Eagle Materials
EAGLE MATERIALS INC (Form: 10-Q, Received: 01/24/2017 17:04:08)

]\ 

 

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, 2016

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 or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

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

Yes       No  

As of January 20, 2017, the number of outstanding shares of common stock was:

 

Class

 

Outstanding Shares

Common Stock, $.01 Par Value

 

48,410,358

 

 

 

 


Eagle Materials Inc. and Subsidiaries

Form 10-Q

December 31, 2016

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, 2016 and 2015

 

1

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Earnings for the Three and Nine Months Ended December 31, 2016 and 2015

 

2

 

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2016, and March 31, 2016

 

3

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2016 and 2015

 

4

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

5

 

 

 

 

 

Item 2.

 

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

 

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

41

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

42

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

43

 

 

 

 

 

Item 1a.

 

Risk Factors

 

44

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

54

 

 

 

 

 

Item 4.

 

Mine Safety Information

 

54

 

 

 

 

 

Item 6.

 

Exhibits

 

54

 

 

 

 

 

SIGNATURES

 

55

 

 

 

 


 

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,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

$

302,395

 

 

$

277,409

 

 

$

932,557

 

 

$

891,360

 

Cost of Goods Sold

 

 

215,015

 

 

 

208,544

 

 

 

682,012

 

 

 

717,104

 

Gross Profit

 

 

87,380

 

 

 

68,865

 

 

 

250,545

 

 

 

174,256

 

Equity in Earnings of Unconsolidated Joint Venture

 

 

11,244

 

 

 

10,483

 

 

 

31,371

 

 

 

29,993

 

Corporate General and Administrative

 

 

(9,166

)

 

 

(8,304

)

 

 

(27,831

)

 

 

(26,659

)

Other Income

 

 

429

 

 

 

1,163

 

 

 

2,008

 

 

 

2,170

 

Interest Expense, Net

 

 

(6,198

)

 

 

(4,002

)

 

 

(15,755

)

 

 

(12,830

)

Earnings Before Income Taxes

 

 

83,689

 

 

 

68,205

 

 

 

240,338

 

 

 

166,930

 

Income Tax Expense

 

 

(27,302

)

 

 

(22,357

)

 

 

(78,370

)

 

 

(53,501

)

Net Earnings

 

$

56,387

 

 

$

45,848

 

 

$

161,968

 

 

$

113,429

 

EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.18

 

 

$

0.93

 

 

$

3.38

 

 

$

2.29

 

Diluted

 

$

1.17

 

 

$

0.92

 

 

$

3.35

 

 

$

2.26

 

AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

47,881,662

 

 

 

49,187,738

 

 

 

47,901,369

 

 

 

49,593,821

 

Diluted

 

 

48,297,748

 

 

 

49,770,020

 

 

 

48,340,326

 

 

 

50,230,091

 

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,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net Earnings

 

$

56,387

 

 

$

45,848

 

 

$

161,968

 

 

$

113,429

 

Change in Funded Status of Defined Benefit Plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Net Actuarial Loss

 

 

500

 

 

 

506

 

 

 

1,500

 

 

 

1,522

 

Tax Expense

 

 

(188

)

 

 

(188

)

 

 

(564

)

 

 

(564

)

Comprehensive Earnings

 

$

56,699

 

 

$

46,166

 

 

$

162,904

 

 

$

114,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements.

 

2


 

Eagle Materials Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands)

 

 

 

December 31,

2016

 

 

March 31,

2016

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets -

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

164,665

 

 

$

5,391

 

Accounts and Notes Receivable

 

 

115,278

 

 

 

120,221

 

Inventories

 

 

222,783

 

 

 

243,595

 

Income Tax Receivable

 

 

 

 

 

5,623

 

Prepaid and Other Assets

 

 

5,959

 

 

 

5,173

 

Total Current Assets

 

 

508,685

 

 

 

380,003

 

Property, Plant and Equipment -

 

 

2,098,695

 

 

 

2,072,776

 

Less: Accumulated Depreciation

 

 

(870,859

)

 

 

(817,465

)

Property, Plant and Equipment, net

 

 

1,227,836

 

 

 

1,255,311

 

Notes Receivable

 

 

1,002

 

 

 

2,672

 

Investment in Joint Venture

 

 

47,600

 

 

 

49,465

 

Goodwill and Intangible Assets

 

 

161,765

 

 

 

165,827

 

Other Assets

 

 

27,101

 

 

 

30,357

 

 

 

$

1,973,989

 

 

$

1,883,635

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities -

 

 

 

 

 

 

 

 

Accounts Payable

 

$

63,847

 

 

$

66,614

 

Accrued Liabilities

 

 

57,649

 

 

 

45,975

 

Income Tax Payable

 

 

5,215

 

 

 

 

Current Portion of Long-term Debt

 

 

81,214

 

 

 

8,000

 

Total Current Liabilities

 

 

207,925

 

 

 

120,589

 

Long-term Debt

 

 

380,134

 

 

 

499,714

 

Other Long-term Liabilities

 

 

57,514

 

 

 

61,122

 

Deferred Income Taxes

 

 

164,841

 

 

 

161,679

 

Total Liabilities

 

 

810,414

 

 

 

843,104

 

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 48,409,454 and 48,526,843 Shares, respectively

 

 

484

 

 

 

485

 

Capital in Excess of Par Value

 

 

143,623

 

 

 

168,969

 

Accumulated Other Comprehensive Losses

 

 

(10,473

)

 

 

(11,409

)

Retained Earnings

 

 

1,029,941

 

 

 

882,486

 

Total Stockholders’ Equity

 

 

1,163,575

 

 

 

1,040,531

 

 

 

$

1,973,989

 

 

$

1,883,635

 

 

 

 

 

 

 

 

 

 

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,

 

 

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net Earnings

 

$

161,968

 

 

$

113,429

 

Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating

   Activities -

 

 

 

 

 

 

 

 

Depreciation, Depletion and Amortization

 

 

67,894

 

 

 

74,245

 

Impairment of Intangible Assets

 

 

 

 

 

28,354

 

Inventory Adjustment to Net Realizable Value

 

 

8,492

 

 

 

9,382

 

Deferred Income Tax Provision

 

 

2,751

 

 

 

(6,478

)

Stock Compensation Expense

 

 

9,067

 

 

 

12,293

 

Excess Tax Benefits from Share Based Payment Arrangements

 

 

(8,546

)

 

 

(2,504

)

Equity in Earnings of Unconsolidated Joint Venture

 

 

(31,371

)

 

 

(29,993

)

Distributions from Joint Venture

 

 

33,250

 

 

 

27,250

 

Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

 

 

Accounts and Notes Receivable

 

 

6,613

 

 

 

11,765

 

Inventories

 

 

12,320

 

 

 

(3,974

)

Accounts Payable and Accrued Liabilities

 

 

6,633

 

 

 

(10,228

)

Other Assets

 

 

413

 

 

 

(1,484

)

Income Taxes Payable

 

 

19,384

 

 

 

(5,767

)

Net Cash Provided by Operating Activities

 

 

288,868

 

 

 

216,290

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Property, Plant and Equipment Additions

 

 

(34,043

)

 

 

(75,536

)

Acquisition Spending

 

 

 

 

 

(32,427

)

Net Cash Used in Investing Activities

 

 

(34,043

)

 

 

(107,963

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Increase (Decrease) in Credit Facility

 

 

(382,000

)

 

 

45,000

 

Repayment of Senior Notes

 

 

(8,000

)

 

 

(57,045

)

Issuance of Long-term Debt

 

 

350,000

 

 

 

 

Payment of Debt Issuance Costs

 

 

(6,637

)

 

 

 

Dividends Paid to Stockholders

 

 

(14,500

)

 

 

(15,078

)

Shares Redeemed to Settle Employee Taxes on Stock Compensation

 

 

(3,084

)

 

 

(1,815

)

Purchase and Retirement of Common Stock

 

 

(60,013

)

 

 

(76,231

)

Proceeds from Stock Option Exercises

 

 

20,137

 

 

 

2,580

 

Excess Tax Benefits from Share Based Payment Arrangements

 

 

8,546

 

 

 

2,504

 

Net Cash Used in Financing Activities

 

 

(95,551

)

 

 

(100,085

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

159,274

 

 

 

8,242

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

5,391

 

 

 

7,514

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

164,665

 

 

$

15,756

 

 

 

 

 

 

 

 

 

See notes to the unaudited consolidated financial statements.

 

 

4


 

Eagle Materials Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

December 31, 2016

 

(A) BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements as of and for the three and nine month periods ended December 31, 2016 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 25, 2016.

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 standard will be effective for us in the first quarter of fiscal 2018. Each of the various provisions within this standard has its own specified transition method; some will be applied prospectively and others will be applied on a retrospective or modified retrospective basis. The effect of adopting this standard will result in volatility in the provision for income taxes depending on fluctuations in the price of the Company's stock.

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 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 expect to 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 are currently evaluating the impact of this ASU .

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.

 

 

5


 

 

(B) PENDING ACQUISITION

On September 11, 2016, Eagle Materials Inc. (the “Company”) and Cemex Construction Materials Atlantic, LLC (the “Seller”) entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) pursuant to which the Company will acquire (the “Fairborn Acquisition”) (i) a cement plant located in Fairborn, Ohio, (ii) a cement distribution terminal located in Columbus, Ohio, and (iii) certain other properties and assets used by the Seller in connection with the foregoing (collectively, the “Fairborn Business”).

The purchase price (the “Fairborn Purchase Price”) to be paid by the Company in the Fairborn Acquisition is $400.0 million in cash, subject to a customary post-closing inventory adjustment. In addition, the Company will assume certain liabilities and obligations of the Seller relating to the Fairborn Business, including contractual obligations, reclamation obligations and various other liabilities and obligations arising out of or relating to the Fairborn Business after the closing of the Fairborn Acquisition. The Company expects to fund the payment of the Fairborn Purchase Price and expenses incurred in connection with the Fairborn Acquisition through a combination of cash on hand and borrowings under the Company’s existing bank credit facility.  The Fairborn Acquisition is expected to close during the fourth quarter of fiscal 2017.  In connection with the closing, we expect to incur approximately $4.0 million in transaction related expenses.

 

 

(C) CASH FLOW INFORMATION—SUPPLEMENTAL  

Cash payments made for interest were $10.7 million and $15.0 million for the nine months ended December 31, 2016 and 2015, respectively. Net payments made for federal and state income taxes during the nine months ended December 31, 2016 and 2015, were $55.6 million and $64.8 million, respectively.

 

 

(D) ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable have been shown net of the allowance for doubtful accounts of $11.3 million and $10.2 million at December 31, 2016 and March 31, 2016, 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 $4.5 million at December 31, 2016, of which approximately $3.5 million has been classified as current and presented with accounts receivable on the balance sheet. We lend funds to certain companies in the ordinary course of business, and the notes bear interest, on average, at LIBOR plus 3.5%. Remaining unpaid amounts, plus accrued interest, mature on various dates between 2017 and 2019. The notes are collateralized by certain assets of the borrowers, namely property and equipment, and are generally payable monthly. We monitor the credit risk of each borrower by focusing on the timeliness of payments, review of credit history and credit metrics and interaction with the borrowers.

 

 

 

6


 

(E) STOCKHOLDERS’ EQUITY

A summary of changes in stockholders’ equity follows:

 

 

 

For the Nine Months

Ended   December 31, 2016

 

 

 

(dollars in thousands)

 

Common Stock –

 

 

 

 

Balance at Beginning of Period

 

$

485

 

Purchase and Retirement of Common Stock

 

 

(9

)

Issuance of Restricted Stock

 

 

1

 

Stock Option Exercises

 

 

7

 

Balance at End of Period

 

 

484

 

Capital in Excess of Par Value –

 

 

 

 

Balance at Beginning of Period

 

 

168,969

 

Stock Compensation Expense

 

 

9,066

 

Shares Redeemed to Settle Employee Taxes

 

 

(3,084

)

Stock Option Exercises

 

 

28,676

 

Purchase and Retirement of Common Stock

 

 

(60,004

)

Balance at End of Period

 

 

143,623

 

Retained Earnings –

 

 

 

 

Balance at Beginning of Period

 

 

882,486

 

Dividends Declared to Stockholders

 

 

(14,513

)

Net Earnings

 

 

161,968

 

Balance at End of Period

 

 

1,029,941

 

Accumulated Other Comprehensive Loss -

 

 

 

 

Balance at Beginning of Period

 

 

(11,409

)

Change in Funded Status of Pension Plan,

   net of tax

 

 

936

 

Balance at End of Period

 

 

(10,473

)

Total Stockholders’ Equity

 

$

1,163,575

 

 

There were no share repurchases during the three months ended December 31, 2016.  During the nine months ended December 31, 2016 we have repurchased 788,800 shares at an average price of $76.08. At December 31, 2016, we have authorization to purchase an additional 4,817,200 shares.

 

 

(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,

2016

 

 

March 31,

2016

 

 

 

(dollars in thousands)

 

Raw Materials and Material-in-Progress

 

$

104,173

 

 

$

119,060

 

Finished Cement

 

 

18,963

 

 

 

21,834

 

Gypsum Wallboard

 

 

6,944

 

 

 

5,839

 

Frac Sand

 

 

3,847

 

 

 

5,501

 

Aggregates

 

 

7,510

 

 

 

10,660

 

Paperboard

 

 

4,818

 

 

 

7,575

 

Repair Parts and Supplies

 

 

70,986

 

 

 

68,155

 

Fuel and Coal

 

 

5,542

 

 

 

4,971

 

 

 

$

222,783

 

 

$

243,595

 

 

 

7


 

During the nine months ended December 31 , 2016 , we wrote down approximately $ 7.7 million and $0.8 million of raw materials and materials-in-process and frac sand, respectively.  During the nine months ended December 31 , 2015 , we wrote down approximately $9.4 million of raw materials and materials-in-process.  These inventories rela ted to our Oil and Gas Proppants segment.

 

 

(G) ACCRUED EXPENSES

Accrued expenses consist of the following:

 

 

 

As of

 

 

 

December 31,

2016

 

 

March 31,

2016

 

 

 

(dollars in thousands)

 

Payroll and Incentive Compensation

 

$

24,917

 

 

$

19,956

 

Benefits

 

 

10,686

 

 

 

10,663

 

Interest

 

 

8,132

 

 

 

3,373

 

Property Taxes

 

 

3,729

 

 

 

4,186

 

Power and Fuel

 

 

1,807

 

 

 

1,390

 

Sales and Use Tax

 

 

798

 

 

 

1,486

 

Legal

 

 

2,217

 

 

 

549

 

Other

 

 

5,363

 

 

 

4,372

 

 

 

$

57,649

 

 

$

45,975

 

 

 

(H) S hare -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 2016, the Compensation Committee approved the granting of an aggregate of 91,074 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 2017 Employee Performance Stock Option Grant”).  The performance criterion for the Fiscal 2017 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 11.0% to 18.0%, for the fiscal year ending March 31, 2017.  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, 2018 through 2020. The stock options have a term of ten years from the date of grant. The Compensation Committee also approved the granting of 75,896 time vesting stock options to the same officers and key employees, which vest ratably over four years (the “Fiscal 2017 Employee Time Vesting Stock Option Grant).  In August 2016, we granted 17,894 options to members of the Board of Directors (the “Fiscal 2017 Board of Directors Stock Option Grant”).  Options granted under the Fiscal 2017 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 grant. The Fiscal 2017 Employee Performance Stock Option Grant, Fiscal 2017 Employee Time Vesting Stock Option Grant and the Fiscal 2017 Board of Directors Stock Option Grant were valued at the grant date using the Black-Scholes option pricing model.

 

8


 

The weighted-average assumptions used in the Bl ack-Scholes model to value the option awards in fiscal 2017 are as follows:

 

 

 

Fiscal 2017

 

Dividend Yield

 

 

1.3%

 

Expected Volatility

 

 

36.5%

 

Risk Free Interest Rate

 

 

1.4%

 

Expected Life

 

6.0 years

 

 

Stock option expense for all outstanding stock option awards totaled approximately $1.2 million and $4.2 million for the three and nine months ended December 31, 2016, respectively and approximately $1.9 million and $6.1 million for the three and nine months ended December 31, 2015, respectively. At December 31, 2016, there was approximately $8.1 million of unrecognized compensation cost related to outstanding stock options, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.6 years.

The following table represents stock option activity for the nine months ended December 31, 2016:

 

 

 

Number

of

Shares

 

 

Weighted-

Average

Exercise Price

 

Outstanding Options at Beginning of Period

 

 

1,817,763

 

 

$

53.03

 

Granted

 

 

192,364

 

 

$

76.29

 

Exercised

 

 

(619,345

)

 

$

34.51

 

Cancelled

 

 

(19,182

)

 

$

70.30

 

Outstanding Options at End of Period

 

 

1,371,600

 

 

$

64.41

 

Options Exercisable at End of Period

 

 

871,840

 

 

$

56.57

 

Weighted-Average Fair Value of Options Granted during

   the Period

 

$

24.56

 

 

 

 

 

 

The following table summarizes information about stock options outstanding at December 31, 2016:

 

 

 

Outstanding Options

 

 

Exercisable Options

 

Range of Exercise Prices

 

Number of

Shares

Outstanding

 

 

Weighted -

Average

Remaining

Contractual

Life

 

 

Weighted -

Average

Exercise

Price

 

 

Number of

Shares

Outstanding

 

 

Weighted -

Average

Exercise

Price

 

$23.17 – $ 30.74

 

 

169,374

 

 

 

3.08

 

 

$

24.95

 

 

 

168,374

 

 

$

24.92

 

$33.43 – $ 37.34

 

 

210,201

 

 

 

5.46

 

 

$

33.85

 

 

 

204,201

 

 

$

33.79

 

$53.22 – $ 77.67

 

 

442,524

 

 

 

7.83

 

 

$

70.08

 

 

 

229,197

 

 

$

67.20

 

$79.73 – $ 93.56

 

 

549,501

 

 

 

8.06

 

 

$

83.70

 

 

 

270,068

 

 

$

84.51

 

 

 

 

1,371,600

 

 

 

6.97

 

 

$

64.41

 

 

 

871,840

 

 

$

56.57

 

 

At December 31, 2016, the aggregate intrinsic value for outstanding and exercisable options was approximately $46.8 million and $36.6 million, respectively. The total intrinsic value of options exercised during the nine months ended December 31, 2016 was approximately $28.7 million.

Restricted Stock. In May 2016, the Compensation Committee approved the granting of an aggregate of 63,029 shares of performance vesting restricted stock to certain officers and key employees that will be earned if certain performance conditions are satisfied (the “Fiscal 2017 Employee Restricted Stock Performance Award”). The performance criterion for the Fiscal 2017 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, 2017.  All restricted shares will be earned if the return on equity is

 

9


 

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%, al l 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, 2 018 through 2020. The Compensation Committee also approved the granting of 52,527 shares of time vesting restricted stock to the same officers and key employees, which vest ratably over four years (the “Fiscal 2017 Employee Restricted Stock Time Vesting Aw ard).  Both of the Fiscal 2017 Employee Restricted Stock Performance Award and the Fiscal 2017 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 2016, we awarded 11,173 shares of restricted stock to members of the Board of Directors (the “Board of Directors Fiscal 2017 Restricted Stock Award”).  Awards issued under the Board of Directors Fiscal 2017 Restricted Stock Award do not fully ves t until the retirement of each director, in accordance with our director retirement policy.  

Expense related to restricted shares was approximately $1.8 million and $5.0 million for the three and nine months ended December 31, 2016, respectively, and approximately $2.1 million and $6.3 million for the three and nine months ended December 31, 2015, respectively. At December 31, 2016, there was approximately $18.3 million of unearned compensation from restricted stock, net of estimated forfeitures, which will be recognized over a weighted-average period of 3.0 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 4,324,866 at December 31, 2016.

 

 

(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,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Weighted-Average Shares of Common Stock

   Outstanding

 

 

47,881,662

 

 

 

49,187,738

 

 

 

47,901,369

 

 

 

49,593,821

 

Common Equivalent Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assumed Exercise of Outstanding Dilutive Options

 

 

764,631

 

 

 

1,017,117

 

 

 

889,411

 

 

 

1,208,130

 

Less: Shares Repurchased from Assumed Proceeds

   of Assumed Exercised Options

 

 

(523,194

)

 

 

(669,209

)

 

 

(612,885

)

 

 

(803,972

)

Restricted Shares

 

 

174,649

 

 

 

234,374

 

 

 

162,431

 

 

 

232,112

 

Weighted-Average Common and Common Equivalent

   Shares Outstanding

 

 

48,297,748

 

 

 

49,770,020

 

 

 

48,340,326

 

 

 

50,230,091

 

Shares Excluded Due to Anti-dilution Effects

 

 

700,734

 

 

 

826,610

 

 

 

679,849

 

 

 

627,090

 

 

 

(J) PENSION AND EMPLOYEE BENEFIT PLANS

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

 

10


 

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

December31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Service Cost – Benefits Earned During the Period

 

$

222

 

 

$

257

 

 

$

665

 

 

$

745

 

Interest Cost of Benefit Obligations

 

 

399

 

 

 

377

 

 

 

1,196

 

 

 

1,135

 

Expected Return on Plan Assets

 

 

(416

)

 

 

(439

)

 

 

(1,247

)

 

 

(1,308

)

Recognized Net Actuarial Loss

 

 

425

 

 

 

427

 

 

 

1,276

 

 

 

1,286

 

Amortization of Prior-Service Cost

 

 

75

 

 

 

75

 

 

 

224

 

 

 

225

 

Net Periodic Pension Cost

 

$

705

 

 

$

697

 

 

$

2,114

 

 

$

2,083

 

 

 

(K) INCOME TAXES

Income taxes for the interim period presented have been included in the accompanying financial statements on the basis of an estimated annual effective tax rate. In addition to the amount of tax resulting from applying the estimated annual effective tax rate to pre-tax income, we will, when appropriate, include certain items treated as discrete events to arrive at an estimated overall tax amount. The effective tax rate for the nine months ended December 31, 2016 was approximately 33%, which was slightly above the effective tax rate of 32% for the nine months ended December 31, 2015.

 

 

(L) LONG-TERM DEBT

Long-term debt consists of the following:

 

 

 

As of

 

 

 

December 31,

2016

 

 

March 31,

2016

 

 

 

(dollars in thousands)

 

Credit Facility

 

$

 

 

$

382,000

 

4.500% Senior Unsecured Notes Due 2026

 

 

350,000

 

 

 

 

Private Placement Senior Unsecured Notes

 

 

117,714

 

 

 

125,714

 

Total Debt

 

 

467,714

 

 

 

507,714

 

Less: Current Portion of Long-term Debt

 

 

(81,214

)

 

 

(8,000

)

Less: Debt Origination Costs

 

 

(6,366

)

 

 

 

Total Long-term Debt

 

$

380,134

 

 

$

499,714

 

 

Credit Facility –

We have a $500.0 million revolving credit facility (the “Credit Facility”), including a swingline loan sublimit of $25.0 million, which 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  1 2 % 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

 

11


 

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, amortiz ation, 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-c ash deductions to consolidated interest expense) of at least 2.5:1.0.  There were no borrowings outstanding at December 31, 2016. Based on our Leverage Ratio, we had $ 490.7   million of available borrowings, net of the outstanding letters of credit, at Dece mber 31, 2016.

The Credit Facility has a $50.0 million letter of credit facility. Under the letter of credit facility, the Company pays a fee at a per annum rate equal to the applicable margin for Eurodollar loans in effect from time to time plus a one-time letter of credit fee in an amount equal to 0.125% of the initial stated amount. At December 31, 2016, we had $9.3 million of letters of credit outstanding.

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 (P) 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 (the “2005 Note Purchase Agreement”) in connection with our sale of $200 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 are guaranteed by substantially all of our subsidiaries, were sold at par and issued in three tranches. At December 31, 2016, the amount outstanding for the remaining tranche is as follows:

 

 

 

Principal

 

Maturity Date

 

Interest Rate

 

Tranche C

 

$57.2 million

 

November 15, 2017

 

 

5.48%

 

 

 

Interest for this tranche of Series 2005A Senior Unsecured Notes is payable semi-annually on May 15 and November 15 of each year until all principal is paid.

 

12


 

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 million of senior unsecured notes, designated as Series 2007A Senior Notes (the “Series 2007A Senior Unsecured Notes” and together with the Series 2005A Senior Unsecured Notes, the “Private Placement 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, 2016, the amounts outstanding for each of the remaining tranches were as follows:

 

 

 

Principal

 

Maturity Date

 

Interest Rate

 

Tranche C

 

$24.0 million

 

October 2, 2017

 

 

6.36%

 

Tranche D

 

$36.5 million

 

October 2, 2019

 

 

6.48%

 

 

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

Our obligations under the 2005 Note Purchase Agreement and 2007 Note Purchase Agreement (together, the “Private Placement Note Purchase Agreements”) and the Private Placement Senior Unsecured Notes 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 Private Placement Note Purchase Agreements contain 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 Private Placement Note Purchase Agreements require 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. The 2007 Note Purchase Agreement requires us 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, 2016.

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 Private Placement Note Purchase Agreements) on the Private Placement Senior Unsecured Notes and the other payment and performance obligations of the Company contained in the Private Placement Senior Unsecured Notes and in the Private Placement Note Purchase Agreements. We are permitted, at our option and without penalty, to prepay from time to time at least 10% of the original aggregate principal amount of the Private Placement 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 Private Placement 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 Private Placement 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

 

13


 

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 operating decision maker in order to allocate resources and assess performance.

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

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

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

 

14


 

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

 

 

 

For the Three Months

 

 

For the Nine Months

 

 

 

Ended December 31,

 

 

Ended December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Revenues -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cement

 

$

138,047

 

 

$

135,419

 

 

$

449,650

 

 

$

428,385

 

Gypsum Wallboard

 

 

121,504

 

 

 

108,907

 

 

 

357,689

 

 

 

343,660

 

Paperboard

 

 

41,254

 

 

 

36,822

 

 

 

128,528

 

 

 

111,285

 

Oil and Gas Proppants

 

 

7,124

 

 

 

8,476

 

 

 

18,851

 

 

 

49,608

 

Concrete and Aggregates

 

 

40,843

 

 

 

31,779

 

 

 

114,734