EAGLE MATERIALS INC - Annual Report: 2020 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT

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

For the Fiscal Year Ended

March 31, 2020

Commission File No. 1-12984

EAGLE MATERIALS INC.

(Exact name of registrant as specified in its charter)

Delaware (State of Incorporation)

75-2520779  (I.R.S. Employer Identification No.)

5960 Berkshire Lane, Suite 900, Dallas, Texas 75225 (Address of principal executive offices)

(214) 432-2000 (Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒     NO ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   YES ☐     NO ☒

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 ☒     NO ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES ☒      NO ☐

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

Large accelerated filer         ☒                                                                                                               Accelerated filer ☐    

Non-accelerated filer            ☐                                                                                              Smaller reporting company ☐

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐     NO ☒

The aggregate market value of the voting stock held by nonaffiliates of the Company at September 30, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $3.7 billion.

As of May 18, 2020, the number of outstanding shares of common stock was:

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Stockholders of Eagle Materials Inc. to be held on August 5, 2020 are incorporated by reference in Part III of this Report.

TABLE OF CONTENTS

PART I

ITEM 1. Business

Overview

Eagle Materials Inc., through its subsidiaries, (the Company, which may be referred to as we, our, or us) is a leading supplier of heavy construction materials and light building materials in the United States. Our primary products are commodities that are essential in commercial and residential construction; public construction projects; and projects to build, expand, and repair roads and highways. Demand for our products is generally cyclical and seasonal, depending on economic and geographic conditions. We distribute our products across many United States markets, which provides us with regional economic diversification. We also produce sand used in hydraulic fracturing as part of our Oil and Gas Proppants sector. As previously announced, we are pursuing alternatives for our Oil and Gas Proppants business, which contributed approximately 3% of fiscal 2020 revenue.

The Company was founded in 1963 as a building materials subsidiary of Centex Corporation (Centex). It operated as a public company under the name Centex Construction Products, Inc. from April 19, 1994 to January 30, 2004, at which time Centex completed a tax-free distribution of its shares to its shareholders, and the company was renamed Eagle Materials Inc. (NYSE: EXP).

Eagle Materials Inc. benefits from several competitive strengths that have enabled the Company to deliver consistently strong operating results and profitable growth. These advantages include:

Integrated plant network with a broad and diversified geographic reach - our plants are located near both raw material reserves and customers in high-growth U.S. markets, providing regional diversification and reducing exposure to regional construction cycles;

Low-cost producer position - which we maintain through cycles;

Capacity flexibility - enabling us to operate at high utilization levels generally, quickly position for downturns, and efficiently ramp up for demand rebounds;

Strong raw material reserves - between 20-50 years of raw-material reserves for each of our cement and wallboard facilities, providing uninterrupted supply of low-cost materials;

Proven management - Our current management team has significant and valuable experience, with an average industry experience of over 20 years, spanning several business cycles. Management’s conservative balance sheet strategy focuses on maintaining prudent levels of leverage and liquidity through the business cycle, to protect the balance sheet through downturns and enable us to take advantage of growth opportunities, whether organic or through acquisitions;

These strengths form the basis of the Company’s strategy to protect and advance its competitive position and continue to deliver profitable growth.

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Strategy

We rigorously pursue four overarching strategic objectives that consistently differentiate us from our competitors and contribute to our margin performance and growth: being a low-cost producer in all our markets, maintaining a decentralized operating structure, operating solely in the United States in regionally diverse and attractive markets, and achieving profitable growth through both strategic acquisitions and the organic development of our asset network.

Continuously innovate to advance our low-cost producer position

Our goal and the bedrock of our strategy, is to be a low-cost producer in each of the markets in which we compete. We have right-sized capacity to service the markets we cover, and we focus diligently on reducing costs and making our operations more efficient to manage free cash flow though the economic cycle. Maintaining our low-cost position provides meaningful competitive, financial, and environmental benefits. The products we make are basic necessities, and competition is often based largely on price, with consistent quality and customer service also being important considerations. Thus, being a low-cost producer is a competitive advantage and can lead to higher margins, better returns and stronger free cash flow generation. Being a low-cost producer is not only key to our commercial success, it also fully aligns with and advances our commitment to sustainable environmental practices. To maintain our low-cost producer position, we are always innovating our production processes with the aim of using fewer resources to make the same commodities. We regularly invest in technologies at our facilities to control emissions and to modify the fuels that we burn.

Maintain decentralized operating structure

The Company operates through a decentralized structure: operations are managed separately, and products are branded and marketed by our individual companies. This regional-market strategy provides several benefits, including increased familiarity with our customers, higher brand recognition, and lower transportation costs, which is a meaningful advantage in the construction materials industry. We view our cement plant system and our wallboard plant system as discrete integrated networks, allowing us to ship products and minimize freight costs. The impact of regional construction cycles on our businesses is mitigated to some degree by our geographic diversification and integrated network of plants.

Operate in regionally diverse and attractive markets

Demand for our products depends on construction activity which tends to correlate with population growth. While the Company’s markets include most of the United States, approximately 80% of our total revenue is generated in ten states: California, Colorado, Illinois, Missouri, Nebraska, Nevada, Ohio, Oklahoma, Texas, and Wyoming. Population growth, which is a major driver of construction products and building materials demand, is expected to grow approximately 28% between the 2010 census and 2040 for these ten states, compared to 23% population growth for the United States as a whole, according to the latest update in December 2018 by the Weldon Cooper Center at the University of Virginia. In our Light Materials sector, we have located operations primarily in the southern part of the United States, known as the Sun Belt. According to the same study, population in the Sun Belt is expected to grow by approximately 38% between the 2010 census and 2040.

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Achieve profitable growth through acquisition and organic development

We seek to grow the Company through acquisitions and the organic development of our asset network. Since 2012, we have expanded the Heavy Materials sector principally through acquisitions, with total investments of approximately $1.9 billion, including our recent purchase of Kosmos Cement Company. These investments have more than doubled our U.S. cement capacity, making us the largest independent U.S. cement producer.

These acquisitions have expanded our geographic footprint so that we now have a contiguous, integrated cement system from California to western Pennsylvania and south to Texas. We have completed additional bolt-on acquisitions, which also contribute to our expanded geographic footprint. 

The Company will continue to proactively pursue acquisition opportunities that further our growth across the Heavy Materials sector. Our free cash flow enables us to consider acquisitions and organic growth opportunities that align with our return on investment profitability objectives.

When an otherwise attractive potential acquisition or investment in organic growth does not meet our return requirements, our practice is to return cash to shareholders. Since becoming a public company in 1994, our share count is down approximately 40%, and we have returned approximately $2.1 billion to our shareholders, through a combination of share repurchases and dividends.

Planned Separation of Heavy Materials and Light Materials Businesses

As previously announced on May 30, 2019, the Company plans to separate its Heavy Materials and Light Materials businesses into two independent, publicly traded corporations by means of a tax-free spin-off to Eagle shareholders.  We remain committed to the separation, although the timing is uncertain.  We continue preparations to ensure that the two businesses are well-positioned for the separation when the markets recover from the effects of the COVID-19 pandemic.  

RECENT DEVELOPMENTS

Acquisitions

On March 6, 2020, we acquired the assets of Kosmos Cement Company (Kosmos), a joint venture between CEMEX S.A.B. de C.V. and Buzzi Unicem S.p.A. for approximately $669 million. The acquisition included a (i) cement plant located in Louisville, Kentucky; (ii) a limestone quarry located in Battletown, Kentucky; (iii) cement distribution terminals located in Indianapolis, Indiana; Cincinnati, Ohio; Pittsburgh, Pennsylvania; Charleston, West Virginia; Ceredo, West Virginia; Mt. Vernon, Indiana; and Lexington, Kentucky; and (iv) certain other properties and assets used by Kosmos in connection with the foregoing (collectively, the Kosmos Business). We assumed certain liabilities and obligations of Kosmos relating to the Kosmos Business, including contractual obligations, reclamation obligations, and various other liabilities and obligations arising out of or relating to the Kosmos Business after the transaction closed. The Kosmos Business is included in our Heavy Materials Sector, in the Cement segment.

On August 2, 2019, we acquired the assets of a readymix concrete and aggregates business (the ConAgg Acquisition). The purchase price of the ConAgg Acquisition was approximately $30.4 million. The ConAgg Acquisition is included in our Heavy Materials sector, in the Concrete and Aggregates segment.

See Footnote (B) to the Audited Consolidated Financial Statements for more information regarding these acquisitions.

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Divestiture

On April 17, 2020 we sold our Western Aggregates and Mathews Readymix operations for $93.5 million to Teichert, Inc. a California-based construction company. These operations were included in our Concrete and Aggregates segment. See Footnote (C) to the Audited Consolidated Financial Statements for more information regarding the sale.

Oil and Gas Proppants

As previously announced, we are pursuing alternatives for the assets and business included in the Oil and Gas Proppants sector. In March 2020, we completed the sale of our Wildcat Minerals distribution business. We are continuing to explore alternatives for the remaining assets included in our Oil and Gas Proppants business. Although we have pursued for some time the possible sale or disposition of our remaining Oil and Gas Proppants business to third parties, we are also considering a full curtailment of operations or closure of our Oil and Gas Proppants facilities. There can be no assurance that we will be able to effect a sale of this business or realize significant proceeds from a sale or other disposition transaction.

EMPLOYEES

As of March 31, 2020, the Company had approximately 2,400 employees, of which approximately 800 were employed under collective bargaining agreements and various supplemental agreements with local unions.

Industry Segment Information

Our business is organized into three sectors: Heavy Materials, which includes the Cement and Concrete and Aggregates segments; Light Materials, which includes the Gypsum Wallboard and Recycled Paperboard segments; and Oil and Gas Proppants, which are used in oil and gas extraction.

For information about the financial results of our business segments, including revenue, average net sales prices, sales volume and operating earnings, please see pages 45-52.

Heavy Materials

Our Heavy Materials sector provides cement and concrete and aggregates for use in infrastructure, commercial, and residential construction. This sector comprises the Cement and Concrete and Aggregates segments. Demand has been strong for these construction products over the last several years. Cement consumption in the United States, as estimated by the PCA, was approximately 109.8 million short tons in calendar 2019, compared with 106.1 million short tons in calendar 2018, and imported cement consumption was 16% of total sales in calendar 2019 compared with 15% in calendar 2018.

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Cement

Cement is the basic binding agent for concrete, a primary construction material. The principal sources of demand for cement are public infrastructure, commercial construction and residential construction, with public infrastructure accounting for nearly 50% of cement demand. Because of its low-value-to-weight ratio, the relative cost of transporting cement on land is high and limits the geographic area in which each producer can market its products profitably. Management believes shipments by truck are generally limited to a 150-mile radius from each plant and approximately 300 miles by rail and further by barge. Therefore, the U.S. cement industry comprises numerous regional markets rather than a single national market. Cement consumption is affected by the time of year and prevalent weather conditions. Cement sales are generally greatest from spring through the middle of autumn.

The manufacturing process for portland cement primarily involves four main steps, as shown in the graphic below:

We also produce and market other cementitious products, including slag cement and fly ash. Slag granules are obtained from a steel company and ground in our grinding facility. Slag is used in concrete mix designs to improve the durability of concrete and reduce future maintenance costs. Fly ash is a by-product of a coal-fired power plant and acts as an extender of cement in concrete.

Cement Plants

We operate eight modern cement plants (one of which is operated through a joint venture); and one slag grinding facility. The acquisition of Kosmos increased our clinker capacity to 6.9 million tons, which is approximately 6% of total U.S. clinker capacity (clinker is the intermediary product before it is ground into cement powder). All of our cement plants use dry-process technology, and approximately 80% of our clinker capacity is produced from preheater or preheater/pre-calciner kilns, which are generally more energy-efficient kiln types. In addition to production facilities, we also operate 29 cement storage and distribution terminals.

Our cement companies focus on the U.S. heartland and operate as an integrated network selling product primarily in California, Colorado, Illinois, Indiana, Iowa, Kentucky, Missouri, Nebraska, Nevada, Ohio, Oklahoma, and Texas. Our joint venture includes a minority interest in an import terminal in Houston, Texas, from which we can purchase up to 495,000 short tons annually. Our slag facility is located near Chicago, Illinois and has 500,000 tons annual grinding capacity.

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The following table sets forth information regarding our cement plants at March 31, 2020 (tons are in thousands of short tons):

All of our cement subsidiaries are wholly owned except the Buda, Texas plant (the Joint Venture), which is owned by Texas Lehigh Cement Company LP, a limited partnership joint venture owned 50% by us and 50% by Lehigh Cement Company LLC, a subsidiary of Heidelberg Cement AG.

Our cement production, including our 50% share of the cement Joint Venture production, totaled 5.4 million short tons in fiscal 2020 and 4.9 million short tons in fiscal 2019. Total net cement sales, including our 50% share of cement sales from the Joint Venture, were 5.9 million and 5.3 million short tons in fiscal 2020 and fiscal 2019, respectively.

Demand, Sales, and Distribution

The principal sources of demand for cement and slag are infrastructure, commercial construction, and residential construction, with public works infrastructure comprising nearly 50% of total demand. Cement consumption in the U.S. increased approximately 3% during calendar 2019 from calendar 2018, and the Portland Cement Association forecasts cement consumption will increase another approximately 2% in calendar 2020. Demand for cement is seasonal, particularly in northern states where inclement winter weather often affects construction activity. Cement sales are generally greatest from spring through the middle of autumn. Demand for slag has increased as the availability of fly ash has decreased due to the conversion of power plants from coal to natural gas.

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Because of cement’s low value-to-weight ratio, the relative cost of transporting cement on land is high and limits the geographic area in which each company can market its products profitably. The low value-to-weight ratio generally limits shipments by truck to a 150-mile radius of each plant and up to 300 miles by rail and further barge. Consequently, the U.S. cement industry is made up of regional markets rather than a single national selling market. No single cement company has a distribution of plants extensive enough to serve all geographic areas, so profitability is sensitive to shifts in the balance between regional supply and demand.

Environmental and zoning regulations have made it increasingly difficult for the U.S. cement industry to expand existing facilities and to build new cement facilities. Although we cannot predict which policies will be adopted in the future by federal, state, and local governmental bodies, we anticipate that future restrictions will likely continue to make zoning and permitting of new capacity additions difficult. This could potentially enhance the value of our existing facilities. Furthermore, cost-efficient alternatives to cement are currently limited, and the availability of some alternatives is diminishing. For example, the availability of fly ash, a cement replacement, has decreased as a result of the conversion of power plants from coal to natural gas and other forms of energy.

The difficulty in adding cement capacity, coupled with limited alternatives, leads to high U.S. cement manufacturing utilization rates, as well as the need for imported cement when demand levels are high.  Cement imports into the U.S. occur primarily to supplement domestic cement production or to supply a particular region. Cement is typically imported into deep water ports along the coast or on the Great Lakes, or transported on the Mississippi River system near major population centers. Our position in the U.S. heartland, away from import terminals, insulates us from coastal imports, given the expense of transporting cement from deep water ports into the heartland regions. This geographic position further enhances the value of our plant network.  

The Portland Cement Association estimates that imports represented approximately 16% of cement used in the U.S. during calendar 2019, compared with 15% in calendar 2018. The PCA also estimates that imports will represent approximately 16% of calendar 2020 consumption. Based on the normal distribution of cement into the market, we believe that no less than approximately 5% to 10% of the total consumption will consistently be served by imported cement.

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The following table sets forth information regarding the geographic areas served by each of our cement and slag plants and the location of our distribution terminals in each area. We have a total of 29 cement storage and distribution terminals that are strategically located to extend the sales areas of our plants.

We are leasing the terminal in Fairfield, Ohio under an initial term of four years, with two one-year options, which expire in fiscal 2025. The terminal in Lexington, Kentucky is being leased under an initial term of five years and will be up for renewal in fiscal 2024. The terminal in Mt. Vernon, Indiana is leased through fiscal 2031, and contains options that will allow the renewal of this lease for an additional twenty years.

Cement and slag are distributed directly to our customers mostly through customer pickups, and also by common carriers from our plants or distribution terminals. We transport cement, slag, and fly ash by truck, barge, and rail to our storage and distribution terminals.

No single customer accounted for more than 10% of our Cement segment sales during fiscal 2020. We do not typically enter into long-term sales contracts or have a significant level of order backlog. Cement and slag are generally sold to companies in private industry that contract with state and local entities for infrastructure and other public works projects.

Raw Materials and Fuel Supplies

The principal raw material used in the production of portland cement is calcium carbonate in the form of limestone. Limestone is obtained primarily through mining and extraction operations conducted at quarries that we own or lease, and that are located in close proximity to our plants. We believe that the estimated recoverable limestone reserves we own or lease will permit each of our plants to operate at our present production capacity for at least 25 years. We are actively seeking additional limestone reserves

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close to our plants and believe we will be able to acquire more reserves in the future. Other raw materials used in substantially smaller quantities than limestone are sand, clay, iron ore, and gypsum. These materials are readily available and can be obtained either from Company-owned or leased reserves or can be purchased from outside suppliers.

We utilize coal, petroleum coke, natural gas, and alternative fuels to fuel our cement plants. The cost of fuel decreased in fiscal 2020, compared with fiscal 2019, due to lower coal and petroleum coke costs. The Tulsa plant burns fuel-quality wastes, as well as coal and petroleum coke, and the Sugar Creek plant burns alternative fuels and petroleum coke. When we acquired Sugar Creek and Tulsa in late 2012, both plants had existing alternative fuels programs managed by a company that supplied alternative fuels and materials to the cement plants. In keeping with our commitment to sustainability and cost management, we continue to use these alternative fuels and materials programs at the Sugar Creek and Tulsa plants.

We have a long-term agreement with a steel manufacturer to supply granules necessary for grinding slag. This agreement requires us to purchase up to 550,000 tons of granules, which meet certain specifications, made available by the steel manufacturer each year. Electric power is also a major cost component in the manufacturing process for both cement and slag, and we have sought to diminish overall power costs by adopting interruptible power supply agreements at certain locations. These agreements may expose us to some production interruptions during periods of power curtailment. Historically, we have not had many production interruptions under these agreements.

Environmental Matters

Our cement operations are subject to numerous federal, state, and local laws and regulations pertaining to health, safety, and the environment. Some of these laws, such as the federal Clean Air Act and the federal Clean Water Act (and analogous state laws) impose environmental-permitting requirements and govern the nature and amount of emissions that may be generated when conducting particular operations. Some laws, such as the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) (and analogous state laws) impose obligations to clean up or remediate spills of hazardous materials into the environment. Other laws require us to reclaim certain land upon completion of extraction and mining operations in our quarries. We believe that we have obtained all the material environmental permits that are necessary to conduct our operations. We further believe that we are conducting our operations in substantial compliance with these permits. In addition, none of our manufacturing sites is listed as a CERCLA Superfund site.

The following seven environmental issues involving the cement manufacturing industry deserve special mention.

The first environmental issue involves cement kiln dust or CKD.  The U.S. Environmental Protection Agency (EPA) has been evaluating the regulatory status of CKD under the Resource Conservation and Recovery Act (RCRA) for several years.  In 1999, the EPA proposed a rule that would allow states to regulate properly managed CKD as a non-hazardous waste under state laws and regulations governing solid waste.  In contrast, CKD that was not properly managed would be treated as a hazardous waste under RCRA.  In 2002, the EPA confirmed its intention to continue to exempt properly managed CKD from the hazardous waste requirements of RCRA.  The agency announced that it would collect additional data over the next three to five years to determine if the states’ regulation of CKD is effective.  To date, the EPA still has not completed its 1999 proposal to exempt properly managed CKD waste and establish protective CKD management standards.  It is uncertain whether or when this proposal will be finalized.  Nevertheless, in the interim, many state environmental agencies have been using the EPA’s 1999 proposed CKD management standards as general industry guidelines.  

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Currently, substantially all CKD produced in connection with our ongoing operations is recycled, and therefore such CKD is not viewed as a waste under RCRA.  However, CKD was historically collected and stored on-site at our Illinois, Nevada, Missouri, Oklahoma and Wyoming cement plants and at a former plant site in Corpus Christi, Texas, which is no longer producing cement.  If either the EPA or the states decide to reclassify or impose new management standards on this CKD at some point in the future, we could incur additional costs to comply with those requirements with respect to our historically collected CKD.  CKD that comes in contact with water might produce a leachate with an alkalinity high enough to be classified as hazardous and might also leach certain hazardous trace metals therein.  

The second environmental issue involves the historical disposal of refractory brick containing chromium.  Such refractory brick was formerly used widely in the cement industry to line cement kilns.  We currently use a small amount of refractory brick containing chromium, all of which is properly disposed under applicable federal and state laws.  Except for such chromium containing refractory, we crush substantially all of our refractory brick and use the crushed material as raw feed in the kiln.  

The third environmental issue involves the potential regulation of our emission of greenhouse gases (GHGs), including carbon dioxide.  The consequences of GHG emission reduction regulations for our cement operations will likely be significant because (1) the cement manufacturing process requires the combustion of large amounts of fuel to generate very high kiln temperatures; and (2) the production of carbon dioxide is a byproduct of the calcination process, whereby carbon dioxide is removed from calcium carbonate to produce calcium oxide.  In the future, it is possible that the EPA will propose performance standards for GHG emissions for the cement manufacturing sector, as it recently has done for the electric generating sector through the Affordable Clean Energy (ACE) rule, 84 Fed. Reg. 32,520 (Jul. 8, 2019).  Further, several states have individually implemented or are presently considering measures to reduce emissions of GHGs, primarily through the planned development of GHG inventories or registries, or regional GHG cap and trade programs.  It is not possible at this time to predict how any future legislation that may be enacted or final EPA regulations that may be adopted to address GHG emissions would impact our business.  However, any imposition of raw materials or production limitations, fuel-use or carbon taxes, or emission limitations or reductions could have a significant impact on the cement manufacturing industry and a material adverse effect on us and our results of operations.

The fourth environmental issue is the EPA’s National Emissions Standards for Hazardous Air Pollutants for Portland cement plants (PC NESHAP), which requires cement plants to meet certain emission and operating standards addressing specific hazardous air pollutants (HAP).  Pursuant to CAA Sections 112(d) and (f), the EPA determined on July 25, 2018, that no revisions to the HAP regulations are necessary to address residual risk from HAP emissions from Portland cement plants, nor to account for developments in practices, process or control technologies.  This determination has been challenged by environmental groups in the D.C. Circuit and the litigation is being held in abeyance while the EPA considers the environmental groups’ administrative petition for reconsideration of the determination.  In the future, EPA is required by the CAA to review whether new developments in practices, process or control technologies require further revisions to the PC NESHAP.

The fifth environmental issue is the EPA’s promulgation pursuant to Section 129 of the CAA of revised regulations for Commercial and Industrial Solid Waste Incineration (CISWI) units.  The EPA has approved several states’ implementation plans under this rule, including plans submitted by Colorado and Oklahoma, and has proposed a federal plan that would apply in states that have not submitted and received approval for a state plan has.  Compared to the PC NESHAP, the CISWI regulations contain requirements across a broader range of pollutants, and the requirement for dioxin/furans for existing and new sources is somewhat more stringent.

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The sixth environmental issue is a revision to the National Emission Standards for Hazardous Air Pollutants for hazardous waste combustors (HWC NESHAP).  The Tulsa, Oklahoma cement facility utilizes hazardous waste as fuel and is required to meet the emission and operating standards of the HWC NESHAP.  This facility has demonstrated and remains in compliance with all of the requirements of the current HWC NESHAP.  In 2009, EPA agreed to revise the HWC NESHAP to resolve litigation over the rule, but has not indicated when it will issue a proposed rule amending the regulations.  It is not possible to predict at this time the stringency or impact of revised HWC NESHAP regulations or timing required for compliance.  

The seventh environmental issue is the EPA’s ongoing review and implementation of the national ambient air quality standards (NAAQS) for ozone.  Nonattainment designations in or surrounding our areas of operations could have a material impact on our consolidated financial results.  The CAA requires the EPA to review, and if necessary, revise the NAAQS every five years.  Accordingly, the EPA is in the process of reviewing the ozone NAAQS, and is scheduled to complete this review in 2020.

We believe that our current procedures and practices in our operations, including those for handling and managing hazardous materials, are consistent with industry standards and are in substantial compliance with applicable environmental laws and regulations.  Nevertheless, because of the complexity of our operations and the environmental laws to which we are subject, there can be no assurance that past or future operations will not result in violations, remediation costs, or other liabilities or claims.  Moreover, we cannot predict what environmental laws will be enacted or adopted in the future or how such future environmental laws or regulations will be administered or interpreted.  Compliance with more stringent environmental laws, or stricter interpretation of existing environmental laws, could necessitate significant capital outlays.

In fiscal 2020, we had $1.9 million of capital expenditures related to compliance with environmental regulations applicable to our cement operations. We anticipate spending $1.4 million during fiscal 2021.

Concrete and Aggregates

Readymix concrete is a versatile, low-cost building material used in almost all construction. The production of readymix concrete involves mixing cement, sand, gravel or crushed stone and water to form concrete, which is then sold and distributed to numerous construction contractors. Concrete is produced in batch plants and transported to customers’ job sites in mixer trucks.

The aggregates business consists of mining, extracting, producing, and selling crushed stone, sand, and gravel. Construction aggregates of suitable characteristics are employed in virtually all types of construction, including the production of readymix concrete, flexible base, and asphaltic mixes used in highway construction and maintenance.

On April 17, 2020 we sold Western Aggregates LLC and Mathews Readymix LLC, our readymix and aggregates companies in Northern California for approximately $93.5 million.  See Footnote (C) to the Audited Consolidated Financial Statements for more information regarding the sale. Information regarding these entities is included in the tables below as we owned them during fiscal 2020.

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Concrete and Aggregates Plants

During August 2019, we acquired a small concrete and aggregate business in Northern Nevada. During fiscal 2020, we produced and distributed readymix concrete from company-owned sites in Austin, Texas; the greater Kansas City area; Northern Nevada; and north of Sacramento, California. The following table sets forth information regarding these operations.

We conduct aggregate operations near our concrete facilities. Aggregates are obtained principally by mining and extracting from quarries owned or leased by the Company. The following table sets forth certain information regarding these aggregate facilities.

⁽²⁾  All reserves are considered to be probable under the definition of Industry Guide 7.

Our total net aggregate sales were 3.3 million tons in fiscal 2020 and 3.2 million tons in fiscal 2019. Total aggregates production was 4.1 million tons in fiscal 2020 and 3.4 million tons in fiscal 2019. During fiscal 2020, approximately 50% of aggregate sales and 40% of aggregates production, related to our northern California business. A portion of our total aggregates production is used internally by our readymix concrete operations in Texas, northern Nevada, and northern California.

Demand, Sales, and Distribution

Demand for readymix concrete and aggregates largely depends on local levels of construction activity. Construction activity is also subject to weather conditions, the availability of financing at reasonable rates, and overall fluctuations in local economies, and therefore tends to be cyclical. We sell readymix concrete to numerous contractors and other customers in each plant’s marketing area. Our batch plants in Austin, Texas, the greater Kansas City area, northern California, and northern Nevada are strategically located to serve each marketing area. Concrete is delivered from the batch plants primarily by company-owned trucks.

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We sell aggregates to building contractors and other customers engaged in a wide variety of construction activities. Aggregates are delivered from our aggregate plants by common carriers and customer pick-up. No customer accounted for more than 10% of fiscal 2020 segment revenue.

The concrete and aggregates industry is highly fragmented, with numerous participants operating in each local area. Because the cost of transporting concrete and aggregates is very high relative to product values, producers of concrete and aggregates typically can profitably sell their products only in areas within 50 miles of their production facilities. Barriers to entry in each industry are low, except with respect to environmental permitting requirements for new aggregates production facilities and zoning of land to permit mining and extraction of aggregates.

Raw Materials and Fuel Supplies

We obtain cement and aggregates for our concrete businesses from related companies, including our Joint Venture, as outlined below:

We obtain the balance of our cement and aggregates requirements from multiple outside sources in each of these areas.

We mine and extract limestone, sand, and gravel, the principal raw materials used in the production of aggregates, from quarries owned or leased by us and located near our plants. On average, our aggregate reserves exceed 20 years based on normalized production levels and in many cases much greater.

Environmental Matters

The concrete and aggregates industry is subject to environmental regulations similar to those governing our Cement operations. (See pages 9-11.)

In fiscal 2020, we had $0.2 million of capital expenditures related to compliance with environmental regulations applicable to our Concrete and Aggregates operations. We do not anticipate any such expenditures in fiscal 2021.

Light Materials

Our Light Materials sector produces gypsum wallboard, which is used in residential and commercial buildings, and recycled paperboard, which is used primarily in the manufacture of gypsum wallboard. The sector comprises the Gypsum Wallboard and Recycled Paperboard segments. Operations in this sector are concentrated in the Sun Belt of the United States, where the population is projected to grow approximately 38% between 2010 and 2040, according to the latest update in December 2018 by the Weldon Cooper Center at the University of Virginia. Population growth is a key long-term driver of demand for gypsum wallboard and recycled paperboard.

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Gypsum Wallboard

Gypsum wallboard is used to finish the interior walls and ceilings in residential, commercial, and industrial structures. Our gypsum wallboard products are marketed under the name American Gypsum.

The gypsum wallboard manufacturing process involves four main steps, as shown in the graphic below.

Gypsum Wallboard Plants

We own and operate five gypsum wallboard plants, outlined in the table below. We anticipate running all of our facilities at the level required to meet customer demand, up to maximum capacity. Our gypsum wallboard is distributed in the geographic markets nearest to our production facilities.

The following table sets forth certain information regarding our gypsum wallboard plants.

Our Gypsum Wallboard production totaled 2,706 MMSF in fiscal 2020 and 2,691 MMSF in fiscal 2019. Total Gypsum Wallboard sales were 2,694 MMSF in fiscal 2020 and 2,651 MMSF in fiscal 2019.

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Demand, Sales, and Distribution

The principal sources of demand for gypsum wallboard are (i) residential construction, (ii) repair and remodeling, (iii) non-residential construction, and (iv) other markets such as exports and manufactured housing. Industry shipments of gypsum wallboard were approximately 25.9 billion square feet in calendar 2019, compared to 24.9 billion square feet in calendar 2018. We estimate that residential and repair and remodel construction accounted for more than 85% of calendar 2019 industry sales.

Demand for gypsum wallboard remains highly cyclical and closely follows construction industry cycles, particularly housing construction. Demand for wallboard can be seasonal and is generally highest from spring through the middle of autumn.

We sell Gypsum Wallboard to numerous building-materials dealers, gypsum wallboard specialty distributors, lumber yards, home-center chains, and other customers located throughout the United States, with the exception of the Northeast. Gypsum wallboard is sold on a delivered basis, mostly by truck. We generally use third-party common carriers for deliveries. Three customers accounted for approximately 30% of our Gypsum Wallboard segment sales during fiscal 2020.

Although gypsum wallboard is distributed principally in local areas, certain industry producers (including the Company) have the ability to ship gypsum wallboard by rail outside their usual regional distribution areas to regions where demand is strong. We own approximately 100 railcars for transporting gypsum wallboard. Our rail distribution capabilities permit us to service customers in markets on both the east and west coasts, except for the Northeast. Less than 10% of our Wallboard volume sold during fiscal 2020 was delivered via rail.

There are currently six manufacturers of gypsum wallboard in the U.S. operating a total of 65 plants, per the Gypsum Association. During 2019, St. Gobain (Certainteed) reached an agreement to acquire Continental Building Products, and the transaction closed in February 2020. After the acquisition, we estimate that the four largest producers ‒ Knauf, National Gypsum Company, Certainteed, and Koch Industries ‒ account for approximately 80% of gypsum wallboard sales in the U.S.

Total wallboard-rated production capacity in the United States is currently estimated by the Gypsum Association at approximately 34.1 billion square feet per year; however, certain lines have been curtailed and plants closed or idled. It is possible that previously closed plants or lines could be brought back into service.

Raw Materials and Fuel Supplies

We mine and extract natural gypsum rock, the principal raw material used in the manufacture of gypsum wallboard, from mines and quarries owned, leased, or subject to mining claims owned by the Company and located near our plants. Certain of our New Mexico reserves are under lease with the Pueblo of Zia. Gypsum ore reserves at the Gypsum, Colorado plant are contained within a total of 115 placer claims encompassing 2,300 acres. Included in this are 94 unpatented mining claims where mineral rights can be developed upon completion of permitting requirements. We currently own land containing gypsum in the area of Duke, Oklahoma, with additional reserves controlled through a lease agreement. Other gypsum deposits are located near the plant in Duke, which we believe may be obtained at a reasonable cost when needed. We are currently in the eleventh year of a 60-year supply agreement (original 20-year term with two 20-year extension options) with a public utility in South Carolina for synthetic gypsum, which we use at our Georgetown, South Carolina plant. If the utility is unable to generate the agreed-upon amount of gypsum, it is responsible for providing gypsum from a third party to fulfill its obligations.

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Through our modern low-cost paperboard mill, we manufacture sufficient quantities of paper necessary for our gypsum wallboard production. Paper is a significant cost component in the manufacture of gypsum wallboard, currently representing approximately one-third of our cost of production. Higher paper costs since March 2020 will increase our operating costs in fiscal 2021. See Raw Materials and Fuel Supplies in the Recycled Paperboard section for more discussion.

Our gypsum wallboard manufacturing operations use natural gas and electrical power. A significant portion of the Company’s natural gas requirements for our gypsum wallboard plants are currently provided by three gas producers under gas-supply agreements expiring in October 2020 for Colorado and October 2021 for South Carolina and Oklahoma. If the agreements are not renewed, we anticipate being able to obtain our gas supplies from other suppliers at competitive prices. Electrical power is supplied to our New Mexico plants at standard industrial rates by a local utility. For our Albuquerque plant, we have an interruptible power supply agreement, which may expose it to some production interruptions during periods of power curtailment. Power for our Gypsum, Colorado facility is generated at the facility by a cogeneration power plant that we own and operate. Currently, the cogeneration power facility supplies power and waste hot gases for drying to the gypsum wallboard plant. We do not sell any power to third parties. Gas costs represented approximately 7% of our production costs in fiscal 2020.

Environmental Matters

The gypsum wallboard industry is subject to numerous federal, state, and local laws and regulations pertaining to health, safety, and the environment. Some of these laws, such as the federal Clean Air Act and the federal Clean Water Act (and analogous state laws), impose environmental permitting requirements and govern the nature and amount of emissions that may be generated when conducting particular operations. Some laws, such as CERCLA (and analogous state laws), impose obligations to clean up or remediate spills of hazardous materials into the environment. Other laws require us to reclaim certain land upon completion of extraction and mining operations in our quarries. None of our gypsum wallboard operations is the subject of any local, state, or federal environmental proceedings. We do not, and have not, used asbestos in any of our gypsum wallboard products.

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 combustion residuals (CCRs) under Subtitle D of the Resource Conservation and Recovery Act, (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 19, 2015. 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. Similarly, material effects on our business, financial condition, and results of operations are unlikely to result from administrative reconsideration by the EPA of certain aspects of the final CCR rule, because none of these pending actions currently seek to overturn the management of CCR as non-hazardous waste or the regulatory exemption for beneficial encapsulated use of CCR.

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As discussed in greater detail in the “Environmental Matters” section for Cement, the EPA in October 2015 strengthened the NAAQS for ozone by lowering the primary and secondary standards from 75 parts per billion (ppb) to 70 ppb. The EPA completed its attainment/nonattainment designations for the revised standards for all areas of the United States in July 2018. Nonattainment designations in or surrounding our areas of operations could have a material impact on our consolidated financial results. EPA is in the process of reviewing the ozone NAAQS, which it is required to do every five years to determine if it is necessary to revise the standards.

Our gypsum wallboard manufacturing process combusts natural gas. It is possible that GHG emissions from our manufacturing could become subject to regulation under the CAA. For a more detailed discussion of this issue, see the “Environmental Matters” section of our Cement business description on pages 9-11.

Although our Gypsum Wallboard operations could be adversely affected by federal, regional, or state climate change initiatives, at this time, it is not possible to accurately estimate how future laws or regulations addressing GHG emissions would impact our business. However, any imposition of raw materials or production limitations, fuel-use or carbon taxes, or emission limitations or reductions could have a significant impact on the gypsum wallboard manufacturing industry and a material adverse effect on the financial results of our operations.

There were $0.6 million of capital expenditures related to compliance with environmental regulations applicable to our Gypsum Wallboard operations during fiscal 2020. We anticipate capital expenditures of approximately $0.9 million related to our Gypsum Wallboard operations during fiscal 2021.

Recycled Paperboard

Our Recycled Paperboard manufacturing operation, which we refer to as Republic Paperboard Company, is located in Lawton, Oklahoma, and has a technologically advanced paper machine designed primarily for gypsum liner production utilizing 100% recycled paper. The paper’s uniform cross-directional strength and finish characteristics facilitate the efficiencies of new high-speed wallboard manufacturing lines and improve the efficiencies of the slower wallboard manufacturing lines. Although the machine was designed primarily to manufacture gypsum liner products, we are also able to manufacture several alternative products, including containerboard grades and lightweight packaging grades.

Our paper machine allows the paperboard operation to manufacture high-strength gypsum liner that is approximately 10-15% lighter in basis weight than generally available in the U.S. The low-basis weight product utilizes less recycled fiber to produce paper that, in turn, requires less energy (natural gas) to evaporate moisture from the board during the gypsum wallboard manufacturing process. The low-basis weight paper also reduces the overall finished board weight, providing our Wallboard operations with more competitive transportation costs for both the inbound and outbound segments.

During fiscal 2020, we substantially completed the project to enhance and expand our papermill, which has been sold out for several years. The project will enable us to increase line speeds and lower our operating costs. Once completed, the project will increase the annual capacity at the paper mill to approximately 390,000 tons.

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Demand, Sales, and Distribution

Our manufactured recycled paperboard products are sold to gypsum wallboard manufacturers and other industrial users. During fiscal 2020, approximately 40% of the recycled paperboard sold by our paper mill was consumed by the Company’s Gypsum Wallboard manufacturing operations. We also have contracts with two other gypsum wallboard manufacturers that represent approximately 50% of our total segment revenue with the remaining volume shipped to other gypsum liner manufacturers. The current contracts with other gypsum wallboard manufacturers expire in three to five years. The loss of any of these contracts or a termination or reduction of their current production of gypsum wallboard, unless replaced by a commercially similar arrangement, could have a material adverse effect on the Company.

Raw Materials and Fuel Supplies

The principal raw materials in recycled paperboard are recycled paper fiber (recovered waste paper), water, and specialty paper chemicals. The largest waste paper source used by the operation is old cardboard containers (known as OCC). A blend of high grades (white papers consisting of ink-free papers such as news blank and unprinted papers) is used in the gypsum liner facing paper, white top linerboard, and white bag liner grades.

We believe that an adequate supply of OCC recycled fiber will continue to be available from sources located within a reasonable proximity of the paper mill. Although we have the capability to receive rail shipments, the vast majority of the recycled fiber purchased is delivered via truck. Prices are subject to market fluctuations based on generation of material (supply), demand, and the presence of the export market. Fiber prices declined in both fiscal 2020 and fiscal 2019 from fiscal 2018 prices, which were higher than historical pricing for fiber. OCC prices increased from $45 per ton in March 2020 to $120 per ton in May 2020, primarily related to reduced generation of OCC due the COVID-19 pandemic. Current gypsum liner customer contracts include price escalators that partially offset and compensate for changes in raw material fiber prices. The chemicals used in the paper making operation, including size, retention aids, biocides, and bacteria controls, are readily available from several manufacturers at competitive prices.

The manufacture of recycled paperboard involves the use of a large volume of water in the production process. We have an agreement with the City of Lawton municipal services for supply of water to our manufacturing facility. Electricity, natural gas, and other utilities are available to us at either contracted rates or standard industrial rates in adequate supplies. These utilities are subject to standard industrial curtailment provisions.

Paperboard operations are generally large consumers of energy, primarily natural gas and electricity. We expect the cost of energy to decline in fiscal 2021 compared with fiscal 2020. Electricity is supplied to the paper mill by Public Service of Oklahoma (PSO) and the Oklahoma Corporation Commission has requested a reduction in rates of approximately 15% for fiscal 2021. This power company is working to switch its fuel source dependency to natural gas, which could affect our electricity rates in future years. Oklahoma is a regulated state for electricity services, and all rate change requests must be presented to the Oklahoma Corporation Commission for review and approval before implementation. Natural gas costs in fiscal 2020 decreased compared with fiscal 2019, and they are expected to further decline in fiscal 2021. A significant portion of our natural gas requirements for our paper mill is provided under a gas supply agreement that expires in December 2020, with approximately 30% remaining under contract through December 2021.  

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Environmental Matters

There were no capital expenditures related to compliance with environmental regulations applicable to our Recycled Paperboard operations during fiscal 2020, and none are expected in fiscal 2021.

Oil and Gas Proppants

The Oil and Gas Proppants sector produces frac sand used in oil and natural gas extraction. As previously announced, we are pursuing alternatives for the assets and business included in the Oil and Gas Proppants sector. In March 2020, we completed the sale of our Wildcat Minerals distribution business. We are continuing to explore alternatives for the remaining assets included in our Oil and Gas Proppants business. Although we have pursued for some time the possible sale or disposition of our remaining Oil and Gas Proppants business to third parties, we are also considering a full curtailment of operations or closure of our Oil and Gas Proppants facilities. There can be no assurances that we will be able to effect a sale of this business or realize significant proceeds from a sale or other disposition transaction.

Frac Sand Plants

We currently own two northern white frac sand mines, two frac sand wet processing plants, and three frac sand drying facilities. Our frac sand mines, wet plants and drying facilities are in New Auburn, Wisconsin and Utica, Illinois as outlined below. Sand is processed into various mesh sizes and marketed primarily to oil service companies.

The following table provides information regarding our frac sand production facilities at March 31, 2020.

The Corpus Christi, Texas plant was closed during fiscal 2020. We also idled our New Auburn, Wisconsin facility in March 2020. The cost of maintaining the Corpus Christi and New Auburn plants is not significant.

Demand, Sales, and Distribution

Our frac sand is currently sold into oil and gas producing shale basins across the United States. Demand for oil and gas proppants, such as frac sand, is driven primarily by oil and gas drilling and well-completion activity.

Drilling and completion activity for oil and gas is highly cyclical in nature. Drilling completion activity is based on many factors, but the primary factor is oil and gas prices. Drilling activity slowed during the latter half of calendar 2018, and declined even more during the latter half of calendar 2019. More recently, during March and April 2020, oil prices declined to all-time lows due to a pronounced decrease in demand

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for oil resulting from the COVID-19 pandemic, as well as an increase in supply caused by disagreements with respect to oil pricing and output between Russia and members of the Organization of the Petroleum Exporting Countries (“OPEC”), particularly Saudi Arabia. The COVID-19 pandemic has caused a global decrease in all modes of travel, the closure of borders between countries and a general slowing of economic activity worldwide, all which has decreased demand for oil. In March 2020, Russia and Saudi Arabia ended a three-year supply level agreement, which resulted in each country increasing its oil production. In April 2020, Russia and OPEC agreed to production cuts to mitigate the decline in the price of oil; however, such cuts may not be sufficient to stabilize prices in the oil market, particularly if demand does not increase to levels consistent with those in prior years. Oil and natural gas prices are expected to continue to be volatile, and we cannot predict when prices will improve or stabilize. These sharp declines in oil prices have led to further reductions in drilling and well-completion activity during calendar 2020, including the suspension of most new drilling activity since March 2020. As a result, these declines negatively affected demand for our frac sand, leading to a significant reduction in new orders.

Another factor that has adversely affected our frac sand business relates to the substitution of local, or in-basin sand for relatively more costly northern white sand. In recent periods, oil and gas producers and service companies in many shale basins, including the Permian Basin, began using, or expanded their use of, in-basin sand instead of northern white sand. This development has significantly reduced demand for our northern white sand. There is no assurance that this trend will not continue, which would have a material adverse effect on our frac sand business.

A portion of the frac sand we produce is sold under long-term contracts that require our customers to pay a specified price per mesh size for a specified volume of sand each month or quarter, depending on the contract. The terms of our contracts, including pricing, delivery, and mesh distribution, vary by customer. Certain of our long-term customer contracts contain liquidated damages for non-performance by our customers. As the demand has slowed, we have negotiated new contract terms with certain of our customers. The renegotiated contracts reflect the reduced demand for frac sand in the current environment by restructuring the contracts to provide reduced contracted sales volume and prices in the near term, with the contracted minimums being increased in the later years. In addition to the long-term sales contracts, we sell frac sand through our distribution network under short-term pricing and other agreements. The terms of our short-term pricing agreements vary by customer.

We currently have contracts to provide frac sand to three customers that, collectively, comprised approximately 60% of our segment revenue for fiscal 2020. These contracts have an average remaining life of approximately two years.

In connection with our previously announced review of alternatives for our Oil and Gas Proppants business, we sold our Wildcat Minerals distribution business in March 2020. After the sale of this business, we currently have four remaining transload facilities that are located in Gardendale, Texas; Kenedy, Texas; Fowlerton, Texas; and El Reno, Oklahoma. These transload locations were currently idled at March 31, 2020 with the exception of El Reno, Oklahoma. The cost of maintaining the idled facilities is not significant.

At March 31, 2020, we had approximately 1,400 rail cars under lease, with an average term of approximately 5 years.

During both fiscal 2020 and fiscal 2019, declining oil prices and increasing use of in-basin sand adversely affected our operating profits, which resulted in our reviewing our long-lived, intangible and other assets for impairment. In both years, these analyses indicated that certain assets were impaired, and resulted in our recording $224.3 million and $220.3 million impairment charges in fiscal 2020 and fiscal 2019,

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respectively. See Footnote (A) to the Audited Consolidated Financial Statements for more information on these impairments.

Raw Materials and Fuel Supplies

Our frac sand is mined from open pit mines and we process the sand in our wet plants. The excavation process includes stripping the overburden overlaying the planned mining area and then removing the sand through blasting or mechanically removing it with the use of mobile equipment. Processing includes washing the sand with water and screening to remove nonsalable material, after which the sand is dried and further screened to its final mesh sizes, which range from 20 mesh to 140 mesh. During the winter months, the cold weather adversely affects our ability to operate our wet processing plants, resulting in these plants being shut down for much of the winter. Generally, our New Auburn, Wisconsin facility is more affected by the weather than our Utica, Illinois facility.

Natural gas is the major fuel used in our dry plants. The cost of natural gas in fiscal 2020 was relatively consistent with the cost in fiscal 2019, and is expected to decline during the first part of fiscal 2021. Electricity and water are also a major cost component in our manufacturing process. We do not anticipate significant changes in the cost of these utilities in fiscal 2021.

Environmental Matters

We and the commercial silica industry are subject to extensive governmental regulation pertaining to matters such as permitting and licensing requirements, plant and wildlife protection, hazardous materials, air and water emissions, and environmental contamination and reclamation. A variety of federal, state, and local agencies implement and enforce these regulations. We believe that we have obtained and are in substantial compliance with all the material environmental permits that are necessary to conduct our operations.

Federal Regulation

At the federal level, we may be required to obtain permits under Section 404 of the Clean Water Act from the U.S. Army Corps of Engineers for the discharge of dredged or fill material into waters of the United States, including wetlands and streams, in connection with our operations. We also may be required to obtain permits under Section 402 of the Clean Water Act from the EPA or the state environmental agencies, to which the EPA has delegated local implementation of the permit program, for discharges of pollutants into waters of the United States, including discharges of wastewater or storm-water runoff associated with construction activities. Failure to obtain these required permits, or to comply with their terms, could subject us to administrative, civil, and criminal penalties as well as injunctive relief.

The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. These regulatory programs may require us to install expensive emissions abatement equipment, modify operational practices, and obtain permits for existing or new operations. Before commencing construction on a new or modified source of air emissions, such laws may require us to reduce emissions at existing facilities. As a result, we may be required to incur increased capital and operating costs to comply with these regulations. We could be subject to administrative, civil, and criminal penalties as well as injunctive relief for noncompliance with air permits or other requirements of the federal Clean Air Act and comparable state laws and regulations.

As part of our operations, we use or store petroleum products and other substances such as diesel fuel, lubricating oils, and hydraulic fluid. We are subject to regulatory programs pertaining to the storage, use,

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transportation, and disposal of these substances. Spills or releases may occur in the course of our operations, and we could incur substantial costs and liabilities as a result of such spills or releases, including claims for damage or injury to property and persons. CERCLA and comparable state laws may impose joint and several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of hazardous substances into the environment. These persons include the owner or operator of the site where the release occurred, and anyone who disposed of, or arranged for disposal, including offsite disposal, of a hazardous substance generated or released at the site. Under CERCLA, such persons may be subject to liability for the costs of cleaning up the hazardous substances, for damages to natural resources, and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.

In addition, RCRA and comparable state statutes regulate the generation, transportation, treatment, storage, disposal, and cleanup of hazardous and non-hazardous wastes. The EPA and state environmental agencies, to which the EPA has delegated portions of the RCRA program for local implementation, administer the RCRA program.

Our operations may also be subject to broad environmental review under the National Environmental Policy Act (NEPA). NEPA requires federal agencies to evaluate the environmental impact of all “major federal actions” significantly affecting the quality of the human environment. The granting of a federal permit for a major development project, such as a mining operation, may be considered a “major federal action” that requires review under NEPA. Therefore, our projects may require review and evaluation under NEPA. As part of this evaluation, the federal agency considers a broad array of environmental impacts, including, among other things, impacts on air quality, water quality, wildlife (including threatened and endangered species), historic and archaeological resources, geology, socioeconomics, and aesthetics. NEPA also requires the consideration of alternatives to the project. The NEPA review process, especially the preparation of a full environmental impact statement, can be time consuming and expensive. The purpose of the NEPA review process is to inform federal agencies’ decision-making on whether federal approval should be granted for a project and to provide the public with an opportunity to comment on the environmental impacts of a proposed project. Though NEPA requires only that an environmental evaluation be conducted and does not mandate a particular result, a federal agency could decide to deny a permit or impose certain conditions on its approval, based on its environmental review under NEPA, or a third party could challenge the adequacy of a NEPA review in court and thereby delay or block the issuance of a federal permit or approval.

Federal agencies granting permits for our operations also must consider impacts to endangered and threatened species and their habitat under the Endangered Species Act. We also must comply with, and are subject to liability under, the Endangered Species Act, which prohibits and imposes stringent penalties for the harming of endangered or threatened species and their habitat. Federal agencies also must consider a project’s impacts on historic or archaeological resources under the National Historic Preservation Act, and we may be required to conduct archaeological surveys of project sites and to avoid or preserve historical areas or artifacts.

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State and Local Regulation

We are also subject to a variety of state and local environmental review and permitting requirements. Some states, including Wisconsin where one of our operations is located, have state laws similar to NEPA; thus, our development of a new site or the expansion of an existing site may be subject to comprehensive state environmental reviews even if the project is not subject to NEPA. In some cases, the state environmental review may be more stringent than the federal review. Our operations may require state-law based permits in addition to federal permits, which obligate state agencies to consider a range of issues, many the same as federal agencies, including, among other things, a project’s impact on wildlife and their habitats, historic and archaeological sites, aesthetics, agricultural operations, and scenic areas. Wisconsin and some other states also have specific permitting and review processes for commercial silica mining operations, and state agencies may impose different or additional monitoring or mitigation requirements than federal agencies. The development of new sites and our existing operations also are subject to a variety of local environmental and regulatory requirements, including land use, zoning, building, and transportation requirements.

Some local communities have expressed concern regarding silica sand mining operations. These concerns have generally included exposure to ambient silica sand dust, truck traffic, water usage, and blasting. In response, certain state and local communities have developed, or are in the process of developing, regulations or zoning restrictions intended to minimize the potential for dust to become airborne, control the flow of truck traffic, significantly curtail the area available for mining activities, require compensation to local residents for potential impacts of mining activities and, in some cases, ban issuance of new permits for mining activities. We are not aware of any proposals for significant increased scrutiny on the part of state or local regulators in the jurisdictions in which we operate, or community concerns with respect to our operations that would reasonably be expected to have a material adverse effect on our business, financial condition, or results of operations going forward.

Existing operations could be more significantly affected by increased regulatory activity. In an effort to minimize these risks, we continue to be engaged with local communities in order to grow and maintain strong relationships with residents and regulators.

There were no capital expenditures related to compliance with environmental regulations applicable to our Oil and Gas Proppants operations during fiscal 2020, and we do not anticipate any such expenditures during fiscal 2021.

Where You Can Find More Information

We publish our annual reports on Form 10-K and Form DEF 14A, Annual Proxy Statement; our quarterly reports on Form 10-Q; and current reports on Form 8-K. These reports along with all amendments to them, are available free of charge through the Investor Relations page of our website, located at www.eaglematerials.com as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission (SEC). This reference to our website is intended solely to inform investors where they may obtain additional information; the materials and other information presented on our website are not incorporated in and should not otherwise be considered part of this Report. Additionally, investors may obtain information by contacting our Investor Relations department directly at (214) 432-2000 or by writing to Eagle Materials Inc., Investor Relations, 5960 Berkshire Lane, Suite 900, Dallas, Texas 75225.

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ITEM 1A. Risk Factors

The foregoing discussion of our business and operations should be read together with the risk factors set forth below. They describe various risks and uncertainties to which we are or may become subject, many of which are outside of our control. These risks and uncertainties, together with other factors described elsewhere in this Report, have affected, or may in the future affect, our business, operations, financial condition and results of operations in a material and adverse manner.

The current outbreak of the novel coronavirus (COVID-19) pandemic has caused severe disruptions in the U.S. and global economies, and while the scale is unknown at this time, the outbreak and the response to it could materially impact our business, operating results, cash flows and/or financial condition.

In March 2020, the World Health Organization designated COVID-19, which began spreading globally in late 2019, as a pandemic. Numerous countries, including the United States, have since declared national emergencies with respect to COVID-19.  Many of these countries, including the United States, reacted by taking steps deemed necessary to slow the virus, including instituting stay-at-home orders, and restricting travel, closing financial markets and/or restricting trading, and limiting operations of non-essential businesses. These actions have had an adverse effect on consumer demand and consumer confidence, as well as created disruption in global supply chains. The U.S. federal government, and most states, have exempted “essential businesses” from many of these restrictions. Although we have been designated an essential business in virtually all of the markets we serve, the restrictions in effect in the areas in which we operate may affect many of our suppliers and the end users of the products we supply, and there is no guarantee that we will continue to be exempted from future government orders.

We are monitoring the impact of COVID-19 on our operations and on the demand for our products. Although we are talking precautions to ensure the safety of our employees, in the event we suffer an outbreak at one of our manufacturing facilities, we may be forced to suspend operations at such facility until the health conditions improve. Any such reduction in our production capacity could render us unable to continue to produce our construction products or meet our customers’ demands for our products. With regard to demand for our products, given the COVID-19-related economic uncertainty, the decline in consumer confidence, and increasing unemployment, contractors, home builders, and customers may delay, or ultimately cancel, building projects. Additionally, as state budgets are increasingly strained by the rapid increase in unemployment claims and the reduction of revenue from sales and other taxes, including fuel-tax revenues due to remote working and stay-at-home practices, infrastructure projects in states in which we do business may be delayed or cancelled. With respect to our Oil and Gas Proppants sector, demand for oil has significantly deteriorated as a result of the COVID-19 pandemic and corresponding preventative measures taken around the world to contain its spread and mitigate its public health effects. At the same time, increases in production of oil by Saudi Arabia and Russia created a significant surplus in the supply of oil. These developments have led to significant reductions in drilling and well-completion activity during calendar 2020, including the suspension of most new drilling activity since March 2020. The reduction in drilling activity has negatively affected demand for our frac sand, and led to a significant reduction in new orders.

Because of various uncertainties, including the ultimate geographic spread of the virus, the duration of the outbreak, actions that governmental authorities and other third-parties may take in response to the pandemic, the impact on the economy of the COVID-19 pandemic and government orders to restrict activities, and the timing and pace of any economic recovery, we are unable to accurately predict the impact that COVID-19 will have on our business, results of operations, cash flows or financial condition.  

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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 affected our business, certain economic fundamentals began improving in calendar 2012, and have continued to improve; however, the rate and sustainability of such improvement remains uncertain, and the total impact of COVID-19 is not yet known. Infrastructure spending continues to be adversely affected by several 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 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 revenue 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, cold weather, hurricanes, tropical storms, and heavy or sustained 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 earnings 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 revenue is 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 negatively 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.

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

Many of 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, frac sand, 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 nameplate capacity in the gypsum wallboard industry in the United States. In addition, the growing utilization of in-basin frac sand by oil and gas producers and service providers has resulted in decreased demand for our frac sand. 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.

The proposed separation of our Heavy Materials and Light Materials businesses into two independent, publicly traded corporations is subject to various risks and uncertainties, and may not be completed on the terms or timeline currently contemplated, if at all.

On May 30, 2019, we announced our plan to separate our Heavy Materials and Light Materials businesses into two independent, publicly traded corporations by means of a tax-free spin-off to our shareholders. We remain committed to the separation, although the timing is uncertain. We continue preparations to ensure the two businesses are well-positioned for the separation when the markets recover from the effects of the COVID-19 pandemic. In addition, unanticipated developments other than COVID-19, including possible delays in obtaining the necessary tax opinion, regulatory approvals or clearances and uncertainty of the financial markets, could further delay or prevent the completion of the proposed separation or cause the proposed separation to occur on terms or conditions that are different from those currently expected. As a result, we cannot assure that we will be able to complete the proposed separation on the terms or the timeline that we announced, if at all.

The proposed separation of our Heavy Materials and Light Materials businesses may not achieve some or all of the anticipated benefits.

Executing the proposed separation will require us to incur costs, as well as time and attention from our senior management and key employees, which could distract them from operating our business, disrupt operations, and result in the loss of business opportunities, which could adversely affect our business, financial condition, and results of operations. We may also experience increased difficulties in attracting, retaining and motivating key employees during the pendency of the separation and following its completion, which could harm our businesses. Even if the proposed separation is completed, we may not realize some or all of the anticipated benefits from the separation and the separation may in fact adversely affect our business. As independent, publicly traded companies, both companies will be smaller, less diversified companies with a narrower business focus and may be more vulnerable to changing market conditions and competitive pressures, which could materially and adversely affect their respective businesses, financial condition and results of operations. There can be no assurance that the combined value of the common stock of the two publicly traded companies following the completion of the proposed separation will be equal to or greater than what the value of our common stock would have been had the proposed separation not occurred.

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Our Cement business is capital intensive, resulting in significant fixed and semi-fixed costs. Therefore, our earnings are sensitive to changes in volume.

Due to the high levels of fixed capital required to produce cement, our profitability is susceptible to significant changes in volume. We believe that our current cash balance, along with our projected internal cash flows and our available financing resources will provide sufficient cash to support our currently anticipated operating and capital needs. However, if we are unable to generate sufficient cash to purchase and maintain the property and machinery necessary to operate our cement business, we may be required to reduce or delay planned capital expenditures or incur additional debt. In addition, given the level of fixed and semi-fixed costs within our Cement business and at our cement production facilities, decreases in volume could have an adverse effect on our financial condition, results of operations, and liquidity.

We are subject to risks and uncertainties related to our review of alternatives for our Oil and Gas Proppants Business.

The Company continues to review alternatives for our remaining Oil and Gas Proppants business and is carefully considering the full range of options, including potential transactions with third parties and other strategic and financial alternatives. There can be no assurance that the review of strategic alternatives will result in any particular action or that a transaction will be consummated. We have and will continue to incur expenses in connection with the review of alternatives and our future results may be affected by the pursuit or consummation of any specific transaction. While the review of alternatives is ongoing, we are exposed to certain risks and uncertainties, including the diversion of management’s time to the process; the need to limit and curtail operations in light of significant decrease in demand and exposure to potential litigation in connection with any specific transaction or other strategic alternative resulting therefrom, all of which could disrupt and negatively affect our business. We may decide to effect the closure of one or more facilities of our Oil and Gas Proppants business or to idle them pending any possible improvement in market conditions. We can provide no assurance that any transaction or other action we may pursue with respect to our Oil and Gas Proppants business will have a positive impact on our results of operations or financial condition.

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 oil and natural gas exploration, development, and production. More specifically, the demand for the frac sand we produce is closely related to the number of oil and natural gas wells drilled and 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 oil and natural gas prices. In recent years, oil and natural gas 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 OPEC, have contributed, and are likely to continue to contribute, to price volatility.

Oil demand has significantly deteriorated as a result of the COVID-19 pandemic and preventative measures taken around the world to contain its spread and mitigate its public health effects. At the same time, increases in production of oil by Saudi Arabia and Russia have created a significant surplus in the supply of oil. The combination of the dissolution of OPEC oil production quotas and the economic impact of the COVID-19 pandemic have resulted in significant reductions in demand for oil and an oversupply of oil worldwide. Downward pressure on commodity prices has continued and could continue for the foreseeable future. A prolonged period of low commodity prices, or further downward pressure on commodity prices, may have a negative impact on drilling and completion activity.

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Additionally, warmer than normal winters in North America and other weather patterns may adversely affect 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 affect the demand for frac sand. A prolonged reduction in oil and natural gas prices would generally depress the level of oil and natural gas exploration, development, production and well completion activity, and would 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 oil and natural gas price environment.

We may be adversely affected by decreases or shifts in 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 oil and natural gas 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, or a shift in demand from higher-margin frac sand to lower-margin frac sand, such as the current shift to in-basin frac sand, could have a material adverse effect on our Oil and Gas Proppants business. The development and use of new technology for effective alternative proppants, or new technologies allowing for improved placement of proppants at reduced volumes, 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. Similarly, the continued presence of lower cost in-basin frac sand could continue to adversely affect our Oil and Gas Proppants business.

Any material nonpayment or nonperformance by any of our key customers could have a material adverse effect on our business and results of operations.

Any material nonpayment or nonperformance by any of our key customers could have a material adverse effect on our revenue and cash flows, in particular with respect to our Oil and Gas Proppants business. Our contracts with our customers provide for different potential remedies to us in the event a customer fails to purchase the minimum contracted amount of product in a given period. If we were to pursue legal remedies in the event that a customer failed to purchase the minimum contracted amount of product under a fixed-volume contract or failed to satisfy the take-or-pay commitment under a take-or-pay contract, we may receive significantly less in a judgment or settlement of any claimed breach than we would have received had the customer fully performed under the contract. In the event of any customer’s breach, we may also choose to renegotiate any disputed contract on less favorable terms (including with respect to price and volume) for us to preserve the relationship with that customer.

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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. For example, certain of our waste-burning cement kilns are subject to the Standards of Performance for New Sources and Emissions Guidelines for Existing Sources for Commercial/Industrial Solid Waste Incinerators (the CISWI Rule). 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 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, we are subject to the National Emissions Standards for Hazardous Air 48 Pollutants, or NESHAP, for Portland cement plants (PC NESHAP). In the future, the EPA may propose to further strengthen the emission limitations applicable under the PC NESHAP to reflect future technological developments, as a result of its periodic reviews of the limitations mandated by the Clean Air Act. Further, out of the 16 states where we have operations, 10 states contain at least one “area” that was designated as being in nonattainment for the 2015 ozone National Ambient Air Quality Standards (NAAQS) (California, Colorado, Illinois, Missouri, Nevada, New Mexico, Ohio, Texas, Utah, and Wisconsin). We may be required to meet new control requirements in these states requiring significant capital expenditures for compliance.

Climate change and climate change legislation or regulations may adversely affect our business.

A number of governmental bodies have finalized, proposed, or are contemplating legislative and regulatory changes in response to the potential effects of climate change. Such legislation or regulation has and potentially could include provisions for a “cap and trade” system of allowances and credits or a carbon tax, among other provisions. 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.

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Other potential effects of climate change include physical effects such as disruption in production and product distribution as a result of major storm events and shifts in regional weather patterns and intensities. Production and shipment levels for our businesses correlate with general construction activity, most of which occurs outdoors and, as a result, is affected by erratic weather patterns, seasonal changes, and other unusual or unexpected weather-related conditions, which can significantly affect our businesses. There is also a potential for climate change legislation and regulation to adversely affect the cost of purchased energy and electricity.

The effects of climate change on our operations are highly uncertain and difficult to estimate. However, because a chemical reaction inherent to the manufacture of portland cement releases carbon dioxide, a GHG, cement kiln operations may be disproportionately affected by future regulation of GHGs. Climate change and legislation and regulation concerning GHGs could have a material adverse effect on our financial condition, results of operations, and liquidity.

Silica-related legislation, health issues and litigation could have a material adverse effect on our business, reputation or results of operations.

The inhalation of respirable crystalline silica is associated with the lung disease silicosis. There is evidence of an association between crystalline silica exposure or silicosis and lung cancer and a possible association with other diseases, including immune system disorders such as scleroderma. These health risks have been, and may continue to be, a significant issue confronting the frac sand industry and related transloading operations. Concerns over silicosis and other potential adverse health effects, as well as concerns regarding potential liability from the use or handling of frac sand, may have the effect of discouraging our customers’ use of our frac sand. The actual or perceived health risks of mining, processing, and handling frac sand could materially and adversely affect frac sand producers and those who transload frac sand, including us, through reduced use of frac sand, the threat of product liability or employee lawsuits, increased scrutiny by federal, state and local regulatory authorities of us and our customers. We are currently subject to laws and regulations relating to human exposure to crystalline silica. Several federal and state regulatory authorities, including MSHA and OSHA, may continue to propose and implement changes in their regulations regarding workplace exposure to crystalline silica, such as permissible exposure limits and required controls and personal protective equipment. We may not be able to comply with any new laws and regulations that are adopted and required modifications or cessation of operations at our affected operations could have a material adverse effect on those businesses. 

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 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 and could be adverse and material in amount. Development in these proceedings can lead to changes in management’s estimates of liabilities associated with these proceedings including the judge’s rulings or judgments, settlements, or changes in applicable law. A future adverse ruling, settlement, or unfavorable development could result in charges that could have a material adverse effect on our results of operations and cash flows in a particular period. 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.

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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.

Changes in the cost or availability of raw materials supplied by third parties may adversely affect our operating and financial performance.

We generally maintain our own reserves of limestone, gypsum, aggregates, and other materials that we use to manufacture our products. However, we obtain certain raw materials used to manufacture our products, such as synthetic gypsum and slag granules, from third parties who produce such materials as by-products of industrial processes. While we try to secure our needed supply of such materials through long-term contracts, those contracts may not be sufficient to meet our needs, or we may be unable to renew or replace existing contracts when they expire or are terminated in the future. Should our existing suppliers cease operations or reduce or eliminate production of these by-products, our costs to procure these materials may increase significantly, or we may be obliged to procure alternatives to replace these materials, which may not be available on commercially reasonable terms or at all. Any such development may adversely affect our operations and financial condition.

We may become subject to significant cleanup, remediation, reclamation, 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, reclamation, 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. 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, 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.

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A frac sand mining facility closure entails substantial costs, and if we close our frac sand mining facilities, our results of operations may be adversely affected.

The closure of a frac sand mining facility would involve significant fixed closure costs, including accelerated employment legacy costs, severance-related obligations, reclamation and other environmental costs and the costs of terminating long-term obligations, including energy contracts and equipment leases. We accrue for the costs of reclaiming open pits, stockpiles, non-saleable sand, ponds, roads and other mining support areas over the estimated mining life of our property.

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.

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 Revolving Credit Facility, Senior Unsecured Notes, and Term Loan 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:

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.

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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:

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 periodically 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 a negative 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 Revolving 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.

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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 as 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.

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 parties to deny 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 our 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.

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We may pursue acquisitions, joint ventures and other transactions that are intended to complement or expand our businesses. We may not be able to complete proposed transactions, and even if completed, the transactions may involve a number of risks that may result in a material adverse effect on our business, financial condition, operating results, and cash flows.

As business conditions warrant and our financial resources permit, we may pursue opportunities to acquire businesses or technologies and to form joint ventures that we believe could complement, enhance, or expand our current businesses or product lines or that might otherwise offer us growth opportunities. We may have difficulty identifying appropriate opportunities, or if we do identify opportunities, we may not be successful in completing transactions for a number of reasons. Any transactions that we are able to identify and complete may involve one or more of a number of risks, including:

In addition, we may not be able to successfully or profitably integrate, operate, maintain, and manage our newly acquired operations or their employees. We may not be able to maintain uniform standards, controls, procedures, and policies, which may lead to operational inefficiencies. In addition, future acquisitions may result in dilutive issuances of equity securities or the incurrence of additional indebtedness.

Increases in our effective income tax rate may harm our results of operations.

A number of factors may increase our future effective income tax rate, including:

Any significant increase in our future effective income tax rate could reduce net earnings and free cash flow for future periods.

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The anticipated benefits of the acquisition of the Kosmos Business may not be realized fully or at all and may take longer to realize than expected.

The acquisition of the Kosmos Business involves the integration of an independently operated business into our business operations. The integration process may be complex, costly and time-consuming, which could adversely affect our businesses, financial results and financial condition. Our management team will be required to devote significant attention and resources to the integration process. Even if the integration is successful, it may not result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that we expect to realize or these benefits may not be achieved within a reasonable period of time.

Our bylaws include a forum selection clause, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any internal corporate claims within the meaning of the Delaware General Corporation Law (DGCL), (ii) any derivative action or proceeding brought on our behalf, (iii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or employees to us or to our stockholders, or (iv) any action asserting a claim arising pursuant to any provision of the DGCL, will be a state or federal court located within the State of Delaware in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the foregoing provisions. This forum selection provision in our bylaws may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. It is also possible that, notwithstanding the forum selection clause included in our bylaws, a court could rule that such a provision is inapplicable or unenforceable.

Our bylaws include a forum selection clause, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any internal corporate claims within the meaning of the Delaware General Corporation Law (DGCL), (ii) any derivative action or proceeding brought on our behalf, (iii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or employees to us or to our stockholders, or (iv) any action asserting a claim arising pursuant to any provision of the DGCL, will be a state or federal court located within the State of Delaware in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the foregoing provisions. This forum selection provision in our bylaws may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. It is also possible that, notwithstanding the forum selection clause included in our bylaws, a court could rule that such a provision is inapplicable or unenforceable.  If the Company does not consent in writing to the selection of an alternative forum, this provision of our bylaws would apply to actions arising under the U.S. federal securities laws and there is uncertainty as to whether a court would enforce this provision with regard to such actions.

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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.

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ITEM 1B. Unresolved Staff Comments

There are no unresolved Staff comments.

ITEM 2. Properties

Our operating facilities span the U.S. They include cement plants, quarries, and related facilities; aggregate plants and quarries; gypsum wallboard plants; a recycled paperboard mill; frac sand mines and processing plants; as well as distribution terminals and our headquarters in Dallas. Other than our leased cement plant located in Sugar Creek, Missouri, none of our facilities are pledged as security for any debts. Please see the Industry Segment Information section on pages 4-23 for more information about the location of our facilities.

The following map shows the locations of our operating facilities, by type of facility. The Concrete and Aggregate facilities in Northern California were sold on April 17, 2020:

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ITEM 3. Legal Proceedings

Our operations and properties are subject to extensive and changing federal, state, and local laws; regulations and ordinances governing the protection of the environment; as well as laws relating to worker health and workplace safety. We carefully consider the requirements mandated by such laws and regulations and have procedures in place at all of our operating units to monitor compliance. Any matters which are identified as potential exposures under these laws and regulations are carefully reviewed by management to determine our potential liability.

ITEM 4. Mine Safety Disclosures

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 Annual Report on Form 10-K.

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PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Stock Prices and Dividends

As of May 18, 2020, there were approximately 1,200 holders of record of our Common Stock which trades on the New York Stock Exchange under the symbol EXP.

SHARE REPURCHASES

On April 18, 2019, the Board of Directors authorized us to repurchase an additional 10,000,000 shares. Including this latest authorization, our Board of Directors has approved the repurchase in the open market of a cumulative total of 48,393,305 shares of our Common Stock since we became publicly held in April 1994.

During fiscal years 2020, 2019, and 2018, we repurchased 3,574,109; 3,309,670; and 627,772 shares, respectively, at average prices of $87.82, $82.18, and $97.30, respectively. We have repurchased approximately 41.1 million shares from April 1994 through March 31, 2020.

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 the Company’s 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 occasionally by the Company’s management, including plans to comply with the safe harbor provided by Rule 10b5-1.

The Equity Compensation Plan information set forth in Part III, Item 12 of this Form 10-K is hereby incorporated by reference into this Part II, Item 5.

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PERFORMANCE GRAPH

The following performance graph and related information shall not be deemed soliciting material or to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

The graph below compares the cumulative 5-year total return to holders of Eagle Materials Inc. common stock with the cumulative total returns of the Russell 1000 index and the Dow Jones US Building Materials & Fixtures index. The graph assumes that the value of the investment (including the reinvestment of dividends) in the Company’s common stock and in each of the indices was $100 on March 31, 2015, and tracks it through March 31, 2020.

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

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ITEM 6. Selected Financial Data

Summary of Selected Financial Data ⁽¹⁾

ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

executive summary

We are a leading supplier of heavy construction materials and light building materials in the United States. Our primary products are commodities that are essential in commercial and residential construction; public construction projects; and projects to build, expand, and repair roads and highways. Demand for our products is generally cyclical and seasonal, depending on economic and geographic conditions. We distribute our products across many United States markets, which provides us with regional economic diversification. We also produce sand used in hydraulic fracturing as part of our Oil and Gas Proppants sector.

Our business is organized into three sectors: Heavy Materials, which includes the Cement and Concrete and Aggregates segments; Light Materials, which includes the Gypsum Wallboard and Recycled Paperboard segments; and Oil and Gas Proppants, which are used in oil and natural gas extraction. Financial results and other information for the fiscal years ended March 31, 2020, 2019, and 2018, respectively, are presented on a consolidated basis and by these business segments – Cement, Concrete and Aggregates, Gypsum Wallboard, Recycled Paperboard, and Oil and Gas Proppants.

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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 Revenue 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.

All our business activities are conducted in the United States. These activities include the mining of limestone for the manufacture, production, distribution, and sale of portland cement (a basic construction material that is the essential binding ingredient in concrete); the grinding and sale of slag; the mining of gypsum for 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).

Demand for our products is generally cyclical and seasonal, depending on economic and geographic conditions. We distribute our products throughout most of the United States, except the Northeast, which provides us with regional economic diversification. However, 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.

On August 2, 2019, we acquired the assets of a readymix concrete and aggregates business (the ConAgg Acquisition). The purchase price (Purchase Price) of the ConAgg Acquisition was approximately $30.4 million. The Purchase Price and expenses incurred in connection with the ConAgg Acquisition were funded through operating cash flows and borrowings under our Revolving Credit Facility. The ConAgg Acquisition’s assets and operating results are included in our Concrete and Aggregates segment reporting from August 2, 2019 through March 31, 2020.

On March 6, 2020, we completed the acquisition (the Kosmos Acquisition) of Kosmos Cement Company (a joint venture between CEMEX S.A.B. de C.V. and Buzzi Unicem S.p.A.) (Kosmos), which included (i) a cement plant located in Louisville, Kentucky, (ii) a limestone quarry located in Battletown, Kentucky, (iii) cement distribution terminals located in Indianapolis, Indiana; Cincinnati, Ohio; Pittsburgh, Pennsylvania; Charleston, West Virginia; Ceredo, West Virginia; Mt. Vernon, Indiana; and Lexington, Kentucky, and (iv) certain other properties and assets used by Kosmos in connection with the foregoing (collectively, the Kosmos Business) for a purchase price of approximately $669 million. We also assumed certain liabilities and obligations of Kosmos relating to the Kosmos Business, including contractual obligations, reclamation obligations and various other liabilities and obligations arising out of or relating to the Kosmos Business after the closing of the transaction. We funded the payment of the purchase price and expenses incurred in connection with the transaction through a combination of cash on hand and a syndicated term loan facility. The Kosmos Business’ assets and operating results are included in our Cement segment reporting from March 6, 2020 through March 31, 2020.

As previously announced on May 30, 2019, the Company plans to separate its Heavy Materials and Light Materials businesses into two independent, publicly traded corporations by means of a tax-free spin-off to Eagle shareholders.  We remain committed to the separation, although the timing is uncertain.  We continue preparations to ensure that the two businesses are well-positioned for the separation when the markets recover from the effects of the COVID-19 pandemic.  

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MARKET CONDITIONS AND OUTLOOK

During our fiscal fourth quarter, from a macroeconomic perspective, we saw several positive indicators for the construction sector, including low interest rates, high consumer confidence and robust employment which led to increasingly positive trends in housing starts, state construction lettings and construction employment. These factors should positively affect both our Heavy Materials and Light Materials businesses. However, given the onset of the COVID-19 pandemic discussed below, we are closely monitoring these indicators for the impact on our business in subsequent quarters. 

In late 2019, a novel strain of the coronavirus (“COVID-19”) virus began spreading globally and is now in every state of the United States. In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. While COVID-19 did not have a significant impact on our business in fiscal 2020 given the timing of when the effects of the pandemic began to impact our operating markets, we believe its impact will negatively affect our operations in subsequent periods. The impact on future results, however, is uncertain. With increasing unemployment and waning consumer confidence, we expect the demand for the new residential market to be affected first. In fiscal 2020, approximately 50% of our wallboard business and 25% of our cement business was driven by new residential construction. In addition, the pandemic will likely continue to severely affect state and local revenues and budgets, negatively affecting construction projects in the future. We continue to monitor our operations, operations of our customers and the recommendations of the various national, state and local governments in the areas in which we operate. The extent to which the spread of COVID-19 impacts the national and local economies in which we operate, and ultimately our business, will depend on numerous developments, which are highly uncertain and difficult to predict. These events, as they continue to develop, could result in business disruption, including reduced revenue, profitability and cashflow. 

Our integrated cement sales network stretches across the U.S. heartland. The Portland Cement Association is estimating cement consumption will increase in calendar 2020 over 2019 by approximately 2%. In addition to weather, cement and concrete and aggregates markets are affected by infrastructure spending, residential construction, and industrial construction activity.

Our primary Gypsum Wallboard sales network stretches across the southern half of the United States, consistent with our facility network. Wallboard demand is heavily influenced by new residential housing construction, as well as repair and remodeling activity. Our Recycled Paperboard business primarily sells paper into the gypsum wallboard market, and demand for paper generally follows the demand for gypsum wallboard. The primary raw material used to produce paperboard business is OCC. OCC prices increased from $45 per ton in March 2020 to $120 per ton in May 2020 largely due to reduced generation of OCC due the COVID-19 pandemic. Although current gypsum liner customer contracts include price escalators that partially offset and compensate for changes in raw material fiber prices, these increases likely will adversely affect our wallboard operations by increasing the cost of paper.

During the second half of calendar year 2019, our Oil and Gas Proppants financial results have been negatively affected by a combination of low demand for our products and the increased use of in-basin sand instead of northern white frac sand. Faced with these market conditions, we recorded long-lived asset and other asset impairments of approximately $224.3 million during the fiscal third quarter. See Footnote (A) to the Audited Consolidated Financial Statements for more information about the impairment. In addition, during the March and April 2020, oil prices declined to all-time lows due to the decrease in demand for oil resulting from the COVID-19 pandemic, as well as an increase in supply caused by disagreements with respect to oil pricing and output between Russia and members of OPEC, particularly Saudi Arabia. The COVID-19 pandemic has caused a global decrease in all modes of travel, the closure of borders between countries and a general slowing of economic activity worldwide, which has decreased

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the demand for oil. In early March, Russia and Saudi Arabia ended a three-year supply level agreement, which resulted in each country increasing its oil production. In April 2020 Russia and OPEC agreed to production cuts to mitigate the decline in the price of oil; however, such cuts may not be sufficient to stabilize the oil market if the decline in demand due to the COVID-19 pandemic continues. Oil and natural gas prices are expected to continue to be volatile as a result of the increase of near-term supply and the decrease in overall demand caused by these events, and we cannot predict when prices will improve or stabilize. This sharp decline in oil prices has led to further declines in drilling and well-completion activity, including the suspension of most new drilling activity since March 2020, and has negatively impacted our Oil and Gas Proppants business. As previously disclosed, we are actively pursuing alternatives for our Oil and Gas Proppants business. If this results in an alternative use or disposition of this business, additional impairment or other losses may be incurred.

Results of Operations

Fiscal Year 2020 Compared with Fiscal Year 2019

Revenue

Revenue increased in fiscal 2020 by $57.6 million to $1,450.8 million. The Kosmos and ConAgg Acquisitions contributed approximately $32.2 million to the increase in Revenue. Excluding the Kosmos and ConAgg Acquisitions, Revenue increased approximately $25.4 million, primarily due to higher Sales Volume of approximately $69.8 million, partially offset by lower average Gross Sales Prices of approximately $44.4 million. The lower Gross Sales Prices related primarily to our Gypsum Wallboard and Recycled Paperboard segments, and is discussed further on pages 50-51.

Cost of Goods Sold

Cost of Goods Sold increased by $52.9 million, or 5%, to $1,119.6 million in fiscal 2020. Approximately $38.6 million of the increase was related to the Kosmos and ConAgg Acquisitions. The remaining increase in Cost of Goods Sold was due to increased Sales Volume, which increased Cost of Goods Sold by approximately $44.4 million, partially offset by lower operating costs of approximately $30.1 million. The decrease in operating costs related primarily to our Gypsum Wallboard, Recycled Paperboard, and Oil and Gas Proppants segments, and is discussed further on pages 50-52.

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Gross Profit

Gross Profit increased by 1% to $331.3 million in fiscal 2020. Excluding the Kosmos and ConAgg Acquisitions, the increase in Gross Profit was primarily related to higher Sales Volume and lower operating costs, partially offset by lower average Gross Sales Prices, as noted above. The gross margin remained consistent at 23% for both fiscal 2020 and 2019.

Equity in Earnings of Unconsolidated Joint Venture

Equity in Earnings of Unconsolidated Joint Venture increased by $4.0 million, or 10%. The improvement was primarily due to higher Sales Volume and Gross Sales Prices of approximately $3.1 million and $0.2 million, respectively, as well as lower operating expenses of $0.7 million. The decrease in operating costs was due primarily to purchased cement costs of approximately $2.1 million, partially offset by higher energy and raw materials costs of $0.8 million and $0.7 million, respectively.

Corporate General and Administrative

Corporate General and Administrative expenses increased by approximately $28.0 million, or 75%, to $65.4 million in fiscal 2020. The increase was due primarily to costs incurred in connection with our pending separation, consulting expenses, acquisition-related expenses, and the acceleration of stock compensation costs upon the retirement of our Chief Executive Officer during the first quarter of fiscal 2020, which contributed approximately $11.5 million, $1.8 million, $7.0 million, and $5.3 million, respectively, to the increase. The accelerated vesting of all earned but unvested shares of restricted stock held by our Chief Executive Officer was consistent with the terms of the Company’s incentive plan documents and was approved by the Board of Directors.  

IMPAIRMENT LOSSES

Impairment Losses in fiscal 2020 were approximately $224.3 million and related to our Oil and Gas Proppants segment. The charges included a $187.6 million impairment of property and equipment, a $29.1 million impairment of Operating Lease Right-of-Use Assets, and a $7.6 million impairment of other current assets, primarily inventories. Impairment Losses in fiscal 2019 were approximately $220.3 million and related to impairment charges taken in our Oil and Gas Proppants segment. The charges included a $211.3 million impairment of Property and Equipment, and a $9.0 million impairment of Goodwill and Intangible, and Other Assets. The Impairment Losses have not been included in the Oil and Gas Proppants’ segment Operating Earnings. See Footnote (A) to the Audited Consolidated Financial Statements for more information.

litigation SETTLEMENTS and losses

Litigation Settlements and Losses in fiscal 2019 relate to third-party property damage that occurred several years ago in our Recycled Paperboard business. This amount was paid during the first quarter of fiscal 2020.

Other non-operating Income

Other Non-Operating Loss was $0.1 million in fiscal 2020, compared with Other Non-Operating Income of $2.4 million in fiscal 2019. Other Non-Operating Income consists of a variety of items that are non-segment operating in nature, including lease and rental income, non-inventoried Aggregates income, asset sales, and other miscellaneous income and cost items.

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Interest Expense, Net

Interest Expense, net, increased by approximately $10.0 million in fiscal 2020. The increase in Interest Expense, net was due primarily to higher interest on borrowings under our Revolving Credit Facility and Term Loan of $9.3 million and $1.4 million, partially offset by lower interest expense on our Private Placement Unsecured Notes. The increase in interest expense for our Revolving Credit Facility was due primarily to higher outstanding balances related to the repurchase of approximately 3.6 million shares of our outstanding stock during fiscal 2020 and the payment of the remaining notes under the Private Placement Unsecured Notes. The Term Loan was entered into in March 2020 to fund the Kosmos Acquisition.

Earnings Before Income Taxes

Earnings Before Income Taxes decreased to $45.7 million during fiscal 2020, primarily due to the increase in Corporate General and Administrative Expense of $28.0 million, Interest Expense of $10.0 million, and Impairment Losses of $4.0 million. This was offset partially by increased Gross Profit of $4.7 million and Equity in Unconsolidated Joint Venture of $4.0 million.

Income Tax Expense

We recorded an Income Tax Benefit of $25.2 million for fiscal 2020 and Income Tax Expense of $10.9 million for fiscal 2019. The tax rate for fiscal 2020 was approximately (55%), compared with 14% for fiscal 2019. The decrease in the fiscal 2020 tax rate was primarily due to the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which allows for a five-year carryback of net operating losses generated beginning in 2018 and ending in 2021. In March 2020, we recorded a one-time discrete benefit of $31.7 million related to the carryback and utilization of net operating losses in prior-year periods at higher rates than the current statutory rate.

Net Earnings and Diluted Earnings per Share

Net Earnings increased 3% in fiscal 2020 to $70.9 million. Diluted Earnings per Share in fiscal 2020 were $1.68, compared with $1.47 for fiscal 2019. The increase in Net Earnings and Diluted Earnings per Share were primarily due to the income tax benefit recognized during the fourth quarter of fiscal 2020, as discussed above, and the repurchase of approximately 3.6 million outstanding shares of common stock during fiscal 2020.

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FISCAL YEAR 2020 vs FISCAL YEAR 2019 Results by Segment

The following presents results within our three business sectors in fiscal 2020 and fiscal 2019. Revenue and operating results are organized by sector and discussed by individual business segment within each respective business sector.

Heavy Materials

Cement ⁽¹⁾

Cement Revenue was $752.0 million for fiscal 2020, a 15% increase over fiscal 2019. Revenue from the Kosmos Acquisition contributed $7.9 million of the increase. The remaining increase in Revenue was primarily due to an increase in gross sales prices and an 10% increase in Sales Volume, which positively affected Revenue by $17.1 million and $70.2 million, respectively.

Cement Operating Earnings increased 10% to $181.3 million for fiscal 2020. Excluding the Kosmos Acquisition, Operating Earnings increased by $23.3 million in fiscal 2020. The increase in Operating Earnings was due primarily to higher Sales Volume and gross sales prices of approximately $15.7 million and $17.1 million, respectively. This was partially offset by increased operating costs, which reduced Operating Earnings by approximately $9.5 million. The increase in operating costs was primarily due to maintenance, freight, and fixed costs of approximately $2.0 million, $2.1 million, and $4.5 million, respectively. The Operating Margin declined to 24% in fiscal 2020, compared with 25% in fiscal 2019. The Kosmos operating loss reflects the plant’s annual maintenance outage which began shortly after we took ownership, as well as the impact of the purchase accounting on inventory cost.

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Concrete and Aggregates

Concrete and Aggregates Revenue increased 30% to $182.8 million for fiscal 2020. Revenue from the ConAgg Acquisition contributed $24.3 million of the increase. The remaining increase in Revenue was due to higher Sales Volume and gross sale prices, primarily for Concrete, which increased Revenue by approximately $14.4 million and $3.9 million, respectively.

Operating Earnings increased 36% to approximately $17.6 million for fiscal 2020. Excluding the ConAgg Acquisition, Operating Earnings increased to approximately $17.2 million, an increase of $4.3 million from fiscal 2019. This increase was a result of higher Sales Volume and gross sales prices, primarily in our Concrete business, which increased Operating Earnings by approximately $1.1 million and $3.9 million, respectively. This increase was partially offset by higher operating costs of approximately $0.7 million.

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Light Materials

Gypsum Wallboard

Gypsum Wallboard Revenue decreased 5% to $508.1 million in fiscal 2020, primarily because of an 8% decrease in gross sales prices. The decrease in gross sales prices adversely affected Revenue by approximately $33.2 million. This decline was partially offset by a 2% increase in Sales Volume that positively affected Revenue by $8.6 million. Our market share was essentially unchanged during fiscal 2020; higher Sales Volume was primarily due to increased construction activity in the markets we serve.

Operating Earnings declined 14% to $154.6 million for fiscal 2020. This decrease was primarily due to lower gross sales prices of approximately $33.2 million which was partially offset by higher Sales Volume and lower operating costs of approximately $2.9 million and $4.1 million, respectively. The lower operating costs were primarily related to lower paper costs of approximately $5.2 million, partially offset by an increase in other raw materials, of approximately $1.4 million. During fiscal 2020, Gypsum Wallboard Operating Margin declined to 30% from 34% in fiscal 2019, primarily because of the decline in gross sales prices, partially offset by lower operating costs. Fixed costs are not a significant part of the overall cost of wallboard; therefore, changes in volume have a relatively minor impact on our operating cost per unit.

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Recycled Paperboard

Recycled Paperboard Revenue decreased 5% to $160.0 million for fiscal 2020 as lower gross sales prices adversely affected Revenue by approximately $15.6 million. The decrease in gross sales prices, which was due to the price-adjustment provisions in our long-term sales agreements, was partially offset by a 5% increase in Sales Volume that increased Revenue by $8.0 million.  

Operating Earnings decreased 1% to $35.0 million for fiscal 2020, primarily because lower gross sales prices reduced operating earnings by $15.6 million. The decrease was partially offset by higher Sales Volume and lower operating costs, which positively affected Operating Earnings by approximately $1.7 million and $13.6 million, respectively. The decrease in operating costs was due primarily to input costs, which positively affected Operating Earnings by approximately $16.5 million, partially offset by costs incurred during planned outages. In connection with the expansion at our paper mill, we had an extended outage during both the third and fourth quarters to install new operating equipment. These outages reduced production during the third and fourth quarters and led to increased costs of approximately $4.5 million. During fiscal 2020, Operating Margin increased to 22% from 21% in fiscal 2019, primarily due to lower operating costs, partially offset by decreased gross sales prices.

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OIL AND GAS PROPPANTS

Revenue from our Oil and Gas Proppants segment decreased 44% to $46.8 million for fiscal 2020. The decrease in Revenue was primarily due to lower gross sales prices and Sales Volume, which adversely affected Revenue by approximately $19.9 million and $16.3 million, respectively.

Operating Loss for fiscal 2020 declined 49% to $14.6 million. The lower Operating Loss was a result of lower operating costs of approximately $34.0 million. This decrease was partially offset by lower gross sales prices of approximately $19.9 million. Lower operating costs were primarily related to decreases in contract mining and depreciation and depletion of approximately $7.1 million and $26.9 million, respectively, partially offset by higher fixed costs of $3.4 million.

During the fiscal 2020 and 2019, we recognized Impairment Losses of approximately $224.3 and $220.3 million, respectively, related primarily to property and equipment. The Impairment Losses are not included in Operating Earnings disclosed above. See Footnote (A) to the Audited Consolidated Financial Statements for more discussion of the Impairment Losses.

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Fiscal Year 2019 Compared with Fiscal Year 2018

Please see our Form 10-K for fiscal year 2019 for the discussion of our Results of Operations and results of Revenue and Operating Income by segment for fiscal 2019 compared with fiscal 2018. Our 2019 Form 10-K can be found on the investor page of our website, at www.eaglematerials.com.

CRITical Accounting Policies

Certain of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Although our accounting policies are in compliance with generally accepted accounting principles, a change in the facts and circumstances of the underlying transactions could significantly change the application of the accounting policies and the resulting financial statement impact. Listed below are those policies that we believe are critical and require the use of complex judgment in their application.

Impairment of Long-Lived Assets

We assess our long-lived assets, including mining and related assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or group of assets, may not be recoverable. Long-lived assets, or groups of assets, are evaluated for impairment at the lowest level for which cash flows are largely independent of the cash flows of other assts. We assess recoverability of assets, or group of assets, by comparing the carrying amount of an asset, or group of assets, to the future undiscounted net cash flows that we expect the asset, or group of assets, to generate. These impairment evaluations are significantly affected by estimates of future revenue, costs and expenses, and other factors. If the carrying value of the assets, or group of assets, exceeds the undiscounted cash flows, then an impairment is indicated. If such assets, or group of assets, are considered to be impaired, the impairment is recognized as the amount by which the carrying amount of the asset, or group of assets, exceeds the fair value of the asset, or group of assets.

During the second half of calendar year 2019, our Oil and Gas Proppants financial results were further negatively affected by a combination of continued low demand for our products and the increased use of in-basin sand instead of northern white frac sand in the Permian and other shale basins. Faced with these dynamics, in connection with the preparation of our financial statements for the three and nine months ended December 31, 2019, we concluded that the reduction in sales volumes and operating losses were other than temporary and that long-lived asset impairment indicators were present in our Oil and Gas Proppants segment.    

Prior to performing recoverability tests to determine whether an impairment was present, we grouped the long-lived assets of the segment into the lowest level at which cash flows are generated, which is considered the operating facility or distribution level. We included the value of our Operating Lease Right-of-Use Assets that support the operating facilities within the value of the operating facility prior to performing our recoverability tests. We then performed recoverability tests on each group of assets using probability-weighted estimates of forecasted undiscounted cash flows over the remaining estimated life of each asset group under a variety of scenarios. Based on these forecasts, we concluded that the carrying values exceeded the undiscounted cash flows for our New Auburn, Wisconsin and Utica, Illinois operating facilities and several distribution facilities related to these operating facilities, indicating impairment.  

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For the impaired asset groups, we calculated the estimated fair value of the operating facilities in New Auburn, Wisconsin; Utica, Illinois; and related distribution terminals, using a discounted cash flow model (Level 3), which utilized a weighted-average cost of capital determined from relevant market comparisons and adjusted for specific risks. We compared the results of the discounted cash flow model to other recent market information about the value of similar assets, noting the amounts to be consistent. The analysis resulted in an impairment loss of approximately $216.8 million.  

The following is a summary of the impairment on the net book value of the long-lived assets:

In addition to the impairment of the operating facilities and transload facilities, we also assessed other current and long-term assets for impairment. As part of this analysis, we wrote down certain Inventories, Accounts and Notes Receivable, and Prepaid and Other Current Assets. The Oil and Gas Proppants business has liabilities related to its capitalized operating leases and asset retirement obligation that total $17.9 million at March 31, 2020.

The following is a summary of Impairment Losses recognized during fiscal 2020, by line item:

Our Oil and Gas Proppants business continues to be subject to commodity price volatility related to the price of oil. See “Market Conditions and Outlook” above.

As previously disclosed in Item 1 “Business”, we are actively pursuing alternatives for our Oil and Gas Proppants business. If this process results in an alternative use or disposition of this business, additional impairment or other losses may be incurred.

Goodwill

We annually assess Goodwill for impairment in the fourth quarter of our fiscal year, or more frequently when indicators of impairment exist. Impairment testing for Goodwill is done at the reporting unit, which is consistent with our reportable segment.

Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. Prior to performing the Step 1 quantitative analysis, we may, at our discretion, perform an optional qualitative analysis, or we may choose to proceed directly to the Step 1 quantitative analysis. The qualitative analysis considers the impact of the following events and circumstances on the reporting unit being tested: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and other relevant entity-specific events. If, as a result of this qualitative analysis, we

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conclude that it is more likely than not (a likelihood of greater than 50%) that the fair value of the reporting unit exceeds its carrying value, then an impairment does not exist and the quantitative Step 1 analysis is not required. If we are unable to conclude that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, then we proceed to the quantitative Step 1 analysis.

Step 1 of the quantitative test for impairment compares the fair value of the reporting unit to its carrying value. If the carrying value exceeds the fair value, then an impairment is indicated. If facts and circumstances related to our business change in subsequent years, we may choose to perform a quantitative analysis in those future years. If we perform a Step 1 analysis, and the carrying value of the reporting unit exceeds its fair value, then an impairment charge equal to the difference, not to exceed the total amount of Goodwill, is recorded.

The fair values of the reporting units are estimated by using both the market and income approaches. The market approach considers market factors and certain multiples in comparison to similar companies, while the income approach uses discounted cash flows to determine the estimated fair values of the reporting units. We also perform an overall comparison of all reporting units to our market capitalization in order to test the reasonableness of our fair value calculations.

We performed qualitative assessments of our Cement, Gypsum Wallboard, and Recycled Paperboard reporting units in the fourth quarters of fiscal 2020 and 2019. As a result of these qualitative assessments, we determined that it was not more likely than not that an impairment existed; therefore, we did not perform a Step 1 quantitative impairment test.

Determining the fair value of our reporting units involves the use of significant estimates and assumptions and considerable management judgment. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. The most important assumption underlying our estimates is the projection of construction spending in the U.S. over the next several years. Actual results may differ materially from those estimates. Changes in market conditions, market trends, interest rates or other factors outside of our control, such as the COVID-19 pandemic, could cause us to change key assumptions and our judgment about a reporting unit’s prospects. Similarly, in a specific period, a reporting unit could significantly underperform relative to its historical or projected future operating results. Either situation could result in a meaningfully different estimate of the fair value of our reporting units, and a consequent future impairment charge.

The segment breakdown of Goodwill at March 31, 2020 and 2019, following the Impairment Loss discussed above, was as follows:

Business Combinations

The acquisition method of accounting requires that we recognize the assets acquired and liabilities assumed at their acquisition date fair values. Goodwill is measured as the excess of consideration transferred over the acquisition date net fair values of the assets acquired and the liabilities assumed. The purchase price allocation is a critical accounting policy because the estimation of fair values of acquired assets and assumed liabilities is judgmental and requires various assumptions. Further, the

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amounts and useful lives assigned to depreciable and amortizable assets versus amounts assigned to goodwill, which is not amortized, can significantly affect the results of operations in the period of and for periods subsequent to a business combination. Although independent appraisals may be used to assist in the determination of the fair values of certain assets and liabilities, the appraised values are usually based on significant estimates provided by management, such as forecasted revenue or profit, and the replacement cost and useful lives of the acquired property, plant, and equipment.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, and therefore represents an exit price. A fair value measurement assumes the highest and best use of the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. We assign the highest level of fair value available to assets acquired and liabilities assumed based on the following options: 

Level 1 – Quoted prices in active markets for identical assets and liabilities.

Level 2 – Observable inputs, other than quoted prices, for similar assets or liabilities in active markets.

Level 3 – Unobservable inputs, which includes the use of valuation models.

Level 2 fair values are typically used to value acquired receivables, inventories, machinery and equipment, land, buildings, deferred income tax assets and liabilities, and accruals for payables, asset retirement obligations, and contingencies. 

Level 3 inputs are used to estimate the fair value of acquired mineral reserves, mineral interests and separately-identifiable intangible assets.

In determining the fair value of property, plant, and equipment, replacement cost, adjusted for the age and condition of the acquired machinery and equipment, is used. The replacement cost is based on estimates of current cost to construct similar machinery and equipment and compared to amounts paid for similar assets in market transactions for consistency.  

In determining the fair value of intangible assets, an income approach is generally used and may incorporate the use of a discounted cash flow method. In applying the discounted cash flow analysis, the estimated future cash flows and residual values for each intangible asset are discounted to a present value using a discount rate based on an estimated weighted average cost of capital for the building materials industry. These cash flow projections are based on management’s estimates of economic and market conditions including revenue growth rates, operating margins, capital expenditures, customer attrition rates, and working capital requirements.

While we use our best estimates and assumptions as part of the process to value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. During the measurement period, which occurs before finalization of the purchase price allocation, changes in assumptions and estimates that result in adjustments to the fair values of assets acquired and liabilities assumed are recorded on a retroactive basis as of the acquisition date, with the corresponding offset to Goodwill. Any adjustments subsequent to the conclusion of the measurement period will be recorded to our Consolidated Statements of Earnings.

LIQUIDITY AND CAPITAL RESOURCES

Notwithstanding the anticipated challenges associated with COVID-19, we believe at this time we have access to sufficient financial resources from our liquidity sources to fund our business and operations, including contractual obligations, capital expenditures and debt service obligations. We will continue to monitor the impact of COVID-19 on the economy, and on our operations and future liquidity needs, as a

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continued worldwide disruption of economic activity could materially affect our future access to these sources of liquidity. Please see the Debt Financing Activities section for a discussion of our credit facility and the amount of borrowings available to us in the next twelve-month period.

Cash Flow

The following table provides a summary of our Cash Flows: