exp-10q_20180930.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

September 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      NO  

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

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

 

  

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

 

Class

 

Outstanding Shares

Common Stock, $.01 Par Value

 

46,889,378

 

 

 

 


TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION (unaudited)

 

 

 

 

 

Page

Item 1.

 

Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

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

 

1

 

 

 

 

 

 

 

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

 

2

 

 

 

 

 

 

 

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

 

3

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Consolidated Statements of Stockholders' Equity as of September 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

 

26

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

40

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

40

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

41

 

 

 

 

 

Item 1a.

 

Risk Factors

 

42

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

52

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

52

 

 

 

 

 

Item 6.

 

Exhibits

 

53

 

 

 

 

 

SIGNATURES

 

54

 

 

 

 


 

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

 

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

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

 

Revenue

 

$

381,499

 

 

$

376,315

 

 

$

775,255

 

 

$

742,436

 

Cost of Goods Sold

 

 

283,568

 

 

 

279,561

 

 

 

585,690

 

 

 

559,623

 

Gross Profit

 

 

97,931

 

 

 

96,754

 

 

 

189,565

 

 

 

182,813

 

Equity in Earnings of Unconsolidated Joint Venture

 

 

10,173

 

 

 

11,955

 

 

 

19,424

 

 

 

21,831

 

Corporate General and Administrative Expense

 

 

(9,922

)

 

 

(9,821

)

 

 

(17,925

)

 

 

(19,500

)

Litigation Settlements and Losses

 

 

 

 

 

 

 

 

(1,800

)

 

 

 

Other Non-Operating Income

 

 

428

 

 

 

887

 

 

 

999

 

 

 

1,644

 

Interest Expense, Net

 

 

(6,817

)

 

 

(7,456

)

 

 

(13,449

)

 

 

(14,939

)

Earnings before Income Taxes

 

 

91,793

 

 

 

92,319

 

 

 

176,814

 

 

 

171,849

 

Income Taxes

 

 

(19,190

)

 

 

(28,957

)

 

 

(37,872

)

 

 

(53,605

)

Net Earnings

 

 

72,603

 

 

 

63,362

 

 

 

138,942

 

 

 

118,244

 

EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.54

 

 

$

1.32

 

 

$

2.93

 

 

$

2.46

 

Diluted

 

$

1.53

 

 

$

1.31

 

 

$

2.90

 

 

$

2.43

 

AVERAGE SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

47,219,532

 

 

 

48,053,733

 

 

 

47,453,655

 

 

 

48,087,625

 

Diluted

 

 

47,563,818

 

 

 

48,504,767

 

 

 

47,853,472

 

 

 

48,579,984

 

CASH DIVIDENDS PER SHARE

 

$

0.10

 

 

$

0.10

 

 

$

0.20

 

 

$

0.20

 

See notes to unaudited consolidated financial statements.


 

1


 

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

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

Net Earnings

 

$

72,603

 

 

$

63,362

 

 

$

138,942

 

 

$

118,244

 

Net Actuarial Change in Defined Benefit Plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss

 

 

73

 

 

 

314

 

 

 

146

 

 

 

628

 

Tax expense

 

 

(17

)

 

 

(117

)

 

 

(34

)

 

 

(234

)

Comprehensive Earnings

 

$

72,659

 

 

$

63,559

 

 

$

139,054

 

 

$

118,638

 

See notes to unaudited consolidated financial statements.


 

2


 

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

 

 

 

September 30,

 

 

March 31,

 

 

 

2018

 

 

2018

 

 

 

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets -

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

10,002

 

 

$

9,315

 

Restricted Cash

 

 

 

 

 

38,753

 

Accounts and Notes Receivable, net

 

 

174,550

 

 

 

141,685

 

Inventories

 

 

238,869

 

 

 

258,159

 

Income Tax Receivable

 

 

5,924

 

 

 

5,750

 

Prepaid and Other Assets

 

 

7,751

 

 

 

5,073

 

Total Current Assets

 

 

437,096

 

 

 

458,735

 

Property, Plant, and Equipment -

 

 

2,636,249

 

 

 

2,586,528

 

Less: Accumulated Depreciation

 

 

(1,011,511

)

 

 

(991,229

)

Property, Plant, and Equipment, net

 

 

1,624,738

 

 

 

1,595,299

 

Notes Receivable

 

 

3,144

 

 

 

115

 

Investment in Joint Venture

 

 

60,482

 

 

 

60,558

 

Goodwill and Intangible Assets, net

 

 

237,738

 

 

 

239,342

 

Other Assets

 

 

16,314

 

 

 

13,954

 

Total Assets

 

$

2,379,512

 

 

$

2,368,003

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities -

 

 

 

 

 

 

 

 

Accounts Payable

 

$

92,479

 

 

$

73,459

 

Accrued Liabilities

 

 

62,223

 

 

 

105,870

 

Total Current Liabilities

 

 

154,702

 

 

 

179,329

 

Long-term Debt

 

 

631,257

 

 

 

620,922

 

Other Long-term Liabilities

 

 

31,099

 

 

 

31,096

 

Deferred Income Taxes

 

 

129,851

 

 

 

118,966

 

Total Liabilities

 

 

946,909

 

 

 

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 47,189,378 and 48,282,784 Shares, respectively

 

 

472

 

 

 

483

 

Capital in Excess of Par Value

 

 

7,752

 

 

 

122,379

 

Accumulated Other Comprehensive Losses

 

 

(3,900

)

 

 

(4,012

)

Retained Earnings

 

 

1,428,279

 

 

 

1,298,840

 

Total Stockholders’ Equity

 

 

1,432,603

 

 

 

1,417,690

 

 

 

$

2,379,512

 

 

$

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 Six Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net Earnings

 

$

138,942

 

 

$

118,244

 

Adjustments to Reconcile Net Earnings to Net Cash Provided

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

 

 

 

 

 

 

 

 

Depreciation, Depletion and Amortization

 

 

62,176

 

 

 

59,253

 

Deferred Income Tax Provision

 

 

10,851

 

 

 

1,077

 

Stock Compensation Expense

 

 

7,559

 

 

 

7,235

 

Equity in Earnings of Unconsolidated Joint Venture

 

 

(19,424

)

 

 

(21,831

)

Distributions from Joint Venture

 

 

19,500

 

 

 

17,500

 

Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

 

 

Accounts and Notes Receivable

 

 

(35,894

)

 

 

(30,361

)

Inventories

 

 

19,290

 

 

 

13,856

 

Accounts Payable and Accrued Liabilities

 

 

(24,399

)

 

 

(14,905

)

Other Assets

 

 

(3,551

)

 

 

2,202

 

Income Taxes Payable (Receivable)

 

 

(174

)

 

 

478

 

Net Cash Provided by Operating Activities

 

 

174,876

 

 

 

152,748

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Additions to Property, Plant, and Equipment

 

 

(93,444

)

 

 

(44,851

)

Acquisition Spending

 

 

 

 

 

(36,761

)

Proceeds from Sale of Property, Plant, and Equipment

 

 

2,281

 

 

 

 

Net Cash Used in Investing Activities

 

 

(91,163

)

 

 

(81,612

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Increase (Decrease) in Credit Facility

 

 

10,000

 

 

 

(30,000

)

Dividends Paid to Stockholders

 

 

(9,582

)

 

 

(9,709

)

Purchase and Retirement of Common Stock

 

 

(122,404

)

 

 

(24,903

)

Proceeds from Stock Option Exercises

 

 

1,992

 

 

 

20,426

 

Shares Redeemed to Settle Employee Taxes on Stock Compensation

 

 

(1,785

)

 

 

(2,455

)

Net Cash Used in Financing Activities

 

 

(121,779

)

 

 

(46,641

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

 

 

(38,066

)

 

 

24,495

 

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

 

$

10,002

 

 

$

31,056

 

 

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

 

 

 

 

 

 

 

 

138,942

 

 

 

 

 

 

138,942

 

Stock Option Exercises and Restricted Share Vesting

 

 

 

 

 

1,992

 

 

 

 

 

 

 

 

 

1,992

 

Purchase and Retirement of Common Stock

 

 

(12

)

 

 

(122,392

)

 

 

 

 

 

 

 

 

(122,404

)

Dividends to Stockholders

 

 

 

 

 

 

 

 

(9,503

)

 

 

 

 

 

(9,503

)

Stock Compensation Expense

 

 

1

 

 

 

7,558

 

 

 

 

 

 

 

 

 

7,559

 

Shares Redeemed to Settle Employee Taxes

 

 

 

 

 

(1,785

)

 

 

 

 

 

 

 

 

(1,785

)

Unfunded Pension Liability, net of tax

 

 

 

 

 

 

 

 

 

 

 

112

 

 

 

112

 

Balance at September 30, 2018

 

$

472

 

 

$

7,752

 

 

$

1,428,279

 

 

$

(3,900

)

 

$

1,432,603

 

See notes to the unaudited consolidated financial statements.

 


 

5


 

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

 

(A) BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements as of and for the three and six-month periods ended September 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, 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 the standard 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 under the new lease guidance land easements 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 $13.9 million and $14.6 million for the six months ended September 30, 2018 and 2017, respectively. Net payments made for federal and state income taxes during the six months ended September 30, 2018 and 2017 were $27.4 million and $52.4 million, respectively.

We have excluded approximately $5.2 million of non-cash investing activities from the September 30, 2017 Unaudited Consolidated Statement of Cash Flows.  The amounts excluded related to fixed asset additions that were accrued at September 30, 2017, and paid during October 2017.

(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

 

7


 

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.

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 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 $9.1 million and $8.6 million at September 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 $3.8 million at September 30, 2018, of which approximately $0.7 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 4.5%. Remaining unpaid amounts, plus accrued interest, mature in fiscal 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 six months ended September 30, 2018, we repurchased 1,239,100 shares at an average price of $98.77. Subsequent to September 30, 2018, we repurchased an additional 300,000 shares through October 26, 2018, at an average price of $80.15. Including the repurchases subsequent to September 30, 2018, we have authorization to purchase an additional 2,650,328 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:

 

 

September 30,

 

 

March 31,

 

 

 

2018

 

 

2018

 

 

 

(dollars in thousands)

 

Raw Materials and Materials-in-Progress

 

$

105,943

 

 

$

121,628

 

Finished Cement

 

 

24,003

 

 

 

24,089

 

Aggregates

 

 

7,309

 

 

 

7,787

 

Gypsum Wallboard

 

 

7,612

 

 

 

8,477

 

Paperboard

 

 

9,793

 

 

 

8,602

 

Frac Sand

 

 

2,729

 

 

 

1,696

 

Repair Parts and Supplies

 

 

76,048

 

 

 

79,878

 

Fuel and Coal

 

 

5,432

 

 

 

6,002

 

 

 

$

238,869

 

 

$

258,159

 

 

 

8


 

(G) ACCRUED EXPENSES

Accrued Expenses consist of the following:

 

 

 

September 30,

 

 

March 31

 

 

 

2018

 

 

2018

 

 

 

(dollars in thousands)

 

Payroll and Incentive Compensation

 

$

21,199

 

 

$

25,290

 

Benefits

 

 

13,076

 

 

 

13,785

 

Interest

 

 

3,852

 

 

 

3,852

 

Property Taxes

 

 

8,292

 

 

 

5,422

 

Power and Fuel

 

 

1,473

 

 

 

1,545

 

Litigation Settlements

 

 

345

 

 

 

45,098

 

Rail Freight

 

 

2,012

 

 

 

 

Legal

 

 

2,185

 

 

 

1,435

 

Sales and Use Tax

 

 

929

 

 

 

890

 

Other

 

 

8,860

 

 

 

8,553

 

 

 

$

62,223

 

 

$

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 to the same officers and key employees of 51,814 time vesting stock options, which vest ratably over four years (the Fiscal 2019 Employee Time Vesting Stock Option Grant).  

In August 2018, we granted 1,741 options to members of the Board of Directors (the Fiscal 2019 Board of Directors Stock Option Grant). Options granted under the Fiscal 2019 Board of Directors Stock Option Grant vest immediately and can be exercised from the date of the grant until their expiration of the tenth anniversary of the date of grant.  

The Fiscal 2019 Employee Performance Stock Option Grant, the Fiscal 2019 Employee Time Vesting Stock Option Grant, and the Fiscal 2019 Board of Directors Stock Option Grant were valued at the grant date using the

 

9


 

Black‒Scholes option pricing model. The weighted average assumptions used in the Black-Scholes models to value the option awards in fiscal 2019 are as follows:  

 

 

 

2018

 

Dividend Yield

 

 

1.3

%

Expected Volatility

 

 

32.7

%

Risk Free Interest Rate

 

 

2.9

%

Expected Life

 

6.0 years

 

 

Stock option expense for all outstanding stock option awards totaled approximately $1.0 million and $2.1 million for the three and six months ended September 30, 2018, respectively, and approximately $1.3 million and $2.2 million for the three and six months ended September 30, 2017, respectively. At September 30, 2018, there was approximately $8.5 million of unrecognized compensation cost related to outstanding stock options, which is expected to be recognized over a weighted average period of 2.7 years.

The following table represents stock option activity for the six months ended September 30, 2018:

 

 

Number

of Shares

 

 

Weighted

Average

Exercise

Price

 

Outstanding Options at Beginning of Year

 

 

958,136

 

 

$

72.52

 

Granted

 

 

115,734

 

 

$

106.14

 

Exercised

 

 

(35,454

)

 

$

110.89

 

Cancelled

 

 

(2,197

)

 

$

100.88

 

Outstanding Options at End of Year

 

 

1,036,219

 

 

$

76.77

 

Options Exercisable at End of Year

 

 

698,207

 

 

$

69.16

 

Weighted Average Fair Value of Options Granted

during the Year

 

 

 

 

 

$

33.99

 

The following table summarizes information about stock options outstanding at September 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

 

 

 

2.85

 

 

$

23.27

 

 

 

65,912

 

 

$

23.27

 

$33.43 - $37.34

 

 

84,582

 

 

 

3.71

 

 

$

33.98

 

 

 

84,582

 

 

$

33.98

 

$53.22 - $77.67

 

 

293,163

 

 

 

6.57

 

 

$

71.27

 

 

 

188,311

 

 

$

70.56

 

$79.73 - $106.24

 

 

592,562

 

 

 

7.50

 

 

$

91.55

 

 

 

359,402

 

 

$

85.12

 

 

 

 

1,036,219

 

 

 

6.63

 

 

$

76.77

 

 

 

698,207

 

 

$

69.16

 

At September 30, 2018, the aggregate intrinsic value for outstanding and exercisable options was approximately $8.8 million and $11.2 million, respectively. The total intrinsic value of options exercised during the six months ended September 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

 

10


 

through 2022. The Compensation Committee also approved the granting to the same officers and key employees of 48,130 shares of time vesting restricted stock, 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.

In August 2018, we granted 15,950 shares of restricted stock to members of the Board of Directors (the Board of Directors Fiscal 2019 Restricted Stock Award), which vest six months after the grant date. The Board of Directors Fiscal 2019 Restricted Stock Award was valued at the closing price of the stock at the date of the grant and are being expensed over a six-month period.

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 six months ended September 30, 2018:

 

 

Number of Shares

 

 

Weighted Average Grant Date Fair Value

 

Restricted Stock Beginning of Year

 

 

328,059

 

 

$

65.76

 

Granted

 

 

121,836

 

 

$

105.13

 

Vested

 

 

(46,686

)

 

$

61.50

 

Forfeited

 

 

(1,990

)

 

$

100.88

 

Nonvested Restricted Stock at End of Year

 

 

401,219

 

 

$

78.29

 

During the six months ended September 30, 2018, the weighted average grant date fair value of restricted shares granted was $105.13.

Expense related to restricted shares was approximately $3.1 million and $5.5 million for the three and six months ended September 30, 2018, respectively, and approximately $2.5 million and $5.0 million for the three and six months ended September 30, 2017, respectively. At September 30, 2018, there was approximately $24.5 million of unearned compensation from restricted stock, which will be recognized over a weighted average period of 2.4 years.

The number of shares available for future grants of stock options, restricted stock units, stock appreciation rights, and restricted stock under the Plan was 3,984,117 at September 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 September 30,

 

 

For the Six Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Weighted Average Shares of Common Stock Outstanding

 

 

47,219,532

 

 

 

48,053,733

 

 

 

47,453,655

 

 

 

48,087,625

 

Effect of Dilutive Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assumed Exercise of Outstanding Dilutive Options

 

 

785,848

 

 

 

1,060,209

 

 

 

807,861

 

 

 

1,159,975

 

Less Shares Repurchased from Proceeds of Assumed Exercised Options

 

 

(588,900

)

 

 

(801,684

)

 

 

(580,350

)

 

 

(865,203

)

Restricted Stock Units

 

 

147,338

 

 

 

192,509

 

 

 

172,306

 

 

 

197,587

 

Weighted Average Common Stock and Dilutive Securities Outstanding

 

 

47,563,818

 

 

 

48,504,767

 

 

 

47,853,472

 

 

 

48,579,984

 

Shares Excluded Due to Anti-dilution Effects

 

 

181,412

 

 

 

88,729

 

 

 

163,450

 

 

 

76,044

 

 

 

(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.

 

11


 

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

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017