistent with historic levels.

Net cash used in financing activities was approximately $100.1 million during the nine months ended December 31, 2015, compared to net cash provided by financing activities of approximately $126.2 million during the similar period in 2014. This $226.3 million increase in net cash used in financing activities is primarily due to the repayment of approximately $12.0 million in debt during the nine months ended December 31, 2015, compared to borrowings of $136.5 million in the nine months ended December 31, 2014.  These borrowings related to the CRS Acquisition in November 2015.  Additionally, during the nine months ended December 31, 2015, we repurchased and retired approximately $76.2 million of our outstanding common stock.  Our debt-to-capitalization ratio and net-debt-to-capitalization ratio improved to 32.3% and 31.6%, respectively, at December 31, 2015, compared to 33.7% and 33.4%, respectively, at March 31, 2015.

    

 

38


 

Debt Financing Activities.

Bank Credit Facility

We have a $500.0 million revolving credit facility (the “Credit Facility”), including a swingline loan sublimit of $25.0 million, which is scheduled to expire on October 30, 2019.  Borrowings under the Credit Facility are guaranteed by substantially all of the Company’s subsidiaries.  At the option of the Company, outstanding principal amounts on the Credit Facility bear interest at a variable rate equal to (i) LIBOR, plus an agreed margin (ranging from 100 to 225 basis points), which is to be established quarterly based upon the Company’s ratio of consolidated EBITDA, defined as earnings before interest, taxes, depreciation and amortization, to the Company’s consolidated indebtedness (the “Leverage Ratio”), or (ii) an alternative base rate which is the higher of (a) the prime rate or (b) the federal funds rate plus ½% per annum plus an agreed margin (ranging from 0 to 125 basis points).  Interest payments are payable, in the case of loans bearing interest at a rate based on the federal funds rate, quarterly, or in the case of loans bearing interest at a rate based on LIBOR, at the end of the LIBOR advance periods, which can be up to a period of nine months at the option of the Company.  The Company is also required to pay a commitment fee on unused available borrowings under the Credit Facility ranging from 10 to 35 basis points depending upon the Leverage Ratio.  The Credit Facility contains customary covenants that restrict our ability to incur additional debt, encumber our assets, sell assets, make or enter into certain investments, loans or guaranties and enter into sale and leaseback arrangements.  The Credit Facility also requires us to maintain a consolidated indebtedness ratio (calculated as consolidated indebtedness to consolidated earnings before interest, taxes, depreciation, amortization, certain transaction-related deductions and other non-cash deductions) of 3.5:1.0 or less and an interest coverage ratio (consolidated earnings before interest, taxes, depreciation, amortization, certain transaction-related deductions and other non-cash deductions to consolidated interest expense) of at least 2.5:1.0.  We had $375.0 million of borrowings outstanding at December 31, 2015.  Based on our Leverage Ratio, we had $116.0 million of available borrowings, net of the outstanding letters of credit, at December 31, 2015.

The Credit Facility has a $50.0 million letter of credit facility. Under the letter of credit facility, the Company pays a fee at a per annum rate equal to the applicable margin for Eurodollar loans in effect from time to time plus a one-time letter of credit fee in an amount equal to 0.125% of the initial stated amount. At December 31, 2015, we had $9.0 million of letters of credit outstanding.

Senior Notes - We entered into a Note Purchase Agreement on November 15, 2005 (the “2005 Note Purchase Agreement”) related to our sale of $200 million of senior, unsecured notes, designated as Series 2005A Senior Notes (the “Series 2005A Senior Notes”) in a private placement transaction. The Series 2005A Senior Notes, which are guaranteed by substantially all of our subsidiaries, were sold at par and issued in three tranches on November 15, 2005. Since entering into the 2005 Note Purchase Agreement, we have repurchased $81.1 million in principal of the Series 2005A Senior Notes (in periods prior to the fiscal year ended March 31, 2013). During November 2012, Tranche A of the Series 2005A Senior Notes matured and we retired the remaining $4.7 million in notes from this Tranche and during November 2015 Tranche B of the Series 2005A Senior Notes matured and we retired the remaining $57.0 million from this Tranche. Following these repurchases and maturities, the amounts outstanding for each of the remaining tranches are as follows:

 

 

 

Principal

 

 

Maturity Date

 

 

Interest Rate

 

Tranche C

 

$

57.2 million

 

 

 

November 15, 2017

 

 

 

5.48

%

 

Interest for each tranche of Notes is payable semi-annually on the 15th day of May and the 15th day of November of each year until all principal is paid for the respective tranche.

We also entered into an additional Note Purchase Agreement on October 2, 2007 (the “2007 Note Purchase Agreement”) related to our sale of $200 million of senior, unsecured notes, designated as Series 2007A Senior Notes (the “Series 2007A Senior Notes”) in a private placement transaction. The Series 2007A Senior Notes, which are guaranteed by substantially all of our subsidiaries, were sold at par and issued in four tranches on October 2, 2007. Since entering into the 2007 Note Purchase Agreement, we have repurchased $122.0 million in

 

39


 

principal of the Series 2007A Senior Notes (in periods prior to the fiscal year ended March 31, 2013). During October 2014, Tranche A of the Series 2007A Senior Notes matured and we retired the remaining $9.5 million in notes from this Tranche. Following the repurchase, the amounts outstanding for each of the four tranches are as follows:

 

 

 

Principal

 

 

Maturity Date

 

 

Interest Rate

 

Tranche B

 

$

8.0 million

 

 

 

October 2, 2016

 

 

 

6.27

%

Tranche C

 

$

24.0 million

 

 

 

October 2, 2017

 

 

 

6.36

%

Tranche D

 

$

36.5 million

 

 

 

October 2, 2019

 

 

 

6.48

%

 

Interest for each tranche of Notes is payable semi-annually on the second day of April and the second day of October of each year until all principal is paid for the respective tranche.

Our obligations under the 2005 Note Purchase Agreement and the 2007 Note Purchase Agreement (collectively referred to as the “Note Purchase Agreements”) and the Series 2005A Senior Notes and the Series 2007A Senior Notes (collectively referred to as “the Senior Notes”) are equal in right of payment with all other senior, unsecured debt of the Company, including our debt under the Credit Facility. The Note Purchase Agreements contain customary restrictive covenants, including covenants that place limits on our ability to encumber our assets, to incur additional debt, to sell assets, or to merge or consolidate with third parties, as well as certain cross covenants with the Credit Facility. We were in compliance with all financial ratios and tests at December 31, 2015.

Pursuant to a Subsidiary Guaranty Agreement, substantially all of our subsidiaries have guaranteed the punctual payment of all principal, interest, and Make-Whole Amounts (as defined in the Note Purchase Agreements) on the Senior Notes and the other payment and performance obligations of the Company contained in the Senior Notes and in the Note Purchase Agreements. We are permitted, at our option and without penalty, to prepay from time to time at least 10% of the original aggregate principal amount of the Senior Notes at 100% of the principal amount to be prepaid, together with interest accrued on such amount to be prepaid to the date of payment, plus a Make-Whole Amount. The Make-Whole Amount is computed by discounting the remaining scheduled payments of interest and principal of the Senior Notes being prepaid at a discount rate equal to the sum of 50 basis points and the yield to maturity of U.S. treasury securities having a maturity equal to the remaining average life of the Senior Notes being prepaid.

We are leasing one of our cement plants from the city of Sugar Creek, Missouri. The city of Sugar Creek issued industrial revenue bonds to partly finance improvements to the cement plant. The lease payments due to the city of Sugar Creek under the cement plant lease, which was entered into upon the sale of the industrial revenue bonds, are equal in amount to the payments required to be made by the city of Sugar Creek to the holders of the industrial revenue bonds. Because we are the holder of all of the outstanding industrial revenue bonds, no debt is reflected on our financial statements in connection with our lease of the cement plant. At the conclusion of the lease in fiscal 2021, we have the option to purchase the cement plant for a nominal amount.

Other than the Credit Facility, we have no other source of committed external financing in place. In the event the Credit Facility should be terminated, no assurance can be given as to our ability to secure a new source of financing. Consequently, if any balance were outstanding on the Credit Facility at the time of termination, and an alternative source of financing could not be secured; it would have a material adverse impact on us. None of our debt is rated by the rating agencies.

We do not have any off balance sheet debt, except for approximately $50.0 million of operating leases, which have an average remaining term of approximately fifteen years. Also, we have no outstanding debt guarantees. We have available under the Credit Facility a $50.0 million Letter of Credit Facility. At December 31, 2015, we had $9.0 million of letters of credit outstanding that renew annually. We are contingently liable for performance under $13.6 million in performance bonds relating primarily to our mining operations.

 

40


 

We believe that our cash flow from operations and available borrowings under our Credit Facility should be sufficient to meet our currently anticipated operating needs, capital expenditures and dividend and debt service requirements for at least the next twelve months. However, our future liquidity and capital requirements may vary depending on a number of factors, including market conditions in the construction industry, our ability to maintain compliance with covenants in our Credit Facility, the level of competition and general and economic factors beyond our control. These and other developments could reduce our cash flow or require that we seek additional sources of funding. We cannot predict what effect these factors will have on our future liquidity.

Dividends.

Dividends paid were $15.1 million and $15.0 million for the nine month periods ended December 31, 2015 and 2014, respectively. Each quarterly dividend payment is subject to review and approval by our Board of Directors, who will continue to evaluate our dividend payment amount on a quarterly basis.

Share Repurchases.

 

 

Common Stock

 

 

 

Shares

Purchased

 

 

Average Price

Paid Per Share

 

July 1 through July 31, 2015

 

 

-

 

 

$

-

 

August 1 through August 31, 2015

 

 

62,000

 

 

 

75.77

 

September 1 through September 30, 2015

 

 

82,000

 

 

 

73.73

 

Quarter 2 Totals

 

 

144,000

 

 

$

74.61

 

 

 

 

 

 

 

 

 

 

October 1 through October 31, 2015

 

 

240,000

 

 

$

70.31

 

November 1 through November 30, 2015

 

 

520,000

 

 

 

67.95

 

December 1 through December 31, 2015

 

 

220,000

 

 

 

60.47

 

Quarter 3 Totals

 

 

980,000

 

 

$

66.85

 

Year to Date Totals

 

 

1,124,000

 

 

$

67.84

 

 

On August 10, 2015, the Board of Directors authorized the Company to repurchase up to an additional 6,782,700 shares, for a total outstanding authorization of 7,500,000 shares. During the nine months ended December 31, 2015, we have repurchased 1,124,000 shares at an average price of $67.84.  At December 31, 2015 we have authorization to purchase an additional 6,376,000 shares.  

Share repurchases may be made from time-to-time in the open market or in privately negotiated transactions. The timing and amount of any repurchases of shares will be determined by management, based on its evaluation of market and economic conditions and other factors. In some cases, repurchases may be made pursuant to plans, programs or directions established from time to time by the Company’s management, including plans intended to comply with the safe-harbor provided by Rule 10b5-1.

During the nine months ended December 31, 2015, 22,287 shares of stock were withheld from employees upon the vesting of Restricted Shares that were granted under the Plan. These shares were withheld by us to satisfy the employees’ minimum statutory tax withholding, which is required once the Restricted Shares or Restricted Shares Units are vested.  

 

41


 

Capital Expenditures.

The following table compares capital expenditures:

 

 

 

 

 

 

For the Nine Months
Ended December 31,

 

 

 

Acquisition

 

 

2015

 

 

2014

 

 

 

 

 

 

 

(dollars in thousands)

 

Land and Quarries

 

$

2,290

 

 

$

18,151

 

 

$

3,572

 

Plants

 

 

18,331

 

 

 

37,046

 

 

 

29,200

 

Buildings, Machinery and Equipment

 

 

3,955

 

 

 

20,339

 

 

 

32,187

 

Total Capital Expenditures

 

$

24,576

 

 

$

75,536

 

 

$

64,959

 

 

Historically, annual maintenance capital expenditures have been approximately $20.0 to $25.0 million, which we anticipate will be similar for fiscal 2016. Total capital expenditures for fiscal 2016, including sustaining capital expenditures, are expected to be approximately $80.0 million to $85.0 million. Historically, we have financed such expenditures with cash from operations and borrowings under our revolving credit facility.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks related to fluctuations in interest rates on our Credit Facility. From time-to-time we have utilized derivative instruments, including interest rate swaps, in conjunction with our overall strategy to manage the debt outstanding that is subject to changes in interest rates. We have a $500.0 million Credit Facility available at December 31, 2015, under which borrowings bear interest at a variable rate. A hypothetical 100 basis point increase in interest rates on the $375.0 million of borrowings at December 31, 2015 would increase our interest expense by approximately $3.8 million on an annual basis. At present, we do not utilize derivative financial instruments.

We are subject to commodity risk with respect to price changes principally in coal, coke, natural gas and power. We attempt to limit our exposure to changes in commodity prices by entering into contracts or increasing our use of alternative fuels.

 

Item 4. Controls and Procedures

We have established a system of disclosure controls and procedures that are designed to ensure that information relating to the Company, which is required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a timely fashion. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) was performed as of the end of the period covered by this quarterly report. This evaluation was performed under the supervision and with the participation of management, including our CEO and CFO. Based upon that evaluation, our CEO and CFO have concluded that these disclosure controls and procedures were effective.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

EPA Notice of Violation

On October 5, 2010, Region IX of the EPA issued a Notice of Violation and Finding of Violation (“NOV”) alleging violations by our subsidiary, Nevada Cement Company (“NCC”), of the Clean Air Act (“CAA”). The NOV alleges that NCC made certain physical changes to its facility in the 1990s without first obtaining permits required by the Prevention of Significant Deterioration requirements and Title V permit requirements of the CAA.

 

42


 

The EPA also alleges that NCC has failed to submit to the EPA since 2002 certain reports required by the National Emissions Standard for Hazardous Air Pollutants General Provisions and the Portland Cement Manufacturing Industry Standards. On March 12, 2014, the EPA Region IX issued a second NOV to NCC. The second NOV is materially similar to the 2010 NOV except that it alleges violations of the new source performance standards (“NSPS”) for Portland cement plants. The NOVs state that the EPA may seek penalties although it does not propose or assess any specific level of penalties or specify what relief the EPA will seek for the alleged violations. NCC believes it has meritorious defenses to the allegations in the NOVs. NCC met with the EPA in December 2010, September 2012 and May 2014 to present its defenses and to discuss a resolution of the alleged violations. The EPA and NCC remain in discussions regarding the alleged violations. If a negotiated settlement cannot be reached, NCC intends to vigorously defend these matters in any enforcement action that may be pursued by the EPA. As a part of a settlement, or should NCC fail in its defense in any enforcement action, NCC could be required to make substantial capital expenditures to modify its facility and incur increased operating costs. NCC could also be required to pay significant civil penalties. Additionally, an enforcement action could take many years to resolve the underlying issues alleged in the NOV. We are currently unable to determine the final outcome of this matter or the impact of an unfavorable determination upon our financial position or results of operations.

Domestic Wallboard Antitrust Litigation

Since late December 2012, several purported class action lawsuits were filed in various United States District Courts, including the Eastern District of Pennsylvania, Western District of North Carolina and the Northern District of Illinois, against the Company’s subsidiary, American Gypsum Company LLC (“American Gypsum”), alleging that American Gypsum conspired with other wallboard manufacturers to fix the price for drywall sold in the United States in violation of federal antitrust laws and, in some cases related provisions of state law. The complaints allege that the defendant wallboard manufacturers conspired to increase prices through the announcement and implementation of coordinated price increases, output restrictions, and other restraints of trade, including the elimination of individual “job quote” pricing. In addition to American Gypsum, the defendants in these lawsuits include CertainTeed Corp., USG Corporation and United States Gypsum (together “USG”), New NGC, Inc., Lafarge North America, Temple Inland Inc. (“TIN”) and PABCO Building Products LLC. On April 8, 2013, the Judicial Panel on Multidistrict Litigation (“JPML”) transferred and consolidated all related cases to the Eastern District of Pennsylvania for coordinated pretrial proceedings.

On June 24, 2013, the direct and indirect purchaser plaintiffs filed consolidated amended class action complaints. The direct purchasers’ complaint added the Company as a defendant. The plaintiffs in the consolidated class action lawsuits bring claims on behalf of purported classes of direct or indirect purchasers of wallboard from January 1, 2012 to the present for unspecified monetary damages (including treble damages) and in some cases injunctive relief. On July 29, 2013, the Company and American Gypsum answered the complaints, denying all allegations that they conspired to increase the price of drywall and asserting affirmative defenses to the plaintiffs’ claims.

In 2014, USG and TIN entered into agreements with counsel representing the direct and indirect purchaser classes pursuant to which they agreed to settle all claims against them.  On August 20, 2015, the court granted final approval of USG and TIN’s settlements with the direct and indirect purchaser plaintiffs.  American Gypsum denies the allegations in these lawsuits and will vigorously defend itself against these claims. At this stage we are unable to estimate the amount of any reasonably possible loss or range of reasonably possible losses associated with these lawsuits.  Defendants’ motions for summary judgement were filed in the class actions in the first quarter of fiscal 2016 and a hearing on the motion occurred on November 23, 2015.  The judge has not yet made a ruling on the motion for summary judgement.

On March 17, 2015, a group of homebuilders filed a complaint against the defendants, including American Gypsum, based upon the same conduct alleged in the consolidated class action complaints.  On March 24, 2015, the JPML transferred this action to the multidistrict litigation already pending in the Eastern District of Pennsylvania.

 

43


 

In June 2015, American Gypsum and an employee received grand jury subpoenas from the United States District Court for the Western District of North Carolina seeking information regarding an investigation of the gypsum drywall industry by the Antitrust Division of the Department of Justice.  We believe the investigation, although a separate proceeding, is related to the same subject matter at issue in the litigation described above and we intend to fully cooperate with government officials.  Given its preliminary nature, we are currently unable to determine the ultimate outcome of such investigation.

Item 1A. Risk Factors

We are affected by the level of demand in the construction industry.

Demand for our construction products and building materials is directly related to the level of activity in the construction industry, which includes residential, commercial and infrastructure construction. While the most recent downturn in residential and commercial construction, which began in calendar 2007, materially impacted our business, certain economic fundamentals began improving in calendar 2012, and have continued to improve through calendar 2015; however, the rate and sustainability of such improvement remains uncertain. Infrastructure spending continues to be adversely impacted by a number of factors, including the budget constraints currently being experienced by federal, state and local governments. Any decrease in the amount of government funds available for such projects or any decrease in construction activity in general (including any weakness in residential construction or commercial construction) could have a material adverse effect on our business, financial condition and results of operations.

Our business is seasonal in nature, and this causes our quarterly results to vary significantly.

A majority of our business is seasonal with peak revenues and profits occurring primarily in the months of April through November when the weather in our markets is more suitable for construction activity. Quarterly results have varied significantly in the past and are likely to vary significantly in the future. Such variations could have a negative impact on the price of our common stock.

We are subject to the risk of unfavorable weather conditions, particularly during peak construction periods, as well as other unexpected operational difficulties.

Unfavorable weather conditions, such as snow, hurricanes, tropical storms and heavy rainfall, can reduce construction activity and adversely affect demand for construction products. Such weather conditions can also increase our costs, reduce our production or impede our ability to transport our products in an efficient and cost-effective manner. Similarly, operational difficulties, such as business interruption due to required maintenance, capital improvement projects or loss of power, can increase our costs and reduce our production. In particular, the occurrence of unfavorable weather conditions and other unexpected operational difficulties during peak construction periods could adversely affect operating income and cash flow and could have a disproportionate impact on our results of operations for the full year.

We and our customers participate in cyclical industries and regional markets, which are subject to industry downturns.

A majority of our revenues are from customers who are in industries and businesses that are cyclical in nature and subject to changes in general economic conditions. For example, many of our customers operate in the construction industry, which is affected by a variety of factors, such as general economic conditions, changes in interest rates, demographic and population shifts, levels of infrastructure spending and other factors beyond our control. In addition, since our operations are in a variety of geographic markets, our businesses are subject to differing economic conditions in each such geographic market. Economic downturns in the industries to which we sell our products or localized downturns in the regions where we have operations generally have an adverse effect on demand for our products and adversely affect the collectability of our receivables. In general, any downturns in these industries or regions could have a material adverse effect on our business, financial condition and results of operations.

 

44


 

Our products are commodities, which are subject to significant changes in supply and demand and price fluctuations.

The products sold by us are commodities and competition among manufacturers is based largely on price. Prices are often subject to material changes in response to relatively minor fluctuations in supply and demand, general economic conditions and other market conditions beyond our control. Increases in the production capacity of industry participants for products such as gypsum wallboard or cement or increases in cement imports tend to create an oversupply of such products leading to an imbalance between supply and demand, which can have a negative impact on product prices. Currently, there continues to be significant excess capacity in the gypsum wallboard industry in the United States. There can be no assurance that prices for products sold by us will not decline in the future or that such declines will not have a material adverse effect on our business, financial condition and results of operations.

Our Oil and Gas Proppants business and financial performance depends on the level of activity in the oil and natural gas industries.

Our operations that produce frac sand are materially dependent on the levels of activity in natural gas and oil exploration, development and production. More specifically, the demand for the frac sand we produce is closely related to the number of natural gas and oil wells completed in geological formations where sand-based proppants are used in fracture treatments. These activity levels are affected by both short- and long-term trends in natural gas and oil prices. In recent years, natural gas and oil prices and, therefore, the level of exploration, development and production activity, have experienced significant fluctuations. Worldwide economic, political and military events, including war, terrorist activity, events in the Middle East and initiatives by the Organization of the Petroleum Exporting Countries (“OPEC”), have contributed, and are likely to continue to contribute, to price volatility. Additionally, warmer than normal winters in North America and other weather patterns may adversely impact the short-term demand for natural gas and, therefore, demand for our products. Reduction in demand for natural gas to generate electricity could also adversely impact the demand for frac sand. A prolonged reduction in natural gas and oil prices would generally depress the level of natural gas and oil exploration, development, production and well completion activity and result in a corresponding decline in the demand for the frac sand we produce. In addition, any future decreases in the rate at which oil and natural gas reserves are discovered or developed, whether due to increased governmental regulation, limitations on exploration and drilling activity or other factors, could have material adverse effect on our oil and gas proppants business, even in a stronger natural gas and oil price environment.

Volatility and disruption of financial markets could affect access to credit.

Difficult economic conditions can cause a contraction in the availability, and increase the cost, of credit in the marketplace. A number of our customers or suppliers have been and may continue to be adversely affected by unsettled conditions in capital and credit markets, which in some cases have made it more difficult or costly for them to finance their business operations. These unsettled conditions have the potential to reduce the sources of liquidity for the Company and our customers.

Our and our customers’ operations are subject to extensive governmental regulation, including environmental laws, which can be costly and burdensome.

Our operations and those of our customers are subject to and affected by federal, state and local laws and regulations with respect to such matters as land usage, street and highway usage, noise level and health and safety and environmental matters. In many instances, various certificates, permits or licenses are required in order for us or our customers to conduct business or carry out construction and related operations. Although we believe that we are in compliance in all material respects with applicable regulatory requirements, there can be no assurance that we will not incur material costs or liabilities in connection with regulatory requirements or that demand for our products will not be adversely affected by regulatory issues affecting our customers. In addition, future developments, such as the discovery of new facts or conditions, the enactment or adoption of new or stricter laws or regulations or stricter interpretations of existing laws or regulations, may impose new liabilities on us, require

 

45


 

additional investment by us or prevent us from opening, expanding or modifying plants or facilities, any of which could have a material adverse effect on our financial condition or results of operations.

For example, GHGs currently are regulated as pollutants under the CAA and subject to reporting and permitting requirements. Future consequences of GHG permitting requirements and potential emission reduction measures for our operations may be significant because (1) the cement manufacturing process requires the combustion of large amounts of fuel, (2) in our cement manufacturing process, the production of carbon dioxide is a byproduct of the calcination process, whereby carbon dioxide is removed from calcium carbonate to produce calcium oxide, and (3) our gypsum wallboard manufacturing process combusts a significant amount of fossil fuel, especially natural gas. In addition, the EPA has proposed to regulate GHG emissions from existing fossil fuel-fired power plants as a result of the EPA’s promulgation of new source performance standards for the same sources.  In the future, the EPA is expected to propose new source performance standards for cement manufacturing, which similarly will trigger a requirement for the EPA to promulgate regulations relating to existing cement manufacturing facilities.  The timing of such regulation is uncertain.  

On September 9, 2010, the EPA finalized National Emissions Standards for Hazardous Air Pollutants, or NESHAP, for Portland cement plants (“PC NESHAP”). The PC NESHAP will require a significant reduction in emissions of certain hazardous air pollutants from Portland cement kilns. The PC NESHAP sets limits on mercury emissions from existing Portland cement kilns and increases the stringency of emission limits for new kilns. The PC NESHAP also sets emission limits for total hydrocarbons, particulate matter (as a surrogate for metal pollutants) and acid gases from cement kilns of all sizes. The PC NESHAP was scheduled to take full effect in September 2013; however, as a result of a decision by the U.S. Court of Appeals for the District of Columbia Circuit in Portland Cement Ass’n. v. EPA, 655 F.3d 177 (D.C. Cir.) arising from industry challenges to the PC NESHAP, the EPA proposed a settlement agreement with industry petitioners in May 2012. In February 2013, the EPA published the final revised rule to the PC NESHAP which extended the compliance date until September 9, 2015 for existing cement kilns and made certain changes to the rules governing particulate matter monitoring methods and emissions limits, among other revisions. The 2013 revised rule was challenged in the U.S. Court of Appeals for the D.C. Circuit and on April 18, 2014, the court vacated the affirmative defense provision.  The court upheld the EPA’s particulate matter emission standards and extended compliance date.  On November 19, 2014, the EPA proposed a rule removing the affirmative defense provision and making minor technical corrections to the regulations. The PC NESHAP will materially increase capital costs and costs of production for the Company and the industry as a whole.

On March 21, 2011 the EPA proposed revised Standards of Performance for New Sources and Emissions Guidelines for Existing Sources for Commercial/Industrial Solid Waste Incinerators (the “CISWI Rule”) per Section 129 of the Clean Air Act, which created emission standards for 4 subcategories of industrial facilities, one of which is “Waste Burning Kilns.” The EPA simultaneously stayed the CISWI Rule for further reconsideration. On February 12, 2013, the EPA finalized revisions to the CISWI Rule. For those cement kilns that utilize non-hazardous secondary materials (“NHSM”) as defined in a rule first finalized on March 21, 2011 (and slightly revised on February 12, 2013), the CISWI Rule will require significant reductions in emissions of certain pollutants from applicable cement kilns. The CISWI Rule sets forth emission standards for mercury, carbon monoxide, acid gases, nitrogen oxides, sulfur dioxide, certain metals (lead and cadmium) and more stringent standards than PC NESHAP for particulate matter and dioxin/furans. The CISWI Rule as currently promulgated may materially increase capital costs and costs for production but only for those facilities that will be using applicable solid wastes as fuel. The compliance date for this rule is expected to be March 1, 2018 (either 3 years after State CISWI plan approval, or 5 years from the date of the final CISWI Rule, whichever is sooner). It is anticipated that the CISWI Rule may materially increase capital costs and costs of production for the Company and the industry as a whole.

On April 17, 2015, the EPA published its final rule addressing the storage, reuse and disposal of coal combustion products, which include fly ash and flue gas desulfurization gypsum (“synthetic gypsum”). We use synthetic gypsum in wallboard manufactured at our Georgetown, South Carolina plant. The rule, which applies only to electric utilities and independent power producers, establishes standards for the management of coal

 

46


 

combustion residuals (CCRs) under Subtitle D of the Resource Conservation and Recovery Act, or RCRA, which is the Subtitle that regulates non-hazardous wastes. The rule imposes requirements addressing CCR surface impoundments and landfills, including location restrictions, design and operating specifications, groundwater monitoring requirements, corrective action requirements, recordkeeping and reporting obligations, and closure requirements. Beneficial encapsulated uses of CCRs, including synthetic gypsum, are exempt from regulation. The rule became effective on October 14, 2015, with many of the requirements phased in months or years after the effective date. Given the EPA’s decision to continue to allow CCR to be used in synthetic gypsum and to regulate CCR under the non-hazardous waste sections of RCRA, we do not expect the rule to materially affect our business, financial condition and results of operations.

On October 1, 2015, the EPA lowered the primary and secondary ozone standards from the current 8-hour standard of 75 parts per billion (“ppb”) to 70 ppb.  The EPA also strengthened the secondary ozone standard to improve protection for trees, plants and ecosystems. Like the primary standard, an area will meet the secondary standard if the fourth-highest maximum daily 8-hour ozone concentration per year, averaged over three years, is equal to or less than 70 ppb.  The EPA based the secondary standard on the “W126 metric,” an index designed to show the cumulative impact of ozone on plants and trees seasonally.  The EPA has issued an implementation memo describing how it will determine whether the ozone levels in areas across the country, typically on a county level, are above the new standards. Areas above the new standards will be designated as “nonattainment;” areas at or below the new standards will be designated “attainment.”  In states with major emitting sources located in or near designated nonattainment areas, States will impose new and costly regulatory requirements.  For areas that are determined to be in non-attainment, states will be required to develop plans to bring the areas into attainment by as early as 2020. At this time, it is not possible to whether any area in which we operate will be designated nonattainment.  However, if that occurs, we may be required to meet new control requirements requiring significant capital expenditures for compliance.

The cement plants located in Kansas City, Missouri and Tulsa, Oklahoma are subject to certain obligations under a consent decree with the United States requiring the establishment of facility-specific emissions limitations for certain air pollutants. Not all specific limitations have been finalized; however, upon determination, these limitations, along with specific emissions limitations that have already been finalized, will apply to our operation of these cement plants. It is difficult to predict with reasonable certainty the impact of these limitations on the operations or operating costs of the Kansas City, Missouri and Tulsa, Oklahoma cement plants. Limitations that significantly restrict emissions levels beyond current operating levels may require additional investments by us or place limitations on operations, any of which could have a material adverse effect on our financial condition or results of operations.

The cement plant in Tulsa, Oklahoma is subject to NESHAP for hazardous waste combustors (the “HWC MACT”), which imposes emission limitations and operating limits on cement kilns that are fueled by hazardous wastes. Compliance with the HWC MACT could impose additional liabilities on us or require additional investment by us, which could have a material adverse effect on our financial condition or results of operations. In addition, new developments, such as new laws or regulations, may impose new liabilities on us, require additional investment by us or prevent us from operating or expanding plants or facilities, any of which could have a material adverse effect on our financial condition or results of operations. For example, while the HWC MACT has not been updated since 2008, 73 Fed. Reg. 64068 (Oct. 28, 2008), future revisions to the HWC MACT regulations would apply to both of the cement kilns used at the cement plant in Tulsa, Oklahoma. Such revision could require new control requirements and significant capital expenditure for compliance. In 2013, the EPA adopted the final CISWI Rule (as discussed above) that likely will apply to the cement kiln used by the cement plant in Sugar Creek, Missouri and the two cement kilns at Nevada Cement Company, and may impose new control requirements requiring significant capital expenditures for compliance. Existing CISWI units will need to comply with the CISWI Rule when it becomes effective, which is expected to occur in early 2018.

We may incur significant costs in connection with pending and future litigation.

We are, or may become, party to various lawsuits, claims, investigations and proceedings, including but not limited to personal injury, environmental, antitrust, tax, asbestos, property entitlements and land use, intellectual

 

47


 

property, commercial, contract, product liability, health and safety, and employment matters. The outcome of pending or future lawsuits, claims, investigations or proceedings is often difficult to predict, but could be adverse and material in amount. In addition, the defense of these lawsuits, claims, investigations and proceedings may divert our management’s attention and we may incur significant costs in defending these matters. See Part II Item 1. Legal Proceedings of this report.

Our results of operations are subject to significant changes in the cost and availability of fuel, energy and other raw materials.

Major cost components in each of our businesses are the costs of fuel, energy and raw materials. Significant increases in the costs of fuel, energy or raw materials or substantial decreases in their availability could materially and adversely affect our sales and operating profits. Prices for fuel, energy or raw materials used in connection with our businesses could change significantly in a short period of time for reasons outside our control. Prices for fuel and electrical power, which are significant components of the costs associated with our gypsum wallboard and cement businesses, have fluctuated significantly in recent years and may increase in the future. In the event of large or rapid increases in prices, we may not be able to pass the increases through to our customers in full, which would reduce our operating margin.

We may become subject to significant clean-up, remediation and other liabilities under applicable environmental laws.

Our operations are subject to state, federal and local environmental laws and regulations, which impose liability for cleanup or remediation of environmental pollution and hazardous waste arising from past acts. These laws and regulations also require pollution control and prevention, site restoration and operating permits and/or approvals to conduct certain of our operations or expand or modify our facilities. Certain of our operations may from time-to-time involve the use of substances that are classified as toxic or hazardous substances within the meaning of these laws and regulations. Additionally, any future laws or regulations addressing GHG emissions would likely have a negative impact on our business or results of operations, whether through the imposition of raw material or production limitations, fuel-use or carbon taxes emission limitations or reductions or otherwise. We are unable to estimate accurately the impact on our business or results of operations of any such law or regulation at this time. Risk of environmental liability (including the incurrence of fines, penalties or other sanctions or litigation liability) is inherent in the operation of our businesses. As a result, it is possible that environmental liabilities and compliance with environmental regulations could have a material adverse effect on our operations in the future.

Significant changes in the cost and availability of transportation could adversely affect our business, financial condition and results of operations.

Some of the raw materials used in our manufacturing processes, such as coal or coke, are transported to our facilities by truck or rail. In addition, transportation logistics play an important part in allowing us to supply products to our customers, whether by truck, rail or barge. For example, we deliver gypsum wallboard to many areas of the United States and the transportation costs associated with the delivery of our wallboard products represent a significant portion of the variable cost of our gypsum wallboard segment. Significant increases in the cost of fuel or energy can result in material increases in the cost of transportation, which could materially and adversely affect our operating profits. In addition, reductions in the availability of certain modes of transportation such as rail or trucking could limit our ability to deliver product and therefore materially and adversely affect our operating profits.

 

48


 

Our debt agreements contain restrictive covenants and require us to meet certain financial ratios and tests, which limit our flexibility and could give rise to a default if we are unable to remain in compliance.

Our Credit Facility and the Note Purchase Agreements governing our Senior Notes contain, among other things, covenants that limit our ability to finance future operations or capital needs or to engage in other business activities, including but not limited to our ability to:

 

·

Incur additional indebtedness;

 

·

Sell assets or make other fundamental changes;

 

·

Engage in mergers and acquisitions;

 

·

Pay dividends and make other restricted payments;

 

·

Make investments, loans, advances or guarantees;

 

·

Encumber our assets or those of our restricted subsidiaries;

 

·

Enter into transactions with our affiliates.

In addition, these agreements require us to meet and maintain certain financial ratios and tests, which may require that we take action to reduce our debt or to act in a manner contrary to our business objectives. Events beyond our control, including the changes in general business and economic conditions, may impair our ability to comply with these covenants or meet those financial ratios and tests. A breach of any of these covenants or failure to maintain the required ratios and meet the required tests may result in an event of default under these agreements. This may allow the lenders under these agreements to declare all amounts outstanding to be immediately due and payable, terminate any commitments to extend further credit to us and pursue other remedies available to them under the applicable agreements. If this occurs, our indebtedness may be accelerated and we may not be able to refinance the accelerated indebtedness on favorable terms, or at all, or repay the accelerated indebtedness. In general, the occurrence of any event of default under these agreements could have a material adverse effect on our financial condition or results of operations.

We have incurred substantial indebtedness, which could adversely affect our business, limit our ability to plan for or respond to changes in our business and reduce our profitability.

Our future ability to satisfy our debt obligations is subject, to some extent, to financial, market, competitive, legislative, regulatory and other factors that are beyond our control. Our substantial debt obligations could have negative consequences to our business, and in particular could impede, restrict or delay the implementation of our business strategy or prevent us from entering into transactions that would otherwise benefit our business. For example:

 

·

we may be required to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flow for other purposes, including business development efforts, capital expenditures or strategic acquisitions;

 

·

we may not be able to generate sufficient cash flow to meet our substantial debt service obligations or to fund our other liquidity needs. If this occurs, we may have to take actions such as selling assets, selling equity or reducing or delaying capital expenditures, strategic acquisitions, investments and joint ventures or restructuring our debt;

 

·

as a result of the amount of our outstanding indebtedness and the restrictive covenants to which we are subject, if we determine that we require additional financing to fund future working capital, capital investments or other business activities, we may not be able to obtain such financing on commercially reasonable terms, or at all; and

 

·

our flexibility in planning for, or reacting to, changes in our business and industry may be limited, thereby placing us at a competitive disadvantage compared to our competitors that have less indebtedness.

As of December 31, 2015, the aggregate principal amount of our debt instruments with exposure to interest rate risk was approximately $375.0 million. As of the same date, each change in interest rates of 100 basis points would result in an approximate $3.8 million change in our annual cash interest expense before any principal payment on our financial instruments with exposure to interest rate risk. As a result, increases in interest rates will

 

49


 

increase the cost of servicing our financial instruments with exposure to interest rate risk and could materially reduce our profitability and cash flows.

Our production facilities may experience unexpected equipment failures, catastrophic events and scheduled maintenance.

Interruptions in our production capabilities may cause our productivity and results of operations to decline significantly during the affected period. Our manufacturing processes are dependent upon critical pieces of equipment. Such equipment may, on occasion, be out of service as a result of unanticipated events such as fires, explosions, violent weather conditions or unexpected operational difficulties. We also have periodic scheduled shut-downs to perform maintenance on our facilities. Any significant interruption in production capability may require us to make significant capital expenditures to remedy problems or damage as well as cause us to lose revenue and profits due to lost production time, which could have a material adverse effect on our results of operations and financial condition.

Increases in interest rates and inflation could adversely affect our business and demand for our products, which would have an adverse effect on our results of operations.

Our business is significantly affected by the movement of interest rates. Interest rates have a direct impact on the level of residential, commercial and infrastructure construction activity by impacting the cost of borrowed funds to builders. Higher interest rates could result in decreased demand for our products, which would have a material adverse effect on our business and results of operations. In addition, increases in interest rates could result in higher interest expense related to borrowings under our Credit Facility. Inflation can result in higher interest rates. With inflation, the costs of capital increase, and the purchasing power of our cash resources can decline. Current or future efforts by the government to stimulate the economy may increase the risk of significant inflation, which could have a direct and indirect adverse impact on our business and results of operations.

Any new business opportunities we may elect to pursue will be subject to the risks typically associated with the early stages of business development or product line expansion.

We are continuing to pursue opportunities which are natural extensions of our existing core businesses and which allow us to leverage our core competencies, existing infrastructure and customer relationships. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Executive Summary.” Our likelihood of success in pursuing and realizing these opportunities must be considered in light of the expenses, difficulties and delays frequently encountered in connection with the early phases of business development or product line expansion, including the difficulties involved in obtaining permits; planning and constructing new facilities; transporting and storing products; establishing, maintaining or expanding customer relationships; as well navigating the regulatory environment in which we operate. There can be no assurance that we will be successful in the pursuit and realization of these opportunities.

We may be adversely affected by decreased demand for frac sand or the development of either effective alternative proppants or new processes to replace hydraulic fracturing.

Frac sand is a proppant used in the completion and re-completion of natural gas and oil wells through hydraulic fracturing. Frac sand is the most commonly used proppant and is less expensive than ceramic proppant, which is also used in hydraulic fracturing to stimulate and maintain oil and natural gas production. A significant shift in demand from frac sand to other proppants, such as ceramic proppants, could have a material adverse effect on our oil and gas proppants business. The development and use of other effective alternative proppants, or the development of new processes to replace hydraulic fracturing altogether, could also cause a decline in demand for the frac sand we produce and could have a material adverse effect on our oil and gas proppants business.

Our operations are dependent on our rights and ability to mine our properties and on our having renewed or received the required permits and approvals from governmental authorities and other third parties.

We hold numerous governmental, environmental, mining and other permits, water rights and approvals authorizing operations at many of our facilities. A decision by a governmental agency or other third party to deny

 

50


 

or delay issuing a new or renewed permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material adverse effect on our ability to continue operations at the affected facility. Expansion of our existing operations is also predicated on securing the necessary environmental or other permits, water rights or approvals, which we may not receive in a timely manner or at all.

Title to, and the area of, mineral properties and water rights may also be disputed. Mineral properties sometimes contain claims or transfer histories that examiners cannot verify. A successful claim that we do not have title to one or more of our properties or lack appropriate water rights could cause us to lose any rights to explore, develop and extract any minerals on that property, without compensation for our prior expenditures relating to such property. Our business may suffer a material adverse effect in the event one or more of our properties are determined to have title deficiencies.

In some instances, we have received access rights or easements from third parties, which allow for a more efficient operation than would exist without the access or easement. A third party could take action to suspend the access or easement, and any such action could be materially adverse to or results of operations or financial conditions.

A cyber-attack or data security breach affecting our information technology systems may negatively affect our businesses, financial condition and operating results.

We use information technology systems to collect, store and transmit the data needed to operate our businesses, including our confidential and proprietary information. Although we have implemented industry-standard security safeguards and policies to prevent unauthorized access or disclosure of such information, we cannot prevent all cyber-attacks or data security breaches. If such an attack or breach occurs, our businesses could be negatively affected, and we could incur additional costs in remediating the attack or breach and suffer reputational harm due to the theft or disclosure of our confidential information.

Risks Related to our acquisitions

We may not realize any or all of the anticipated benefits of the CRS and Skyway Acquisitions and these acquisitions may adversely impact our existing operations.

We may not be able to achieve the anticipated benefits of the acquisitions. We may not be able to accomplish the integration of CRS Proppants and Skyway Plant smoothly, successfully or within the anticipated costs or timeframe. In general, we cannot be certain that we will be able to timely achieve the anticipated incremental revenues, cost savings, operational synergies and other expected benefits of these acquisitions.

The diversion of our management’s attention from our current operations to integration efforts and any difficulties encountered in combining operations could prevent us from realizing the full benefits anticipated to result from acquisitions and could adversely affect our business and the price of our common stock. The integration process may be complex, costly and time-consuming. The difficulties of integrating CRS Proppants and the Skyway Plant with our business include, among others:

 

·

failure to implement our business plan for the combined business;

 

·

unanticipated issues in integrating logistics, information, communications and other systems;

 

·

unanticipated changes in applicable laws and regulations;

 

·

the impact of the acquisitions on our internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002; and

 

·

unanticipated issues, expenses and liabilities.

We incurred significant liabilities and costs as a result of or in connection with the CRS and Skyway Acquisitions.

Upon consummation of the acquisitions we became responsible for all liabilities and obligations that arose in connection with the operation of CRS Proppants and the Skyway Plant.

 

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In addition, we incurred significant costs in connection with the acquisitions. The substantial majority of these costs are non-recurring transaction expenses and costs. Furthermore, substantial time and resources have been and may continue to be devoted to the acquisitions and related matters, which could otherwise have been devoted to other opportunities that may have been beneficial to us.

This report includes various forward-looking statements, which are not facts or guarantees of future performance and which are subject to significant risks and uncertainties.

This report and other materials we have filed or will file with the SEC, as well as information included in oral statements or other written statements made or to be made by us, contain or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate to matters of a strictly factual or historical nature and generally discuss or relate to forecasts, estimates or other expectations regarding future events. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “may,” “can,” “could,” “might,” “will” and similar expressions identify forward-looking statements, including statements related to expected operating and performing results, planned transactions, plans and objectives of management, future developments or conditions in the industries in which we participate, including future prices for our products, audits and legal proceedings to which we are a party and other trends, developments and uncertainties that may affect our business in the future.

Forward-looking statements are not historical facts or guarantees of future performance but instead represent only our beliefs at the time the statements were made regarding future events, which are subject to significant risks, uncertainties, and other factors, many of which are outside of our control. Any or all of the forward-looking statements made by us may turn out to be materially inaccurate. This can occur as a result of incorrect assumptions, changes in facts and circumstances or the effects of known risks and uncertainties. Many of the risks and uncertainties mentioned in this report or other reports filed by us with the SEC, including those discussed in the risk factor section of this report, will be important in determining whether these forward-looking statements prove to be accurate. Consequently, neither our stockholders nor any other person should place undue reliance on our forward-looking statements and should recognize that actual results may differ materially from those that may be anticipated by us.

All forward-looking statements made in this report are made as of the date hereof, and the risk that actual results will differ materially from expectations expressed in this report will increase with the passage of time. We undertake no obligation, and disclaim any duty, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in our expectations or otherwise.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The disclosure required under this Item is included in “Management’s Discussion and Analysis of Results of Operations and Financial Condition” of this Quarterly Report on Form 10-Q under the heading “Share Repurchases” and is incorporated herein by reference.

 

Item 4. Mine Safety Disclosures

The information concerning mine safety violations or other regulatory matters required by Section 1503 (a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Form 10-Q.

 

 

52


 

Item 6. Exhibits

 

12.1*

 

Computation of Ratio of Earnings to Fixed Charges.

 

 

31.1*

 

Certification of the Chief Executive Officer of Eagle Materials Inc. pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended.

 

 

31.2*

 

Certification of the Chief Financial Officer of Eagle Materials Inc. pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended.

 

 

32.1*

 

Certification of the Chief Executive Officer of Eagle Materials Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2*

 

Certification of the Chief Financial Officer of Eagle Materials Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

95*

 

Mine Safety Disclosure

 

 

101.INS*

 

XBRL Instance Document.

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document.

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

*

Filed herewith.

**

Pursuant to Item 601(b)(2) of Regulation S-K, the Company agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request.

(1)

Management contract or compensatory plan or arrangement.

 

 

 

53


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

EAGLE MATERIALS INC.

 

 

Registrant

 

 

January 29, 2016

 

/s/ STEVEN R. ROWLEY

 

 

Steven R. Rowley

President and Chief Executive Officer

(principal executive officer)

 

 

January 29, 2016

 

/s/ D. CRAIG KESLER

 

 

D. Craig Kesler

Executive Vice President – Finance and

Administration and Chief Financial Officer

(principal financial officer)

 

January 29, 2016

  

/s/ WILLIAM R. DEVLIN

 

  

William R. Devlin

Senior Vice President – Controller and

Chief Accounting Officer

(principal accounting officer)

 

 

54