exp-10q_20171231.htm

 

 

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT

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

For the Quarterly Period Ended

December 31, 2017

Commission File Number 1-12984

 

Eagle Materials Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

75-2520779

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

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

(Address of principal executive offices)

(214) 432-2000

(Registrant’s telephone number, including area code)

 

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

Yes      No  

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

YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions 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

 

  (Do not check if a smaller reporting company)

  

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 Exchange Act.)

Yes      No  

As of January 29, 2018, the number of outstanding shares of common stock was:

 

Class

 

Outstanding Shares

Common Stock, $.01 Par Value

 

48,668,850

 

 

 

 


Eagle Materials Inc. and Subsidiaries

Form 10-Q

December 31, 2017

Table of Contents

PART I. FINANCIAL INFORMATION (unaudited)

 

 

 

 

 

Page

Item 1.

 

Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Statements of Earnings for the Three and Nine Months Ended December 31, 2017 and 2016

 

1

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Earnings for the Three and Nine Months Ended December 31, 2017 and 2016

 

2

 

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2017, and March 31, 2017

 

3

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2017 and 2016

 

4

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

5

 

 

 

 

 

Item 2.

 

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

 

28

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

43

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

43

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

43

 

 

 

 

 

Item 1a.

 

Risk Factors

 

45

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

54

 

 

 

 

 

Item 4.

 

Mine Safety Information

 

54

 

 

 

 

 

Item 6.

 

Exhibits

 

55

 

 

 

 

 

SIGNATURES

 

56

 

 

 

 


 

Eagle Materials Inc. and Subsidiaries

Consolidated Statements of Earnings

(dollars in thousands, except share data)

(unaudited)

 

 

 

For the Three Months

Ended December 31,

 

 

For the Nine Months

Ended December 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

$

359,371

 

 

$

302,395

 

 

$

1,101,807

 

 

$

932,557

 

Cost of Goods Sold

 

 

264,805

 

 

 

215,015

 

 

 

824,428

 

 

 

682,012

 

Gross Profit

 

 

94,566

 

 

 

87,380

 

 

 

277,379

 

 

 

250,545

 

Equity in Earnings of Unconsolidated Joint Venture

 

 

11,372

 

 

 

11,244

 

 

 

33,203

 

 

 

31,371

 

Corporate General and Administrative Expense

 

 

(9,883

)

 

 

(9,166

)

 

 

(29,383

)

 

 

(27,831

)

Legal Settlement

 

 

(39,098

)

 

 

 

 

 

(39,098

)

 

 

 

Other Non-Operating Income

 

 

1,084

 

 

 

429

 

 

 

2,728

 

 

 

2,008

 

Interest Expense, Net

 

 

(6,653

)

 

 

(6,198

)

 

 

(21,592

)

 

 

(15,755

)

Earnings Before Income Taxes

 

 

51,388

 

 

 

83,689

 

 

 

223,237

 

 

 

240,338

 

Income Tax Expense

 

 

49,992

 

 

 

(27,302

)

 

 

(3,613

)

 

 

(78,370

)

Net Earnings

 

$

101,380

 

 

$

56,387

 

 

$

219,624

 

 

$

161,968

 

EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.10

 

 

$

1.18

 

 

$

4.56

 

 

$

3.38

 

Diluted

 

$

2.08

 

 

$

1.17

 

 

$

4.52

 

 

$

3.35

 

AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

48,221,093

 

 

 

47,881,662

 

 

 

48,132,276

 

 

 

47,901,369

 

Diluted

 

 

48,757,762

 

 

 

48,297,748

 

 

 

48,641,430

 

 

 

48,340,326

 

CASH DIVIDENDS PER SHARE:

 

$

0.10

 

 

$

0.10

 

 

$

0.30

 

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements.

 

1


 

Eagle Materials Inc. and Subsidiaries

Consolidated Statements of Comprehensive Earnings

(unaudited – dollars in thousands)

 

 

 

For the Three Months

Ended December 31,

 

 

For the Nine Months

Ended December 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net Earnings

 

$

101,380

 

 

$

56,387

 

 

$

219,624

 

 

$

161,968

 

Change in Funded Status of Defined Benefit Plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Net Actuarial Loss

 

 

314

 

 

 

500

 

 

 

942

 

 

 

1,500

 

Tax Expense

 

 

(117

)

 

 

(188

)

 

 

(351

)

 

 

(564

)

Comprehensive Earnings

 

$

101,577

 

 

$

56,699

 

 

$

220,215

 

 

$

162,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements.

 

2


 

Eagle Materials Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands)

 

 

 

December 31,

2017

 

 

March 31,

2017

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets -

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

21,676

 

 

$

6,561

 

Accounts and Notes Receivable

 

 

143,662

 

 

 

136,313

 

Inventories

 

 

239,628

 

 

 

252,846

 

Prepaid and Other Assets

 

 

20,378

 

 

 

4,904

 

Total Current Assets

 

 

425,344

 

 

 

400,624

 

Property, Plant and Equipment -

 

 

2,547,430

 

 

 

2,439,438

 

Less: Accumulated Depreciation

 

 

(972,706

)

 

 

(892,601

)

Property, Plant and Equipment, net

 

 

1,574,724

 

 

 

1,546,837

 

Notes Receivable

 

 

296

 

 

 

815

 

Investment in Joint Venture

 

 

55,337

 

 

 

48,620

 

Goodwill and Intangible Assets, net

 

 

240,145

 

 

 

235,505

 

Other Assets

 

 

12,197

 

 

 

14,723

 

 

 

$

2,308,043

 

 

$

2,247,124

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities -

 

 

 

 

 

 

 

 

Accounts Payable

 

$

73,203

 

 

$

92,193

 

Accrued Liabilities

 

 

101,432

 

 

 

55,379

 

Income Tax Payable

 

 

 

 

 

733

 

Current Portion of Long-term Debt

 

 

 

 

 

81,214

 

Total Current Liabilities

 

 

174,635

 

 

 

229,519

 

Long-term Debt

 

 

565,755

 

 

 

605,253

 

Other Long-term Liabilities

 

 

35,112

 

 

 

42,878

 

Deferred Income Taxes

 

 

116,352

 

 

 

166,024

 

Total Liabilities

 

 

891,854

 

 

 

1,043,674

 

Stockholders’ Equity -

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Common Stock, Par Value $0.01; Authorized 100,000,000 Shares; Issued and

   Outstanding 48,664,650 and 48,453,268 Shares, respectively

 

 

487

 

 

 

485

 

Capital in Excess of Par Value

 

 

156,834

 

 

 

149,014

 

Accumulated Other Comprehensive Losses

 

 

(6,805

)

 

 

(7,396

)

Retained Earnings

 

 

1,265,673

 

 

 

1,061,347

 

Total Stockholders’ Equity

 

 

1,416,189

 

 

 

1,203,450

 

 

 

$

2,308,043

 

 

$

2,247,124

 

 

 

 

 

 

 

 

 

 

See notes to the unaudited consolidated financial statements.

 

3


 

Eagle Materials Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited – dollars in thousands)

 

 

 

For the Nine Months Ended

December 31,

 

 

 

2017

 

 

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net Earnings

 

$

219,624

 

 

$

161,968

 

Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating

   Activities -

 

 

 

 

 

 

 

 

Depreciation, Depletion and Amortization

 

 

87,903

 

 

 

67,894

 

Inventory Adjustment to Net Realizable Value

 

 

 

 

 

8,492

 

Deferred Income Tax Provision

 

 

(50,023

)

 

 

2,751

 

Stock Compensation Expense

 

 

10,890

 

 

 

9,067

 

Excess Tax Benefits from Share Based Payment Arrangements

 

 

 

 

 

(8,546

)

Equity in Earnings of Unconsolidated Joint Venture

 

 

(33,203

)

 

 

(31,371

)

Distributions from Joint Venture

 

 

26,500

 

 

 

33,250

 

Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

 

 

Accounts and Notes Receivable

 

 

(4,718

)

 

 

6,613

 

Inventories

 

 

13,417

 

 

 

12,320

 

Accounts Payable and Accrued Liabilities

 

 

17,372

 

 

 

6,633

 

Other Assets

 

 

(11,889

)

 

 

413

 

Income Taxes Payable

 

 

(733

)

 

 

19,384

 

Net Cash Provided by Operating Activities

 

 

275,140

 

 

 

288,868

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Property, Plant and Equipment Additions

 

 

(83,698

)

 

 

(34,043

)

Acquisition Spending

 

 

(36,761

)

 

 

 

Net Cash Used in Investing Activities

 

 

(120,459

)

 

 

(34,043

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Decrease in Credit Facility

 

 

(40,000

)

 

 

(382,000

)

Repayment of Senior Notes

 

 

(81,214

)

 

 

(8,000

)

Issuance of Long-term Debt

 

 

 

 

 

350,000

 

Payment of Debt Issuance Costs

 

 

 

 

 

(6,637

)

Dividends Paid to Stockholders

 

 

(14,571

)

 

 

(14,500

)

Shares Redeemed to Settle Employee Taxes on Stock Compensation

 

 

(2,607

)

 

 

(3,084

)

Purchase and Retirement of Common Stock

 

 

(24,903

)

 

 

(60,013

)

Proceeds from Stock Option Exercises

 

 

23,729

 

 

 

20,137

 

Excess Tax Benefits from Share Based Payment Arrangements

 

 

 

 

 

8,546

 

Net Cash Used in Financing Activities

 

 

(139,566

)

 

 

(95,551

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

15,115

 

 

 

159,274

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

6,561

 

 

 

5,391

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

21,676

 

 

$

164,665

 

 

 

 

 

 

 

 

 

See notes to the unaudited consolidated financial statements.

 

 

4


 

Eagle Materials Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

December 31, 2017

 

(A) BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements as of and for the three and nine month periods ended December 31, 2017 include the accounts of Eagle Materials Inc. (“Eagle” or “Parent”) and its majority-owned subsidiaries (collectively, the “Company”, “us” or “we”) and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 24, 2017.

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

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

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which provides for simplification of certain aspects of employee share-based payment accounting, including income taxes, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted ASU 2016-09 on April 1, 2017. The new standard provides for changes to accounting for stock compensation including 1) excess tax benefits and tax deficiencies related to share based payment awards will be recognized as income tax benefit or expense in the reporting period in which they occur; 2) excess tax benefits will be classified as an operating activity in the statement of cash flow; 3) the option to elect to estimate forfeitures or account for them when they occur; and 4) an increase in the tax withholding requirements threshold to qualify for equity classification. The primary impact of adoption was the recognition of excess tax benefits for our stock awards in the provision for income taxes rather than additional paid-in capital.  As provided by the new standard, the Company changed its method of accounting for forfeitures, and will now recognize forfeitures as they occur, which resulted in an approximately $0.7 million reduction to retained earnings.  Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had no impact to retained earnings.

Adoption of the new standard resulted in the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital of $2.5 million for the nine months ended December 31, 2017. The presentation of excess tax benefits on stock-based compensation was adopted prospectively within the unaudited Condensed Consolidated Statements of Cash Flows. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact on any of the periods presented on the unaudited Condensed Consolidated Statements of Cash Flows as the Company has historically presented them as a financing activity.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to

 

5


 

recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The standard will be effective for us in the first quarter of fiscal 2019. We will adopt the new standard using the modified retrospective approach, which requires the standard be applied only to the most current period presented, with the cumulative effect of initially applying the standard recognized at the date of initial application. We performed an evaluation of all segments and do not expect the adoption of this standard to materially impact our consolidated financial statements, but we are still evaluating the impact on our financial statement disclosures.

In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, which revises the accounting for periodic pension and postretirement expense.  This ASU requires net periodic benefit cost, with the exception of service cost, to be presented retrospectively as nonoperating expense.  Service cost will remain a component of cost of goods sold and represent the only cost of pension and postretirement expense eligible for capitalization. We will adopt the standard on April 1, 2018 using the retrospective method for presentation of service cost and other components in the income statement.  We will prospectively adopt the requirement to limit the capitalization of benefit cost to the service cost component.  The impact of adopting this standard will be a reduction to cost of goods sold and an increase in other expense.  Had we adopted this standard on April 1, 2017, our gross profit for the nine months ended December 31, 2017 would have increased by approximately $0.3 million, and other income would have decreased by $0.3 million.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which supersedes existing lease guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. The standard will be effective for us in the first quarter of fiscal 2020, and we will adopt using the modified retrospective approach. We are currently assessing the impact of the ASU on our consolidated financial statements and disclosures, as well as our internal lease accounting processes.

 

(B) ACQUISITION

Fairborn Acquisition

On February 10, 2017, we completed the acquisition (the “Fairborn Acquisition”) of certain assets of CEMEX Construction Materials Atlantic, LLC (the “Seller”). The assets acquired by the Company in the Fairborn Acquisition include a cement plant located in Fairborn, Ohio, a cement distribution terminal located in Columbus, Ohio, and certain other related assets.

Purchase Price: The purchase price (the “Fairborn Purchase Price”) of the Fairborn Acquisition was approximately $400.5 million. We funded the payment of the Fairborn Purchase Price at closing and expenses incurred in connection with the Fairborn Acquisition through a combination of cash on hand and borrowings under our bank credit facility.

Recording of assets acquired and liabilities assumed: The transaction has been accounted for using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The Company engaged a third-party to perform a valuation to support the Company’s preliminary estimate of the fair value of certain assets acquired in the Fairborn Acquisition.

During the quarter ended December 31, 2017, we completed our mine plan, enabling us to finalize the asset retirement obligation at the date of purchase.  Based on the updated mine plan, the asset retirement obligation and corresponding asset was revised to approximately $2.8 million from $4.0 million.  

 

6


 

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

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

 

Purchase price allocation at acquisition date (in thousands)

 

As of

February 10, 2017

 

Inventories

 

$

11,106

 

Property and Equipment

 

 

314,897

 

Intangible Assets

 

 

10,000

 

Other Assets

 

 

2,820

 

Asset Retirement Obligation

 

 

(2,820

)

Total Net Assets

 

 

336,003

 

Goodwill

 

 

64,485

 

Total Purchase Price

 

$

400,488

 

Goodwill represents the excess purchase price over the fair values of assets acquired and liabilities assumed.  The goodwill was generated by the availability of co-product sales and the opportunity associated with the expansion of our cement business to the eastern region of the United States.  All of the goodwill generated by the transaction will be deductible for income tax purposes.  

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

  

 

 

Weighted

Average Life

 

 

Estimated

Fair Value

 

Customer Relationships

 

 

15

 

 

 

9,000

 

Permits

 

 

40

 

 

 

1,000

 

Total Intangible Assets

 

 

 

 

 

$

10,000

 

Actual and pro forma impact of the Fairborn Acquisition: The following table presents the net sales and operating earnings related to the Fairborn Acquisition that have been included in our consolidated statement of earnings for the three and nine months ended December 31, 2017:

 

 

 

For the Three Months

 

 

For the Nine Months

 

 

 

Ended December 31,

 

 

Ended December 31,

 

 

 

2017

 

 

2017

 

 

 

(dollars in thousands)

 

Revenues

 

$

21,699

 

 

$

69,120

 

Operating Earnings

 

$

6,547

 

 

$

20,380

 

 

Operating earnings shown above for the nine months ended December 31, 2017 have been impacted by approximately $11.2 million and $0.6 million related to depreciation and amortization and the recording of acquired inventory at fair value, respectively.  

 

7


 

The unaudited pro forma results presented below include the effects of the Fairborn Acquisition as if it had been consummated as of April 1, 2016. The pro forma results include the amortization associated with an estimate for acquired intangible assets and interest expense associated with debt used to fund the Fairborn Acquisition and depreciation from the fair value adjustments for property and equipment. To better reflect the combined operating results, material nonrecurring charges directly related to the Fairborn Acquisition of approximately $5.5 million have been excluded from pro forma net income for fiscal 2017.

  

 

 

For the Three Months

Ended December 31, 2016

 

 

For the Nine Months

Ended December 31, 2016

 

 

 

(dollars in thousands)

 

Revenues

 

$

321,378

 

 

$

998,910

 

Net Income

 

$

58,294

 

 

$

169,631

 

Earnings per share – basic

 

$

1.22

 

 

$

3.54

 

Earnings per share - diluted

 

$

1.21

 

 

$

3.51

 

The pro forma results do not include any anticipated synergies or other expected benefits of the Fairborn Acquisition. Accordingly, the unaudited pro forma results are not necessarily indicative of either future results of operations or results that might have been achieved had the Fairborn Acquisition been consummated as of April 1, 2016.

Wildcat Acquisition

On July 27, 2017, we acquired all of the outstanding equity interests in Wildcat Minerals LLC (the “Wildcat Acquisition”).  Wildcat Minerals LLC operates transload facilities serving the oil and gas industry in several oil and gas basins across the United States.  The purchase price (the “Purchase Price”) of the Wildcat Acquisition was approximately $36.8 million, subject to adjustments for working capital and other customary post-closing adjustments.  The Purchase Price was allocated as follows: approximately $3.1 million to current assets, $28.3 million to property and equipment, $1.4 million to intangible and other assets, $2.8 million to current liabilities and $6.8 million to goodwill. The Purchase Price and expenses incurred in connection with the Wildcat Acquisition were funded through operating cash flow and borrowings under our bank credit facility.  Assets related to the Wildcat Acquisition will be included in the Corporate and Other segment in our segment reporting.

 

(C) CASH FLOW INFORMATION—SUPPLEMENTAL  

Cash payments made for interest were $19.8 million and $10.7 million for the nine months ended December 31, 2017 and 2016, respectively. Net payments made for federal and state income taxes during the nine months ended December 31, 2017 and 2016, were $68.8 million and $55.6 million, respectively.

 

(D) ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable have been shown net of the allowance for doubtful accounts of $11.1 million and $10.7 million at December 31, 2017 and March 31, 2017, respectively. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral from our customers. The allowance for non-collection of receivables is based upon analysis of economic trends in the construction industry, detailed analysis of the expected collectability of accounts receivable that are past due and the expected collectability of overall receivables. We have no significant credit risk concentration among our diversified customer base.

We had notes receivable totaling approximately $2.6 million at December 31, 2017, of which approximately $2.3 million has been classified as current and presented with accounts receivable on the balance sheet. We lend funds to certain companies in the ordinary course of business, and the notes bear interest, on average, at LIBOR plus 3.5%. Remaining unpaid amounts, plus accrued interest, mature in fiscal 2018 and 2021. The notes are collateralized by certain assets of the borrowers, namely property and equipment, and are generally payable

 

8


 

monthly. We monitor the credit risk of each borrower by focusing on the timeliness of payments, review of credit history and credit metrics and interaction with the borrowers.

 

(E) STOCKHOLDERS’ EQUITY

A summary of changes in stockholders’ equity follows:

 

 

 

For the Nine Months

Ended December 31, 2017

 

 

 

(dollars in thousands)

 

Common Stock –

 

 

 

 

Balance at Beginning of Period

 

$

485

 

Issuance of Restricted Stock

 

 

1

 

Purchase and Retirement of Common Stock

 

 

(1

)

Stock Option Exercises

 

 

2

 

Balance at End of Period

 

 

487

 

Capital in Excess of Par Value –

 

 

 

 

Balance at Beginning of Period

 

 

149,014

 

Stock Compensation Expense

 

 

10,890

 

Cumulative Impact of the Adoption of ASU 2016-09

 

 

713

 

Shares Redeemed to Settle Employee Taxes

 

 

(2,607

)

Stock Option Exercises

 

 

23,726

 

Purchase and Retirement of Common Stock

 

 

(24,902

)

Balance at End of Period

 

 

156,834

 

Retained Earnings –

 

 

 

 

Balance at Beginning of Period

 

 

1,061,347

 

Dividends Declared to Stockholders

 

 

(14,585

)

Cumulative Impact of the Adoption of ASU 2016-09

 

 

(713

)

Net Earnings

 

 

219,624

 

Balance at End of Period

 

 

1,265,673

 

Accumulated Other Comprehensive Loss -

 

 

 

 

Balance at Beginning of Period

 

 

(7,396

)

Change in Funded Status of Pension Plan,

   net of tax

 

 

591

 

Balance at End of Period

 

 

(6,805

)

Total Stockholders’ Equity

 

$

1,416,189

 

 

During the nine months ended December 31, 2017, we repurchased 272,772 shares at an average price of $91.31.  As of December 31, 2017, we have authorization to purchase an additional 4,544,428 shares.

 

9


 

(F) INVENTORIES

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

 

 

 

As of

 

 

 

December 31,

2017

 

 

March 31,

2017

 

 

 

(dollars in thousands)

 

Raw Materials and Material-in-Progress

 

$

107,340

 

 

$

122,736

 

Finished Cement

 

 

24,313

 

 

 

24,428

 

Gypsum Wallboard

 

 

8,305

 

 

 

7,951

 

Paperboard

 

 

7,467

 

 

 

8,635

 

Frac Sand

 

 

2,345

 

 

 

2,907

 

Aggregates

 

 

7,268

 

 

 

7,686

 

Repair Parts and Supplies

 

 

76,741

 

 

 

73,732

 

Fuel and Coal

 

 

5,849

 

 

 

4,771

 

 

 

$

239,628

 

 

$

252,846

 

 

 

(G) ACCRUED EXPENSES

Accrued expenses consist of the following:

 

 

 

As of

 

 

 

December 31,

2017

 

 

March 31,

2017

 

 

 

(dollars in thousands)

 

Payroll and Incentive Compensation

 

$

26,001

 

 

$

22,850

 

Benefits

 

 

14,204

 

 

 

11,503

 

Interest

 

 

7,196

 

 

 

5,992

 

Property Taxes

 

 

3,817

 

 

 

4,759

 

Power and Fuel

 

 

1,800

 

 

 

1,536

 

Sales and Use Tax

 

 

486

 

 

 

2,459

 

Legal Settlement

 

 

39,098

 

 

 

 

Other Legal

 

 

2,770

 

 

 

944

 

Acquisition Related Expenses

 

 

 

 

 

350

 

Other

 

 

6,060

 

 

 

4,986

 

 

 

$

101,432

 

 

$

55,379

 

 

 

(H) Share-BASED EMPLOYEE COMPENSATION

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

Long-Term Compensation Plans -

Options. In May 2017, the Compensation Committee approved the granting of an aggregate of 58,055 performance vesting stock options pursuant to the Plan to certain officers and key employees that will be earned if certain performance conditions are satisfied (the “Fiscal 2018 Employee Performance Stock Option Grant”).  The performance criterion for the Fiscal 2018 Employee Performance Stock Option Grant is based upon the

 

10


 

achievement of certain levels of return on equity (as defined in the option agreements), ranging from 11.0% to 18.0%, for the fiscal year ending March 31, 2018.  All stock options will be earned if the return on equity is 18.0% or greater, and the percentage of shares earned will be reduced proportionately to approximately 66.7% if the return on equity is 11.0%.  If the Company does not achieve a return on equity of at least 11.0%, all stock options granted will be forfeited.  Following any such reduction, restrictions on the earned stock options will lapse ratably over four years, with the first fourth lapsing promptly following the determination date, and the remaining restrictions lapsing on March 31, 2019 through 2021. The stock options have a term of ten years from the date of grant. The Compensation Committee also approved the granting of 48,379 time vesting stock options to the same officers and key employees, which vest ratably over four years (the “Fiscal 2018 Employee Time Vesting Stock Option Grant).  In August 2017, we granted 6,052 options to members of the Board of Directors (the “Fiscal 2018 Board of Directors Stock Option Grant”).  Options granted under the Fiscal 2018 Board of Directors Stock Option Grant vest immediately and can be exercised from the date of grant until their expiration on the tenth anniversary of the date of the grant.  The Fiscal 2018 Employee Performance Stock Option Grant, Fiscal 2018 Employee Time Vesting Stock Option Grant and Fiscal 2018 Board of Directors Stock Option Grant were valued at the grant date using the Black-Scholes option pricing model.

The weighted-average assumptions used in the Black-Scholes model to value the option awards in fiscal 2018 are as follows:

 

 

 

Fiscal 2018

 

Dividend Yield

 

 

1.3%

 

Expected Volatility

 

 

36.3%

 

Risk Free Interest Rate

 

 

2.1%

 

Expected Life

 

6.0 years

 

 

Stock option expense for all outstanding stock option awards totaled approximately $1.1 million and $3.3 million for the three and nine months ended December 31, 2017, respectively and approximately $1.2 million and $4.2 million for the three and nine months ended December 31, 2016, respectively.  At December 31, 2017, there was approximately $7.8 million of unrecognized compensation cost related to outstanding stock options, which is expected to be recognized over a weighted-average period of 2.6 years.

The following table represents stock option activity for the nine months ended December 31, 2017:

 

 

 

Number

of

Shares

 

 

Weighted-

Average

Exercise Price

 

Outstanding Options at Beginning of Period

 

 

1,323,379

 

 

$

66.07

 

Granted

 

 

119,986

 

 

$

100.20

 

Exercised

 

 

(441,691

)

 

$

59.97

 

Cancelled

 

 

(16,742

)

 

$

78.05

 

Outstanding Options at End of Period

 

 

984,932

 

 

$

72.76

 

Options Exercisable at End of Period

 

 

597,945

 

 

$

65.18

 

Weighted-Average Fair Value of Options Granted during

   the Period

 

$

33.37

 

 

 

 

 


 

11


 

The following table summarizes information about stock options outstanding at December 31, 2017:

 

 

 

Outstanding Options

 

 

Exercisable Options

 

Range of Exercise Prices

 

Number of

Shares

Outstanding

 

 

Weighted -

Average

Remaining

Contractual

Life

 

 

Weighted -

Average

Exercise

Price

 

 

Number of

Shares

Outstanding

 

 

Weighted -

Average

Exercise

Price

 

$23.17 – $ 29.84

 

 

65,912

 

 

 

3.60

 

 

$

23.27

 

 

 

65,912

 

 

$

23.47

 

$33.43 – $ 37.34

 

 

99,582

 

 

 

4.46

 

 

$

33.94

 

 

 

99,582

 

 

$

33.94

 

$53.22 – $ 77.67

 

 

308,924

 

 

 

7.24

 

 

$

71.06

 

 

 

158,166

 

 

$

69.19

 

$79.73 – $ 106.00

 

 

510,514

 

 

 

7.60

 

 

$

87.76

 

 

 

274,285

 

 

$

84.27

 

 

 

 

984,932

 

 

 

6.90

 

 

$

72.76

 

 

 

597,945

 

 

$

65.18

 

 

At December 31, 2017, the aggregate intrinsic value for outstanding and exercisable options was approximately $39.9 million and $28.8 million, respectively. The total intrinsic value of options exercised during the nine months ended December 31, 2017 was approximately $18.5 million.

Restricted Stock. In May 2017, the Compensation Committee approved the granting of an aggregate of 52,646 shares of performance vesting restricted stock to certain officers and key employees that will be earned if certain performance conditions are satisfied (the “Fiscal 2018 Employee Restricted Stock Performance Award”). The performance criterion for the Fiscal 2018 Employee Restricted Stock Performance Award is based upon the achievement of certain levels of return on equity (as defined in the award agreement), ranging from 11.0% to 18.0%, for the fiscal year ending March 31, 2018.  All restricted shares will be earned if the return on equity is 18.0% or greater, and the percentage of shares earned will be reduced proportionately to approximately 66.7% if the return on equity is 11.0%.  If the Company does not achieve a return on equity of at least 11.0%, all awards will be forfeited.   Following any such reduction, restrictions on the earned shares will lapse ratably over four years, with the first fourth lapsing promptly following the determination date, and the remaining restrictions lapsing on March 31, 2019 through 2021. The Compensation Committee also approved the granting of 43,874 shares of time vesting restricted stock to the same officers and key employees, which vest ratably over four years (the “Fiscal 2018 Employee Restricted Stock Time Vesting Award”).  In August 2017, we awarded 11,444 shares of restricted stock to members of the Board of Directors (the “Board of Directors Fiscal 2018 Restricted Stock Award”), which vest six months after the grant date.  The Fiscal 2018 Employee Restricted Stock Performance Award and the Fiscal 2018 Employee Restricted Stock Time Vesting Award were valued at the closing price of the stock on the date of grant, and are being expensed over a four year period. The Board of Director Fiscal 2018 Restricted Stock Awards were valued at the closing price of the stock on the date of grant, and are being expensed over a six month period.  

Expense related to restricted shares was approximately $2.6 million and $7.5 million for the three and nine months ended December 31, 2017, respectively and approximately $1.8 million and $5.0 million for the three and nine months ended December 31, 2016, respectively. At December 31, 2017, there was approximately $19.4 million of unearned compensation from restricted stock, which will be recognized over a weighted-average period of 2.3 years.

The number of shares available for future grants of stock options, restricted stock units, stock appreciation rights and restricted stock under the Plan was 4,165,706 at December 31, 2017.

 

 

 

12


 

(I) COMPUTATION OF EARNINGS PER SHARE

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

 

 

 

For the Three Months

Ended December 31,

 

 

For the Nine Months

Ended December 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Weighted-Average Shares of Common Stock

   Outstanding

 

 

48,221,093

 

 

 

47,881,662

 

 

 

48,132,276

 

 

 

47,901,369

 

Common Equivalent Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assumed Exercise of Outstanding Dilutive Options

 

 

887,506

 

 

 

764,631

 

 

 

1,069,152

 

 

 

889,411

 

Less: Shares Repurchased from Assumed Proceeds

   of Assumed Exercised Options

 

 

(606,549

)

 

 

(523,194

)

 

 

(778,985

)

 

 

(612,885

)

Restricted Shares

 

 

255,712

 

 

 

174,649

 

 

 

218,987

 

 

 

162,431

 

Weighted-Average Common and Common Equivalent

   Shares Outstanding

 

 

48,757,762

 

 

 

48,297,748

 

 

 

48,641,430

 

 

 

48,340,326

 

Shares Excluded Due to Anti-dilution Effects

 

 

121,179

 

 

 

700,734

 

 

 

91,089

 

 

 

679,849

 

 

 

(J) PENSION AND EMPLOYEE BENEFIT PLANS

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

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

 

 

 

For the Three Months Ended

December 31,

 

 

For the Nine Months ended

December 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Service Cost – Benefits Earned During the Period

 

$

153

 

 

$

222

 

 

$

557

 

 

$

665

 

Interest Cost of Benefit Obligations

 

 

357

 

 

 

399

 

 

 

1,110

 

 

 

1,196

 

Expected Return on Plan Assets

 

 

(578

)

 

 

(416

)

 

 

(1,558

)

 

 

(1,247

)

Recognized Net Actuarial Loss

 

 

46

 

 

 

425

 

 

 

519

 

 

 

1,276

 

Amortization of Prior-Service Cost

 

 

60

 

 

 

75

 

 

 

210

 

 

 

224

 

Net Periodic Pension Cost

 

$

38

 

 

$

705

 

 

$

838

 

 

$

2,114

 

 

We contributed approximately $8.5 million to our pension plans during December 2017, which is expected to substantially decrease our unfunded pension liability at March 31, 2018.

 

(K) INCOME TAXES

On December 22, 2017, the United States (“U.S.”) enacted significant changes to U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”).  Under the new law, beginning January 1, 2018, the U.S. corporate income tax rate is reduced from 35% to 21%, accordingly, our effective tax rate for fiscal 2018 is based on a blended statutory rate of 31.5%.   

The effect on our net deferred tax liability for the change in tax rates is required to be recognized in the period the tax rate change was enacted. We estimated the impact of the reduction in the U.S. corporate income tax rate, as well as other aspects of the new law, which resulted in a one-time, non-cash decrease to income tax expense of approximately $61.0 million for the nine months ended December 31, 2017.

The Company will continue to assess the expected impacts of the new tax law, and will include any changes to the preliminary impacts noted above, in the Company’s Annual Report on Form 10-K for the year ended March 31, 2018.

 

13


 

Income taxes for the interim period presented have been included in the accompanying financial statements on the basis of an estimated annual effective tax rate. In addition to the amount of tax resulting from applying the estimated annual effective tax rate to pre-tax income, we will, when appropriate, include certain items treated as discrete events to arrive at an estimated overall tax amount. The tax rate for the nine months ended December 31, 2017 was approximately 2%, which was lower than the tax rate of 33% for the nine months ended December 31, 2016.  The decline in the rate was primarily due to the discrete benefit related to the change in corporate tax rates, as described above, which reduced deferred tax liabilities by approximately $61.0 million and the impact of the adoption of ASU 2016-09, which reduced income tax expense by approximately $2.5 million.

 

(L) LONG-TERM DEBT

Long-term debt consists of the following:

 

 

 

As of

 

 

 

December 31,

2017

 

 

March 31,

2017

 

 

 

(dollars in thousands)

 

Credit Facility

 

$

185,000

 

 

$

225,000

 

4.500% Senior Unsecured Notes Due 2026

 

 

350,000

 

 

 

350,000

 

Private Placement Senior Unsecured Notes

 

 

36,500

 

 

 

117,714

 

Total Debt

 

 

571,500

 

 

 

692,714

 

Less: Current Portion of Long-term Debt

 

 

 

 

 

(81,214

)

Less: Debt Origination Costs

 

 

(5,745

)

 

 

(6,247

)

Total Long-term Debt

 

$

565,755

 

 

$

605,253

 

 

Credit Facility –

We have a $500.0 million revolving credit facility (the “Credit Facility”), including a swingline loan sublimit of $25.0 million, which terminates on August 2, 2021.  Borrowings under the Credit Facility are guaranteed by substantially all of the Company’s subsidiaries. At the option of the Company, outstanding principal amounts on the Credit Facility bear interest at a variable rate equal to (i) The London Interbank Offered Rate (“LIBOR”) for the selected period, plus an applicable rate (ranging from 100 to 225 basis points), which is to be established quarterly based upon the Company’s ratio of consolidated EBITDA, defined as earnings before interest, taxes, depreciation and amortization, to the Company’s consolidated indebtedness (the “Leverage Ratio”), or (ii) an alternative base rate which is the higher of (a) the prime rate or (b) the federal funds rate plus  12% per annum plus an applicable rate (ranging from 0 to 125 basis points). Interest payments are payable, in the case of loans bearing interest at a rate based on the federal funds rate, quarterly, or in the case of loans bearing interest at a rate based on LIBOR, at the end of the applicable interest period. The Company is also required to pay a commitment fee on unused available borrowings under the Credit Facility ranging from 10 to 35 basis points depending upon the Leverage Ratio. The Credit Facility contains customary covenants that restrict our ability to incur additional debt, encumber our assets, sell assets, make or enter into certain investments, loans or guaranties and enter into sale and leaseback arrangements. The Credit Facility also requires us to maintain a consolidated indebtedness ratio (calculated as consolidated indebtedness to consolidated earnings before interest, taxes, depreciation, amortization, certain transaction-related deductions and other non-cash deductions) of 3.5:1.0 or less and an interest coverage ratio (consolidated earnings before interest, taxes, depreciation, amortization, certain transaction-related deductions and other non-cash deductions to consolidated interest expense) of at least 2.5:1.0.  We had $185.0 million of borrowings outstanding at December 31, 2017. Based on our Leverage Ratio, we had $305.6  million of available borrowings, net of the outstanding letters of credit, at December 31, 2017.

The Credit Facility has a $40.0 million letter of credit facility. Under the letter of credit facility, the Company pays a fee at a per annum rate equal to the applicable margin for Eurodollar loans in effect from time to time plus a one-time letter of credit fee in an amount equal to 0.125% of the initial stated amount. At December 31, 2017, we had $9.4 million of letters of credit outstanding.

 

14


 

4.500% Senior Unsecured Notes Due 2026 –

On August 2, 2016, the Company issued $350.0 million aggregate principal amount of 4.500% senior notes ("Senior Unsecured Notes") due August 2026. Interest on the Senior Unsecured Notes is payable semiannually on February 1 and August 1 of each year until all of the outstanding notes are paid. The Senior Unsecured Notes rank equal to existing and future senior indebtedness, including the Credit Facility and the Private Placement Senior Unsecured Notes. Prior to August 1, 2019, we may redeem up to 40% of the original aggregate principal amount of the Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of 104.5% of the principal amount of the notes.  On or after August 1, 2019 and prior to August 1, 2021, we may redeem some or all of the Senior Unsecured Notes at a price equal to 100% of the principal amount, plus a “make-whole” premium.  Beginning on August 1, 2021, we may redeem some or all of the Senior Unsecured Notes at the redemption prices set forth below (expressed as a percentage of the principal amount being redeemed):

 

 

 

Percentage

 

2021

 

 

102.25

%

2022

 

 

101.50

%

2023

 

 

100.75

%

2024 and thereafter

 

 

100.00

%

 

The Senior Unsecured Notes contain covenants that limit our ability and/or our guarantor subsidiaries' ability to create or permit to exist certain liens; enter into sale and leaseback transactions; and consolidate, merge, or transfer all or substantially all of our assets. The Company’s Senior Unsecured Notes are fully and unconditionally and jointly and severally guaranteed by each of our subsidiaries that is a guarantor under the Credit Facility and Private Placement Senior Unsecured Notes. See Footnote (Q) to the Unaudited Consolidated Financial Statements for more information on the guarantors of the Senior Public Notes.

Private Placement Senior Unsecured Notes -

We entered into a Note Purchase Agreement on November 15, 2005 in connection with our sale of $200.0 million of senior, unsecured notes, designated as Series 2005A Senior Notes (the “Series 2005A Senior Unsecured Notes”) in a private placement transaction. The Series 2005A Senior Unsecured Notes, which were guaranteed by substantially all of our subsidiaries, were sold at par and issued in three tranches. During November 2017, all remaining notes were repaid in full and cancelled.  

We also entered into an additional Note Purchase Agreement on October 2, 2007 (the “2007 Note Purchase Agreement”) in connection with our sale of $200.0 million of senior unsecured notes, designated as Series 2007A Senior Notes (the “Series 2007A Senior Unsecured Notes”) in a private placement transaction. The Series 2007A Senior Unsecured Notes, which are guaranteed by substantially all of our subsidiaries, were sold at par and issued in four tranches. At December 31, 2017, the amount outstanding for the remaining tranche is as follows:

 

 

 

Principal

 

Maturity Date

 

Interest Rate

 

Tranche D

 

$36.5 million

 

October 2, 2019

 

 

6.48%

 

 

Interest for each tranche of Notes is payable semi-annually April 2 and October 2 of each year until all principal is paid for the respective tranche.  During October 2017, the $24.0 million outstanding under Tranche C of the Series 2007A Senior Unsecured Notes matured, and the related notes were repaid and cancelled at that time.

Our obligations under the 2007 Note Purchase Agreement are equal in right of payment with all other senior, unsecured indebtedness of the Company, including our indebtedness under the Credit Facility and Senior Unsecured Notes. The 2007 Note Purchase Agreement contains customary restrictive covenants, including, but not limited to, covenants that place limits on our ability to encumber our assets, to incur additional debt, to sell assets, or to merge or consolidate with third parties.

 

15


 

The 2007 Note Purchase Agreement requires us to maintain a Consolidated Debt to Consolidated EBITDA (calculated as consolidated indebtedness to consolidated earnings before interest, taxes, depreciation, depletion, amortization, certain transaction related deductions and other non-cash charges) ratio of 3.50 to 1.00 or less, and to maintain an interest coverage ratio (Consolidated EBITDA to Consolidated Interest Expense (calculated as consolidated EBITDA, as defined above, to consolidated interest expense)) of at least 2.50:1.00. In addition, the 2007 Note Purchase Agreement requires the Company to ensure that at all times either (i) Consolidated Total Assets equal at least 80% of the consolidated total assets of the Company and its Subsidiaries, determined in accordance with GAAP, or (ii) consolidated total revenues of the Company and its Restricted Subsidiaries for the period of four consecutive fiscal quarters most recently ended equals at least 80% of the consolidated total revenues of the Company and its Subsidiaries during such period.  We were in compliance with all financial ratios and tests at December 31, 2017.

Pursuant to a Subsidiary Guaranty Agreement, substantially all of our subsidiaries have guaranteed the punctual payment of all principal, interest, and Make-Whole Amounts (as defined in the 2007 Note Purchase Agreement) on the Series 2007A Senior Unsecured Notes and the other payment and performance obligations of the Company contained in the 2007 Note Purchase Agreement. We are permitted, at our option and without penalty, to prepay from time to time at least 10% of the original aggregate principal amount of the Series 2007A Senior Unsecured Notes at 100% of the principal amount to be prepaid, together with interest accrued on such amount to be prepaid to the date of payment, plus a Make-Whole Amount. The Make-Whole Amount is computed by discounting the remaining scheduled payments of interest and principal of the Series 2007A Senior Unsecured Notes being prepaid at a discount rate equal to the sum of 50 basis points and the yield to maturity of U.S. treasury securities having a maturity equal to the remaining average life of the Series 2007A Senior Unsecured Notes being prepaid.

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

 

(M) SEGMENT INFORMATION

Operating segments are defined as components of an enterprise that engage in business activities that earn revenues, incur expenses and prepare separate financial information that is evaluated regularly by our chief operatin