EAGLE MATERIALS INC. executive summary
We are a leading manufacturer of heavy construction materials and light building materials inthe United States . Our primary products,Portland Cement and Gypsum Wallboard, are commodities that are essential in commercial and residential construction; public construction projects; or projects to build, expand, and repair roads and highways. Demand for our products is generally cyclical and seasonal, depending on economic and geographic conditions. We distribute our products throughout most ofthe United States , except the Northeast, which provides us with regional economic diversification. However, general economic downturns or localized downturns in the regions where we have operations may have a material adverse effect on our business, financial condition, and results of operations. Our current businesses are organized into two sectors: Heavy Materials, which includes the Cement and Concrete and Aggregates segments; and Light Materials, which includes the Gypsum Wallboard and Recycled Paperboard segments. Financial results and other information for the fiscal years endedMarch 31, 2022 and 2021, are presented on a consolidated basis and with respect to these business segments - Cement, Concrete and Aggregates, Gypsum Wallboard, and Recycled Paperboard. We conduct one of our cement operations through a joint venture,Texas Lehigh Cement Company LP , which is located inBuda, Texas (the Joint Venture). We own a 50% interest in the Joint Venture and account for our interest under the equity method of accounting. We proportionately consolidate our 50% share of the Joint Venture's Revenue and Operating Earnings in the presentation of our Cement segment, which is the way management organizes the segments within the Company for making operating decisions and assessing performance. All our business activities are conducted inthe United States . These activities include the mining of limestone for the manufacture and sale of portland cement (a basic construction material that is the essential binding ingredient in concrete); the grinding and sale of slag; the mining of gypsum for the manufacture and sale of gypsum wallboard; the manufacture and sale of recycled paperboard to the gypsum wallboard industry and other paperboard converters; the sale of readymix concrete; and the mining and sale of aggregates (crushed stone, sand, and gravel). OnApril 22, 2022 , we finalized the ConAgg Acquisition. The purchase price of the ConAgg Acquisition was approximately$121.2 million . The ConAgg Acquisition will be included in our Heavy Materials sector, in the Concrete and Aggregates segment. See Footnote (B) to the Audited Consolidated Financial Statements for more information regarding the ConAgg Acquisition. OnSeptember 18, 2020 , we sold our Oil and Gas Proppants business, which had previously been reported as a separate operating segment, for a purchase price of$2.0 million , which was paid in Smart Sand common stock. For financial reporting purposes, the sale resulted in a gain of approximately$9.2 million . Because the sale of the Oil and Gas Proppants business was determined to meet the accounting criteria for discontinued operations, this segment is no longer separately reported in our reportable segment footnote for any of the periods presented. See Footnotes (C) and (I) in the Audited Consolidated Financial Statements for more information about the sale of the Oil and Gas Proppants business. 38 --------------------------------------------------------------------------------
MARKET CONDITIONS AND OUTLOOK
Our fiscal 2022 results were strong, with increased operating earnings in our Cement and Gypsum Wallboard segments. Favorable underlying economic conditions supported construction activity in our markets. Our end markets generally remained resilient despite external challenges, such as transportation disruptions, supply chain constraints and the resurgence of COVID-19 in multiple variants across the country. Our regional construction markets continued in most cases to outperform the national average, and sales volume in our largest business lines remained strong - our Gypsum Wallboard shipments were up 3%, and our Cement sales volume increased 1%.
Demand Outlook
The principal end-use market of Cement is public infrastructure (i.e. roads, bridges, and highways). While construction spending in the public and private market segments is affected by economic cycles, the historic level of spending on public infrastructure projects has been comparatively more stable in recent periods due to levels of funding from federal, state, and local governments. The federalInfrastructure Investment and Jobs Act was signed into law onNovember 15, 2021 , and maintains a five-year surface transportation reauthorization, plus$110 billion of funding for roads, bridges, and other infrastructure projects. The PCA is estimating cement consumption will increase slightly in calendar 2022. Our integrated cement sales network stretches across theU.S. heartland and is operating at high utilization levels; therefore, our ability to achieve further Cement sales volume growth from our existing facilities is limited. The principal end use for Gypsum Wallboard is residential housing, consisting of new construction (both single-family and multi-family homes) as well as repair and remodel. The construction of single-family homes is more wallboard-intensive than multi-family homes. The timing of new housing permits is a good indication of future residential volumes. Residential housing starts increased, on a seasonally adjusted basis, approximately 4% fromMarch 2021 throughMarch 2022 , and are expected to remain strong throughout the remainder of calendar 2022, despite recent increases in both inflation and mortgage interest rates. In the long term, we expect continued growth in the residential market driven by favorable demographics, notably millennials entering into the housing market, undersupply of homes, job growth, and the shift in population from urban areas to the suburbs. Our Recycled Paperboard business sells paper primarily into the gypsum wallboard market, and demand for our paper generally follows the demand for gypsum wallboard. Cost Outlook We are well positioned to manage our cost structure and meet our customers' needs during the upcoming fiscal year, despite growing challenges related to rising inflation and increased transportation costs. Our substantial raw material reserves for our Cement, Aggregates, and Gypsum Wallboard businesses, and their proximity to our respective manufacturing facilities, support our low-cost producer position across all of our business segments. Energy and freight costs increased in all of our businesses during fiscal 2022, and we anticipate further increases throughout fiscal 2023. The increases in energy costs are related to rising demand and disruption in the global supply of natural gas. Regarding energy, we have forward purchase contracts for approximately 30% of our natural gas needs across all of our businesses for fiscal 2023. For freight, several factors are contributing to higher costs, including: limited availability of trucking and rail service, congestion on the shipping routes, and the increase in price of diesel fuel, all of which have constrained freight capacity. We do not expect these factors to improve in the near term. 39
-------------------------------------------------------------------------------- The primary raw material used to produce paperboard is OCC. Prices for OCC significantly increased during fiscal 2022 but started to decline during the winter and spring. We expect OCC prices to remain relatively level for the remainder of fiscal 2023. Our current customer contracts for gypsum liner include price adjustments that partially compensate for changes in raw material fiber prices. However, because these price escalations are not realized until future quarters, material costs in our Gypsum Wallboard segment are likely to be higher in the period that these price increases are realized.
Results of Operations
Fiscal Year 2022 Compared with Fiscal Year 2021
For the Years Ended March 31,
Percentage
2022 2021 Change
(in thousands, except per share)
Revenue $ 1,861,522 $ 1,622,642 15 %
Cost of Goods Sold (1,341,908 ) (1,214,287 ) 11 %
Gross Profit 519,614 408,355 27 %
Equity in Earnings of Unconsolidated Joint
Venture 32,488 37,441 (13 )%
Corporate General and Administrative (46,801 ) (49,511 ) (5 )%
Loss on Early Retirement of Senior Notes (8,407 ) - -
Gain on Sale of Businesses - 51,973 (100 )%
Other Non-Operating Income 9,073 20,274 (55 )%
Interest Expense, net (30,873 ) (44,420 ) (30 )%
Earnings from Continuing Operations Before
Income Taxes 475,094 424,112 12 %
Income Tax Expense (100,847 ) (89,946 ) 12 %
Net Earnings From Continuing Operations 374,247 334,166 12 %
Net Earnings from Discontinued Operations - 5,278 (100 )%
Net Earnings $ 374,247 $ 339,444 10 %
Diluted Earnings per Share from Continuing
Operations $ 9.14 $ 7.99 14 %
Revenue
Revenue increased in fiscal 2022 by $238.9 million , or 15%, to $1,861.5 million .
The increase in Revenue was due to higher gross sales prices and Sales Volume of
approximately $211.2 million and $27.7 million , respectively. All of our
segments contributed to the higher gross sales prices, while the increase in
Sales Volume primarily related to the Cement and Gypsum Wallboard segments. See
individual segment disclosure on pages 43-46 for more information.
Cost of Goods Sold
Cost of Goods Sold increased by$127.6 million , or 11%, to$1,341.9 million in fiscal 2022. The rise in Cost of Goods Sold was due to higher operating costs of$107.4 million and higher Sales Volume of$20.2 million . Operating costs increased in all of our businesses, and this is discussed further on pages 43-46. 40
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Gross Profit
Gross Profit increased by 27% to$519.6 million in fiscal 2022. The increase in Gross Profit was mainly due to higher gross sales prices and Sales Volume, partially offset by higher operating costs, as noted above. The gross margin increased to 28% in fiscal 2022 from 25% in fiscal 2021, primarily because of higher gross sales prices.
Equity in Earnings of Unconsolidated Joint Venture
Equity in Earnings of Unconsolidated Joint Venture decreased by$4.9 million , or 13%. The decline was mostly due to lower Sales Volume and higher operating costs of approximately$2.8 million and$8.7 million , respectively. This was partially offset by increased gross sales prices of$6.6 million . The higher operating costs were due primarily to higher maintenance costs and increased amounts of purchased cement, which increased by approximately$3.3 million and$3.7 million , respectively.
Corporate General and Administrative
Corporate General and Administrative expenses decreased by approximately$2.7 million , or 5%, to$46.8 million in fiscal 2022. The decrease was due primarily to professional and transaction fees incurred in fiscal 2021 of approximately$5.2 million and$3.9 million , respectively. Professional fees related mainly to our strategic portfolio review, and the transaction fees mostly related to the sale of Mathews Readymix and Western Aggregates, as well as our Oil and Gas Proppants business. The decrease was partially offset by higher insurance, travel, and incentive compensation costs, which increased by approximately$3.2 million ,$2.6 million , and$0.9 million , respectively.
LOSS ON EARLY RETIRMENT OF SENIOR NOTES
InJuly 2021 , the Company redeemed and retired its 4.500% Senior Unsecured Notes due in 2026 prior to the maturity date. As a result of the early retirement, the Company paid a premium of$8.4 million . See Footnote (G) to the Audit Consolidated Financial Statements for more information.
GAIN ON SALE OF BUSINESSES
OnApril 17, 2020 , we sold Western and Mathews for approximately$93.5 million , resulting in a gain on sale of approximately$52.0 million . See Footnote (C) to the Audited Consolidated Financial Statements for more information regarding this sale. Other non-operating Income Other Non-Operating Income was$9.1 million in fiscal 2022, compared with$20.3 million in fiscal 2021. Other Non-Operating Income consists of a variety of items that are non-segment operating in nature, including lease and rental income, investment income, asset sales, and other miscellaneous income and cost items, such as large non-routine sales of excess raw materials or energy.
Interest Expense, Net
Interest Expense, net decreased by approximately$13.5 million , or 30%, during fiscal 2022. The decline was primarily due to lower interest on borrowings under our Revolving Credit Facility and Term Loan of approximately$7.3 million and$14.5 million , respectively. Interest Expense related to our Revolving Credit Facility was lower because our average outstanding borrowings under the Revolving Credit Facility were significantly less during fiscal 2022, compared with fiscal 2021. Interest Expense on our Term Loan declined because we repaid the Term Loan onJuly 1, 2021 . The lower interest on our Revolving Credit Facility and Term Loan was partially offset by higher Interest Expense on our public notes and loan 41
-------------------------------------------------------------------------------- amortization expense of approximately$2.9 million and$5.4 million , respectively. Interest on our public notes was higher because our public notes outstanding balance increased to$750.0 million from$350.0 million inJuly 2021 , although the increase was partially offset by the interest rate decreasing to 2.500% from 4.500%. Loan amortization expense increased as a result of our$6.1 million write-off of debt issuance costs inJuly 2021 related to our 4.500% Unsecured Senior Notes due in 2026 and our Term Loan. See Footnote (G) to the Consolidated Financial Statements for more information.
Earnings from continuing operations Before Income Taxes
Earnings from Continuing Operations Before Income Taxes increased to$475.1 million during fiscal 2022, primarily because of higher Gross Profit and lower Corporate General and Administrative expenses and Interest Expense. This was partially offset by lower Gain on Sale of Businesses and Equity in Earnings of Unconsolidated Joint Venture, as well as the Premium Paid on Early Retirement of Senior Notes. Income Tax Expense
Income Tax Expense for fiscal 2022 increased to
Net Earnings from continuing operations and Diluted Earnings per Share from continuing operations
Net Earnings from Continuing Operations increased 12% in fiscal 2022 to
Net Earnings from Discontinued Operations
Net Earnings from Discontinued Operations was$5.3 million during fiscal 2021. The Oil and Gas Proppants business was sold inSeptember 2020 , and there was no activity related to this business in fiscal 2022.
net earnings
Net Earnings increased 10% to
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--------------------------------------------------------------------------------FISCAL YEAR 2022 vs FISCAL YEAR 2021 Results by Segment
The following presents results within our two business sectors in fiscal 2022 and fiscal 2021. Revenue and operating results are organized by sector and discussed by individual business segment within each respective business sector.
Heavy Materials
Cement (1)
For the Years Ended March 31,
2022 2021 Percentage Change
(in thousands, except per ton
information)
Gross Revenue, including Intersegment and
Joint Venture $ 1,007,094 $ 944,556 7 %
Less Intersegment Revenue $ (22,915 ) $ (20,862 ) 10 %
Less Joint Venture Revenue $ (103,899 ) $ (105,191 ) (1 )%
Gross Revenue, as reported $ 880,280 $ 818,503 8 %
Freight and Delivery Costs billed to
Customers (60,620 ) (68,725 ) (12 )%
Net Revenue $ 819,660 $ 749,778 9 %
Sales Volume (M Tons) 7,534 7,466 1 %
Average Net Sales Price, per ton (2) $ 119.13 $ 111.19 7 %
Operating Margin, per ton $ 34.45 $ 31.34 10 %
Operating Earnings $ 259,556 $ 233,957 11 %
(1)
Total of wholly owned subsidiaries and proportionately consolidated 50% interest
of the Joint Venture's results.
(2)
Net of freight, including the Joint Venture.
Cement Revenue was $1,007.1 million for fiscal 2022, a 7% increase over fiscal
2021. Cement Revenue increased by approximately $62.5 million , primarily as a
result of higher gross sales prices and Sales Volume, which improved Cement
Revenue by approximately $52.0 million and $10.5 million , respectively.
Cement Operating Earnings increased 11% to $259.6 million for fiscal 2022. The
increase was due to higher gross sales prices and Sales Volume, which positively
affected Operating Earnings by approximately $52.0 million and $1.0 million ,
respectively. This was partially offset by higher operating expenses, which
reduced Operating Earnings by $27.5 million . The rise in operating expenses was
mostly due to maintenance, energy and purchased cement costs of approximately
$17.2 million , $10.2 million and $6.4 million , respectively. These increases
were partially offset by a cost reduction of approximately $3.7 million at
Kosmos Cement related to the recording of acquired inventory at fair value in
the first quarter of fiscal 2021. The Operating Margin increased to 26% from
25%, primarily because of higher gross sales prices.
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Concrete and Aggregates
For the Years Ended March 31,
Percentage
2022 2021 Change
(in thousands, except net sales
prices)
Gross Revenue, Including Intersegment
168,829 5 % Less intersegment Revenue - (106 ) (100 )% Gross Revenue, as reported$ 177,122 $ 168,723 5 % Sales Volume - M Cubic Yards of Concrete 1,333 1,300 3 % M Tons of Aggregate 1,525 1,956 (22 )% AverageNet Sales Price - Concrete - Per Cubic Yard$ 120.97 $ 115.59 5 % Aggregates - Per Ton$ 10.45 $ 9.51 10 % Operating Earnings$ 18,467 $ 19,054 (3 )% Concrete and Aggregates Revenue increased 5% to$177.1 million for fiscal 2022. The improvement in Revenue was primarily related to higher gross sales prices and Sales Volume in Concrete, which positively affected Revenue by$8.8 million and$3.8 million , respectively. This was partially offset by lower Sales Volume in Aggregates, which reduced Revenue by$4.1 million . Operating Earnings decreased 3% to approximately$18.5 million . The reduction was due to higher operating expenses and lower Aggregates Sales Volume, which adversely affected Operating Earnings by$9.1 million and$0.3 million , respectively. This was partially offset by higher gross sales prices of$8.8 million . The increase in operating expenses was primarily due to higher cost of materials and diesel fuel of approximately$6.0 million and$3.3 million , respectively. 44
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Light Materials
Gypsum Wallboard
For the Years Ended March 31,
2022 2021 Percentage Change
(in thousands, except per MMSF
information)
Gross Revenue, as reported $ 692,152 $ 539,009 28 %
Freight and Delivery Costs billed to Customers (130,629 ) (111,537 ) 17 %
Net Revenue $ 561,523 $ 427,472 31 %
Sales Volume (MMSF) 2,944 2,857 3 %
Average Net Sales Price, per MSF (1) $ 190.76 $ 149.62 27 %
Freight, per MSF $ 44.37 $ 39.04 14 %
Operating Margin, per MSF $ 88.82 $ 58.57 52 %
Operating Earnings $ 261,476 $ 167,336 56 %
(1)
Net of freight per MSF.
Gypsum Wallboard Revenue increased 28% to $692.2 million in fiscal 2022. This
increase was due to higher gross sales prices and Sales Volume, which positively
affected Revenue by $136.7 million and $16.4 million , respectively. Our market
share remained relatively flat in fiscal 2022 compared with fiscal 2021.
Operating Earnings increased 56% to $261.5 million for fiscal 2022. This
increase was primarily due to higher gross sales prices and Sales Volume of
approximately $136.7 million and $5.1 million , respectively. This was partially
offset by higher operating expenses of $47.7 million . The rise in operating
expenses was primarily related to freight, energy, and raw materials costs of
approximately $15.7 million , $11.5 million and $19.9 million , respectively.
During fiscal 2022, Gypsum Wallboard Operating Margin increased to 38% from 31%
in fiscal 2021, primarily because of higher gross sales prices, partially offset
by higher operating expenses. Fixed costs are not a significant part of the
overall cost of wallboard; therefore, changes in volume have a relatively minor
impact on our operating cost per unit.
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Recycled Paperboard
For the Years Ended March 31,
2022 2021 Percentage Change
(in thousands, except per ton
information)
Gross Revenue, including intersegment $ 194,054 $ 163,507 19 %
Less intersegment Revenue (82,086 ) (67,100 ) 22 %
Gross Revenue, as reported $ 111,968 $ 96,407 16 %
Freight and Delivery Costs billed to Customers (7,888 ) (5,534 ) 43 %
Net Revenue $ 104,080 $ 90,873 15 %
Sales Volume (M Tons) 334 325 3 %
Average Net Sales Price, per ton (1) $ 558.28 $ 486.15 15 %
Freight, per ton $ 23.62 $ 17.03 39 %
Operating Margin, per ton $ 37.73 $ 78.30 (52 )%
Operating Earnings $ 12,603 $ 25,449 (50 )%
(1)
Net of freight per ton.
Recycled Paperboard Revenue increased 19% to $194.1 million for fiscal 2022, as
higher gross sales prices and Sales Volume positively affected Revenue by
approximately $26.3 million and $4.3 million , respectively. The increase in
gross sales prices, was due to the price adjustment provisions in our long-term
sales agreements, while the rise in Sales Volume was due primarily to
intersegment sales.
Operating Earnings decreased 50% to $12.6 million for fiscal 2022, primarily
related to an increase in operating expenses, which adversely affected Operating
Earnings by approximately $39.8 million , partially offset by increased gross
sales prices and Sales Volume of approximately $26.3 million and $0.7 million ,
respectively. The increase in operating expense was primarily due to higher
input costs, namely fiber and raw materials, and energy, which reduced Operating
Earnings by $33.7 million and $3.5 million , respectively. During fiscal 2022,
Operating Margin decreased to 6% from 16% in fiscal 2021, primarily because of
the higher operating expenses, partially offset by increased gross sales prices.
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Fiscal Year 2021 Compared with Fiscal Year 2020
Please see our Form 10-K for fiscal year 2021 for the discussion of our Results of Operations and results of Revenue and Operating Earnings by segment for fiscal 2021 compared with fiscal 2020. Our 2021 Form 10-K can be found on the investor page of our website, at eaglematerials.com.
CRITical Accounting Policies
Certain of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Although our accounting policies are in compliance with generally accepted accounting principles, a change in the facts and circumstances of the underlying transactions could significantly change the application of the accounting policies and the resulting financial statement impact. Listed below are those policies that we believe are critical and require the use of complex judgment in their application.
Impairment of Long-Lived Assets
We assess our long-lived assets, including mining and related assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or group of assets, may not be recoverable. Long-lived assets, or groups of assets, are evaluated for impairment at the lowest level for which cash flows are largely independent of the cash flows of other assets. We assess recoverability of assets, or group of assets, by comparing the carrying amount of an asset, or group of assets, to the future undiscounted net cash flows that we expect the asset, or group of assets, to generate. These impairment evaluations are significantly affected by estimates of future revenue, costs and expenses, and other factors. If the carrying value of the assets, or group of assets, exceeds the undiscounted cash flows, then an impairment is indicated. If such assets, or group of assets, are considered to be impaired, the impairment is recognized as the amount by which the carrying amount of the asset, or group of assets, exceeds the fair value of the asset, or group of assets.Goodwill We annually assessGoodwill for impairment in the fourth quarter of our fiscal year, or more frequently when indicators of impairment exist. Impairment testing forGoodwill is done at the reporting unit, which is consistent with our reportable segments.Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. Prior to performing the Step 1 quantitative test, we may, at our discretion, perform an optional qualitative analysis, or we may choose to proceed directly to the Step 1 quantitative test. The qualitative test considers the impact of the following events and circumstances on the reporting unit being tested: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and other relevant entity-specific events. If, as a result of this qualitative analysis, we conclude that it is more likely than not (a likelihood of greater than 50%) that the fair value of the reporting unit exceeds its carrying value, then an impairment does not exist and the quantitative Step 1 test is not required. If we are unable to conclude that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, then we proceed to the quantitative Step 1 test. Step 1 of the quantitative test for impairment compares the fair value of the reporting unit to its carrying value. If the carrying value exceeds the fair value, then an impairment is indicated. If facts and circumstances related to our business change in subsequent years, we may choose to perform a quantitative analysis in those future years. If we perform a Step 1 test, and the carrying value of the 47
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reporting unit exceeds its fair value, then an impairment charge equal to the
difference, not to exceed the total amount of
The fair values of the reporting units are estimated by using both the market and income approaches. The market approach considers market factors and certain multiples in comparison to similar companies, while the income approach uses discounted cash flows to determine the estimated fair values of the reporting units. Key assumptions in the model include estimated average net sales prices, sales volume, and the estimated weighted average cost of capital specific to each industry. We also perform an overall comparison of all reporting units to our market capitalization in order to test the reasonableness of our fair value calculations. Determining the fair value of our reporting units involves the use of significant estimates and assumptions and considerable management judgment. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. The most important assumption underlying our estimates is the projection of construction spending in theU.S. over the next several years. Actual results may differ materially from those estimates. Changes in market conditions, market trends, interest rates or other factors outside of our control, such as the COVID-19 pandemic, could cause us to change key assumptions and our judgment about a reporting unit's prospects. Similarly, in a specific period, a reporting unit could significantly underperform relative to its historical or projected future operating results. Either situation could result in a meaningfully different estimate of the fair value of our reporting units, and a consequent future impairment charge. The segment breakdown ofGoodwill atMarch 31, 2022 and 2021, was as follows: 2022 2021 (dollars in thousands) Cement$ 203,342 $ 203,342 Concrete and Aggregates 1,639 1,639 Gypsum Wallboard 116,618 116,618 Paperboard 7,538 7,538 329,137 329,137 Business Combinations The acquisition method of accounting requires that we recognize the assets acquired and liabilities assumed at their acquisition date fair values.Goodwill is measured as the excess of consideration transferred over the acquisition date net fair values of the assets acquired and the liabilities assumed. The purchase price allocation is a critical accounting policy because the estimation of fair values of acquired assets and assumed liabilities is judgmental and requires various assumptions. Further, the amounts and useful lives assigned to depreciable and amortizable assets versus amounts assigned toGoodwill , which is not amortized, can significantly affect the results of operations in the period of and for periods subsequent to a business combination. Although independent appraisals may be used to assist in the determination of the fair values of certain assets and liabilities, the appraised values are usually based on significant estimates provided by management, such as forecasted revenue or profit, and the replacement cost and useful lives of the acquired property, plant, and equipment. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, and therefore represents an exit price. A fair value measurement assumes the highest and best use of the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. We assign the highest level of fair value available to assets acquired and liabilities assumed based on the following options: 48 --------------------------------------------------------------------------------
Level 1 - Quoted prices in active markets for identical assets and liabilities.
Level 2 - Observable inputs, other than quoted prices, for similar assets or liabilities in active markets.
Level 3 - Unobservable inputs, which includes the use of valuation models.
Level 2 fair values are typically used to value acquired receivables, inventories, machinery and equipment, land, buildings, deferred income tax assets and liabilities, and accruals for payables, asset retirement obligations, and contingencies.
Level 3 inputs are used to estimate the fair value of acquired mineral reserves, mineral interests, and separately identifiable intangible assets.
In determining the fair value of property, plant, and equipment, replacement cost, adjusted for the age and condition of the acquired machinery and equipment, is used. The replacement cost is based on estimates of current cost to construct similar machinery and equipment and is compared to amounts paid for similar assets in market transactions for consistency. In determining the fair value of intangible assets, an income approach is generally used and may incorporate the use of a discounted cash flow method. In applying the discounted cash flow analysis, the estimated future cash flows and residual values for each intangible asset are discounted to a present value using a discount rate based on an estimated weighted average cost of capital for the building materials industry. These cash flow projections are based on management's estimates of economic and market conditions including revenue growth rates, operating margins, capital expenditures, customer attrition rates, and working capital requirements. While we use our best estimates and assumptions as part of the process to value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. During the measurement period, which occurs before finalization of the purchase price allocation, changes in assumptions and estimates that result in adjustments to the fair values of assets acquired and liabilities assumed are recorded on a retroactive basis as of the acquisition date, with the corresponding offset toGoodwill . Any adjustments subsequent to the conclusion of the measurement period will be recorded to our Consolidated Statements of Earnings.
LIQUIDITY AND CAPITAL RESOURCES
We believe that we have access to sufficient financial resources from our
liquidity sources to fund our business and operations, including contractual
obligations, capital expenditures, and debt service obligations, for at least
the next twelve months. We will continue to monitor the potential impact of
future COVID-19 outbreaks, or similar disruptions on the economy, and on our
operations, as well as any other economic impacts related to changing fiscal
policy or economic conditions. Please see the Debt Financing Activities section
for a discussion of our credit facility and the amount of borrowings available
to us in the next twelve-month period.
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--------------------------------------------------------------------------------Cash Flow
The following table provides a summary of our Cash Flows:
For the Fiscal Years Ended March 31,
2022 2021
(dollars in thousands)
Net Cash Provided by Operating Activities $ 517,171 $ 643,073
Investing Activities:
Additions to Property, Plant, and Equipment (74,121 ) (53,933 )
Proceeds from Sale of Businesses - 91,022
Net Cash Provided by (Used in) Investing Activities (74,121 ) 37,089
Financing Activities:
Increase (Decrease) in Revolving Credit Facility 200,000 (560,000 )
Proceeds from 2.500% Senior Unsecured Notes 743,692 -
Repayment of 4.500% Senior Unsecured Notes (350,000 ) -
Repayment of Term Loan (665,000 ) -
Dividends Paid to Stockholders (30,770 ) (4,163 )
Purchase and Retirement of Common Stock (589,742 ) -
Proceeds from Stock Option Exercises 21,366 40,455
Premium Paid Early Retirement of Senior Notes (8,407 ) -
Payment of Debt Issuance Costs (7,985 ) (2,396 )
Shares Redeemed to Settle Employee Taxes on Stock
Compensation (5,308 ) (4,186 )
Net Cash Provided by (Used in) Financing Activities (692,154 ) (530,290 )
Net Increase in Cash, Cash Equivalents and
Restricted Cash $ (249,104 ) $ 149,872
Cash Flows from Operating Activities decreased by
Working capital decreased by$257.1 million to$235.2 million atMarch 31, 2022 , primarily because of lower Cash and Restricted Cash of$244.1 million and$5.0 million , respectively, and increased Accounts Payable and Accrued Liabilities of$29.5 million and$8.0 million , respectively. This was partially offset by increased Accounts Receivable and Income Tax Receivable of$29.2 million and$4.4 million , respectively. The decrease in Cash was due to theJuly 2021 redemption and repayment of our 4.500% Senior Unsecured Notes due 2026 and Term Loan. The increase in Accounts and Notes Receivable atMarch 31, 2022 , was primarily due to higher revenue during the quarter endedMarch 31, 2022 compared withMarch 31, 2021 . As a percentage of quarterly sales generated in the fiscal fourth quarters, Accounts Receivable was 43% at bothMarch 31, 2022 andMarch 31, 2021 . Management measures the change in Accounts Receivable by monitoring the day's sales outstanding monthly to determine if any deterioration has occurred in the collectability of the Accounts Receivable. No significant deterioration in the collectability of our Accounts Receivable was identified atMarch 31, 2022 . Notes Receivable are monitored on an individual basis, and no significant deterioration in the collectability of Notes Receivable was identified atMarch 31, 2022 . We are closely monitoring the impact of supply chain delays, and other related impacts, on our customers' ability to pay their outstanding balances. 50
-------------------------------------------------------------------------------- Our inventory balance remained relatively consistent atMarch 31, 2022 , compared with the prior year. Within Inventories, raw materials and materials-in-progress decreased by approximately$11.4 million , while finished cement, paperboard, and repair parts increased by$4.4 million ,$2.5 million , and$4.8 million , respectively. The decreases in raw materials and materials-in-progress and increases in finished cement and paperboard were mostly due to timing, and the increase in repair parts was primarily due to the timing of outages in our Cement business. We have less than one year's sales of all product inventories, and our inventories have a low risk of obsolescence given that they are basic construction materials. The largest individual balance in our inventory is repair parts. The size and complexity of our manufacturing plants, as well as the age of certain of our plants, creates the need to stock a high level of repair parts inventory. We believe all of these repair parts are necessary, and we perform semi-annual analyses to identify obsolete parts.Net Cash Used in Investing Activities during fiscal 2022 was approximately$74.1 million , compared with Net Cash Provided by Investing Activities of$37.1 million in fiscal 2021, a decrease of approximately$111.2 million . The decrease was primarily due to the$91.0 million of cash received for the sale of businesses in fiscal 2021, and an increase in capital spending of$20.2 million in fiscal 2022, compared with fiscal 2021. The increase in capital spending was mainly due to higher spending in our Cement and Gypsum Wallboard businesses, partially offset by lower spending in our Recycled Paperboard business.Net Cash Used in Financing Activities was approximately$692.2 million during fiscal 2022, compared with$530.3 million in fiscal 2021. The$161.9 million increase was primarily due to share repurchases and retirements of$589.7 million , higher Dividends Paid Shareholders of$26.6 million , and the write-off of Debt Issuance costs of$6.1 million . This was partially offset by a reduction in net borrowing of$488.7 million , and a reduction in cash received from the exercise of stock options of$19.1 million , compared with fiscal 2021.
Our debt-to-capitalization ratio and net debt-to-capitalization ratio were 45.6%
and 45.1%, respectively, at
Debt Financing Activities
Below is a summary of the Company's outstanding debt facilities, after the
Maturity
Amended Credit Facility May 2027
2.500% Senior Unsecured Notes July 2031
See Footnote (G) to the Consolidated Financial Statements for further details on
the Company's debt facilities, including interest rate, and financial and other
covenants and restrictions.
The revolving borrowing capacity of our Revolving Credit Facility (and under the
Amended Credit Facility, as defined below) is $750.0 million (any revolving
loans borrowed under the Revolving Credit Facility or Amended Credit Facility,
as applicable, the Revolving Loans). The Revolving Credit Facility (and Amended
Credit Facility) also includes a swingline loan sublimit of $25.0 million , and a
$40.0 million letter of credit facility. At March 31, 2022 , we had $200.0
million outstanding of Revolving Loans under the Revolving Credit Facility and
$5.0 million of outstanding letters of credit. We are contingently liable for
performance under $25.9 million in performance bonds relating primarily to our
mining operations. We do not have any off-balance-sheet debt or any outstanding
debt guarantees.
51-------------------------------------------------------------------------------- Subsequent to year end, we borrowed approximately$120.0 million of Revolving Loans related to the ConAgg Acquisition. After this additional borrowing, we had approximately$320.0 million outstanding under our Revolving Credit Facility (the Existing Revolving Loans). OnMay 5, 2022 , we amended the Revolving Credit Facility (such facility, as amended, the Amended Credit Facility), to establish the maturity date of the Amended Credit Facility (including with respect to the continuing Revolving Credit Facility and the New Term Loans) asMay 5, 2027 and to establish a SOFR-based reference rate in lieu of a LIBOR-based reference rate for purposes of calculating interest on the loans outstanding under the Amended Credit Facility. Additionally, the Amended Credit Facility contemplates additional uncommitted incremental capacity (which may take the form of term loans and/or revolving loans) in an amount not to exceed$375.0 million . On the closing date of the amendment, we borrowed all$200.0 million of the New Term Loan, and used the proceeds to, among other things, pay down a portion of the Existing Revolving Loans (such paydown, the RCF Paydown). Scheduled repayment of the New Term Loan is$2.5 million per quarter, with the remaining$152.5 million due inMay 2027 . As of the closing date of the amendment and after giving effect to the RCF Paydown, we had$156.0 million of Revolving Loans and$200.0 million of New Term Loans, in each case, outstanding under the Amended Credit Facility, leaving us with future available revolving borrowings of$589.0 million , net of outstanding letters of credit, all of which was available for future borrowings based on our current Leverage Ratio. Other than the Amended Credit Facility, we have no additional source of committed external financing in place. Should the Amended Credit Facility be terminated, no assurance can be given as to our ability to secure a new source of financing. Consequently, if any balance were outstanding on the Amended Credit Facility at the time of termination, and an alternative source of financing could not be secured, it would have a material adverse impact on our business. We believe that our cash flow from operations and available borrowings under our Amended Credit Facility, as well as cash on hand, should be sufficient to meet our currently anticipated operating needs, capital expenditures, and debt service requirements for at least the next 12 months. However, our future liquidity and capital requirements may vary depending on a number of factors, including market conditions in the construction industry, our ability to maintain compliance with covenants in our Amended Credit Facility, the level of competition, and general and economic factors beyond our control, such as supply chain constraints and inflation. These and other developments could reduce our cash flow or require that we seek additional sources of funding. We cannot predict what effect these factors will have on our future liquidity. See Market Conditions and Outlook section above for further discussion of the possible effects on our business. As market conditions warrant, the Company may from time to time seek to purchase or repay its outstanding debt securities or loans, including the 2.500% Senior Unsecured Notes, the New Term Loan, and any Revolving Credit Loans, in each case, in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing our indebtedness, any purchases made by us may be funded by the use of cash on our balance sheet or the incurrence of new debt. The amounts involved in any such purchase transactions, individually or in aggregate, may be material. 52 -------------------------------------------------------------------------------- Our Senior Unsecured Notes are rated by Moody's Investor Service (Moody's) and Standard and Poor's Global Ratings (S&P). The ratings are typically monitored by stockholders, creditors, or suppliers, and they serve as indicators of the Company's viability. Below is a summary of the ratings published by the agencies as of the date indicated: Moody's S&P Corporate/Family Rating Baa2 BBB Outlook Stable Stable Guaranteed Senior Notes Baa2 BBB Date of Latest Report June 2021 May 2021
We also have approximately
Cash Used for Share Repurchases and Stock Repurchase Program
See table under Item 5. "Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Share repurchases may be made from time to time in the open market or in
privately negotiated transactions. The timing and amount of any repurchases of
shares will be determined by the Company's management, based on its evaluation
of market and economic conditions and other factors. In some cases, repurchases
may be made pursuant to plans, programs, or directions established from time to
time by the Company's management, including plans to comply with the safe harbor
provided by Rule 10b5-1.
Capital Expenditures
The following table shows Capital Expenditures in fiscal years 2022 and 2021:
For the Fiscal Years Ended March 31,
2022 2021
(dollars in thousands)
Land and Quarries $ 15,943 $ 5,353
Plants 40,843 38,768
Buildings, Machinery and Equipment 17,335 9,812
Total Capital Expenditures $ 74,121 $ 53,933
Capital expenditures for fiscal 2023 are expected to range from $115.0 million
to $125.0 million and to be allocated across the Heavy Materials and Light
Materials sectors. These estimated capital expenditures will include maintenance
capital expenditures and improvements, as well as other safety and regulatory
projects.
53--------------------------------------------------------------------------------
Contractual and Other Obligations
We have certain Contractual Obligations arising from indebtedness, operating
leases, and purchase obligations. Future payments due, aggregated by type of
contractual obligation, are set forth as follows:
Payments Due by Period
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
(dollars in thousands)
Amended Credit Facility (1)
- $ - $ 156,000
New Term Loan (2) 200,000 7,500 20,000 20,000 152,500
Senior Unsecured Notes 750,000 - - - 750,000
Interest and Commitment Fees on
Amended Credit Facility (3) 11,239 3,291 4,949 2,921 78
Interest on Senior Unsecured Notes 173,438 18,750 37,500 37,500 79,688
Operating Leases 44,926 8,130 12,053 7,809 16,934
Purchase Obligations (4) 91,065 55,482 20,871 7,356 7,356
Total $ 1,426,668 $ 93,153 $ 95,373 $ 75,586 $ 1,162,556
(1) The Amended Credit Facility expires in May 2027 . Amounts due above are as of
the date of the Amendment, which was May 5, 2022
(2) The New Term Loan facility was entered into on May 5, 2022 .
(3) As of May 5, 2022 , and in connection with the closing of the Amended Credit
Facility, all accrued and unpaid interest and commitment fees under the
Revolving Credit Facility were paid in full. Further, as of May 5, 2022 , loans
outstanding under the Amended Credit Facility bear interest based on adjusted
SOFR plus a margin based on our credit rating. We also pay a commitment fee,
which is calculated based on the available amount of borrowings at a .125% per
annum through the expiration date of the Amended Credit Facility on May 5, 2027 .
We estimate the future cash flows for interest and commitment fees by assuming a
level repayment of the Amended Credit Facility over its remaining term. Actual
amounts paid, as well as the payment time periods, will likely differ from this
estimate.
(4) Purchase obligations are non-cancelable agreements to purchase coal, natural
gas, slag, and synthetic gypsum; to pay royalty amounts; and to fund capital
expenditure commitments.
Based on our current actuarial estimates, we do not anticipate making contributions to our defined benefit plans for fiscal year 2023.
Dividends
Dividends paid in fiscal years 2022 and 2021 were
Inflation and Changing Prices
The Consumer Price Index rose approximately 8.5% in calendar 2021, 1.4% in 2020, and 2.3% in 2019. Prices of all materials and services increased this year compared with the previous year, with much of the increase related to energy and transportation. During calendar 2021, the Consumer Price Index for electricity and natural gas increased 11.1% and 21.6%, respectively, while the Consumer Price Index for transportation increased 7.7%. The increase in energy prices resulted in increased cost for our manufacturing businesses for the fiscal year 2022, and we expect these increases to continue throughout the rest of calendar 2022. We have some protection from increasing natural gas costs in fiscal 2023 as we have forward purchase contracts for approximately 30% of our anticipated natural gas usage. Freight costs are expected to increase in fiscal 2023 by approximately 5% to 10%. Our ability to increase sales prices to cover higher costs in the future varies with the level of activity in the construction industry: the number, size, and strength of competitors; and the availability of products to supply a local market.
General Outlook
See "Market Conditions and Outlook" within Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 39-40.
54
--------------------------------------------------------------------------------Recent Accounting Pronouncements
Refer to Footnote (A) to the Audited Consolidated Financial Statements for information regarding recently issued accounting pronouncements that may affect our financial statements.
Forward-Looking Statements
Certain matters discussed in this report contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, Section 21E of
the Securities Exchange Act of 1934 and the Private Securities Litigation Reform
Act of 1995. Forward-looking statements may be identified by the context of the
statement and generally arise when the Company is discussing its beliefs,
estimates or expectations. These statements are not historical facts or
guarantees of future performance but instead represent only the Company's belief
at the time the statements were made regarding future events which are subject
to certain risks, uncertainties and other factors, many of which are outside the
Company's control. Actual results and outcomes may differ materially from what
is expressed or forecast in such forward-looking statements. The principal risks
and uncertainties that may affect the Company's actual performance include the
following: the cyclical and seasonal nature of the Company's businesses; public
infrastructure expenditures; adverse weather conditions; the fact that our
products are commodities and that prices for our products are subject to
material fluctuation due to market conditions and other factors beyond our
control; availability of raw materials; changes in the costs of energy,
including, without limitation, electricity, natural gas, coal and oil, and the
nature of our obligations to counterparties under energy supply contracts, such
as those related to market conditions (such as fluctuations in spot market
prices), governmental orders and other matters; changes in the cost and
availability of transportation; unexpected operational difficulties, including
unexpected maintenance costs, equipment downtime and interruption of production;
material nonpayment or non-performance by any of our key customers; inability to
timely execute announced capacity expansions; difficulties and delays in the
development of new business lines; governmental regulation and changes in
governmental and public policy (including, without limitation, climate change
and other environmental regulation); possible outcomes of pending or future
litigation or arbitration proceedings; changes in economic conditions specific
to any one or more of the Company's markets; adverse impact of severe weather
conditions (such as winter storms, tornados and hurricanes) on our facilities,
operations and contractual arrangements with third parties; competition;
cyber-attacks or data security breaches; announced increases in capacity in the
gypsum wallboard and cement industries; changes in the demand for residential
housing construction or commercial construction or construction projects
undertaken by state or local governments; the availability of acquisitions or
other growth opportunities that meet our financial return standards and fit our
strategic focus; risks related to pursuit of acquisitions, joint ventures and
other transactions or the execution or implementation of such transactions,
including the integration of operations acquired by the Company; general
economic conditions; and interest rates. For example, increases in interest
rates, decreases in demand for construction materials or increases in the cost
of energy (including, without limitation, electricity, natural gas, coal and
oil) could affect the revenue and operating earnings of our operations. In
addition, changes in national or regional economic conditions and levels of
infrastructure and construction spending could also adversely affect the
Company's result of operations. Finally, any forward-looking statements made by
the Company are subject to the risks and impacts associated with natural
disasters, pandemics or other unforeseen events, including, without limitation,
any resurgence of the COVID-19 pandemic and responses thereto, as well as their
impact on economic conditions, capital and financial markets. All
forward-looking statements made herein are made as of the date hereof, and the
risk that actual results will differ materially from expectations expressed
herein will increase with the passage of time. The Company undertakes no duty to
update any forward-looking statement to reflect future events or changes in the
Company's expectations.
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