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 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 business is 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 three and nine months endedDecember 31, 2021 and 2020, are presented on a consolidated basis and by 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, 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; and the mining and sale of aggregates (crushed stone, sand, and gravel). OnSeptember 18, 2020 , we sold our Oil and Gas Proppants business, which had previously been reported as a separate operating segment. 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 Footnote (C) in the Unaudited Consolidated Financial Statements for more information about the sale of the Oil and Gas Proppants business. OnApril 17, 2020 , we sold two of our businesses,Western Aggregates LLC (Western) andMathews Readymix LLC (Mathews), 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 .
MARKET CONDITIONS AND OUTLOOK
Strong underlying market conditions in calendar 2021 supported construction activity in our markets, despite supply chain disruptions during the latter half of the calendar year, which adversely affected some of our customers. We believe demand for our products will remain strong in calendar 2022, supported in part by the passage of theInfrastructure Investment and Jobs Act inNovember 2021 . 21
-------------------------------------------------------------------------------- Energy and freight costs increased in all of our businesses during the fiscal third quarter, and we anticipate further increases throughout the remainder of fiscal 2022. Regarding energy, we have forward purchase contracts for approximately 50% of our natural gas needs for the remainder of the fiscal year. For freight, several factors are contributing to higher costs, including: limited availability of trucking and rail service, and congestion on the shipping routes, all of which have constrained capacity.
Cement and Concrete and Aggregates markets are affected by infrastructure
spending, residential construction, private non-residential construction
activity, and weather. Despite underlying increases in market demand, our
organic Cement sales volume growth is expected to be limited in fiscal 2022
because our integrated cement sales network, which stretches across the
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. Residential housing starts increased, on a seasonally adjusted basis, approximately 3% in calendar 2021, compared with 2020. Repair and remodel activity is expected to remain strong throughout the rest of the fiscal year, but may be negatively affected by further delays in the supply chain. Our Recycled Paperboard business sells paper primarily into the gypsum wallboard market, and demand for paper generally follows the demand for gypsum wallboard. The primary raw material used to produce paperboard is Old Corrugated Containers (OCC). Prices for OCC significantly increased during the first nine months of fiscal 2022. Our current customer contracts for gypsum liner include price escalators 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
THREE MONTHS ENDEDDECember 31, 2021 Compared WITH THREE MONTHS ENDEDDECember 31, 2020 For the Three Months Ended December 31, 2021 2020 Change (dollars in thousands, except per share) Revenue$ 462,941 $ 404,667 14 % Cost of Goods Sold (324,355 ) (291,288 ) 11 % Gross Profit 138,586 113,379 22 % Equity in Earnings of Unconsolidated Joint Venture 8,555 10,083 (15 )% Corporate General and Administrative (12,851 ) (11,327 ) 13 % Other Non-Operating Income 3,207 2,297 40 % Interest Expense, net (5,651 ) (9,360 ) (40 )% Earnings from Continuing Operations Before Income Taxes 131,846 105,072 25 % Income Tax Expense (29,367 ) (23,879 ) 23 % Net Earnings from Continuing Operations 102,479 81,193 26 %
Net Earnings from Discontinued Operations $ - $ -
-
Net Earnings $ 102,479 $ 81,193 26 %
Diluted Earnings per Share from Continuing
Operations $ 2.53 $ 1.94 30 %
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REVENUE
Revenue increased by
COST OF GOODS SOLD
Cost of Goods Sold increased by$33.1 million , or 11%, to$324.4 million for the three months endedDecember 31, 2021 . The increase was due to higher Sales Volume and increased operating costs of$3.8 million and$29.3 million , respectively. Higher operating costs were primarily related to our Gypsum Wallboard and Recycled Paperboard segments, which are discussed further in the segment analysis. GROSS PROFIT Gross Profit increased 22% to$138.6 million during the three months endedDecember 31, 2021 . The improvement was primarily related to higher gross sales prices and Sales Volume, partially offset by increased operating costs. The gross margin increased to 30% from 28%, mainly because of higher gross sales prices, partially offset by an increase in operating costs.
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT VENTURE
Equity in Earnings of our Unconsolidated Joint Venture declined$1.5 million , or 15%, for the three months endedDecember 31, 2021 . The decrease was primarily due to lower Sales Volume and increased operating costs, which adversely affected earnings by approximately$0.5 million and$2.6 million , respectively. This was partially offset by higher gross sales prices of$1.6 million . The increase in operating costs was due primarily to maintenance and purchased cement, which reduced operating earnings by$0.6 million and$2.3 million , respectively.
CORPORATE GENERAL AND ADMINISTRATIVE
Corporate General and Administrative expenses increased by approximately$1.6 million , or 13%, for the three months endedDecember 31, 2021 . The increase was primarily due to higher professional fees and insurance expenses of$1.1 million and$0.5 million , respectively.
OTHER NON-OPERATING INCOME
Other Non-Operating Income 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.
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INTEREST EXPENSE, NET
Interest Expense, net decreased by approximately$3.7 million , or 40%, during the three months endedDecember 31, 2021 . The decrease was primarily due to lower interest on borrowings under our Revolving Credit Facility and Term Loan of approximately$0.3 million and$4.0 million , respectively. Interest Expense related to our Revolving Credit Facility was lower because our average outstanding borrowings under the Revolving Credit Facility were less in the fiscal 2022 third quarter, compared with the same period in fiscal 2021. Interest Expense on our Term Loan declined because we repaid the loan onJuly 1, 2021 . The lower interest amounts were partially offset by higher interest expense on our public notes, which increased by$0.8 million . Interest on our public notes was higher because our public notes outstanding increased to$750.0 million from$350.0 million . See Footnote (M) to the Unaudited Consolidated Financial Statements for more information.
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Earnings From Continuing Operations Before Income Taxes increased to$131.8 million during the three months endedDecember 31, 2021 , primarily as a result of higher Gross Profit and lower Interest Expense. This was partially offset by higher Corporate General and Administrative Expenses and lower Equity in Earnings of Unconsolidated Joint Venture.
INCOME TAX EXPENSE
Income Tax Expense was$29.4 million for the three months endedDecember 31, 2021 , compared with$23.9 million for the three months endedDecember 31, 2020 . The effective tax rate decreased to 22% from 23% in the prior-year period. The decrease in the effective tax rate for the three months endedDecember 31, 2021 was primarily due to the benefit received from the exercise of employee stock options during the quarter.
NET EARNINGS FROM CONTINUING OPERATIONS AND DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS
Net Earnings from Continuing Operations increased 26% to$102.5 million for the three months endedDecember 31, 2021 . Diluted Earnings per Share from Continuing Operations increased 30% to$2.53 per share.
NET EARNINGS FROM DISCONTINUED OPERATIONS
The Oil and Gas Proppants business was sold in
NET EARNINGS
Net Earnings increased 26% to
24
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RESULTS OF OPERATIONS
Nine MONTHS ENDEDDECember 31, 2021 Compared WITH NINE MONTHS ENDEDDecember 31, 2020 For the Nine Months Ended December 31, 2021 2020 Change (dollars in thousands, except per share) Revenue$ 1,448,405 $ 1,279,340 13 % Cost of Goods Sold (1,027,967 ) (940,815 ) 9 % Gross Profit 420,438 338,525 24 % Equity in Earnings of Unconsolidated Joint Venture 24,785 28,456 (13 )% Corporate General and Administrative (32,986 ) (40,225 ) (18 )% Premium Paid on Early Retirement of Senior Notes (8,407 ) - - Gain on Sale of Businesses - 51,973 (100 )% Other Non-Operating Income 5,941 1,898 213 % Interest Expense, net (24,891 ) (35,957 ) (31 )% Earnings from Continuing Operations Before Income Taxes 384,880 344,670 12 % Income Tax Expense (84,949 ) (76,515 ) 11 % Net Earnings from Continuing Operations 299,931 268,155 12 % Net Earnings from Discontinued Operations $ -$ 5,278 (100 )% Net Earnings$ 299,931 $ 273,433 10 % Diluted Earnings per Share from Continuing Operations$ 7.23 $ 6.43 12 % REVENUE Revenue increased by$169.1 million , or 13%, to$1,448.4 million for the nine months endedDecember 31, 2021 . The increase in Revenue was due to higher gross sales prices and Sales Volume, which positively affected Revenue by approximately$141.2 million and$27.9 million , respectively.
COST OF GOODS SOLD
Cost of Goods Sold increased by$87.2 million , or 9%, to$1,028.0 million for the nine months endedDecember 31, 2021 . The increase was due to higher Sales Volume and operating costs of$20.4 million and$66.7 million , respectively. The increase in operating costs was primarily related to our Gypsum Wallboard and Recycled Paperboard segments, which are discussed further in the segment analysis.
GROSS PROFIT
Gross Profit increased 24% to
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT VENTURE
Equity in Earnings of our Unconsolidated Joint Venture decreased$3.7 million , or 13%, for the nine months endedDecember 31, 2021 . The decrease was primarily due to lower Sales Volume and higher operating costs, which reduced earnings by$2.7 million and$5.9 million , respectively. This was partially offset by higher net sales prices, which raised earnings by approximately$4.9 million . The increase in operating costs was due primarily to maintenance, energy, and purchased cement, which reduced earnings by approximately$2.3 million ,$0.6 million , and$2.3 million , respectively. 25
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CORPORATE GENERAL AND ADMINISTRATIVE
Corporate General and Administrative expenses declined by approximately$7.2 million , or 18%, for the nine months endedDecember 31, 2021 . The decrease was primarily due to lower professional and transaction fees incurred in fiscal 2021 of approximately$5.1 million and$3.4 million , respectively. The professional fees related primarily to our strategic portfolio review in the prior year, and the transaction fees mostly related to the prior year sale of Mathews Readymix and Western Aggregates, as well as preparation for the sale of the Oil and Gas Proppants business. The decrease was partially offset by an increase of$1.4 million in insurance expense.
EARLY RETIREMENT 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 (M) to the Unaudited Consolidated Financial Statements for more information.
GAIN ON SALE OF BUSINESSES
OnApril 17, 2020 we sold Western and Mathews for approximately$93.5 million . See Footnote (C) to the Unaudited Consolidated Financial Statements for more information regarding the sale.
OTHER NON-OPERATING INCOME
Other Non-Operating Income 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. The increase in Other Non-Operating Income was primarily due to the current year sale of land that resulted in a gain of approximately$1.7 million .
INTEREST EXPENSE, NET
Interest Expense, net decreased by approximately$11.1 million , or 31%, during the nine months endedDecember 31, 2021 . The decrease was primarily due to lower interest on borrowings under our Revolving Credit Facility and Term Loan of approximately$7.1 million and$11.4 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 in the first nine months of fiscal 2022, compared with average borrowings during the same period in fiscal 2021. Interest Expense on our Term Loan declined because of lower average interest rates and because we repaid the loan onJuly 1, 2021 . The lower interest amounts were partially offset by higher interest expense on our public notes and loan amortization expense, which increased by$2.2 million and$5.5 million , respectively. Interest on our public notes was higher because our public notes outstanding increased to$750.0 million from$350.0 million inJuly 2021 . Loan amortization expense increased as a result of our$6.1 million write-off of debt issuance costs related to our 4.500% Unsecured Senior Notes Due in 2026 and our Term Loan inJuly 2021 . See Footnote (M) to the Unaudited Consolidated Financial Statements for more information.
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Earnings From Continuing Operations Before Income Taxes increased to$384.9 million during the nine months endedDecember 31, 2021 , primarily as a result of higher Gross Profit and Other Non-Operating Income, as well as lower Corporate General and Administrative expenses and Interest Expense than the prior-year period. This was partially offset by lower Gross Equity in Earnings of Unconsolidated Joint Venture and Gain on Sale of Business, as well as the Premium Paid on Early Retirement of Senior Notes. 26
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INCOME TAX EXPENSE
Income Tax Expense was
NET EARNINGS FROM CONTINUING OPERATIONS AND DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS
Net Earnings from Continuing Operations increased 12% to$299.9 million for the nine months endedDecember 31, 2021 . Diluted Earnings per Share from Continuing Operations increased 12% to$7.23 per share.
NET EARNINGS FROM DISCONTINUED OPERATIONS
Net Earnings from Discontinued Operations declined$5.3 million during the nine months endedDecember 31, 2021 . The Oil and Gas Proppants business was sold inSeptember 2020 , and there was no activity related to this business during fiscal 2022. NET EARNINGS
Net Earnings increased 10% to
Three and NINE MONTHS ENDED
The following presents results within our two business sectors for the three and nine months endedDecember 31, 2021 and 2020. Revenue and operating results are organized by sector and discussed by individual business segment within each respective business sector. 27
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Heavy Materials
CEMENT (1)
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
2021 2020 Percentage Change 2021 2020 Percentage Change
(in thousands, except per ton (in thousands, except per ton
information) information)
Gross Revenue, including
Intersegment and Joint
Venture $ 261,155 $ 234,092 12 % $ 819,734 $ 773,565 6 %
Less Intersegment Revenue (5,301 ) (5,241 ) 1 % (18,357 ) (17,539 ) 5 %
Less Joint Venture Revenue (27,406 ) (27,110 ) 1 % (77,023 ) (79,603 ) (3 )%
Gross Revenue, as reported $ 228,448 $ 201,741 13 % $ 724,354 $ 676,423 7 %
Freight and Delivery Costs
billed to Customers (12,849 ) (15,077 ) (15 )% (51,501 ) (50,896 ) 1 %
Net Revenue $ 215,599 $ 186,664 16 % $ 672,853 $ 625,527 8 %
Sales Volume (M Tons) 1,963 1,842 7 % 6,197 6,107 1 %
Average Net Sales Price ,
per ton (2) $ 118.44 $ 111.91 6 % $ 117.49 $ 110.84 6 %
Operating Margin, per ton $ 40.67 $ 38.24 6 % $ 37.30 $ 34.52 8 %
Operating Earnings $ 79,836 $ 70,434 13 % $ 231,133 $ 210,802 10 %
(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.
Three months ended
Cement Revenue was$261.2 million , a 12% increase, for the three months endedDecember 31, 2021 . The increase was primarily due to higher gross sales prices and Sales Volume, which improved Cement Revenue by approximately$11.8 million and$15.3 million , respectively. Cement Operating Earnings increased by 13% to$79.8 million for the three months endedDecember 31, 2021 . The increase was due to higher gross sales prices and Sales Volume, which positively affected Operating Earnings by approximately$11.8 million and$4.4 million , respectively. This was partially offset by increased operating costs, which negatively affected Operating Earnings by$6.9 million . The increase in operating costs was primarily due to higher energy and maintenance costs of approximately$3.4 million and$5.4 million , respectively. These increases were partially offset by lower fixed costs of$1.6 million . The Operating Margin increased to 31%, primarily because of higher gross sales prices, partially offset by increased operating costs.
Nine months ended
Cement Revenue was$819.7 million , a 6% increase, for the nine months endedDecember 31, 2021 . The increase was primarily due to higher gross sales prices and Sales Volume, which improved Cement Revenue by approximately$33.7 million and$12.4 million , respectively. Cement Operating Earnings increased by 10% to$231.1 million for the nine months endedDecember 31, 2021 . The improvement was due to higher gross sales prices and Sales Volume, which positively affected Operating Earnings by approximately$33.7 million and$2.5 million , respectively. This was partially offset by increased operating costs, which negatively affected Operating Earnings by$15.8 million . The increase in operating costs was primarily due to higher maintenance and energy costs of approximately$12.1 million and$6.6 million , respectively. These increases were partially offset by a cost reduction of$3.7 million atKosmos Cement related to the recording of acquired inventory at fair value in the first quarter of fiscal 2021. The Operating Margin increased to 28% because of higher gross sales prices, partially offset by the increase in operating costs. 28
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CONCRETE AND AGGREGATES
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
Percentage
2021 2020 Percentage Change 2021 2020 Change
(in thousands, except net (in thousands, except net sales
sales prices) prices)Gross Revenue, including intersegment$ 42,384 $ 43,530 (3 )%$ 139,888 $ 134,020 4 % Less intersegment Revenue - - - - (106 ) (100 )% Gross Revenue, as reported$ 42,384 $ 43,530 (3 )%$ 139,888 $ 133,914 4 % Sales Volume M Cubic Yards of Concrete 317 327 (3 )% 1,063 1,032 3 % M Tons of Aggregate 341 583 (42 )% 1,183 1,533 (23 )% AverageNet Sales Price Concrete - Per Cubic Yard$ 122.36 $ 116.88 5 %$ 120.17 $ 115.66 4 % Aggregates - Per Ton$ 10.38 $ 8.96 16 %$ 10.25 $ 9.54 7 % Operating Earnings$ 4,115 $ 5,075 (19 )%$ 16,998 $ 15,748 8 %
Three months ended
Concrete and Aggregates Revenue decreased 3% to$42.4 million for the three months endedDecember 31, 2021 . The decline was mainly due to lower Sales Volume, primarily for Aggregates, which reduced Revenue by$3.3 million . This was partially offset by higher average gross selling prices, which increased Revenue by$2.2 million . Operating Earnings decreased 19% to approximately$4.1 million . The decrease was a result of lower Sales Volume and higher operating costs of approximately$0.5 million and$2.7 million , respectively, partially offset by higher average net sales prices of$2.2 million . The increase in operating costs was primarily due to higher cost of materials and delivery costs of approximately$0.5 million and$1.4 million , respectively.
Nine months ended
Concrete and Aggregates Revenue increased 4% to$139.9 million for the nine months endedDecember 31, 2021 . The improvement was mainly due to higher gross sales prices and Sales Volume, primarily for Concrete, which increased Revenue by$5.6 million and$3.6 million , respectively. This was partially offset by lower Sales Volume in Aggregates, which reduced Revenue by$3.3 million . Operating Earnings increased 8% to approximately$17.0 million . The increase was a result of higher gross sales prices of approximately$5.7 million . This was partially offset by lower Sale Volume and higher operating costs of approximately$0.2 million and$4.2 million , respectively. The increase in operating costs was primarily due to higher cost of materials and delivery costs of approximately$0.9 million and$3.4 million , respectively. 29
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Light Materials
GYPSUM WALLBOARD
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
2021 2020 Percentage Change 2021 2020 Percentage Change
(in thousands, except per MSF (in thousands, except per MSF
information) information)
Gross Revenue, as reported $ 163,584 $ 135,658 21 % $ 502,836 $ 397,018 27 %
Freight and Delivery Costs
billed to Customers (30,642 ) (28,235 ) 9 % (94,427 ) (83,334 ) 13 %
Net Revenue $ 132,942 $ 107,423 24 % $ 408,409 $ 313,684 30 %
Sales Volume (MMSF) 695 727 (4 )% 2,194 2,151 2 %
Average Net Sales Price ,
per MSF (1) $ 191.41 $ 147.87 29 % $ 186.16 $ 145.86 28 %
Freight, per MSF $ 44.09 $ 38.84 14 % $ 43.04 $ 38.74 11 %
Operating Margin, per MSF $ 87.54 $ 56.11 56 % $ 86.79 $ 55.66 56 %
Operating Earnings $ 60,841 $ 40,792 49 % $ 190,425 $ 119,723 59 %
(1) Net of freight per MSF.
Three months ended
Gypsum Wallboard Revenue increased 21% to$163.6 million for the three months endedDecember 31, 2021 . The improvement was due to higher gross sales prices, which added approximately$33.9 million of Revenue. This was partially offset by lower Sales Volume, which reduced Revenue by approximately$6.0 million . Our market share remained relatively consistent during the three months endedDecember 31, 2021 . Operating Earnings increased 49% to$60.8 million , primarily because of higher gross sales prices. The increase in gross sales prices positively affected Operating Earnings by approximately$33.9 million . This was partially offset by lower Sales Volume and higher operating costs, which adversely affected Operating Earnings by approximately$1.8 million and$12.1 million , respectively. The higher operating costs were primarily related to freight, energy, and raw material costs, which reduced Operating Earnings by approximately$3.6 million ,$3.5 million , and$4.4 million , respectively. The Operating Margin increased to 37% for the three months endedDecember 31, 2021 , primarily because of higher gross sales prices, partly offset by higher operating costs. 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.
Nine months ended
Gypsum Wallboard Revenue increased 27% to$502.8 million for the nine months endedDecember 31, 2021 . The increase was due to higher gross sales prices and Sales Volume, which contributed approximately$97.9 million and$7.9 million , respectively. Our market share remained relatively consistent during the nine months endedDecember 31, 2021 . Operating Earnings increased 59% to$190.4 million , primarily because of higher gross sales prices and Sales Volume. The increase in gross sales prices and Sales Volume positively affected Operating Earnings by approximately$97.9 million and$2.4 million , respectively. This was partially offset by higher operating costs, which adversely affected Operating Earnings by approximately$29.6 million . The higher operating costs were primarily related to freight, energy, and raw material costs which reduced Operating Earnings by approximately$9.4 million ,$8.6 million , and$7.8 million , respectively. The Operating Margin increased to 38% for the nine months endedDecember 31, 2021 , primarily because of higher gross sales prices, partly offset by higher operating costs. 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. 30
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RECYCLED PAPERBOARD
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
2021 2020 Percentage Change 2021 2020 Percentage Change
(in thousands, except per ton (in thousands, except per ton
information) information)
Gross Revenue, including
intersegment $ 49,763 $ 39,602 26 % $ 140,828 $ 122,417 15 %
Less intersegment Revenue (21,238 ) (15,864 ) 34 % (59,501 ) (50,432 ) 18 %
Gross Revenue, as reported $ 28,525 $ 23,738 20 % $ 81,327 $ 71,985 13 %
Freight and Delivery Costs
billed to Customers (2,120 ) (1,361 ) 56 % (5,691 ) (4,046 ) 41 %
Net Revenue $ 26,405 $ 22,377 18 % $ 75,636 $ 67,939 11 %
Sales Volume (M Tons) 81 79 3 % 252 243 4 %
Average Net Sales Price ,
per ton (1) $ 585.54 $ 484.92 21 % $ 535.55 $ 487.76 10 %
Freight, per ton $ 26.17 $ 17.23 52 % $ 22.58 $ 16.65 36 %
Operating Margin, per ton $ 29.00 $ 90.65 (68 )% $ 26.46 $ 85.22 (69 )%
Operating Earnings $ 2,349 $ 7,161 (67 )% $ 6,667 $ 20,708 (68 )%
(1) Net of freight per ton.
Three months ended
Recycled Paperboard Revenue increased 26% to$49.8 million during the three months endedDecember 31, 2021 . The increase was primarily due to higher gross sales prices and Sales Volume, which positively affected Revenue by$8.9 million and$1.3 million , respectively. Higher gross sales prices were related to the pricing provisions in our long-term sales agreements. Operating Earnings decreased 67% to$2.3 million , primarily because of higher operating costs, which reduced Operating Earnings by approximately$13.9 million . This was partially offset by higher gross sales prices and Sales Volume, which increased Operating Earnings by$8.9 million and$0.2 million , respectively. The increase in operating costs was primarily related to higher input costs, namely fiber and energy, which lowered Operating Earnings by approximately$11.2 million and$1.4 million , respectively. The Operating Margin declined to 5% because of increased operating costs, partially offset by higher gross sales prices. Although the Company has certain pricing provisions in its long-term sales agreements, prices are only adjusted at certain times throughout the year so the timing of price adjustments is not always in the same period as the change in costs.
Nine months ended
Recycled Paperboard Revenue increased 15% to
Operating Earnings decreased 68% to$6.7 million , primarily because of higher operating costs, which adversely affected Operating Earnings by$28.4 million . This was partially offset by higher gross sales prices and Sales Volume, which positively affected Operating Earnings by approximately$13.5 million and$0.8 million , respectively. The increase in operating costs was mainly related to higher input costs, namely fiber, and energy, which lowered Operating Earnings by approximately$24.7 million and$3.0 million , respectively. The Operating Margin decreased to 5% primarily because of higher operating costs, partially offset by increased gross sales prices. Although the Company has certain pricing provisions in its long-term sales agreements, prices are only adjusted at certain times throughout the year so the timing of price adjustments is not always in the same period as the change in costs. 31
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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.
LIQUIDITY AND CAPITAL RESOURCES
We believe at this time 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 to 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 below for a discussion of our revolving 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 Nine Months Ended December 31,
2021 2020
(dollars in thousands)
Net Cash Provided by Operating Activities $ 428,878 $ 542,017
Investing Activities
Additions to Property, Plant, and Equipment (55,188 ) (45,541 )
Proceeds from Sale of Businesses - 91,022
Net Cash Provided by (Used in) Investing
Activities (55,188 ) 45,481
Financing Activities
Increase (Decrease) in Credit Facility 100,000 (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 (20,538 ) (4,163 )
Purchase and Retirement of Common Stock (435,975 ) -
Proceeds from Stock Option Exercises 20,754 8,649
Premium Paid on Early Retirement of Senior Notes (8,407 ) -
Payment of Debt Issuance Costs (7,985 ) (1,718 )
Shares Redeemed to Settle Employee Taxes on Stock
Compensation (1,359 ) (1,130 )
Net Cash Provided by (Used in) Financing
Activities (624,818 ) (558,362 )
Net Increase (Decrease) in Cash, Cash Equivalents,
and Restricted Cash $ (251,128 ) $ 29,136
Net Cash Provided by Operating Activities decreased by $113.2 million to $428.9
million during the nine months ended December 31, 2021 . This decrease was
primarily attributable to changes in working capital of $166.9 million and lower
dividends from our Unconsolidated Joint Venture of $6.7 million . This was
partially offset by higher Net Earnings, adjusted for non-cash charges, of
approximately $60.5 million . The decline related to the changes in working
capital was primarily due to approximately $130.0 million of Income Tax
Receivables at March 31, 2020 being applied during the nine months ended
December 31, 2020 .
Working capital decreased by $270.6 million to $221.7 million at December 31,
2021 , because of lower Cash and Inventories of approximately $246.1 million and
$23.7 million , respectively, and higher Accounts Payable and Accrued Liabilities
of $23.7 million . This was partially offset by increased Accounts Receivable and
Income Tax Receivable of approximately $23.6 million and $6.1 million ,
respectively. The reduction in Cash was due to the redemption and repayment of
our 4.500% Senior Unsecured Notes due 2026 and Term Loan in July 2021 . The
reduction in inventory was due to our normal sales cycle where we build
inventory in the winter months to meet demand in the spring and summer.
The increase in Accounts Receivable at December 31, 2021 , was primarily related
to higher Revenue during the three months ended December 31, 2021 , compared with
the three months ended March 31, 2021 . As a percentage of quarterly sales
generated for the respective quarter, Accounts Receivable was approximately 37%
at December 31, 2021 and 43% at March 31, 2021 . 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 December 31, 2021 . Notes Receivable
are monitored on an individual basis, and no significant deterioration in the
collectability of our Notes Receivable was identified at December 31, 2021 .
33
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Our Inventory balance at December 31, 2021 declined by approximately $23.7
million from our balance at March 31, 2021 . Within Inventory, raw materials and
materials-in-progress decreased by approximately $29.6 million and finished
cement decreased by approximately $2.3 million . The decline in raw materials and
materials-in-progress and finished cement is consistent with our business cycle;
we generally build up clinker inventory over the winter months to meet the
demand for cement in the spring and summer. This was partially offset by
increases in Gypsum Wallboard, Recycled Paperboard, and Repair Parts inventories
of $2.0 million , $2.3 million , and $3.7 million , respectively. The increases in
repair parts inventory is primarily due to the build-up of inventory necessary
for our scheduled outages over the next several months. 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 Used in Investing Activities during the nine months ended December 31,
2021 was approximately $55.2 million , compared with Net Cash Provided by
Investing Activities of $45.5 million during the same period in 2020, a decrease
of approximately $100.7 million . The decrease was primarily related to the $91.0
million of cash received for the sale of businesses in fiscal 2021, and an
increase of $9.7 million in capital spending in fiscal 2022 compared with fiscal
2021. The increase in capital spending was mainly related 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 $624.8 million during
the nine months ended December 31, 2021 , compared with $558.4 million during the
nine months ended December 31, 2020 . During the first nine months of fiscal
2022, we had $436.0 million of share repurchases and retirements, increased
Dividends Paid to Shareholders of $16.3 million , and Debt Issuance costs of $6.3
million . This was partially offset by an increase of $12.2 million of cash
received from the exercise of stock options and a reduction in net borrowings of
$388.7 million compared with fiscal 2021.
Our debt-to-capitalization ratio and net-debt-to-capitalization ratio were 41.0%
and 40.5%, respectively, at December 31, 2021 , compared with 42.8% and 35.6%,
respectively, at March 31, 2021 .
Debt Financing Activities
Below is a summary of the Company's outstanding debt facilities atDecember 31, 2021 : Maturity Revolving Credit FacilityJuly 2026
2.500% Senior Unsecured Notes
See Footnote (M) 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 of our Revolving Credit Facility is$750.0 million untilJuly 1, 2026 . The Revolving Credit Facility also includes a swingline loan sublimit of$25.0 million , and a$40.0 million letter of credit facility. AtDecember 31, 2021 we had$100.0 million outstanding 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. Other than the Revolving Credit Facility, we have no additional 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. 34
-------------------------------------------------------------------------------- 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 or similar pandemics. 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. 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, 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 have approximately
Dividends
Dividends paid were$20.5 million and$4.2 million for the nine months endedDecember 31, 2021 and 2020, respectively. OnMay 19, 2021 , we announced the reinstatement of our quarterly dividend that was suspended in fiscal 2021. Each quarterly dividend payment is subject to review and approval by our Board of Directors, who will continue to evaluate our dividend payment amount on a quarterly basis.
Share Repurchases
During the nine months endedDecember 31, 2021 , our share repurchases were as follows: Total Number Maximum of Number Shares of Shares Purchased that May as Part of Yet be Total Number Publicly Purchased of Average Announced Under the Shares Price Paid Plans Plans Period Purchased Per Share or Programs or Programs April 1 through April 30, 2021 - $ - - May 1 through May 31, 2021 110,000 143.77 110,000 June 1 through June 30, 2021 315,500 146.16 315,500 Quarter 1 Totals 425,500$ 145.54 425,500 July 1 through July 31, 2021 298,044$ 137.82 298,044 August 1 through August 31, 2021 509,402 150.19
509,402
470,000
Quarter 2 Totals 1,277,446$ 145.54
1,277,446
October 1 through October 31, 2021 278,000$ 138.51
278,000
451,500
484,000 Quarter 3 Totals 1,213,500$ 155.03 1,213,500 Year-to-Date Totals 2,916,446$ 149.49 2,916,446 4,389,203 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 . ThroughDecember 31, 2021 , we have repurchased approximately 44.0 million shares. 35
-------------------------------------------------------------------------------- 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. During the nine months endedDecember 31, 2021 , the Company withheld from employees 8,973 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 Nine Months Ended December 31,
2021 2020
(dollars in thousands)
Land and Quarries $ 14,034 $ 5,306
Plants 28,660 30,026
Buildings, Machinery, and Equipment 12,494 10,209
Total Capital Expenditures $ 55,188 $ 45,541
Capital expenditures for fiscal 2022 are expected to range from $80.0 million to
$90.0 million and will be allocated across both 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.
36
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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, 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; fluctuations in or changes in the nature of activity in the oil and gas industry; 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) and their effects 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; 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, natural gas, coal and oil) and the cost of our raw materials 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, the COVID-19 pandemic and responses thereto designed to contain its spread and mitigate its public health effects, as well as their impact on economic conditions, capital and financial markets. These and other factors are described in the Company's Annual Report on Form 10-K for the fiscal year endedMarch 31, 2021 . 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. 37
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