exp-10q_20180630.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

June 30, 2018

Commission File Number 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.)

3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219 (Address of principal executive offices)

(214) 432-2000 (Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  x    NO  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  x    NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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      Smaller reporting company

Non-accelerated filer   (Do not check if a 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  x

As of July 26, 2018, the number of outstanding shares of common stock was:

 

Class

 

Outstanding Shares

Common Stock, $.01 Par Value

 

47,786,301

 

 

 

 


TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION (unaudited)

 

 

 

 

 

Page

Item 1.

 

Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Statements of Earnings for the Three Months Ended June 30, 2018 and 2017

 

1

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Earnings for the Three Months Ended June 30, 2018 and 2017

 

2

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2018, and March 31, 2018

 

3

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Consolidated Statements of Stockholders' Equity as of June 30, 2018 and March 31, 2018

 

5

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2.

 

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

 

24

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

36

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

36

 

 

 

 

 

Item 1a.

 

Risk Factors

 

37

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

47

 

 

 

 

 

Item 4.

 

Mine Safety Information

 

47

 

 

 

 

 

Item 6.

 

Exhibits

 

48

 

 

 

 

 

SIGNATURES

 

49

 

 

 

 


 

EAGLE MATERIALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

 

 

 

 

For the Three Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

 

(dollars in thousands, except share and per share data)

 

Revenue

 

$

393,756

 

 

$

366,121

 

Cost of Goods Sold

 

 

302,122

 

 

 

280,062

 

Gross Profit

 

 

91,634

 

 

 

86,059

 

Equity in Earnings of Unconsolidated Joint Venture

 

 

9,251

 

 

 

9,876

 

Corporate General and Administrative Expense

 

 

(8,003

)

 

 

(9,679

)

Litigation Settlements and Losses

 

 

(1,800

)

 

 

 

Other Non-Operating Income

 

 

571

 

 

 

757

 

Interest Expense, Net

 

 

(6,632

)

 

 

(7,483

)

Earnings before Income Taxes

 

 

85,021

 

 

 

79,530

 

Income Taxes

 

 

(18,682

)

 

 

(24,648

)

Net Earnings

 

 

66,339

 

 

 

54,882

 

EARNINGS PER SHARE

 

 

 

 

 

 

 

 

Basic

 

$

1.39

 

 

$

1.14

 

Diluted

 

$

1.38

 

 

$

1.13

 

AVERAGE SHARES OUTSTANDING

 

 

 

 

 

 

 

 

Basic

 

 

47,690,351

 

 

 

48,121,890

 

Diluted

 

 

48,144,325

 

 

 

48,655,553

 

CASH DIVIDENDS PER SHARE

 

$

0.10

 

 

$

0.10

 

See notes to unaudited consolidated financial statements.


 

1


 

EAGLE MATERIALS INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 

See notes to unaudited consolidated financial statements.

 

 

For the Three Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

Net Earnings

 

$

66,339

 

 

$

54,882

 

Net Actuarial Change in Defined Benefit Plans:

 

 

 

 

 

 

 

 

Amortization of net actuarial loss

 

 

73

 

 

 

314

 

Tax expense

 

 

(17

)

 

 

(117

)

Comprehensive Earnings

 

$

66,395

 

 

$

55,079

 

See notes to unaudited consolidated financial statements.


 

2


 

EAGLE MATERIALS INC. AND SUBSDIARIES CONSOLIDATED BALANCE SHEETS (unaudited)

 

 

 

June 30,

 

 

March 31,

 

 

 

2018

 

 

2018

 

 

 

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets -

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

14,334

 

 

$

9,315

 

Restricted Cash

 

 

38,753

 

 

 

38,753

 

Accounts and Notes Receivable, net

 

 

184,083

 

 

 

141,685

 

Inventories

 

 

241,000

 

 

 

258,159

 

Income Tax Receivable

 

 

7,315

 

 

 

5,750

 

Prepaid and Other Assets

 

 

8,304

 

 

 

5,073

 

Total Current Assets

 

 

493,789

 

 

 

458,735

 

Property, Plant, and Equipment -

 

 

2,627,261

 

 

 

2,586,528

 

Less: Accumulated Depreciation

 

 

(1,009,726

)

 

 

(991,229

)

Property, Plant, and Equipment, net

 

 

1,617,535

 

 

 

1,595,299

 

Notes Receivable

 

 

3,266

 

 

 

115

 

Investment in Joint Venture

 

 

60,309

 

 

 

60,558

 

Goodwill and Intangible Assets, net

 

 

238,541

 

 

 

239,342

 

Other Assets

 

 

13,535

 

 

 

13,954

 

 

 

$

2,426,975

 

 

$

2,368,003

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities -

 

 

 

 

 

 

 

 

Accounts Payable

 

$

93,182

 

 

$

73,459

 

Accrued Liabilities

 

 

95,910

 

 

 

105,870

 

Total Current Liabilities

 

 

189,092

 

 

 

179,329

 

Long-term Debt

 

 

651,090

 

 

 

620,922

 

Other Long-term Liabilities

 

 

30,158

 

 

 

31,096

 

Deferred Income Taxes

 

 

125,156

 

 

 

118,966

 

Total Liabilities

 

 

995,496

 

 

 

950,313

 

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 47,912,300 and 48,282,784 Shares, respectively

 

 

479

 

 

 

483

 

Capital in Excess of Par Value

 

 

74,568

 

 

 

122,379

 

Accumulated Other Comprehensive Losses

 

 

(3,956

)

 

 

(4,012

)

Retained Earnings

 

 

1,360,388

 

 

 

1,298,840

 

Total Stockholders’ Equity

 

 

1,431,479

 

 

 

1,417,690

 

 

 

$

2,426,975

 

 

$

2,368,003

 

See notes to the unaudited consolidated financial statements.

 

3


 

EAGLE MATERIALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

 

 

For the Three Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net Earnings

 

$

66,339

 

 

$

54,882

 

Adjustments to Reconcile Net Earnings to Net Cash Provided

by Operating Activities, Net of Effect of Non-Cash Activity -

 

 

 

 

 

 

 

 

Depreciation, Depletion and Amortization

 

 

29,850

 

 

 

28,947

 

Deferred Income Tax Provision

 

 

6,173

 

 

 

(3,812

)

Stock Compensation Expense

 

 

3,493

 

 

 

3,399

 

Equity in Earnings of Unconsolidated Joint Venture

 

 

(9,251

)

 

 

(9,876

)

Distributions from Joint Venture

 

 

9,500

 

 

 

4,750

 

Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

 

 

Accounts and Notes Receivable

 

 

(45,549

)

 

 

(38,527

)

Inventories

 

 

17,159

 

 

 

7,960

 

Accounts Payable and Accrued Liabilities

 

 

8,897

 

 

 

(16,062

)

Other Assets

 

 

(3,137

)

 

 

(3,720

)

Income Taxes Payable (Receivable)

 

 

(1,565

)

 

 

25,729

 

Net Cash Provided by Operating Activities

 

 

81,909

 

 

 

53,670

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Additions to Property, Plant, and Equipment

 

 

(53,073

)

 

 

(16,160

)

Proceeds from Sale of Property, Plant, and Equipment

 

 

2,281

 

 

 

 

Net Cash Used in Investing Activities

 

 

(50,792

)

 

 

(16,160

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Increase (Decrease) in Credit Facility

 

 

30,000

 

 

 

(25,000

)

Dividends Paid to Stockholders

 

 

(4,790

)

 

 

(4,853

)

Purchase and Retirement of Common Stock

 

 

(52,344

)

 

 

(1,880

)

Proceeds from Stock Option Exercises

 

 

1,992

 

 

 

1,273

 

Shares Redeemed to Settle Employee Taxes on Stock Compensation

 

 

(956

)

 

 

(1,378

)

Net Cash Used in Financing Activities

 

 

(26,098

)

 

 

(31,838

)

NET INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

 

 

5,019

 

 

 

5,672

 

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD

 

 

48,068

 

 

 

6,561

 

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

 

$

53,087

 

 

$

12,233

 

 

See notes to the unaudited consolidated financial statements.


 

4


 

EAGLE MATERIALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

 

 

 

Common

Stock

 

 

Capital in

Excess of

Par Value

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Losses

 

 

Total

 

 

 

(dollars in thousands)

 

Balance at March 31, 2017

 

$

485

 

 

$

149,014

 

 

$

1,061,347

 

 

$

(7,396

)

 

$

1,203,450

 

Net Earnings

 

 

 

 

 

 

 

 

256,632

 

 

 

 

 

 

256,632

 

Stock Option Exercises and Restricted Share Vesting

 

 

3

 

 

 

24,261

 

 

 

 

 

 

 

 

 

24,264

 

Purchase and Retirement of Common Stock

 

 

(5

)

 

 

(61,073

)

 

 

 

 

 

 

 

 

(61,078

)

Dividends to Stockholders

 

 

 

 

 

 

 

 

(19,404

)

 

 

 

 

 

(19,404

)

Stock Compensation Expense

 

 

 

 

 

14,079

 

 

 

 

 

 

 

 

 

14,079

 

Cumulative Impact of the Adoption of ASU 2016-09

 

 

 

 

 

713

 

 

 

(713

)

 

 

 

 

 

 

Reclassification of Income Tax Effects to Retained Earnings

 

 

 

 

 

 

 

 

978

 

 

 

(978

)

 

 

 

Shares Redeemed to Settle Employee Taxes

 

 

 

 

 

(4,974

)

 

 

 

 

 

 

 

 

(4,974

)

Other

 

 

 

 

 

359

 

 

 

 

 

 

 

 

 

359

 

Unfunded Pension Liability, net of tax

 

 

 

 

 

 

 

 

 

 

 

4,362

 

 

 

4,362

 

Balance at March 31, 2018

 

$

483

 

 

$

122,379

 

 

$

1,298,840

 

 

$

(4,012

)

 

$

1,417,690

 

Net Earnings

 

 

 

 

 

 

 

 

66,339

 

 

 

 

 

 

66,339

 

Stock Option Exercises and Restricted Share Vesting

 

 

 

 

 

1,992

 

 

 

 

 

 

 

 

 

1,992

 

Purchase and Retirement of Common Stock

 

 

(5

)

 

 

(52,339

)

 

 

 

 

 

 

 

 

(52,344

)

Dividends to Stockholders

 

 

 

 

 

 

 

 

(4,791

)

 

 

 

 

 

(4,791

)

Stock Compensation Expense

 

 

1

 

 

 

3,492

 

 

 

 

 

 

 

 

 

3,493

 

Shares Redeemed to Settle Employee Taxes

 

 

 

 

 

(956

)

 

 

 

 

 

 

 

 

(956

)

Unfunded Pension Liability, net of tax

 

 

 

 

 

 

 

 

 

 

 

56

 

 

 

56

 

Balance at June 30, 2018

 

$

479

 

 

$

74,568

 

 

$

1,360,388

 

 

$

(3,956

)

 

$

1,431,479

 

See notes to the unaudited consolidated financial statements.

 


 

5


 

Eagle Materials Inc. and Subsidiaries
N
otes to Consolidated Financial Statements

 

(A) BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements as of and for the three-month period ended June 30, 2018 include the accounts of Eagle Materials Inc. 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 23, 2018.

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 revenue and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

RECENTLY ADOPTED

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We adopted the new standard on April 1, 2018 using the modified retrospective approach. The adoption of this standard did not affect our consolidated financial statements. We have included expanded disclosure of our revenue recognition policies in Footnote (C) to the Unaudited Consolidated Financial Statements.

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 adopted the standard on April 1, 2018 using the retrospective method for presentation of service cost and other components in the income statement. We prospectively adopted the requirement to limit the capitalization of benefit cost to the service cost component. The impact of adopting this standard was not material to our financial statements.

In January 2017, the FASB issued ASU 2017-04 “Simplifying the Test for Goodwill Impairment,” which eliminates the second step of the goodwill impairment test. Under the new standard, an entity should recognize an impairment charge for the amount by which the carrying value of the reporting unit exceeds the reporting unit’s fair value. This standard is effective for us in the first quarter of fiscal 2021. We adopted this standard effective April 1, 2018, and it will be effective for annual goodwill impairment tests in the fourth quarter of fiscal 2019.

 

6


 

PENDING ADOPTION

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.

In January 2018, the FASB issued ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842.” This ASU permits the Company to elect not to evaluate land easements under the new lease guidance that existed or expired before the adoption of the ASU 2016-02 and that were not previously accounted for as leases. We will adopt ASU 2018-01 concurrently with the adoption of ASU 2016-02 in the first quarter of fiscal 2020.

 

(B) CASH FLOW INFORMATION—SUPPLEMENTAL  

Cash payments made for interest were $3.8 million and $5.3 million for the three months ended June 30, 2018 and 2017, respectively. Net payments made for federal and state income taxes during the three months ended June 30, 2018 and 2017 were $14.7 million and $0.5 million, respectively.

(C) REVENUE

On April 1, 2018, we adopted the new accounting standard ASU 2014-09 (Topic 606), “Revenue from Contracts with Customers” and all the related amendments to contracts using the modified retrospective method.  The adoption of ASU 2014-09 had no impact on our financial statements at the time of the adoption.

We earn Revenue primarily from the sale of products, which include cement, concrete, aggregates, gypsum wallboard, recycled paperboard, and frac sand. The vast majority of Revenue from the sale of cement, concrete, aggregates, and gypsum wallboard are originated by purchase orders from our customers, who are primarily third-party contractors and suppliers.  Revenue from our Recycled Paperboard and Oil and Gas Proppants segments is generated primarily through long-term supply agreements that mature between 2018 and 2025. We also earn Revenue from transload services and storage; we recognize Revenue from these services when the product is transferred from the rail car to the truck or silo, or from the silo to the railcar or truck.  We invoice customers upon shipment, and our collection terms range from 30-65 days. Revenue from the sale of cement, concrete, aggregates and gypsum wallboard that is not related to long-term supply agreements is recognized upon shipment of the related products to customers, which is when title and ownership are transferred and the customer is obligated to pay.  

Revenue from sales under our long-term supply agreements is also recognized upon transfer of control to the customer, which generally occurs at the time the product is shipped from the production facility or transload location. Our long-term supply agreements with customers define, among other commitments, the volume of product that we must provide and the volume that the customer must purchase by the end of the defined periods. Pricing structures under our agreements are generally market based but are subject to certain contractual adjustments. Historically the pricing and volume requirements under certain of these contracts have been renegotiated during volatile market conditions. Shortfall amounts, if applicable under these arrangements, are constrained and not recognized as Revenue until agreement is reached with the customer and not subject to the risk of reversal. 

The Company offers certain of its customers, including those with long-term supply agreements, rebates and incentives, which we treat as variable consideration. We adjust the amount of revenue recognized for the variable consideration using the most likely amount method based on past history and projected volumes in the rebate and incentive period.  Any amounts billed to customers for taxes are excluded from Revenue.

 

7


 

The Company has elected to treat freight and delivery charges we pay for the delivery of goods to our customers as a fulfilment activity rather than a separate performance obligation. When we arrange for a third party to deliver products to customers, fees for shipping and handling that are billed to the customer are recorded as Revenue, while costs we incur for shipping and handling are recorded as expenses and included in Cost of Goods Sold.

Other Non-Operating Income (loss) includes lease and rental income, asset sale income, non-inventoried aggregates sales income, distribution center income, and trucking income, as well as other miscellaneous revenue items and costs that have not been allocated to a business segment.

See Footnote (M) to the Unaudited Consolidated Financial Statements for disaggregation of revenue by segment.

(D) ACCOUNTS AND NOTES RECEIVABLE

Accounts and Notes Receivable have been shown net of the allowance for doubtful accounts of $8.8 million and $8.6 million at June 30, 2018 and March 31, 2018, 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 $5.6 million at June 30, 2018, 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 4.3%. Remaining unpaid amounts, plus accrued interest, mature in fiscal 2021 and 2025. The notes are collateralized by certain assets of the borrowers, namely property and equipment, and are generally payable monthly. We monitor the credit risk of each borrower by assessing the timeliness of payments, credit history, credit metrics, and our ongoing interactions with each borrower.

(E) STOCKHOLDERS’ EQUITY

During the three months ended June 30, 2018, we repurchased 500,300 shares at an average price of $104.62. Subsequent to June 30, 2018, we repurchased an additional 126,000 shares at an average price of $106.93. Including the repurchases subsequent to June 30, 2018, we have authorization to purchase an additional 3,563,128 shares.

(F) INVENTORIES

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

 

 

 

June 30,

 

 

March 31,

 

 

 

2018

 

 

2018

 

 

 

(dollars in thousands)

 

Raw Materials and Materials-in-Progress

 

$

110,487

 

 

$

121,628

 

Finished Cement

 

 

26,004

 

 

 

24,089

 

Aggregates

 

 

8,083

 

 

 

7,787

 

Gypsum Wallboard

 

 

6,588

 

 

 

8,477

 

Paperboard

 

 

7,157

 

 

 

8,602

 

Frac Sand

 

 

1,785

 

 

 

1,696

 

Repair Parts and Supplies

 

 

74,084

 

 

 

79,878

 

Fuel and Coal

 

 

6,812

 

 

 

6,002

 

 

 

$

241,000

 

 

$

258,159

 

 

 

8


 

(G) ACCRUED EXPENSES

Accrued Expenses consist of the following:

 

 

 

June 30,

 

 

March 31

 

 

 

2018

 

 

2018

 

 

 

(dollars in thousands)

 

Payroll and Incentive Compensation

 

$

16,276

 

 

$

25,290

 

Benefits

 

 

12,221

 

 

 

13,785

 

Interest

 

 

7,198

 

 

 

3,852

 

Property Taxes

 

 

6,415

 

 

 

5,422

 

Power and Fuel

 

 

1,804

 

 

 

1,545

 

Litigation Settlements

 

 

40,525

 

 

 

45,098

 

Legal

 

 

872

 

 

 

1,435

 

Sales and Use Tax

 

 

1,023

 

 

 

890

 

Other

 

 

9,576

 

 

 

8,553

 

 

 

$

95,910

 

 

$

105,870

 

 

(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 2018, the Compensation Committee of the Board of Directors approved the granting to certain officers and key employees an aggregate of 62,179 performance vesting stock options that will be earned only if certain performance conditions are satisfied (the Fiscal 2019 Employee Performance Stock Option Grant). The performance criteria for the Fiscal 2019 Employee Performance Stock Option Grant is based upon the achievement of certain levels of return on equity (as defined in the option agreements), ranging from 10.0% to 20.0%, for the fiscal year ending March 31, 2019. All stock options will be earned if the return on equity is 20.0% or greater, and the percentage of shares earned will be reduced proportionately to approximately 66.7% if the return on equity is 10.0%. If the Company does not achieve a return on equity of at least 10.0%, 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 initial fourth lapsing promptly following the determination date, and the remaining restrictions lapsing on March 31, 2020 through 2022. The stock options have a term of ten years from the date of grant. The Compensation Committee also approved the granting of 51,814 time vesting stock options to the same officers and key employees, which vest ratably over four years (the Fiscal 2019 Employee Time Vesting Stock Option Grant).  

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

 

 

2018

 

Dividend Yield

 

 

1.3

%

Expected Volatility

 

 

32.7

%

Risk Free Interest Rate

 

 

2.88

%

Expected Life

 

6.0 years

 

Stock option expense for all outstanding stock option awards totaled approximately $1.1 million and $0.9 million for the three months ended June 30, 2018 and 2017, respectively. At June 30, 2018, there was approximately

 

9


 

$9.5 million of unrecognized compensation cost related to outstanding stock options, which is expected to be recognized over a weighted average period of 2.9 years.

The following table represents stock option activity for the three months ended June 30, 2018:

 

 

Number

of Shares

 

 

Weighted

Average

Exercise

Price

 

Outstanding Options at Beginning of Year

 

 

958,136

 

 

$

72.52

 

Granted

 

 

113,993

 

 

$

106.24

 

Exercised

 

 

(35,454

)

 

$

110.89

 

Cancelled

 

 

(2,197

)

 

$

100.88

 

Outstanding Options at End of Year

 

 

1,034,478

 

 

$

76.74

 

Options Exercisable at End of Year

 

 

696,466

 

 

$

69.08

 

Weighted Average Fair Value of Options Granted

during the Year

 

 

 

 

 

$

34.20

 

The following table summarizes information about stock options outstanding at June 30, 2018:

 

 

 

Options Outstanding

 

 

Options Exercisable

 

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

 

 

 

3.10

 

 

$

23.27

 

 

 

65,912

 

 

$

23.27

 

$33.43 - $37.34

 

 

84,582

 

 

 

3.96

 

 

$

33.98

 

 

 

84,582

 

 

$

33.98

 

$53.22 - $77.67

 

 

293,163

 

 

 

6.82

 

 

$

71.27

 

 

 

188,311

 

 

$

70.56

 

$79.73 - $106.24

 

 

590,821

 

 

 

7.66

 

 

$

91.53

 

 

 

357,661

 

 

$

85.05

 

 

 

 

1,034,478

 

 

 

6.83

 

 

$

76.74

 

 

 

696,466

 

 

$

69.08

 

At June 30, 2018, the aggregate intrinsic value for outstanding and exercisable options was approximately $29.2 million and $25.0 million, respectively. The total intrinsic value of options exercised during the three months ended June 30, 2018 was approximately $1.9 million.

RESTRICTED STOCK

In May 2018, the Compensation Committee approved the granting to certain officers and key employees an aggregate of 57,756 shares of performance vesting restricted stock that will be earned if certain performance conditions are satisfied (the Fiscal 2019 Employee Restricted Stock Performance Award). The performance criteria for the Fiscal 2019 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 10.0% to 20.0%, for the fiscal year ending March 31, 2019.  All restricted shares will be earned if the return on equity is 20.0% or greater, and the percentage of shares earned will be reduced proportionately to approximately 66.7% if the return on equity is 10.0%.  If the Company does not achieve a return on equity of at least 10.0%, all awards will be forfeited. Following any such reduction, restrictions on the earned shares will lapse ratably over four years, with the initial fourth lapsing promptly following the determination date, and the remaining restrictions lapsing on March 31, 2020 through 2022. The Compensation Committee also approved the granting of 48,130 shares of time vesting restricted stock to the same officers and key employees, which vest ratably over four years (the Fiscal 2019 Employee Restricted Stock Time Vesting Award). The Fiscal 2019 Employee Restricted Stock Performance Award and the Fiscal 2019 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.


 

10


 

The fair value of restricted stock is based on the stock price at the date of grant.  The following table summarizes the activity for nonvested restricted shares during the three months ended June 30, 2018:

 

 

Number of Shares

 

 

Weighted Average Grant Date Fair Value

 

Restricted Stock Beginning of Year

 

 

328,059

 

 

$

65.76

 

Granted

 

 

105,886

 

 

$

106.24

 

Vested

 

 

(25,019

)

 

$

88.45

 

Forfeited

 

 

(1,990

)

 

$

100.88

 

Nonvested Restricted Stock at End of Year

 

 

406,936

 

 

$

76.12

 

During the three months ended June 30, 2018, the weighted average grant date fair value of restricted shares granted was $106.24.

Expense related to restricted shares was approximately $2.4 million and $2.5 million for the three months ended June 30, 2018 and 2017, respectively. At June 30, 2018, there was approximately $26.0 million of unearned compensation from restricted stock, which will be recognized over a weighted average period of 2.7 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 3,992,994 at June 30, 2018.

 

(I) COMPUTATION OF EARNINGS PER SHARE

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

 

 

 

For the Three Months Ended June 30,

 

 

 

2018

 

 

2017

 

Weighted Average Shares of Common Stock Outstanding

 

 

47,690,351

 

 

 

48,121,890

 

Effect of Dilutive Shares:

 

 

 

 

 

 

 

 

Assumed Exercise of Outstanding Dilutive Options

 

 

829,873

 

 

 

1,259,741

 

Less Shares Repurchased from Proceeds of Assumed Exercised Options

 

 

(571,799

)

 

 

(928,723

)

Restricted Stock Units

 

 

195,900

 

 

 

202,645

 

Weighted Average Common Stock and Dilutive Securities Outstanding

 

 

48,144,325

 

 

 

48,655,553

 

Shares Excluded Due to Anti-dilution Effects

 

 

145,488

 

 

 

63,359

 

 

 

(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 June 30,

 

 

 

2018

 

 

2017

 

 

 

(dollar in thousands)

 

Service Cost - Benefits Earned During the Period

 

$

100

 

 

$

250

 

Interest Cost of Projected Benefit Obligation

 

 

337

 

 

 

396

 

Expected Return on Plan Assets

 

 

(463

)

 

 

(401

)

Recognized Net Actuarial Loss

 

 

58

 

 

 

428

 

Amortization of Prior-Service Cost

 

 

15

 

 

 

90

 

Net Periodic Pension Cost

 

$

47

 

 

$

763

 

 


 

11


 

(K) INCOME TAXES

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act, among other changes, reduces the U.S. federal corporate tax rate from 35% to 21%, allows for the immediate 100% deductibility of certain capital expenditures, repeals the domestic production deduction, and further limits the deductibility of certain executive compensation.   

In December 2017, we recorded a tax benefit after the initial assessment of the tax effects of the Act, and we will continue refining this amount throughout December 2018. We are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of our deferred tax balance or give rise to new deferred tax amounts in future periods of fiscal 2019. The impact of the Act may differ from our estimate due to changes in the regulations, rulings, guidance, and interpretations issued by the Internal Revenue Service (IRS) and the FASB as well as interpretations and assumptions made by the Company.

The calculation of our estimated annual effective tax rate includes the estimated impact of provisions of the Act, including limitations on the deductibility of certain executive compensation. Such estimates could change as additional information becomes available on these provisions of the Tax Act.

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 three months ended June 30, 2018 was approximately 22%, which was lower than the tax rate of 31% for the three months ended June 30, 2017. The decline in the rate was primarily due to the passage of the Act and the corresponding changes in U.S. tax law mentioned above.

 

(L) LONG-TERM DEBT

Long-term debt consists of the following:

 

 

June 30,

 

 

March 31,

 

 

 

2018

 

 

2018

 

 

 

(dollars in thousands)

 

Bank Credit Facility

 

$

270,000

 

 

$

240,000

 

4.500% Senior Unsecured Notes Due 2026

 

 

350,000

 

 

 

350,000

 

Private Placement Senior Unsecured Notes

 

 

36,500

 

 

 

36,500

 

Total Debt

 

 

656,500

 

 

 

626,500

 

Less: Debt Origination Costs

 

 

(5,410

)

 

 

(5,578

)

Long-term Debt

 

$

651,090

 

 

$

620,922

 

 

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. The debt under the Credit Facility is not rated by ratings agencies.

At our option, outstanding principal amounts on the Credit Facility bear interest at a variable rate equal to (i) the London Interbank Offered Rate (LIBOR) plus an agreed margin (ranging from 100 to 225 basis points), which is to be established quarterly based upon the Company’s ratio of consolidated EBITDA, defined as earnings before interest, taxes, depreciation, and amortization, to the Company’s consolidated indebtedness (the Leverage Ratio); or (ii) an alternative base rate which is the higher of (a) the prime rate or (b) the federal funds rate plus  12% per annum plus an applicable rate (ranging from 0 to 125 basis points). In the case of loans bearing interest at a rate based on the federal funds rate, interest payments are payable quarterly. In the case of loans bearing interest at a rate based on LIBOR, interest is payable at the end of the LIBOR advance periods, which can be up to nine months at the option of the Company. The Company is also required to pay a commitment fee on unused

 

12


 

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 $270.0 million of borrowings outstanding at June 30, 2018. Based on our Leverage Ratio, we had $222.2  million of available borrowings, net of the outstanding letters of credit, at June 30, 2018.

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 June 30, 2018, we had $7.8 million of outstanding letters of credit.

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 with the proceeds of certain equity offerings up to 40% of the original aggregate principal amount of the Senior Unsecured Notes 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, unconditionally, jointly, and severally guaranteed by each of our subsidiaries that are guarantors 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  

On October 2, 2007, in a private placement transaction, we entered into a Note Purchase Agreement (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). 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 June 30, 2018, 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

%

 

13


 

Interest for the Series 2007A Senior Unsecured Notes is payable semi-annually April 2 and October 2 of each year until all principal is paid for the respective tranche.  

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.

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 Revenue 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 revenue of the Company and its Subsidiaries during such period.  We were in compliance with all financial ratios and tests at June 30, 2018.

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 principal and interest payments at a discount rate of 50 basis points above 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 hold all outstanding industrial revenue bonds, no debt is reflected on our financial statements in connection with our lease of the cement plant. Upon expiration 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 revenue, incur expenses, and prepare separate financial information that is evaluated regularly by our chief operating decision maker in order to allocate resources and assess performance.

We are a leading supplier of heavy construction materials, light building materials, and materials used for oil and natural gas extraction in the United States. Our products are commodities that are essential in commercial and residential construction; public construction projects; projects to build, expand, and repair roads and highways; and in oil and natural gas extraction.

Our business is organized into three sectors within which there are five reportable business segments. The Heavy Materials sector includes the Cement and Concrete and Aggregates segments. The Light Materials sector

 

14


 

includes the Gypsum Wallboard and Recycled Paperboard segments. The Oil and Gas Proppants segment produces frac sand used in oil and gas exploration and extraction.

Our operations are conducted in the U.S. and include the mining of limestone for the manufacture, production, distribution, and sale of portland cement (a basic construction material which 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; and the mining and sale of aggregates (crushed stone, sand, and gravel) and sand used in hydraulic fracturing (frac sand).

We operate seven cement plants, one slag grinding facility, 18 cement distribution terminals, five gypsum wallboard plants, a gypsum wallboard distribution center, a recycled paperboard mill, 17 readymix concrete batch plants, four aggregates processing plants, two frac sand processing facilities, three frac sand drying facilities, and six frac sand trans-load locations. The principal markets for our cement products are Texas, Illinois, the central plains, Michigan, Iowa, the Rocky Mountains, northern Nevada, southern Ohio, and northern California. Gypsum wallboard and recycled paperboard are distributed throughout the continental U.S., with the exception of the Northeast. Concrete and aggregates are sold to local readymix producers and paving contractors in the Austin, Texas area, north of Sacramento, California; and the greater Kansas City, Missouri area, while frac sand is currently sold into shale deposits across the United States. Other segment operations that are not material to our business are included in Other.

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

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

 

 

For the Three Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

Revenue -

 

 

 

 

 

 

 

 

Cement

 

$

186,788

 

 

$

182,935

 

Concrete and Aggregates

 

 

40,840

 

 

 

43,919

 

Gypsum Wallboard

 

 

142,415

 

 

 

126,813

 

Paperboard

 

 

45,133

 

 

 

44,413

 

Oil and Gas Proppants

 

 

21,758

 

 

 

18,910

 

Other

 

 

5,942