EAGLE MATERIALS INC. EXECUTIVE SUMMARY
We are a leading supplier of heavy construction materials and light building materials inthe United States . Our primary products are commodities that are essential in commercial and residential construction; public construction projects; and 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 across manyUnited States markets, which provides us with regional economic diversification. We also produce sand used in hydraulic fracturing as part of our Oil and Gas Proppants sector. Our business is organized into three sectors: Heavy Materials, which includes the Cement and Concrete and Aggregates segments; Light Materials, which includes the Gypsum Wallboard and Recycled Paperboard segments; and Oil and Gas Proppants, which are used in oil and natural gas extraction. Financial results and other information for the three months endedJune 30, 2020 and 2019, respectively, are presented on a consolidated basis and by these business segments - Cement, Concrete and Aggregates, Gypsum Wallboard, Recycled Paperboard, and Oil and Gas Proppants. 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, production, distribution, 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; the mining and sale of aggregates (crushed stone, sand, and gravel); and the mining and sale of sand used in hydraulic fracturing (frac sand). 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. OnAugust 2, 2019 , we acquired the assets of a readymix concrete and aggregates business (the ConAgg Acquisition). The purchase price (Purchase Price) of the ConAgg Acquisition was approximately$30.4 million . The Purchase Price and expenses incurred in connection with the ConAgg Acquisition were funded through operating cash flows and borrowings under our Revolving Credit Facility. The ConAgg Acquisition's assets and operating results are included in our Concrete and Aggregates segment reporting fromAugust 2, 2019 throughMarch 31, 2020 , and for the three months endedJune 30, 2020 . 26 -------------------------------------------------------------------------------- OnMarch 6, 2020 , we acquired the assets ofKosmos Cement Company (Kosmos), a joint venture between CEMEX S.A.B. de C.V. and Buzzi Unicem S.p.A. for approximately$669 million (the Kosmos Acquisition). The Kosmos Acquisition included (i) a cement plant located inLouisville, Kentucky , (ii) a limestone quarry located inBattletown, Kentucky , (iii) cement distribution terminals located inIndianapolis, Indiana ;Cincinnati, Ohio ;Pittsburgh, Pennsylvania ;Charleston, West Virginia ;Ceredo, West Virginia ;Mt. Vernon, Indiana ; andLexington, Kentucky , and (iv) certain other properties and assets used by Kosmos in connection with the foregoing (collectively, the Kosmos Business). We also assumed certain liabilities and obligations of Kosmos relating to the Kosmos Business, including contractual obligations, reclamation obligations and various other liabilities and obligations arising out of or relating to the Kosmos Business. We funded the payment of the purchase price and expenses incurred in connection with the transaction through a combination of cash on hand and a syndicated term loan facility. The Kosmos Business' assets and operating results are included in our Cement segment reporting fromMarch 6, 2020 throughMarch 31, 2020 , and for the three months endedJune 30, 2020 . OnApril 17, 2020 , we sold ourWestern Aggregates LLC (Western) andMathews Readymix LLC (Mathews) businesses for an aggregate purchase price of$93.5 million , resulting in a gain of$52.0 million . Western and Mathews were part of our Concrete and Aggregates operating segment, and their results of operations were included in our financial statements for the period fromApril 1, 2020 throughApril 17, 2020 . As previously announced onMay 30, 2019 , the Company plans to separate its Heavy Materials and Light Materials businesses into two independent, publicly traded corporations by means of a tax-free spin-off to Eagle shareholders. We remain committed to the separation, although the timing is uncertain. We continue preparations to ensure that the two businesses are well-positioned for the separation when the markets recover from the effects of the COVID-19 pandemic.
MARKET CONDITIONS AND OUTLOOK
During the fourth quarter of fiscal 2020, several macroeconomic factors had a positive impact on the construction sector, including low interest rates, high consumer confidence and robust employment, which led to favorable trends in housing starts, state construction lettings and construction employment. These factors continued to have a positive effect on both our Heavy Materials and Light Materials businesses during the first quarter of fiscal 2021, despite the extraordinary and wide-ranging actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the spread of COVID-19, including quarantines, "shelter-in-place" orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. To date, we have not been materially affected by governmental orders requiring businesses to curtail or cease normal operations. We are continuing to operate as an essential business in virtually all of the markets we serve. However, in light of the continued spread COVID-19, we are closely monitoring the disruptions caused by the pandemic and their possible effects on our business in current and future periods. Although the COVID-19 pandemic did not have a significant impact on our business in fiscal 2020 or the first quarter of fiscal 2021, we believe it is likely to negatively affect us in subsequent periods. The timing, nature and extent of its impact, however, is highly uncertain. To date, the pandemic and responses designed to contain its spread and mitigate its public health effects have resulted in significant job losses, causing an increase in theU.S. unemployment rate from 3.5% inFebruary 2020 to 11.1% inJune 2020 , which is among the sharpest increases on record. In addition, consumer confidence has substantially decreased in many of the markets in which we operate. We expect that the new residential housing market, which depends to a significant extent on the amount of funds available to and expended by consumers, likely will be the first of our market segments to be materially affected. In fiscal 2020, approximately 50% of our wallboard business and 25% of our cement business was attributable to new residential construction. 27
-------------------------------------------------------------------------------- The pandemic is also likely to have a significant effect on state and local government revenues and construction budgets, and may result in delays, cancellations or curtailment of construction projects in the future. We continue to monitor our operations, the operations of our customers and actions taken by the various national, state, and local governments in the areas in which we operate. The extent to which the spread of COVID-19 will impact the national and local economies in which we operate, and ultimately our business, will depend on numerous factors, which are highly uncertain and difficult to predict. Our integrated cement sales network stretches across theU.S. heartland. ThePortland Cement Association is estimating cement consumption will increase in calendar 2020 over 2019 by approximately 2%. In addition to weather, cement and concrete and aggregates markets are affected by infrastructure spending, residential construction, and industrial construction activity. While we anticipate cement demand will remain strong in our markets throughout the remainder of the calendar 2020, the uncertainty around the COVID-19 pandemic and possible "second-wave" cases may cause demand to weaken during the fall. Oil well cement demand has been negatively affected by the reduction in drilling activity; however, oil well cement sales volume represented less than 2% of cement volume in the three months endedJune 30, 2020 . Our primary Gypsum Wallboard sales network stretches across the southern half ofthe United States , consistent with our facility network. Wallboard demand is heavily influenced by new residential housing construction, as well as repair and remodeling activity. Demand for housing, and construction of new homes, was strong during three months endedJune 30, 2020 , in part aided by historically low interest rates. We anticipate demand to remain consistent for the next two quarters; however, the uncertainty around the COVID-19 pandemic and possible "second-wave" cases may cause demand to weaken during the late summer or early fall. Our Recycled Paperboard business primarily sells paper into the gypsum wallboard market, and demand for paper generally follows the demand for gypsum wallboard. The primary raw material used to produce recycled paperboard is recycled fiber, also known as OCC. During the quarter, recycled fiber costs increased a total of$75 per ton over the course of April and May because of a significant decline in generation as many states issued shelter-in-place orders to combat the COVID-19 pandemic. As economies began to re-open and recycled fiber generation increased, costs declined a total of$55 per ton over the course of June and July. We expect OCC pricing will remain fairly consistent over the next quarter, but pricing remains sensitive to any changes in economic activity related to COVID-19, which could result in further pricing volatility over the remainder of our fiscal year. Our current gypsum liner customer contracts include price escalators that partially offset and compensate for changes in raw material fiber prices, so the impact of the OCC price increases in the first quarter likely will adversely affect our wallboard operations by increasing the cost of paper during our second fiscal quarter. During March andApril 2020 , oil prices declined to all-time lows due to the decrease in demand for oil resulting from the COVID-19 pandemic. At the same time, increases in production of oil bySaudi Arabia andRussia created a significant surplus in supply and resulted in sharp declines in oil and gas prices. These developments have led to substantial decreases in drilling and well-completion activity beginning inMarch 2020 . The reduction in drilling activity has negatively affected demand for our frac sand and oil well cement, and led to a significant reduction or cessation of new orders. In response to these market conditions, we have curtailed our operations and reduced headcount at our frac sand facilities and are focused on preserving the value of our operating assets for future use. As previously disclosed, we are actively pursuing alternatives for our Oil and Gas Proppants business. If this results in an alternative use or disposition of this business, additional impairment or other losses may be incurred. 28
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RESULTS OF OPERATIONS
THREE MONTHS ENDEDJUNE 30, 2020 Compared WITH THREE MONTHS ENDEDJune 30, 2019 For the Three Months Ended June 30, 2020 2019 Change (in thousands, except per share) Revenue$ 428,020 $ 370,597 15 % Cost of Goods Sold (327,041 ) (295,268 ) 11 % Gross Profit 100,979 75,329 34 % Equity in Earnings of Unconsolidated Joint Venture 7,796 9,432 (17 )% Corporate General and Administrative (17,789 ) (21,254 ) (16 )% Gain on Sale of Businesses 51,973 - - Other Non-Operating Income (Loss) (127 ) 200 (164 )% Interest Expense, net (14,041 ) (8,846 ) 59 % Earnings Before Income Taxes 128,791 54,861 135 % Income Tax Expense (32,585 ) (13,557 ) 140 % Net Earnings$ 96,206 $ 41,304 133 % Diluted Earnings per Share$ 2.31 $ 0.94 146 % REVENUE Revenue increased by$57.4 million , or 15%, to$428.0 million for the three months endedJune 30, 2020 . The Kosmos and ConAgg Acquisitions contributed$57.6 million of Revenue for the three months endedJune 30, 2020 , while Western and Mathews contributed$7.8 million of Revenue for the three months endedJune 30, 2019 . Excluding the acquisitions and dispositions, Revenue improved by$7.6 million , or 2%. The increase in Revenue was due to higher Sales Volume, which positively affected Revenue by approximately$8.0 million . This was partially offset by lower gross sale prices, which negatively affected Revenue by$0.4 million . COST OF GOODS SOLD Cost of Goods Sold increased by$31.7 million , or 11%, to$327.0 million for the three months endedJune 30, 2020 . The Kosmos and ConAgg Acquisitions contributed$46.3 million of Cost of Goods Sold for the three months endedJune 30, 2020 , while Western and Mathews contributed$6.8 million of Cost of Goods Sold for the three months endedJune 30, 2019 . Excluding the acquisitions and dispositions, Cost of Goods Sold decreased by$7.8 million , or 3%. The decline in Cost of Goods Sold was due to the reduction in operating costs of approximately$18.9 million , partially offset by increased Cost of Goods Sold related to increased Sales Volume of$11.1 million . The reduction in operating costs was primarily related to our Cement, Gypsum Wallboard and Oil and Gas Proppants segments, which are discussed further on pages 31-35.
GROSS PROFIT
Gross Profit increased 34% to$101.0 million during the three months endedJune 30, 2020 . Excluding the acquisitions and dispositions, Gross Profit increased by$15.3 million , or 21%. The increase in Gross Profit was primarily due to lower operating expenses and increased Sales Volume, partially offset by lower gross sales prices. The gross margin increased to 24% from 21%, primarily because of lower operating expenses, partially offset by lower gross sales prices.
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT VENTURE
Equity in Earnings of our Unconsolidated Joint Venture decreased$1.6 million , or 17%, for the three months endedJune 30, 2020 . The decline was primarily due to lower net sales prices and Sales Volume, which adversely affected earnings by approximately$0.3 million and$0.5 million , respectively, as well as increased operating costs, which decreased operating earnings by approximately$0.8 million . The increase in operating costs was primarily due to maintenance, which increased by approximately$0.7 million . 29 --------------------------------------------------------------------------------
CORPORATE GENERAL AND ADMINISTRATIVE
Corporate General and Administrative expenses declined by approximately$3.5 million , or 16%, for the three months endedJune 30, 2020 . The decrease was primarily because of lower salary and incentive compensation costs and promotion and travel costs of approximately$4.1 million and$0.5 million , respectively. This was partially offset by increased professional costs of$0.7 million incurred in connection with the Kosmos Acquisition and the sale of Mathews and Western. The lower salary and incentive compensation costs were primarily due to the acceleration of stock compensation costs of$5.3 million upon the retirement of our Chief Executive Officer in the first quarter of fiscal 2020.
GAIN ON SALE OF BUSINESSES
On
OTHER NON-OPERATING INCOME (LOSS)
Other Non-Operating Income (Loss) consists of a variety of items that are unrelated to segment operations and include non-inventoried aggregates income, asset sales, and other miscellaneous income and cost items.
INTEREST EXPENSE, NET
Interest Expense, net increased by approximately$5.2 million , or 59%, during the three months endedJune 30, 2020 . The increase in Interest Expense, net was primarily due to higher interest on borrowings under our Revolving Credit Facility, Term Loan, and amortization of related debt issuances costs of approximately$0.5 million ,$4.5 million , and$0.8 million , respectively. These increases were partially offset by lower interest on our Unsecured Private Placement Notes of$0.6 million , which were paid in full in fiscal 2020. The Term Loan was entered into inFebruary 2020 to fund the Kosmos Acquisition. The increase in debt issuance costs was related to the issuance of the Term Loan and the amendment of both the Revolving Credit Facility and the Term Loan inApril 2020 . EARNINGS BEFORE INCOME TAXES Earnings Before Income Taxes increased to$128.8 million during the three months endedJune 30, 2020 , primarily as a result of higher Gross Profit and Gain on Sale of Businesses, and lower Corporate General and Administrative Expense. This was partially offset by lower Equity in Earnings of Unconsolidated Joint Venture and increased Interest Expense, net.
INCOME TAX EXPENSE
Income Tax Expense increased 140% to$32.6 million for the three months endedJune 30, 2020 , primarily related to changes in pre-tax income. The effective tax rate was constant at 25% year over year. The increase in income tax expense was primarily because of higher pre-tax income for the three months endedJune 30, 2020 .
NET EARNINGS AND DILUTED EARNINGS PER SHARE
Net Earnings increased 133% to
THREE MONTHS ENDED
The following presents results within our three business sectors for the three months endedJune 30, 2020 and 2019. Revenue and operating results are organized by sector and discussed by individual business segment within each respective business sector. 30
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Heavy Materials
CEMENT (1)
For the Three Months Ended June
30,
2020 2019 Percentage Change
(in thousands, except per ton
information)
Gross Revenue, including Intersegment and
Joint Venture $ 261,411 $ 195,313 34 %
Less Intersegment Revenue (6,031 ) (4,253 ) 42 %
Less Joint Venture Revenue (25,300 ) (27,505 ) (8 )%
Gross Revenue, as reported $ 230,080 $ 163,555 41 %
Freight and Delivery Costs billed to
Customers (16,969 ) (12,896 ) 32 %
Net Revenue $ 213,111 $ 150,659 41 %
Sales Volume (M Tons) 2,085 1,550 35 %
Average Net Sales Price, per ton (2) $ 109.10 $ 109.70 (1 )%
Operating Margin, per ton $ 29.00 $ 23.30 24 %
Operating Earnings $ 60,455 $ 36,121 67 %
(1) Total of wholly owned subsidiaries and proportionately consolidated 50% interest of the Joint Venture's results.
(2) Net of freight per ton, including Joint Venture.
Cement Revenue was$261.4 million , a 34% increase, for the three months endedJune 30, 2020 . Excluding$47.6 million of Revenue related to the Kosmos Acquisition, Revenue increased$18.5 million , or 10%. Excluding the Kosmos Acquisition, the increase was primarily due to higher gross sales prices and Sales Volume, which improved Cement Revenue by approximately$3.8 million and$14.7 million , respectively. Cement Operating Earnings increased by 67% to$60.5 million for the three months endedJune 30, 2020 . Excluding$10.5 million of Operating Earnings related to the Kosmos Acquisition, Operating Earnings increased$13.9 million , or 39%. The increase was due to higher gross sales prices and Sales Volume, and lower operating costs, which positively affected Operating Earnings by approximately$3.8 million ,$1.8 million , and$8.2 million , respectively. The decline in operating costs was primarily because of lower maintenance and energy costs of approximately$8.0 million and$2.2 million , respectively, partially offset by higher purchased raw materials costs of$2.5 million . Due to the uncertainty of the impact of the COVID-19 pandemic, we modified the timing and extent of our annual cement maintenance outages. Approximately$6.0 million of the anticipated maintenance costs have been deferred to the fiscal second and third quarters. The operating margin increased to 23% from 18%, primarily because of lower operating costs and higher gross sales prices. 31 --------------------------------------------------------------------------------
CONCRETE AND AGGREGATES
For the Three Months Ended June
30,
2020 2019 Percentage Change
(in thousands, except net sales
prices)
Gross Revenue, including intersegment $ 44,190 $ 39,778 11 %
Less intersegment Revenue (106 ) (377 ) (72 )%
Gross Revenue, as reported $ 44,084 $ 39,401 12 %
Sales Volume -
M Cubic Yards of Concrete 348 310 12 %
M Tons of Aggregate 475 799 (41 )%
Average Net Sales Price -
Concrete - Per Cubic Yard $ 113.61 $ 103.52 10 %
Aggregates - Per Ton $ 9.77 $ 9.66 1 %
Operating Earnings $ 5,418 $ 4,434 22 %
Concrete and Aggregates Revenue increased 11% to $44.2 million for the three
months ended June 30, 2020 . Excluding Revenue related to the ConAgg Acquisition
in fiscal 2021, and Western and Mathews in fiscal 2021 and 2020, Revenue
increased $0.7 million , or 2%. The primary reason for the increase in Revenue
was higher gross sales prices, which increased Revenue by $1.9 million . This was
partially offset by lower Sales Volume, which reduced Revenue by $1.2 million .
Operating Earnings increased 22% to approximately $5.4 million . Excluding
Operating Earnings related to the ConAgg Acquisition in fiscal 2021, and Western
and Mathews in fiscal 2021 and 2020, Operating Earnings increased $1.1 million ,
or 32%. The increase was a result of higher gross sales prices, which positively
affected Operating Earnings by approximately $1.9 million . This was partially
offset by lower Sales Volume and higher operating costs of approximately $0.2
million and $0.6 million , respectively. The operating costs increase was
primarily due to higher cost of materials of approximately $0.6 million .
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Light Materials
GYPSUM WALLBOARD
For the Three Months Ended June
30,
2020 2019 Percentage Change
(in thousands, except per MMSF
information)
Gross Revenue, as reported $ 130,150 $ 126,724 3 %
Freight and Delivery Costs billed to Customers (27,122 ) (27,100 ) -
Net Revenue $ 103,028 $ 99,624 3 %
Sales Volume (MMSF) 704 660 7 %
Average Net Sales Price, per MMSF (1) $ 146.28 $ 150.96 (3 )%
Freight, per MMSF $ 38.53 $ 41.06 (6 )%
Operating Margin, per MMSF $ 58.70 $ 57.47 2 %
Operating Earnings $ 41,325 $ 37,932 9 %
(1) Net of freight per MMSF.
Gypsum Wallboard Revenue increased 3% to$130.2 million for the three months endedJune 30, 2020 , primarily related to a 7% increase in Sales Volume. The increase in Sales Volume positively affected Revenue by approximately$8.5 million , partially offset by lower average gross sales prices, which adversely affected Revenue by$5.0 million . Our market share increased during the three months endedJune 30, 2020 , due to the minimal effect of COVID-19 shutdowns in our markets compared to the national average. Operating Earnings increased 9% to$41.3 million , primarily due to higher Sales Volume and decrease in operating costs. The increase in Sales Volume and decrease in operating costs positively affected Operating Earnings by approximately$2.6 million and$5.9 million , respectively. This was partially offset by lower gross sales prices, which adversely affected Operating Earnings by approximately$5.0 million . The lower operating costs were primarily related to freight, energy, and paper costs which reduced operating costs by approximately$1.8 million ,$1.1 million , and$1.2 million , respectively. The operating margin increased to 32% for the three months endedJune 30, 2020 , primarily related to lower operating costs, partially offset by lower gross sales prices. Fixed costs are not a significant portion of the overall cost of wallboard; therefore, changes in utilization have a relatively minor impact on our operating cost per unit. 33
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RECYCLED PAPERBOARD
For the Three Months Ended June
30,
2020 2019 Percentage Change
(in thousands, except per ton
information)
Gross Revenue, including intersegment $ 36,744 $ 42,700 (14 )%
Less intersegment Revenue (14,069 ) (17,015 ) (17 )%
Gross Revenue, as reported $ 22,675 $ 25,685 (12 )%
Freight and Delivery Costs billed to Customers (1,333 ) (1,205 ) 11 %
Net Revenue $ 21,342 $ 24,480 (13 )%
Sales Volume (M Tons) 77 81 (5 )%
Average Net Sales Price, per ton (1) $ 461.87 $ 510.32 (9 )%
Freight, per ton $ 17.31 $ 14.88 16 %
Operating Margin, per ton $ 37.60 $ 122.77 (69 )%
Operating Earnings $ 2,895 $ 9,944 (71 )%
(1) Net of freight per ton.
Recycled Paperboard Revenue declined 14% to$36.7 million during the three months endedJune 30, 2020 . The decrease in Revenue was due to lower gross sales prices and Sales Volume, which adversely affected Revenue by$3.5 million and$2.5 million , respectively. Lower gross sales prices were due to the pricing provisions in our long-term sales agreements. Operating Earnings declined 71% to$2.9 million , primarily because of the decrease in gross sales prices and Sales Volume, and an increase in operating costs, which adversely affected Operating Earnings by approximately$3.5 million ,$0.5 million , and$3.0 million , respectively. The increase in operating costs was related to operating inefficiencies in April and May related to start-up of the papermill after the completion of the project to enhance and expand the mill, as well as higher input costs, namely fiber, which lowered Operating Earnings by approximately$2.1 million and$1.5 million . The increase in fiber cost was due primarily to the decline in generation of OCC due to the shelter-in-place orders issued to combat the COVID-19 pandemic. This was partially offset by lower energy costs of approximately$0.5 million . Operating margin decreased to 8% from 23%, primarily because of higher operating costs and lower gross sales prices. 34
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OIL AND GAS PROPPANTS
For the Three Months Ended June
30,
2020 2019 Percentage Change
(in thousands, except net sales
prices)
Gross Revenue, as reported $ 1,031 $ 15,232 (93 )%
Sales Volume (M Tons) 45 407 (89 )%
Average Net Sales Price, per ton (1) $ 22.32 $ 31.80 (30 )%
Operating Loss $ (1,318 ) $ (3,670 ) (64 )%
(1) Net of freight per ton.
Revenue from our Oil and Gas Proppants segment declined 93% to approximately$1.0 million during the three months endedJune 30, 2020 . The decline in Revenue was due to lower Sales Volume and gross sales prices, which adversely affected Revenue by approximately$13.5 million and$0.7 million , respectively. During the quarter we significantly curtailed our operating activities and reduced our headcount at our fac sand facilities, as deteriorating market conditions in the oil and gas industry have resulted in sharp declines in pricing and slowdown in drilling and fracturing activity. Operating Loss for the quarter decreased 64% to approximately$1.3 million . The decrease in Operating Loss was primarily related to the curtailment of operating activities and reduced headcount during the quarter, and lower fixed costs due to the impairment loss recognized during the third quarter of fiscal 2020.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted inthe United States requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare our financial statements. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information. Information regarding our Critical Accounting Policies can be found in our Annual Report. The three critical accounting policies that we believe either require the use of the most judgment, or the selection or application of alternative accounting policies, and are material to our financial statements, are those relating to long-lived assets, goodwill, and business combinations. Management has discussed the development and selection of these Critical Accounting Policies and estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm. In addition, Note (A) to the financial statements in our Annual Report contains a summary of our significant accounting policies.
Recent Accounting Pronouncements
Refer to Footnote (A) in the Notes to Unaudited Consolidated Financial Statements of this Form 10-Q for information regarding recently issued accounting pronouncements that may affect our financial statements.
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LIQUIDITY AND CAPITAL RESOURCES
Notwithstanding the anticipated challenges associated with COVID-19, we believe at this time 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. We will continue to monitor the impact of COVID-19 on the economy, and on our operations and future liquidity needs, as a continued worldwide disruption of economic activity could materially affect our future access to these sources of liquidity. Please see the Debt Financing Activities section for a discussion of our cash position, credit facility and the amount of borrowings available to us in the next twelve-month period.
Cash Flow
The following table provides a summary of our cash flows:
For the Three Months Ended June 30,
2020 2019
(dollars in thousands)
Net Cash Provided by Operating Activities $ 95,313 $ 50,698
Investing Activities:
Additions to Property, Plant, and Equipment (25,991 ) (21,813 )
Proceeds from Sale of Property, Plant, and Equipment 93,482 -
Net Cash Provided by (Used in) Investing Activities 67,491 (21,813 )
Financing Activities:
Increase (Decrease) in Credit Facility (75,000 ) 185,000
Dividends Paid to Stockholders (4,160 ) (4,499 )
Purchase and Retirement of Common Stock - (198,355 )
Proceeds from Stock Option Exercises - 396
Payment of Debt Issuance Costs (1,718 ) -
Shares Redeemed to Settle Employee Taxes on Stock
Compensation (1,130 ) (866 )
Net Cash Used in Financing Activities (82,008 ) (18,324 )
Net Increase in Cash, Cash Equivalents, and
Restricted Cash $ 80,796 $ 10,561
Net Cash Provided by Operating Activities increased by $44.6 million to $95.3
million during the three months ended June 30, 2020 . This increase was primarily
attributable to higher dividends from our Joint Venture, and a reduction in the
change of working capital, which increased cash flows by approximately $6.5
million and $40.5 million , respectively.
Working capital increased by $63.0 million to $571.6 million at June 30, 2020 ,
primarily due to the increased Cash and Accounts and Notes Receivable of
approximately $80.8 million and $42.8 million , respectively, and decreased
Accounts Payable of approximately $4.2 million . This was partially offset by
increased Accrued Expenses and Income Taxes Payable of approximately $2.2
million and $32.1 million , respectively, and decreased Inventory and Income Tax
Receivables of approximately $29.4 million and $4.7 million , respectively. The
reduction in Inventory is due to increased Revenue and lower production
resulting from scheduled outages at our cement plants. The decrease in Accrued
Liabilities and increase in Income Taxes Payable were both due primarily to
timing.
The increase in Accounts and Notes Receivable at June 30, 2020 , was primarily
related to higher Revenue during the three months ended June 30, 2020 , compared
with the three months ended March 31, 2020 . As a percentage of quarterly sales
generated for the respective quarter, Accounts Receivable was approximately 45%
at June 30, 2020 and 48% at March 31, 2020 . Management measures the change in
Accounts Receivable by monitoring the days sales outstanding on a monthly basis
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 at June 30, 2020 . Notes Receivable are
monitored on an individual basis, and no significant deterioration in the
collectability of our Notes Receivable was identified at June 30, 2020 . We are
closely monitoring the impact of COVID-19 on our customers' ability to pay their
outstanding balances.
36
-------------------------------------------------------------------------------- Our Inventory balance atJune 30, 2020 declined by approximately$29.4 million from our balance atMarch 31, 2020 . Within Inventory, raw materials and materials-in-progress, finished cement, and aggregates decreased approximately$14.5 million ,$9.9 million , and$4.8 million , respectively. The decline in raw materials and materials-in-progress was due primarily to the maintenance outages at all of our cement plants during the quarter. The decline in finished cement was due to both maintenance outages, and increased cement Sales Volume during the quarter. The reduction in aggregates inventory was primarily due to the sale of Western, which had approximately$5.1 million of aggregate inventory at the date of sale. The largest individual balance in our Inventory is our repair parts. These parts are necessary given the size and complexity of our manufacturing plants, as well as the age of certain of our plants, which 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. We have less than one year's sales of all product inventories, and our inventories have a low risk of obsolescence because our products are basic construction materials. Net Cash Provided by Investing Activities during the three months endedJune 30, 2020 was approximately$67.5 million , compared withNet Cash Used in Investing Activities of$21.8 million during the same period in 2019, an increase of approximately$89.3 million . The increase was primarily related to sale of Western and Mathews for approximately$93.5 million , partially offset by an increase of$4.2 million in capital spending. The increase in capital spending was primarily related to the$4.6 million increase in our Gypsum Wallboard business. This increase was primarily related to the acquisition of additional gypsum reserves.Net Cash Used in Financing Activities was approximately$82.0 million during the three months endedJune 30, 2020 , compared with$18.3 million in the first quarter of fiscal 2020. The$63.7 million increase was primarily due to the$75.0 million reduction in net borrowings compared with additional borrowings of$185.0 million in fiscal 2020, as well as a reduction of$198.4 million in repurchase and retirement of common stock.
Our debt-to-capitalization ratio and net-debt-to-capitalization ratio were 58.3%
and 54.8%, respectively, at
Debt Financing Activities
Below is a summary of the Company's debt facilities at
Maturity
Revolving Credit Facility August 2022
4.500% Senior Unsecured Notes August 2026
Term Loan August 2022
See Footnote (N) to the Unaudited Consolidated Financial Statements for further
details on the Company's debt facilities, including interest rate, and financial
and other covenants and restrictions.
The borrowing capacity or our Revolving Credit Facility is $750.0 million until
August 2, 2021 , after which the aggregate borrowing capacity will be reduced to
$665.0 million . The Revolving Credit Facility also includes a swingline loan
sublimit of $25.0 million , and a $40.0 million letter of credit facility. At
June 30, 2020 we had $5.0 million of outstanding letter of credit. We previously
provided an irrevocable stand-by letter of credit for any borrowings made by our
Joint Venture under its credit facility; however, this credit facility was
terminated and the letter of credit cancelled in July 2020 . We are contingently
liable for performance under $29.9 million in performance bonds relating
primarily to our mining operations. We do not have any off-balance sheet debt,
or any outstanding debt guarantees.
We had $485.0 million of borrowing outstanding under the Revolving Credit
Facility at June 30, 2020 . We had $260.0 million of available borrowings under
the Revolving Credit Facility, net of outstanding letters of credit, at June 30,
2020 , all of which was available for future borrowings based on our current
Leverage Ratio.
In addition to the Revolving Credit Facility, we have $199.4 million of cash on
hand at June 30, 2020 , giving us total liquidity of approximately $459.0 million
(cash on hand plus Revolving Credit Facility availability). During July
37
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2020, we received $103.7 million of the $123.7 million Income Tax Receivable
that was recorded at June 30, 2020 . We anticipate using these funds to reduce
the outstanding amounts under the Revolving Credit Agreement.
Other than the Revolving Credit Facility, we have no other source of committed
external financing in place. Should the Revolving 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 Revolving 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. Our Revolving
Credit Facility is not rated by the rating agencies.
We believe that our cash flow from operations and available borrowings under our
Revolving Credit Facility, as well as cash on hand, should be sufficient to meet
our currently anticipated operating needs, capital expenditures, and dividend
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 Revolving Credit Facility, the
level of competition, and general and economic factors beyond our control, such
as COVID-19. 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 on
page 28 for further discussion out the possible effects of COVID-19 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 Term Loan,
4.500% Senior Unsecured Notes, and borrowings under the Revolving Credit
Facility, 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.
We lease one of our cement plants from the city of Sugar Creek, Missouri . The
city of Sugar Creek issued industrial revenue bonds to partly finance
improvements to the cement plant. The lease payments due to the city of Sugar
Creek under the cement plant lease, which was entered into upon the sale of the
industrial revenue bonds, are equal in amount to the payments required to be
made by the city of Sugar Creek to the holders of the industrial revenue bonds.
Because we hold all outstanding industrial revenue bonds, no debt is reflected
on our financial statements in connection with our lease of the cement plant. At
the expiration of the lease in fiscal 2021, we have the option to purchase the
cement plant for a nominal amount. We also have approximately $57.9 million of
lease liabilities at June 30, 2020 that have an average remaining life of
approximately 9.1 years.
Dividends
Dividends paid were
Share Repurchases
OnApril 18, 2019 , the Board of Directors authorized us to repurchase an additional 10.0 million shares. This authorization brought the cumulative total of Common Stock our Board has approved for repurchase in the open market to 48.4 million shares since we became publicly held inApril 1994 . ThroughJune 30, 2020 , we have repurchased approximately 41.1 million shares. Share repurchases may be made from time to time in the open market or in privately negotiated transactions. The timing and amount of any share repurchases are determined by 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 intended to comply with the safe-harbor provided by Rule 10b5-1. 38
-------------------------------------------------------------------------------- During the three months endedJune 30, 2020 , the Company withheld from employees 23,901 shares of stock upon the vesting of Restricted Shares that were granted under the Plan. We withheld these shares to satisfy the employees' statutory tax withholding requirements, which is required once the Restricted Shares or Restricted Shares Units are vested.
Capital Expenditures
The following table details capital expenditures by category:
For the Three Months Ended June 30,
2020 2019
(dollars in thousands)
Land and Quarries $ 4,795 $ 206
Plants 17,216 23,885
Buildings, Machinery, and Equipment 3,980 1,397
Total Capital Expenditures $ 25,991 $ 25,488
Capital expenditures for fiscal 2021 are expected to range from $60.0 million to
$70.0 million and be allocated across the Heavy and Light Materials sectors.
These estimated capital expenditures are limited to critical maintenance and
safety and regulatory projects, as we manage our cash flow in response to the
COVID-19 pandemic.
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