XNYS:EXP Eagle Materials, Inc. Annual Report 10-K Filing - 3/31/2012
Effective Date 3/31/2012
| • FORM 10-K • COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES • SUBSIDIARIES OF THE COMPANY • CONSENT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM - ERNST & YOUNG LLP • CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 • CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 • CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 • CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 • MINE SAFETY DISCLOSURE • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended March 31, 2012 Commission File No. 1-12984
EAGLE MATERIALS INC. (Exact name of registrant as specified in its charter)
Delaware (State of Incorporation) 75-2520779 (I.R.S. Employer Identification No.) 3811 Turtle Creek Blvd, Suite 1100, Dallas, Texas 75219 (Address of principal executive offices) (214) 432-2000 (Registrant’s telephone number) Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ¨ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x The aggregate market value of the voting stock held by nonaffiliates of the Company at September 30, 2011 (the last business day of the registrants’ most recently completed second fiscal quarter) was approximately $706.1 million. As of May 24, 2012, the number of outstanding shares of common stock was:
DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Annual Meeting of Stockholders of Eagle Materials Inc. to be held on August 7, 2012 are incorporated by reference in Part III of this Report.
TABLE OF CONTENTS
Eagle Materials Inc. (the “Company” or “EXP” which may be referred to as “we”, “our” or “us”) was founded in 1963 as a building materials subsidiary of Centex Corporation (“Centex”), and we operated as a public company under the name Centex Construction Products, Inc. from April 1994 to January 30, 2004, at which time Centex completed a tax-free distribution of its shares in EXP to its shareholders (the “Spin-off”). Since the date of the Spin-off, we have no longer been affiliated with Centex. Our primary businesses are the manufacture and distribution of gypsum wallboard and the manufacture and sale of cement. Gypsum wallboard is distributed throughout the U.S. with particular emphasis in the geographic markets nearest to our production facilities. We sell cement in four regional markets, including northern Nevada and California, the greater Chicago area, the Rocky Mountain region and Texas. Our gypsum wallboard business is supported by our recycled paperboard business, while our cement business is supported by our concrete and aggregates business. At March 31, 2012, we operated four cement plants (one of which belongs to our joint venture company), four gypsum wallboard plants, one recycled paperboard plant, nine concrete batching plants and two aggregates facilities. One of our gypsum wallboard plants has been temporarily idled since 2009, pending market demand improvement. Our products are commodities that are essential in the construction and renovation of houses, roads, bridges, commercial and industrial buildings and other, newer generation structures like wind farms. Demand for these products is generally cyclical and seasonal, depending on economic and geographic conditions. Our operations are geographically diverse, which subject us to the economic conditions in each such geographic market as well as the national construction market. General economic downturns or localized downturns in the regions where we have operations could have a material adverse effect on our business, financial condition and results of operations. Our gypsum wallboard and paperboard operations are more national in scope and shipments are made throughout the continental U.S., except for the northeast, and therefore are more impacted by national downturns. The markets of our cement companies are more regional due to the low value-to-weight ratio of cement, which generally limits shipments to a 150 mile radius of the plants by truck and up to 300 miles by rail. Concrete and aggregates are primarily local businesses that serve the areas immediately surrounding Austin, Texas and north of Sacramento, California. Cement, concrete and aggregates demand is more sensitive to change in local and regional markets and economies than the national market, as well as being more susceptible to seasonal impact due to adverse weather. Our goal, through relentless and disciplined continuous improvement, is to be the lowest cost producer in each of the markets in which we compete. As such, we will continue to focus on reducing costs and improving our operations, recognizing that being the lowest cost producer is a key to our success. While each of our segments has been impacted by the economic downturn, underlying economic fundamentals may be improving in the U.S. Cement consumption in the United States, as estimated by the Portland Cement Association, increased 3% to 77.5 million short tons in calendar 2011 as compared to 75.3 million short tons in calendar 2010, with imported cement consumption consistent at approximately 10% of total sales in calendar 2011. The increase in consumption benefited EXP, as our cement sales volumes increased approximately 7% in fiscal 2012, as compared to fiscal 2011. The increases occurred in all of our markets, except Texas, which remained sold-out. Utilization of our gypsum wallboard manufacturing facilities was approximately 50% during fiscal year 2012, which was consistent with the industry as a whole. Recycled paperboard division earnings increased due to an increase in sales of higher margin gypsum paper, and relatively flat costs of recycled fiber and fiber freight. Although the residential housing market may improve in fiscal 2013, we do not expect this improvement to materially increase industry capacity utilization.
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We continue to pursue opportunities in businesses which are naturally adjacent to our existing core businesses and would allow us to leverage our core competencies and existing infrastructure and customer relationships. The entry into any such new businesses requires capital expenditures and the investment of management time and other resources, and is subject to the risks associated with any new business development. During fiscal 2012, we purchased land with mineral reserves in the Midwest for the purpose of developing a business for mining and processing of sand that could be used by oil services businesses and other industrial users. Our pursuit of this opportunity is currently in the initial stages with the focus on permitting, plant design, logistics and market development; however, during fiscal 2013, as we continue to develop this business, we anticipate additional capital expenditures in the range of $25 million to $50 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary”. We will also continue to focus on growth through acquisitions or expansion of existing facilities that we believe provide an opportunity to realize an appropriate return on investment and increased profitability for our shareholders. While our businesses are separated into four segments, these four segments are generally related to two businesses, and are therefore discussed as follows: Cement and Concrete and Aggregates, and Gypsum Wallboard and Recycled Paperboard. A description of these business segments can be found on pages 2-12. We conduct one of our four cement plant operations through a joint venture, Texas Lehigh Cement Company LP, which is located in Buda, Texas. We own a 50% interest in the joint venture and account for our interest using the equity method of accounting. However, for segment reporting purposes, we proportionately consolidate our 50% share of the cement joint venture’s revenues and operating earnings, which is consistent with the way management organizes the segments within the Company for making operating decisions and assessing performance. Revenues from external customers, operating earnings, identifiable assets, depreciation, depletion and amortization, and capital expenditures by segment are presented in Note (F) of the Notes to the Consolidated Financial Statements on pages 56-59. CEMENT, CONCRETE AND AGGREGATES OPERATIONS Company Operations Cement. Our cement production facilities are located in or near Buda, Texas; LaSalle, Illinois; Laramie, Wyoming; and Fernley, Nevada. The LaSalle, Illinois, Laramie, Wyoming and Fernley, Nevada facilities are wholly-owned. The Buda, Texas plant is owned by Texas Lehigh Cement Company LP, a limited partnership joint venture owned 50% by us and 50% by Lehigh Cement Company LLC, a subsidiary of Heidelberg Cement AG. Our LaSalle, Illinois plant operates under the name of Illinois Cement Company; the Laramie, Wyoming plant operates under the name of Mountain Cement Company and the Fernley, Nevada plant operates under the name of Nevada Cement Company.
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Cement is the basic binding agent for concrete, a primary construction material. Our modern cement plants utilize dry process technology and at present approximately 85% of our clinker capacity is from preheater or preheater/pre-calciner kilns. The following table sets forth certain information regarding these plants:
Our net cement production, including our 50% share of the cement Joint Venture production, totaled 2.4 million short tons in fiscal 2012 and 2.3 million short tons in fiscal 2011. Total net cement sales, including our 50% share of cement sales from the Joint Venture, were 2.7 million short tons and 2.5 million short tons in fiscal 2012 and fiscal 2011, respectively. The Joint Venture also owns a minority interest in an import terminal in Houston, Texas and can purchase up to 495,000 short tons annually from the cement terminal. Concrete and Aggregates. Readymix concrete is a versatile, low-cost building material used in almost all construction. The production of readymix concrete involves the mixing of cement, sand, gravel, or crushed stone and water to form concrete, which is then sold and distributed to numerous construction contractors. Concrete is produced in batch plants and transported to the customer’s job site in mixer trucks. The construction aggregates business consists of the mining, extraction, production and sale of crushed stone, sand, gravel and lightweight aggregates such as expanded clays and shales. Construction aggregates of suitable characteristics are employed in virtually all types of construction, including the production of readymix concrete and asphaltic mixes used in highway construction and maintenance. We produce and distribute readymix concrete from company-owned sites north of Sacramento, California and in Austin, Texas. The following table sets forth certain information regarding these operations:
We conduct aggregate operations near our concrete facilities in northern California and Austin, Texas. Aggregates are obtained principally by mining and extracting from quarries owned or leased by the Company. The following table sets forth certain information regarding these operations:
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Our total net aggregate sales were 2.2 million tons in fiscal 2012 and 2.6 million tons in fiscal 2011. Total aggregates production was 2.9 million tons and 2.7 million tons for fiscal 2012 and fiscal 2011, respectively. A portion of our total aggregates production is used internally by our readymix concrete operations, both in Texas and California. Raw Materials and Fuel Supplies Cement. The principal raw material used in the production of portland cement is calcium carbonate in the form of limestone. Limestone is obtained principally through mining and extraction operations conducted at quarries that we own or lease and are located in close proximity to our plants. We believe that the estimated recoverable limestone reserves owned or leased by us will permit each of our plants to operate at our present production capacity for at least 30 years. Other raw materials used in substantially smaller quantities than limestone are sand, clay, iron ore and gypsum. These materials are readily available and can either be obtained from Company-owned or leased reserves or purchased from outside suppliers. All of the limestone reserves are deemed to be probable under the definition provided by Industry Guide 7. Coal and petroleum coke are the primary fuels used in our cement plants, but the plants are equipped to burn natural gas as an alternative. The cost of delivered coal and petroleum coke rose in fiscal 2012 as compared to fiscal 2011, primarily due to increased freight costs. We have not used hazardous waste-derived fuels in any of our plants. Electric power is also a major cost component in our manufacturing process and we have sought to diminish overall power costs by adopting interruptible power supply agreements at certain locations. These agreements may expose us to some production interruptions during periods of power curtailment. Concrete and Aggregates. We supply from our manufactured cement facilities approximately 100% and 50% of the cement requirements for our Austin and northern California concrete operations, respectively. We supply approximately 40% and 80%, respectively, of our aggregates requirements for our Austin and northern California concrete operations. We obtain the balance of our cement and aggregates requirements from multiple sources in each of these areas. We mine and extract limestone, sand and gravel, the principal raw materials used in the production of aggregates, from quarries owned or leased by us and located near our plants. The northern California quarry is estimated to contain over one billion tons of sand and gravel reserves. The Austin, Texas quarry is covered by a lease which expires in 2060. Based on its current production capacity, we estimate our northern California and Austin, Texas quarries contain over 100 years and approximately 50 years of reserves, respectively. Sales and Distribution Cement. The principal sources of demand for cement are infrastructure, commercial construction and residential construction, with public works contracts comprising over 50% of total demand. Cement consumption increased 3% during calendar 2011 from calendar 2010, and the Portland Cement Association predicts cement consumption will increase another 4% in calendar 2012. Demand for cement is seasonal, particularly in northern states where inclement winter weather often affects construction activity. Cement sales are generally greater from spring through the middle of autumn than during the remainder of the year; however there was a very mild winter in fiscal 2012 that contributed to the increase in cement consumption. The impact to our business of regional construction cycles may be mitigated to some degree by our geographic diversification.
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The following table sets forth certain information regarding the geographic areas served by each of our cement plants and the location of our distribution terminals in each area. We have a total of 11 cement storage and distribution terminals that are strategically located to extend the sales areas of our plants.
Cement is distributed directly to our customers mostly through customer pickups, as well as by common carriers from our plants or distribution terminals. We transport cement principally by rail to our storage and distribution terminals, and no single customer accounted for 10% or more of our cement segment sales during fiscal 2012. Sales are made on the basis of competitive prices in each market and, as is customary in the industry, we do not typically enter into long-term sales contracts. The cement industry is extremely competitive as a result of multiple domestic suppliers and the importation of foreign cement through various terminal operations. Approximately 85% of the U.S. cement industry is owned by foreign international companies. Competition among producers and suppliers of cement is based primarily on price, with consistency of quality and service to customers being important but of lesser significance. Price competition among individual producers and suppliers of cement within a geographic area is intense because of the fungible nature of the product. Because of cement’s low value-to-weight ratio, the relative cost of transporting cement on land is high and limits the geographic area in which each company can market its products profitably; therefore, the U.S. cement industry is fragmented into regional geographic areas rather than a single national selling area. No single cement company has a distribution of plants extensive enough to serve all geographic areas, so profitability is sensitive to shifts in the balance between regional supply and demand. Cement imports into the U.S. occur primarily to supplement domestic cement production or to supply a particular region. Cement is typically imported into deep water ports or transported on the Mississippi River system near major population centers to take advantage of lower waterborne freight costs versus higher truck and rail transportation costs that U.S. based manufacturers incur to deliver into the same areas. The Portland Cement Association estimates that imports represented approximately 9% of cement used in the U.S. during calendar 2011, 8% during calendar 2010, and 10% in calendar 2009. Based on the normal distribution of cement into the market, we believe that approximately 5% of the total consumption will consistently be served by imported cement. Concrete and Aggregates. Demand for readymix concrete and aggregates largely depend on local levels of construction activity. Construction activity is also subject to weather conditions, the availability of financing at reasonable rates and overall fluctuations in local economies, and therefore tends to be cyclical. We sell readymix concrete to numerous contractors and other customers in each plant’s selling area. Our batch plants in Austin and northern California are strategically located to serve each selling area. Concrete is delivered from the batch plants by company-owned trucks.
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We sell aggregates to building contractors and other customers engaged in a wide variety of construction activities. Aggregates are delivered from our aggregate plants by common carriers and customer pick-up. None of our customers accounted for 10% or more of our segment revenues during fiscal 2012. We are continuing our efforts to secure a rail link from our principal aggregates deposit north of Sacramento, California to supply extended markets in northern California. Both the concrete and aggregates industries are highly fragmented, with numerous participants operating in each local area. Because the cost of transporting concrete and aggregates is very high relative to product values, producers of concrete and aggregates typically can profitably sell their products only in areas within 50 miles of their production facilities. Barriers to entry in each industry are low, except with respect to environmental permitting requirements for new aggregates production facilities and zoning of land to permit mining and extraction of aggregates. Additionally, many of the larger concrete and aggregate companies are owned by cement manufacturers, which increase price competition as these companies seek to sell their cement in a soft economy. Environmental Matters Cement. Our cement operations are subject to numerous federal, state and local laws and regulations pertaining to health, safety and the environment. Some of these laws, such as the federal Clean Air Act and the federal Clean Water Act (and analogous state laws) impose environmental permitting requirements and govern the nature and amount of emissions that may be generated when conducting particular operations. Some laws, such as the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) (and analogous state laws) impose obligations to clean up or remediate spills of hazardous materials into the environment. Other laws require us to reclaim certain land upon completion of extraction and mining operations in our quarries. We believe that we have obtained all the material environmental permits that are necessary to conduct our operations. We further believe that we are conducting our operations in substantial compliance with these permits. In addition, none of our manufacturing sites is listed as a CERCLA “Superfund” site. Four environmental issues involving the cement manufacturing industry deserve special mention. The first issue involves cement kiln dust or CKD. The federal Environmental Protection Agency (“EPA”) has been evaluating the regulatory status of CKD under the Resource Conservation and Recovery Act (“RCRA”) for a number of years. In 1999, the EPA proposed a rule that would allow states to regulate properly-managed CKD as a non-hazardous waste under state laws and regulations governing solid waste. In contrast, CKD that was not properly managed would be treated as a hazardous waste under RCRA. In 2002, the EPA confirmed its intention to continue to exempt properly-managed CKD from the hazardous waste requirements of RCRA. The agency announced that it would collect additional data over the next three to five years to determine if the states’ regulation of CKD is effective. Although the EPA had previously indicated that it continues to consider an approach whereby it would finalize its 1999 proposal to exempt properly-managed CKD wastes and establish protective CKD management standards, as of May 2012 the EPA still has not finalized the 1999 proposal. Based on currently available information, it is uncertain whether or when this proposal will be finalized. Nevertheless, in the interim many state environmental agencies have been using the EPA’s 1999 proposed CKD management standards as general industry guidelines. Currently, substantially all CKD produced in connection with our ongoing operations is recycled, and therefore such CKD is not viewed as a waste under RCRA. However, CKD was historically collected and stored on-site at our Illinois, Nevada and Wyoming cement plants and at a former plant site in Corpus Christi, Texas, which is no longer in operation. If either the EPA or the states decide to impose management standards on this CKD at some point in the future, we could incur additional costs to comply with those requirements with respect to our historically collected CKD. CKD that comes in contact with water might produce a leachate with an alkalinity high enough to be classified as hazardous and might also leach certain hazardous trace metals therein. A second industry environmental issue involves the historical disposal of refractory brick containing chromium. Such refractory brick was formerly used widely in the cement industry to line cement kilns. We currently do not use refractory brick containing chromium, and we crush spent refractory brick which is then used as raw feed in the kiln.
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A third industry environmental issue involves the potential regulation of our emission of GHG, including carbon dioxide. The consequences of GHG emission reduction regulations for our cement operations will likely be significant because (1) the cement manufacturing process requires the combustion of large amounts of fuel to generate very high kiln temperatures, and (2) the production of carbon dioxide is a byproduct of the calcination process, whereby carbon dioxide is removed from calcium carbonate to produce calcium oxide. In the absence of comprehensive federal legislation regulating emissions of greenhouse gases, or “GHGs”, the EPA has taken steps that would result in the regulation of GHGs as pollutants under the Clean Air Act. On September 22, 2009, the EPA issued a “Mandatory Reporting of Greenhouse Gases” final rule, which took effect December 29, 2009. This rule establishes a new comprehensive scheme requiring operators of stationary sources in the United States emitting more than established annual thresholds of GHGs to inventory and report their GHG emissions annually on a facility-by-facility basis. In addition, on December 15, 2009, the EPA published a final rule finding that current and projected concentrations of six key GHGs in the atmosphere threaten public health and welfare. This rule, according to EPA, will trigger construction and operating permit requirements for large stationary sources, including cement plants. In a final rule issued on May 13, 2010, known as EPA’s “Tailoring Rule,” any modification or expansion of our existing plants (or construction of a new plant) after January 1, 2011 that triggered New Source Review (“NSR”) requirements for non-GHG emissions would also trigger NSR for GHG if our proposed GHG emissions equaled or exceeded 75,000 tons per year. This would require the installation of controls on those GHG emissions. Effective July 1, 2011, any modification or expansion of our existing plants that results in an increase in GHG emissions of 75,000 tons or more per year or any construction of a new plant that results in an increase in GHG emissions of 100,000 tons or more per year will require the plant to meet NSR and the GHG control requirements even if NSR is not triggered for any other pollutant. Furthermore, EPA has committed to periodically reviewing the tonnage thresholds for new and modified sources and may lower them in the future. These limitations on emissions of GHGs from our equipment or operations could require us to incur costs to reduce such emissions and could ultimately affect our operations and our ability to obtain air permits for new or modified facilities. Several states have also taken measures to reduce emissions of greenhouse gases, primarily through the planned development of GHG inventories or registries or regional GHG “cap and trade” programs. Many states have also joined together to form regional initiatives, which include the Regional Greenhouse Gas Initiative in the northeast, the Western Regional Climate Action Initiative and the Midwestern Greenhouse Gas Accord. It is not possible at this time to predict how any future legislation that may be enacted or regulations that may be adopted to address GHG emissions would impact our business. However, any imposition of raw materials or production limitations, fuel-use or carbon taxes, or emission limitations or reductions could have a significant impact on the cement manufacturing industry and a material adverse effect on us and our results of operations. The fourth industry environmental issue is that in September 2010 the EPA promulgated final regulations for certain Hazardous Air Pollutants (“HAPs”) for portland cement manufacturing. For specific HAPs, the final rule requires cement plants to meet certain emission and operating standards. The new rule sets limits on mercury emissions from existing Portland cement kilns and increases the stringency of emission limits for new kilns. The rule sets emission limits for total hydrocarbons, and also sets emission limits for particulate matter as a surrogate for non-volatile metal HAPS, from cement kilns of all sizes, and reduces hydrochloric acid emissions from kilns that are large emitters. As a result of industry challenges to the regulations, the U.S. Court of Appeals for the D.C. Circuit remanded certain provisions of the regulations to EPA for review in December 2011 in Portland Cement Ass’n v. EPA, 665 F.3d 177 (D.C. Cir. 2011) and EPA proposed a settlement agreement in May 2012 with industry petitioners that would require EPA to agree to reconsider certain other provisions of the regulations. If the settlement agreement is finalized, EPA has agreed to issue revisions to the regulations by December 2012. We do not believe we would be placed at a competitive disadvantage by such rules. We believe that our current procedures and practices in our operations, including those for handling and managing hazardous materials, are consistent with industry standards and are in substantial compliance with applicable environmental laws and regulations. Nevertheless, because of the complexity of our operations and the environmental laws to which we are subject, there can be no assurance that past or future operations will not result in violations, remediation costs or other liabilities or claims. Moreover, we cannot predict what environmental laws will be enacted or adopted in the future or how such future environmental laws or regulations will be administered or interpreted. Compliance with more stringent environmental laws, or stricter interpretation of existing environmental laws, could necessitate significant capital outlays. Concrete and Aggregates. The concrete and aggregates industry is subject to environmental regulations similar to those governing our cement operations. None of our concrete or aggregates operations are presently the subject of any material local, state or federal environmental proceedings or inquiries.
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Capital Expenditures Cement. We had capital expenditures related to compliance with environmental regulations applicable to our cement operations of $0.5 million during fiscal 2012 and anticipate spending an additional $1.4 million during fiscal 2013. GYPSUM WALLBOARD AND RECYCLED PAPERBOARD OPERATIONS Company Operations Gypsum Wallboard. We currently own five gypsum wallboard manufacturing facilities; however, we temporarily idled our gypsum manufacturing facility in Bernalillo, N.M. beginning in December 2009, due to low demand. We anticipate re-opening this facility when business conditions improve. There are four primary steps in the gypsum wallboard manufacturing process: (1) gypsum is mined and extracted from the ground (or, in the case of synthetic gypsum, received from a power generation company); (2) the gypsum is then calcined and converted into plaster; (3) the plaster is mixed with various other materials and water to produce a mixture known as slurry, which is extruded between two continuous sheets of recycled paperboard on a high-speed production line and allowed to harden; and (4) the sheets of gypsum wallboard are then cut to appropriate lengths, dried and bundled for sale. Gypsum wallboard is used to finish the interior walls and ceilings in residential, commercial and industrial structures. The following table sets forth certain information regarding our plants:
Our gypsum wallboard production totaled 1,650 MMSF in fiscal 2012 and 1,695 MMSF in fiscal 2011. Total gypsum wallboard sales were 1,633 MMSF in fiscal 2012 and 1,665 MMSF in fiscal 2011. Total wallboard production as a percentage of current rated capacity was approximately 50% in both fiscal 2012 and 2011. Our operating rates were consistent with industry average capacity utilization in both fiscal 2012 and fiscal 2011. Recycled Paperboard. Our recycled paperboard manufacturing operation, which we refer to as Republic Paperboard Company (“Republic”), was acquired in November 2000 and is located in Lawton, Oklahoma. Our paperboard operation has a highly technologically advanced paper machine designed primarily for gypsum liner production. The paper’s uniform cross-directional strength and finish characteristics facilitate the efficiencies of new high-speed wallboard manufacturing lines. Although the machine was designed primarily to manufacture gypsum liner products, we are also able to manufacture alternative products, including containerboard grades (such as linerboard and medium) and lightweight packaging grades (such as bag liner). In addition, recycled industrial paperboard grades (tube/core stock and protective angle board stock) are produced to maximize manufacturing efficiencies.
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Our paper machine allows the paperboard operation to manufacture high-strength gypsum liner that is approximately 10-15% lighter in basis weight than generally available in the U.S. The low-basis weight product utilizes less recycled fiber to produce paper that, in turn, absorbs less moisture during the gypsum wallboard manufacturing process resulting in reduced drying time and energy (natural gas) usage. The low-basis weight paper also reduces the overall finished board weight, providing wallboard operations with more competitive transportation costs for both the inbound and outbound segments. Raw Materials and Fuel Supplies Gypsum Wallboard. We mine and extract natural gypsum rock, the principal raw material used in the manufacture of gypsum wallboard, from mines and quarries owned, leased or subject to mining claims owned by the Company and located near our plants. We also use synthetic gypsum at our Georgetown, South Carolina plant that we obtain through a supply agreement with Santee Cooper, a South Carolina utility company. Two leases cover the New Mexico reserves; one with the Pueblo of Zia and the second with the State of New Mexico. Gypsum ore reserves at the Gypsum, Colorado plant are contained within a total of 115 placer claims encompassing 2,300 acres. Included in this are 94 unpatented mining claims where mineral rights can be developed upon completion of permitting requirements. We currently own land with over 17 million tons of gypsum in the area of Duke, Oklahoma, with an additional 4 million tons controlled through a lease agreement. All of the gypsum reserves are deemed to be probable under the definition provided by Industry Guide 7. Other gypsum deposits are located near the plant in Duke, which we believe may be obtained at reasonable cost when needed. We are currently in the fifth year of a sixty year supply agreement (original twenty year term with two twenty year extension options) with a public utility in South Carolina for our synthetic gypsum. It is anticipated that the public utility will provide adequate gypsum for the foreseeable future. If the utility is unable to provide the agreed-upon amount of gypsum, it is responsible for providing gypsum from a third party to fulfill its obligations. Through our modern low cost paperboard mill we manufacture sufficient quantities of paper necessary for our gypsum wallboard production. Paper is a significant cost component in the manufacture of gypsum wallboard, currently representing approximately one-third of our cost of production. Our gypsum wallboard manufacturing operations use large quantities of natural gas and electrical power. A significant portion of the Company’s natural gas requirements for our gypsum wallboard plants are currently provided by four gas producers under gas supply agreements expiring in May 2013 for Colorado and New Mexico, January 2013 for South Carolina and May 2013 for Oklahoma. If the agreements are not renewed, we anticipate being able to obtain our gas supplies from other suppliers at competitive prices. Electrical power is supplied to our New Mexico plants at standard industrial rates by a local utility. Our Albuquerque plant utilizes an interruptible power supply agreement, which may expose it to some production interruptions during periods of power curtailment. Power for our Gypsum, Colorado facility is generated at the facility by a cogeneration power plant that we own. Currently, the cogeneration power facility supplies power and waste hot gases for drying to the gypsum wallboard plant. We do not sell any power to third parties. Gas costs represented approximately 10% of our production costs in fiscal 2012. Recycled Paperboard. The principal raw materials are recycled paper fiber (recovered waste paper), water and specialty paper chemicals. The largest waste paper source used by the operation is old cardboard containers (known as OCC). A blend of high grades (white papers consisting of ink-free papers such as news blank and unprinted papers) is used in the gypsum liner facing paper and white top linerboard and bag liner grades. We believe that an adequate supply of OCC recycled fiber will continue to be available from sources located within a 600 mile radius of the paper mill. The majority of the recycled fiber purchased is delivered via truck, with occasional limited amounts received by rail. Prices are subject to market fluctuations based on generation of material (supply), demand and the presence of the export market. The current outlook for fiscal year 2013 is for waste paper prices to decrease slightly relative to fiscal year 2012 but to remain elevated above historic pricing. Current gypsum liner customer contracts include price escalators that partially offset/compensate for changes in raw material fiber prices.
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The chemicals used in the paper making operation, including size, retention aids, dry strengths additives, biocides and bacteria controls, are readily available from several manufacturers at competitive prices. We continue to source the majority of these chemicals from a supplier with whom we have had an established business relationship for several years. The manufacture of recycled paperboard involves the use of large volumes of water in the production process. We have an agreement with the City of Lawton municipal services for supply of water to Republic. Electricity, natural gas and other utilities are available to us at either contracted rates or standard industrial rates in adequate supplies. These utilities are subject to standard industrial curtailment provisions. Paperboard operations are generally large consumers of energy, primarily natural gas and electricity. During fiscal 2012, natural gas costs declined throughout the year and were lower compared to fiscal year 2011. Natural gas costs continued to be impacted by increased transportation costs from the transportation service company. Upward movement in natural gas cost has a negative impact on production costs and operating earnings. The paper mill has an electricity supply agreement with Public Service of Oklahoma (PSO); however, this power company has a large dependency on natural gas, which could impact our electricity rates. Oklahoma is a regulated state for electricity services and as such all rate change requests must be presented to the Oklahoma Corporation Commission for review and approval before implementation. Sales and Distribution Gypsum Wallboard. The principal sources of demand for gypsum wallboard are (i) residential construction, (ii) repair and remodeling, (iii) non-residential construction, and (iv) other markets such as exports and manufactured housing, which we estimate accounted for approximately 35%, 54%, 9% and 2%, respectively, of calendar 2011 industry sales. The gypsum wallboard industry remains highly cyclical; and closely follows construction industry cycles, particularly housing construction. Demand for wallboard can be seasonal and is generally greater from spring through the middle of autumn. We sell gypsum wallboard to numerous building materials dealers, gypsum wallboard specialty distributors, lumber yards, home center chains and other customers located throughout the United States. Gypsum wallboard is sold on a delivered basis, mostly by truck. We generally utilize third-party common carriers for deliveries. Two customers with multiple shipping locations accounted for approximately 20% of our total gypsum wallboard sales during fiscal 2012. The loss of either of these customers could have a material adverse effect on the financial results of the gypsum wallboard segment. Although gypsum wallboard is distributed principally in local areas, certain industry producers (including the Company) have the ability to ship gypsum wallboard by rail outside their usual regional distribution areas to regions where demand is strong. We own or lease 100 railcars for transporting gypsum wallboard. In addition, in order to facilitate distribution in certain strategic areas, we maintain a distribution center in New Mexico and two reload yards in California. Our rail distribution capabilities permit us to service customers in markets on both the east and west coasts. During fiscal 2012, less than 5% of our sales volume of gypsum wallboard was transported by rail. Equipment availability for truck shipments is expected to be in tight supply during fiscal 2013; however, we do not anticipate an increase in rail shipments due to cost and scheduling constraints. There are eight manufacturers of gypsum wallboard in the U.S. operating a total of approximately 60 plants. We estimate that the three largest producers—USG Corporation, National Gypsum Company and Koch Industries—account for approximately 60% of gypsum wallboard sales in the U.S. Due to the commodity nature of the product, competition is based principally on price, which is highly sensitive to changes in supply and demand. Product quality and customer service are also important to the customer. Wallboard production capacity in the United States is currently estimated at approximately 34 billion square feet per year. One new competitive plant is expected to be added in North Carolina during calendar year 2012. The Gypsum Association, an industry trade group, estimates that total calendar 2011 gypsum wallboard shipments by U.S. manufacturers were approximately 17.0 billion square feet, resulting in average industry capacity utilization in calendar 2011 of approximately 50%.
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Recycled Paperboard. Our manufactured recycled paperboard products are sold to gypsum wallboard manufacturers and other industrial users. During fiscal 2012, approximately 30% of the recycled paperboard sold by our paper mill was consumed by the Company’s gypsum wallboard manufacturing operations, approximately 20% was sold to CertainTeed, pursuant to a paper supply contract (the “CertainTeed Agreement”), and the remainder was shipped to other gypsum liner manufacturers, bag producers, containerboard consumers and other manufacturers. The existing CertainTeed Agreement was originally entered into by Republic Paperboard and James Hardie Gypsum, Inc. in 1999; however, the James Hardie North American gypsum wallboard operations were acquired by BPB Gypsum, whose operations were then purchased during fiscal 2006 by St. Gobain. St. Gobain’s North American operations conduct business under the CertainTeed trade name. The loss of CertainTeed as a customer or a termination or reduction of CertainTeed’s production of gypsum wallboard, unless replaced by a commercially similar arrangement, could have a material adverse effect on the Company. Environmental Matters Gypsum Wallboard. The gypsum wallboard industry is subject to numerous federal, state and local laws and regulations pertaining to health, safety and the environment. Some of these laws, such as the federal Clean Air Act and the federal Clean Water Act (and analogous state laws), impose environmental permitting requirements and govern the nature and amount of emissions that may be generated when conducting particular operations. Some laws, such as CERCLA (and analogous state laws), impose obligations to clean up or remediate spills of hazardous materials into the environment. Other laws require us to reclaim certain land upon completion of extraction and mining operations in our quarries. None of our gypsum wallboard operations is the subject of any local, state or federal environmental proceedings or inquiries. We do not, and have not, used asbestos in any of our gypsum wallboard products. In June 2010, the EPA released proposed regulations to address the storage and disposal of coal combustion products, which include fly ash and flue gas desulfurization gypsum (“synthetic gypsum”). We use synthetic gypsum in wallboard manufactured at our Georgetown, SC plant. In its release, the EPA is proposing two alternative regulations. Under one proposal, the EPA would characterize coal combustion products destined for disposal as a special waste under Subtitle C of the Resource Conservation and Recovery Act (“RCRA”) (the subtitle that regulates hazardous waste). However, under this proposal, beneficial use of coal combustion products, including synthetic gypsum used in the manufacture of wallboard, would continue to be exempt from Subtitle C of RCRA under the Bevill Amendment and not warrant federal regulation. Under the other proposal, the EPA would continue to regulate coal combustion products under Subtitle D of RCRA, which regulates solid wastes that are not hazardous wastes. The EPA has emphasized that it does not wish to discourage the beneficial reuse of coal combustion products under either of its two proposals. The EPA continues to review the public comments and associated data that were received in response to its 2010 proposals. Since the EPA’s regulatory process is on-going, it is possible that these proposals could be modified or revised, and it is not possible to accurately estimate how any final rule would impact our business or which regulation will be ultimately adopted. However, it is possible that EPA’s rulemaking could affect our business, financial condition and results of operations depending on how any such regulation affects our costs or the demand for our products. Our gypsum wallboard manufacturing process combusts a significant amount of fuel, especially natural gas, and our operations could therefore be subject to future regulation of GHG emissions. For a more detailed discussion of this issue, see the “Environmental Matters” section of our cement business description on pages 6-7. Although our gypsum wallboard operations could be adversely affected by federal, regional or state climate change initiatives, at this time, it is not possible to accurately estimate how future laws or regulations addressing GHG emissions would impact our business. However, any imposition of raw materials or production limitations, fuel-use or carbon taxes or emission limitations or reductions could have a significant impact on the gypsum wallboard manufacturing industry and a material adverse effect on the financial results of our operations.
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Capital Expenditures Gypsum Wallboard and Recycled Paperboard. We had no capital expenditures related to compliance with environmental regulations applicable to our gypsum wallboard and recycled paperboard operations during fiscal 2012, and we do not anticipate any material capital expenditures during fiscal 2013. As of March 31, 2012, we had approximately 1,350 employees, of which 400 were employed under collective bargaining agreements and various supplemental agreements with local unions. WHERE YOU CAN FIND MORE INFORMATION We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports available free of charge through the investor relations page of our website, located at www.eaglematerials.com as soon as reasonably practicable after they are filed with or furnished to the SEC. This reference to our website is merely intended to suggest where additional information may be obtained by investors, and the materials and other information presented on our website are not incorporated in and should not otherwise be considered part of this Report. Alternatively, you may contact our investor relations department directly at (214) 432-2000 or by writing to Eagle Materials Inc., Investor Relations, 3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219.
The foregoing discussion of our business and operations should be read together with the risk factors set forth below. They describe various risks and uncertainties to which we are or may become subject, many of which are outside of our control. These risks and uncertainties, together with other factors described elsewhere in this Report, have affected, or may in the future affect, our business, operations, financial condition and results of operations in a material and adverse manner. We are affected by the level of demand in the construction industry, which is currently experiencing a significant downturn. Demand for our products is directly related to the level of activity in the construction industry, which includes residential, commercial and infrastructure construction. In particular, the downturn in residential construction and commercial construction has impacted, and will likely continue to adversely impact, our wallboard business. The residential construction industry is currently in the midst of a significant downturn. A similar downturn has occurred in commercial construction as well. Furthermore, activity in the infrastructure construction business is directly related to the amount of government funding available for such projects, which is very limited in light of the budget constraints being experienced by federal, state and local governments. Any decrease in the amount of government funds available for such projects or any decrease in construction activity in general (including a continued weakness in residential construction or commercial construction) could have a material adverse effect on our business, financial condition and results of operations.
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Our business is seasonal in nature, and this causes our quarterly results to vary significantly. A majority of our business is seasonal with peak revenues and profits occurring primarily in the months of April through November when the weather in our markets is more favorable to construction activity. Quarterly results have varied significantly in the past and are likely to vary significantly from quarter to quarter in the future. Such variations could have a negative impact on the price of our common stock. We are subject to the risk of unfavorable weather conditions during peak construction periods and other unexpected operational difficulties. Because a majority of our business is seasonal, unfavorable weather conditions and other unexpected operational difficulties during peak construction periods could adversely affect operating income and cash flow and could have a disproportionate impact on our results of operations for the full year. Our customers participate in cyclical industries, which are subject to industry downturns. A majority of our revenues are from customers who are in industries and businesses that are cyclical in nature and subject to changes in general economic conditions. In addition, since our operations are in a variety of geographic markets, our businesses are subject to the economic conditions in each such geographic market. General economic downturns or localized downturns in the regions where we have operations, including the current and any future downturns in the residential or commercial construction industries, generally have an adverse effect on demand for our products. Furthermore, additions to the production capacity of industry participants, particularly in the gypsum wallboard industry, have created an imbalance between supply and demand, which could continue to adversely affect the prices at which we sell our products and adversely affect the collectability of our receivables. In general, any further downturns in the industries to which we sell our products or any further increases in capacity in the gypsum wallboard, paperboard and cement industries could have a material adverse effect on our business, financial condition and results of operations. Volatility and disruption of financial markets could affect access to credit. Difficult economic conditions can cause a contraction in the availability, and increase the cost, of credit in the marketplace. This could potentially reduce the sources of liquidity for the Company and our customers. Our operations and our customers are subject to extensive governmental regulation, which can be costly and burdensome. Our operations and those of our customers are subject to and affected by federal, state and local laws and regulations with respect to such matters as land usage, street and highway usage, noise level and health and safety and environmental matters. In many instances, various certificates, permits or licenses are required in order for us or our customers to conduct business or for construction and related operations. Although we believe that we are in compliance in all material respects with regulatory requirements, there can be no assurance that we will not incur material costs or liabilities in connection with regulatory requirements or that demand for our products will not be adversely affected by regulatory issues affecting our customers. In addition, future developments, such as the discovery of new facts or conditions, new or stricter laws or regulations (including without limitation, climate change legislation described below), or stricter interpretations of existing laws or regulations, may impose new liabilities on us, require additional investment by us or prevent us from opening or expanding plants or facilities, any of which could have a material adverse effect on our financial condition or results of operations. Legislative and regulatory measures to address emissions of GHG’s are in various phases of discussions or implementation at the international, national, regional and state levels. In addition, GHGs are now regulated as pollutants under the Clean Air Act. On September 22, 2009, the EPA issued a “Mandatory Reporting of Greenhouse Gases” final rule, which took effect December 29, 2009. This rule establishes a new comprehensive scheme requiring operators of stationary sources in the United States emitting more than established annual thresholds of GHGs to inventory and report their GHG
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emissions annually on a facility-by-facility basis. In addition, in a final rule issued on May 13, 2010, known as EPA’s “Tailoring Rule,” any modification or expansion of our existing plants (or construction of a new plant) after January 1, 2011 that would trigger NSR requirements for non-GHG emissions would also trigger NSR for GHG if proposed GHG emissions from the plant exceed 75,000 tons or more per year. This would require the permitting of, and evaluation of potential controls for, GHG emissions. Effective July 1, 2011, any modification or expansion of our existing plants that results in an increase of our GHG emissions in excess of 75,000 tons per year, or construction of a new plant with the potential to emit 100,000 tons per year, will require NSR permitting and the implementation of “best available control technology” for GHG emissions. These limitations on emissions of GHGs from our equipment or operations could require us to incur costs to reduce such emissions and could ultimately affect our operations and our ability to obtain air permits for new or modified facilities. The potential consequences of GHG emission reduction measures for our operations are potentially significant because (1) the cement manufacturing process requires the combustion of large amounts of fuel, (2) in our cement manufacturing process, the production of carbon dioxide is a byproduct of the calcination process, whereby carbon dioxide is removed from calcium carbonate to produce calcium oxide, and (3) our gypsum wallboard manufacturing process combusts a significant amount of fossil fuel, especially natural gas. At this time, it is not possible to accurately estimate how laws or regulations addressing GHG emissions would impact our business. Any imposition of raw materials or production limitations, fuel-use or carbon taxes, or emission limitations or reductions could have a significant impact on the cement manufacturing industry and the gypsum wallboard manufacturing industry and a material adverse effect on us and our results of operations. On September 9, 2010, the EPA finalized National Emissions Standards for Hazardous Air Pollutants, or NESHAP, for Portland cement plants (“PC MACT”). The PC MACT will require a significant reduction in emissions of certain hazardous air pollutants from Portland cement kilns. The PC MACT sets limits on mercury emissions from existing Portland cement kilns and increases the stringency of emission limits for new kilns. The PC MACT also sets emission limits for total hydrocarbons, particulate matter and sulfur dioxide from cement kilns of all sizes and would reduce hydrochloric acid emissions from kilns that are large emitters. The PC MACT is scheduled to take full effect in September 2013; however, as a result of industry challenges to the PC MACT, EPA proposed a settlement agreement with industry petitioners in May 2012, in which the EPA agreed to consider extending the compliance date of the PC MACT to September 9, 2015. The settlement agreement also would require EPA to make revisions to the rule based on the decision by the U.S. Court of Appeals for the D.C. Circuit in Portland Cement Ass’n v. EPA, 665 F.3d 177 (D.C. Cir. 2011). Finally, the settlement agreement would require EPA to consider several petitions for reconsideration filed on the PC MACT and make revisions to the rule if appropriate. EPA would promulgate any revisions to the PC MACT, including any extension to the compliance date, by December 2012. The PC MACT, both as originally promulgated and as it is expected to be revised, will materially increase capital costs and costs of production for the Company and the industry as a whole. In 2010, the EPA released proposed regulations to address the storage and disposal of coal combustion products, which include fly ash and flue gas desulfurization gypsum (“synthetic gypsum”). We use synthetic gypsum in wallboard manufactured at our Georgetown, SC plant. In its release, the EPA is proposing two alternative regulations. Under one proposal, the EPA would characterize coal combustion products destined for disposal as a special waste under Subtitle C of the RCRA, which is the Subtitle that regulates hazardous wastes. However, under this proposal, beneficial encapsulated use of coal combustion products, including synthetic gypsum, would continue to be exempt under the Bevill Amendment and not warrant regulation. Under the other proposal, the EPA would continue to regulate coal combustion products under Subtitle D of RCRA, which regulates solid wastes that are not hazardous wastes. The EPA has emphasized that it does not wish to discourage the beneficial reuse of coal combustion products under either of its two proposals. It is not possible to accurately predict the regulations that will be ultimately adopted. However, it is possible that EPA’s rulemaking could affect our business, financial condition and results of operations, depending on how any such regulation affects our costs or the demand for our products utilizing synthetic gypsum. Our products are commodities, which are subject to significant changes in supply and demand and price fluctuations. The products sold by us are commodities and competition among manufacturers is based largely on price. Prices are often subject to material changes in response to relatively minor fluctuations in supply and demand, general economic conditions and other market conditions beyond our control. Increases in the industry’s production capacity for products such as gypsum wallboard or cement or increases in cement imports tend to
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create an oversupply of such products and negatively impact product prices. There can be no assurance that prices for products sold by us will not decline in the future or that such declines will not have a material adverse effect on our business, financial condition and results of operations. Our results of operations are subject to significant changes in the cost and availability of fuel, energy and other raw materials. Major cost components in each of our businesses are the costs of fuel, energy and raw materials. Significant increases in the costs of fuel, energy or raw materials or substantial decreases in their availability could materially and adversely affect our sales and operating profits. Prices for fuel, energy or raw materials used in connection with our businesses could change significantly in a short period of time for reasons outside our control. Prices for fuel and electrical power, which are significant components of the costs associated with our gypsum wallboard and cement businesses, have fluctuated significantly in recent years and may increase in the future. In the event of large or rapid increases in prices, we may not be able to pass the increases through to our customers in full, which would reduce our operating margin. We may become subject to significant clean-up, remediation and other liabilities under applicable environmental laws. Our operations are subject to state, federal and local environmental laws and regulations, which impose liability for cleanup or remediation of environmental pollution and hazardous waste arising from past acts. These laws and regulations also require pollution control and prevention, site restoration and operating permits and/or approvals to conduct certain of our operations. Certain of our operations may from time-to-time involve the use of substances that are classified as toxic or hazardous substances within the meaning of these laws and regulations. Additionally, any future laws or regulations addressing greenhouse gas emissions would likely have a negative impact on our business or results of operations, either through the imposition of raw material or production limitations, fuel-use or carbon taxes or emission limitations or reductions. We are unable to estimate accurately the impact on our business or results of operations of any such law or regulation at this time. Risk of environmental liability (including the incurrence of fines, penalties or other sanctions or litigation liability) is inherent in the operation of our businesses. As a result, it is possible that environmental liabilities and compliance with environmental regulations could have a material adverse effect on our operations in the future. See “Item 1. Business – Industry Segment Information – Environmental Matters” for more information on our regulatory and environmental matters. Significant changes in the cost and availability of transportation could adversely affect our business, financial condition and results of operations. Some of the raw materials used in our manufacturing processes, such as coal or coke, are transported to our facilities by truck or rail. In addition, the transportation costs associated with the delivery of our wallboard products are a significant portion of the variable cost of our gypsum wallboard segment. Significant increases in the cost of fuel or energy can result in material increases in the cost of transportation which could materially and adversely affect our operating profits. In addition, reductions in the availability of certain modes of transportation such as rail or trucking could limit our ability to deliver product and therefore materially and adversely affect our operating profits. Our debt agreements contain restrictive covenants and require us to meet certain financial ratios and tests, which limit our flexibility and could give rise to a default if we are unable to remain in compliance. Our amended and restated credit agreement and the note purchase agreements governing our senior notes contain, among other things, covenants that limit our ability to finance future operations or capital needs or to engage in other business activities, including our ability to:
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In addition, these agreements require us to meet and maintain certain financial ratios and tests, which may require that we take action to reduce our debt or to act in a manner contrary to our business objectives. Events beyond our control, including the severity and duration of the current industry downturn and changes in general business and economic conditions, may impair our ability to comply with these covenants or meet those financial ratios and tests. A breach of any of these covenants or failure to maintain the required ratios and meet the required tests may result in an event of default under those agreements. This may allow the lenders under those agreements to declare all amounts outstanding thereunder to be immediately due and payable, terminate any commitments to extend further credit to us and pursue other remedies available to them under the applicable agreements. If this occurs, our indebtedness may be accelerated and we may not be able to refinance the accelerated indebtedness on favorable terms, or at all, or repay the accelerated indebtedness. Our production facilities may experience unexpected equipment failures, catastrophic events and scheduled maintenance. Interruptions in our production capabilities may cause our productivity and results of operations to decline significantly during the affected period. Our manufacturing processes are dependent upon critical pieces of equipment. Such equipment may, on occasion, be out of service as a result of unanticipated events such as fires, explosions, violent weather conditions or unexpected operational difficulties. We also have periodic scheduled shut-downs to perform maintenance on our facilities. Any significant interruption in production capability may require us to make significant capital expenditures to remedy problems or damage as well as cause us to lose revenue due to lost production time, which could have a material adverse effect on our results of operations and financial condition. Pension assets and costs associated with employee benefit plans generally are affected by economic and market conditions. The current economic environment could negatively impact the fair value of pension assets, which could increase future funding requirements to our pension trusts. More generally, our costs are significantly affected by expenses related to our employee benefit plans. The recognition of costs and liabilities associated with these plans for financial reporting purposes is affected by assumptions made by management and used by actuaries engaged by us to calculate the projected and accumulated benefit obligations and the annual expense recognized for these plans. Economic and market factors and conditions could affect any of these assumptions and may affect our estimated and actual employee benefit plan costs and our results of operations. Inflation and increases in interest rates could adversely affect our business and demand for our products, which would have an adverse effect on our results of operations. Our business is significantly affected by the movement of interest rates. Interest rates have a direct impact on the level of residential, commercial and infrastructure construction activity by impacting the cost of borrowed funds to builders. Higher interest rates could result in decreased demand for our products, which would have a material adverse effect on our business and results of operations. In addition, increases in interest rates could result in higher interest expense related to borrowings under our credit facilities. Inflation can result in higher interest rates. With inflation, the costs of capital increase, and the purchasing power of our cash resources can decline. Current or future efforts by the government to stimulate the economy may increase the risk of significant inflation and its direct and indirect adverse impact on our business and results of operations. Any new business opportunities we may elect to pursue will be subject to the risks typically associated with the early stages of business development or product line expansion. We are continuing to pursue opportunities which are natural extensions of our existing core businesses and which allow us to leverage our core competencies, existing infrastructure and customer relationships. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Executive
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Summary.” Our likelihood of success in pursuing and realizing these opportunities must be considered in light of the expenses, difficulties and delays frequently encountered in connection with the early phases of business development or product line expansion, including the difficulties involved in obtaining permits; planning and constructing new facilities; transporting and storing products; establishing, maintaining or expanding customer relationships; as well navigating the regulatory environment in which we operate. There can be no assurance that we will be successful in the pursuit and realization of these opportunities. This report includes various forward-looking statements, which are not facts or guarantees of future performance and which are subject to significant risks and uncertainties. This report and other materials we have filed or will file with the SEC, as well as information included in oral statements or other written statements made or to be made by us, contain or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate to matters of a strictly factual or historical nature and generally discuss or relate to forecasts, estimates or other expectations regarding future events. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “may,” “can,” “could,” “might,” “will” and similar expressions identify forward-looking statements, including statements related to expected operating and performing results, planned transactions, plans and objectives of management, future developments or conditions in the industries in which we participate, including future prices for our products, audits and legal proceedings to which we are a party and other trends, developments and uncertainties that may affect our business in the future. Forward-looking statements are not historical facts or guarantees of future performance but instead represent only our beliefs at the time the statements were made regarding future events, which are subject to significant risks, uncertainties, and other factors, many of which are outside of our control. Any or all of the forward-looking statements made by us may turn out to be materially inaccurate. This can occur as a result of incorrect assumptions, changes in facts and circumstances or the effects of known risks and uncertainties. Many of the risks and uncertainties mentioned in this report or other reports filed by us with the SEC, including those discussed in the risk factor section of this report, will be important in determining whether these forward-looking statements prove to be accurate. Consequently, neither our stockholders nor any other person should place undue reliance on our forward-looking statements and should recognize that actual results may differ materially from those that may be anticipated by us. All forward-looking statements made in this report are made as of the date hereof, and the risk that actual results will differ materially from expectations expressed in this report will increase with the passage of time. We undertake no obligation, and disclaim any duty, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in our expectations or otherwise.
There are no unresolved Staff comments.
We operate cement plants, quarries and related facilities at Buda, Texas; LaSalle, Illinois; Fernley, Nevada and Laramie, Wyoming. The Buda plant is owned by a partnership in which we have a 50% interest. Our principal aggregate plants and quarries are located near Austin, Texas and Marysville, California. In addition, we operate gypsum wallboard plants in Albuquerque, New Mexico; Gypsum, Colorado; Duke, Oklahoma; and in Georgetown, South Carolina. We produce recycled paperboard at Lawton, Oklahoma. None of our facilities are pledged as security for any debts. We also have a gypsum wallboard plant in Bernalillo, New Mexico that we temporarily idled beginning in December 2009. We anticipate re-opening this facility when business conditions improve. See “Item 1. Business” on pages 1-12 of this Report for additional information relating to the Company’s properties.
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We are a party to certain ordinary legal proceedings incidental to our business. In general, although the outcome of litigation is inherently uncertain, we believe that all of the pending litigation proceedings in which the Company or any subsidiary are currently involved are likely to be resolved without having a material adverse effect on our consolidated financial condition or operations. As previously reported, the Internal Revenue Service (the “IRS”) completed the examination of our federal income tax returns for all of the fiscal years ended March 31, 2001 through 2006. The IRS issued Exam Reports and Notices of Proposed Adjustment on November 9, 2007 for the examination of the 2001, 2002 and 2003 tax years, and on February 5, 2010 for the examination of the 2004, 2005 and 2006 fiscal years, in which it proposes to deny certain depreciation deductions claimed by us with respect to assets acquired by us from Republic Group LLC in November 2000. We paid a deposit to the IRS of approximately $45.8 million during November 2007 for the years ended March 31, 2001, 2002 and 2003, which is comprised of $27.6 million in federal income taxes, $5.7 million for penalties and $12.5 million for interest. During March 2010, we paid the IRS an additional deposit of $29.3 million for the years ended March 31, 2004, 2005 and 2006, which is comprised of $18.1 million in federal income taxes, $3.7 million for penalties and $7.5 million for interest. These deposits were made to avoid imposition of the large corporate tax underpayment interest rates. On June 29, 2010 we received a Notice of Deficiency (commonly referred to as a “90 day letter”) and shortly thereafter converted the previously made deposits to tax, penalty and interest paid plus paid an additional $23.6 million comprised of $13.6 million of tax, $2.9 million of penalties and $7.1 million of interest. Subsequent reviews of IRS interest computations resulted in a $0.8 million dollar refund which reduced the total net payment to $97.9 million. On May 4, 2011 we filed a lawsuit in Federal District Court to recover the $97.9 million of taxes, penalties and interest ultimately paid. See Note (H) of the Notes to the Consolidated Financial Statements for more information. On October 5, 2010, Region IX of the EPA issued a Notice of Violation and Finding of Violation (“NOV”) alleging violations by our subsidiary, Nevada Cement Company (“NCC”), of the Clean Air Act (“CAA”). NCC had previously responded to an EPA request for information pursuant to Section 114 of the CAA. The NOV alleges that NCC made certain physical changes to its facility in the 1990s without first obtaining permits as required by the Prevention of Significant Deterioration requirements and Title V permit requirements of the CAA. The EPA also alleges that NCC has failed to submit to EPA since 2002 certain reports as required by the National Emissions Standard for Hazardous Air Pollutants General Provisions and the Portland Cement Manufacturing Industry Standards. The NOV states that the EPA may seek penalties although it does not propose or assess any specific level of penalties or specify what relief the EPA will seek for the alleged violations. NCC believes it has substantial meritorious defenses to the allegations in the NOV. NCC met with the EPA in December 2010 to present its defenses and is working to negotiate a resolution of the NOV with the EPA. If a negotiated settlement cannot be reached, NCC intends to vigorously defend these matters in any enforcement action that may be pursued by EPA. As a part of a settlement, or should NCC fail in its defense in any enforcement action, NCC could be required to make substantial capital expenditures to modify its facility and incur increased operating costs. NCC could also be required to pay significant civil penalties. If litigation regarding this matter occurs, it could take many years to resolve the underlying issues alleged in the NOV. We are currently unable to determine the final outcome of this matter or the impact of an unfavorable determination upon our financial position or results of operations. Another of our subsidiaries, Mountain Cement Company, has also responded to a separate Section 114 information request letter from EPA under the CAA seeking information similar to the request previously received by NCC.
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Annual Report on Form 10-K.
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STOCK PRICES AND DIVIDENDS As of May 17, 2012, there were approximately 2,000 holders of record of our Common Stock which trades on the New York Stock Exchange under the symbol EXP. The following table sets forth the high and low closing prices for our Common Stock as reported on the New York Stock Exchange for the periods indicated, as well as dividends declared during these periods:
The “Dividends” section of Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is hereby incorporated by reference into this Part II, Item 5. SHARE REPURCHASES Our Board of Directors has approved the repurchase of a cumulative total of 31,610,605 shares of our Common Stock since we became publicly held in April 1994. On November 7, 2006, the Board of Directors authorized us to repurchase up to an additional 5,156,800 shares, for a total authorization, as of that date, of 6,000,000 shares, of which 717,300 remain eligible for purchase at March 31, 2012. We did not repurchase any shares during the fiscal years ended March 31, 2012, 2011 and 2010. Share repurchases may be made from time-to-time in the open market or in privately negotiated transactions. The timing and amount of any repurchases of shares may be determined by our management, based on its evaluation of market and economic conditions and other factors. Repurchases may also be effected pursuant to plans or instructions that meet the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934. During fiscal 2012, we reacquired shares of stock from an employee upon the exercise of stock options that were granted under our Incentive Plan. These shares were surrendered by the employee and reacquired by us to satisfy the employee’s exercise price and minimum statutory tax withholding, which is required upon the exercise of stock options and the surrendered shares are shown in the following table:
The equity compensation plan information set forth in Part III, Item 12 of this Form 10-K is hereby incorporated by reference into this Part II, Item 5.
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PERFORMANCE GRAPH The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing. The graph below compares the cumulative 5-year total return to holders of common stock with the cumulative total returns of the Russell 1000 index and the Dow Jones US Building Materials & Fixtures index. The graph assumes that the value of the investment in the Company’s common stock and in each of the indexes (including the reinvestment of dividends) was $100 on March 31, 2007 and tracks it through March 31, 2012.
*$100 invested on March 31, 2007 in stock or index, including reinvestment of dividends.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
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SUMMARY OF SELECTED FINANCIAL DATA (1) (amounts in thousands, except per share data)
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EXECUTIVE SUMMARY Eagle Materials Inc. is a diversified producer of basic building products used in residential, industrial, commercial and infrastructure construction. Information presented for the fiscal years ended March 31, 2012, 2011 and 2010, respectively, reflects the Company’s four business segments, consisting of Cement, Gypsum Wallboard, Recycled Paperboard and Concrete and Aggregates. These operations are conducted in the U.S. and include the mining of limestone and the manufacture, production, distribution and sale of Portland cement (a basic construction material which is the essential binding ingredient in concrete), the mining of gypsum and the manufacture and sale of gypsum wallboard, the manufacture and sale of recycled paperboard to the gypsum wallboard industry and other paperboard converters, the sale of readymix concrete and the mining and sale of aggregates (crushed stone, sand and gravel). These products are used primarily in commercial and residential construction, public construction projects and projects to build, expand and repair roads and highways. Certain information for each of Concrete and Aggregates is broken out separately in the segment discussions. Our businesses are cyclical commodity businesses that are directly related to the overall construction environment. Our operations, depending on each business segment, range from local in nature to national businesses. We have operations in a variety of geographic markets, which subject us to the economic conditions in each such geographic market as well as the national market. General economic downturns or localized downturns in the regions where we have operations generally have a material adverse effect on our business, financial condition and results of operations. Our Cement companies are located in geographic areas west of the Mississippi River and the Chicago, Illinois metropolitan area. Due to the low value-to-weight ratio of cement, cement is usually shipped within a 150 mile radius of the plants by truck and up to 300 miles by rail; though the price of diesel fuel may impact the truck shipping radius. Concrete and Aggregates are even more regional as those operations serve the areas immediately surrounding Austin, Texas and north of Sacramento, California. Cement, concrete and aggregates demand may fluctuate more widely because local and regional markets and economies may be more sensitive to changes than the national markets. Our Wallboard and Paperboard operations are more national in scope and shipments are made throughout the continental U.S. We continue to pursue opportunities in businesses which are naturally adjacent to our existing core businesses and would allow us to leverage our core competencies and existing infrastructure and customer relationships. The entry into any such new businesses requires capital expenditures and the investment of management time and other resources, and is subject to the risks associated with any new business development. During fiscal 2012, we purchased land with mineral reserves in the Midwest for the purpose of developing a business for mining and processing of sand that could be used by oil services businesses and other industrial users. Our pursuit of this opportunity is currently in the initial stages with the focus on permitting, plant design, logistics and market development; however, during fiscal 2013, as we continue to develop this business, we anticipate additional capital expenditures in the range of $25 million to $50 million. We will also continue to focus on growth through acquisitions or expansion of existing facilities that we believe provide an opportunity to realize an appropriate return on investment and increased profitability for our shareholders. We conduct one of our cement operations through a joint venture, Texas Lehigh Cement Company LP, which is located in Buda, 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 revenues 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. Our annual results were significantly impacted by a strong fourth quarter, particularly with respect to increased sales volumes for our cement segment, and increased sales price for our gypsum wallboard segment. Due to this impact, we have included discussions of our fourth quarter revenues and cost of goods sold in our fiscal 2012 consolidated operating results section, as compared to the fourth quarter of fiscal 2011. This discussion is also included in our segment discussions for both the cement and gypsum wallboard segments.
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RESULTS OF OPERATIONS Fiscal Year 2012 Compared to Fiscal Year 2011
Revenues. Revenues were $495.0 million in fiscal 2012 and $462.2 million in fiscal 2011. The $32.8 million increase in consolidated revenues for fiscal 2012, as compared to fiscal 2011, is primarily due to increases in the average net sales prices for all of our products and an increase in sales volumes for all of our businesses except gypsum wallboard and aggregates. The impact of increased average net sales prices and sales volumes on revenues for fiscal 2012, as compared to fiscal 2011 was $18.2 million and $14.6 million, respectively. Revenues were $116.8 million and $95.4 million in the fourth quarter of fiscal 2012 and 2011, respectively. The $21.4 million increase in revenues during the fourth quarter of fiscal 2012, as compared to the fourth quarter of fiscal 2011, was primarily due to increased average net sales prices for all of our businesses. The impact of the increased net sales prices on revenues for the fourth quarter of fiscal 2012, as compared to the fourth quarter of fiscal 2011, was approximately $14.0 million. Revenues for the fourth quarter of fiscal 2012 were also positively impacted by increased sales volumes for our cement and recycled paperboard businesses, partially offset by declines in our other businesses. The impact of increased volumes was approximately $7.4 million. Cost of Goods Sold. Cost of goods sold was $454.5 million in fiscal 2012 and $426.6 million in fiscal 2011. The 7% increase in cost of goods sold for fiscal 2012, as compared to fiscal 2011, was primarily due to increased operating costs and increased sales volumes. The impact of increased operating costs and increased volumes on cost of goods sold for fiscal 2012, as compared to fiscal 2011, was $19.7 million and $8.2 million, respectively. The impact of increased volumes on cost of sales was primarily related to our cement and paperboard businesses, which increased cost by approximately $8.4 million and $5.5 million, respectively, partially offset by approximately $5.5 million related to decreased volumes in our gypsum wallboard business. The increase in operating costs was primarily due to an increase of approximately $4.6 million in purchased cement, approximately $7.1 million and $4.1 million in gypsum wallboard freight and paper expense, respectively, approximately $1.1 million in paperboard chemicals and dyes, and approximately $0.9 million in concrete delivery. Cost of goods sold was $101.9 million and $97.6 million in the fourth quarter of fiscal 2012 and 2011, respectively. The $4.3 million increase in cost of goods sold was related primarily to approximately $8.3 million from an increase in sales volumes, partially offset by approximately $4.0 million of reduced operating costs. The increase in cost related to sales volumes was primarily related to our cement and paperboard businesses, which comprised approximately $8.9 million and $3.5 million respectively, offset by reduced volumes in our wallboard and concrete and aggregates businesses of approximately $3.2 million and $0.9 million, respectively. The reduced operating costs in the fourth quarter of fiscal 2012, as compared to fiscal 2011, were approximately $4.3 million primarily in our cement business. This reduction is primarily due to approximately $5.0 million of costs due to an expanded plant shutdown and an exceptionally harsh winter in fiscal 2011, partially offset by approximately $2.0 million of additional maintenance costs in the fourth quarter of fiscal 2012.
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Gross Profit. Gross profit was $40.5 million in fiscal 2012 and $35.6 million in fiscal 2011. The 14% increase in gross profit was primarily due to increased average sales prices and increased sales volumes, partially offset by increased manufacturing costs, as noted above. Gross profit was $14.9 million in the fourth quarter of fiscal 2012, as compared to a loss of $2.2 million in the fourth quarter of fiscal 2011. The $17.1 million increase was due primarily to increased average sales prices and increased sales volumes, partially offset by increased cost of goods sold related to the increased sales volumes, as noted above. Equity in Earnings of Unconsolidated Joint Venture. Equity in earnings of our unconsolidated joint venture increased $4.3 million, or 18% for fiscal 2012, as compared to fiscal 2011. The increase is primarily due to a 9% increase in average selling prices and a 5% increase in sales volumes. The increase in sales volumes is primarily due to favorable weather conditions, an increase in demand for higher priced oil well cement, and strong state spending on infrastructure during fiscal 2012. The impact of the increases in average net sales price and sales volumes on equity in earnings of unconsolidated joint venture in fiscal 2012 was approximately $7.3 million and $3.9 million, respectively, partially offset by increased cost of sales of approximately $6.9 million. The increase in cost of sales was primarily due to increased operating costs of approximately $2.2 million in freight, $3.1 million in purchased cement, $0.8 million in purchased raw materials and $0.3 million in maintenance. Corporate General and Administrative. Corporate general and administrative expenses were $19.6 million in fiscal 2012, as compared to $16.7 million in fiscal 2011. The 18% increase in corporate general and administrative expenses is due primarily to an increase of approximately $1.9 million of stock compensation expenses related to the issuance of restricted stock during May 2011 and an increase in legal and professional fees of approximately $0.9 million, related to our lawsuit with the IRS. Other Income (Expense). Other income (expense) was $0.4 million and $0.8 million in fiscal 2012 and 2011, respectively, and consists of a variety of items that are non-segment operating in nature including non-inventoried aggregates income, gypsum wallboard distribution center income, asset sales and other miscellaneous income and cost items. The decrease in other income during fiscal 2012, as compared to fiscal 2011, was primarily due to the sale of property in fiscal 2011 that resulted in a gain of approximately $0.6 million. Other Non-Operating Expense. Other non-operating expense was $9.1 million in fiscal 2012 and $10.7 million in fiscal 2011. During January 2012, an arbitration panel ruled against the Company in a contract dispute between one of our aggregate mining subsidiaries and another mining company over the right to mine certain areas. As a result of the adverse ruling, we paid approximately $6.9 million in damages, plus legal fees of approximately $1.2 million. The remaining $1.0 million is related to our legal expenses incurred during the arbitration. During fiscal 2011, we determined that we would not move forward with the planned expansion of Nevada Cement Company. This decision was based on the economic impact of new environmental regulations combined with the challenging market conditions in northern Nevada and Northern California. As a result of this decision, we wrote-off approximately $8.9 million during fiscal 2011. The remaining expense consists of the write-down of unused aggregate equipment at our Texas operation and other miscellaneous write-downs. Interest Expense, Net. Interest expense net, increased 1% to $16.6 million in fiscal 2012, from $16.5 million in fiscal 2011. Interest expense from our Senior Notes and Bank Credit Facility decreased approximately $0.8 million during fiscal 2012, as compared fiscal 2011, while interest expense related to our unrecognized tax benefit and amortization of debt issuance costs increased approximately $0.6 million and $0.3 million, respectively. The decrease in interest expense related to lower outstanding balances during the year. The increase in amortization of our debt issue costs is primarily related to the repurchase of $88.1 million of Senior Notes during December 2011. The increase in interest expense is related to our unrecognized tax benefit of approximately $0.6 million in fiscal 2012, as compared to fiscal 2011, is due primarily to an interest credit of $2.0 million in fiscal 2011 related to our ability to participate in several state amnesty programs. Due to our repurchase of approximately $88.1 million in Senior Notes during December 2011, we anticipate a decline in interest expense in fiscal 2013. This decline is anticipated because the current interest rate for our Bank Credit Facility is less than the interest rate of our Senior Notes, and we also anticipate reducing the amounts drawn under the Bank Credit Facility throughout fiscal 2013.
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Loss on Debt Retirement. The $2.1 million loss is related to the repurchase of certain of our Senior Notes during the quarter ended December 31, 2011. On December 16, 2011, we repurchased a total of approximately $88.1 million of our Series 2005A and Series 2007A Notes. This expense consists of a 2% premium paid on the repurchase, plus brokerage and miscellaneous fees related to the repurchase. Earnings Before Income Taxes. Earnings before income taxes increased to $21.9 million, during fiscal 2012, as compared to $16.8 million in fiscal 2011, primarily due to increased gross profit and increased equity in earnings of unconsolidated joint venture, partially offset by increased corporate general and administrative expenses and loss on debt retirement. Income Taxes. Income tax expense was $3.2 million and $1.9 million in fiscal 2012 and fiscal 2011, respectively. The effective tax rate for fiscal 2012 increased to 14.5% from 11.4% in fiscal 2011. The increase in the effective tax rate is primarily attributable to a decrease in favorable discrete items related to the IRS examination and federal and state amended return filings between years from 17% of pretax income in fiscal 2011 to 11% in fiscal 2012, as well as a reduction in the impact of our depletion deduction from 15% of pre-tax income in fiscal 2011 to 12% in fiscal 2012. Excluding discrete items, our effective tax rate was 26% in fiscal 2012, as compared to 28% in fiscal 2011. See Footnote (G) to the Consolidated Financial Statements for more information. Net Earnings and Diluted Earnings per Share. Net earnings for fiscal 2012 of $18.7 million increased 26% from last year’s net earnings of $14.8 million. Diluted earnings per share for fiscal 2012 were $0.42, as compared to $0.34 for fiscal 2011.
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The following table highlights certain operating information related to our four business segments:
Cement Operations. Revenues increased to $244.0 million in fiscal 2012 as compared to $225.8 million in fiscal 2011, primarily due to the increase in sales volumes in fiscal 2012, as compared to fiscal 2011. The increased sales volumes positively impacted revenues in fiscal 2012 by approximately $15.8 million, as compared to fiscal 2011. The increase in sales volumes was consistent across all markets, with the exception of the Texas market, where volumes were relatively flat. The increased volumes are primarily due to the relatively mild winter experienced across the northern portion of the U.S., which enabled construction projects to proceed during the winter months, as compared to the relatively harsh winter in fiscal 2011. Additionally, the increase in average sales prices positively impacted revenues by approximately $1.6 million. Operating earnings increased 3% to $46.9 million in fiscal 2012, from $45.7 million in fiscal 2011, although the operating margin declined to 19% in fiscal 2012, as compared to 20% in fiscal 2011. The decrease in operating margin is due to increased operating costs in fiscal 2012, as compared to fiscal 2011. Increased operating costs in fiscal 2012, as compared to fiscal 2011, for maintenance and purchased raw materials, adversely impacted operating costs by approximately $2.1 million and $0.8 million, respectively, partially offset by $0.6 million in lower per unit costs fixed costs due to increased production. Also negatively impacting operating earnings was an increase in purchased cement sold during fiscal 2012, as compared to fiscal 2011. The increase in purchased cement adversely impacted operating earnings by approximately $0.6 million, and such increased purchases were due to our increased use of purchased cement in the Northern California market, and a change in the product mix sold in our Texas market.
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Cement revenues were $49.2 million in the fourth quarter of fiscal 2012, which is a 22% increase over revenues of $40.1 million in the fourth quarter of fiscal 2011. The increase in revenues during the fourth quarter of fiscal 2012, as compared to the similar quarter in 2011, is primarily due to a 20% increase in sales volumes. The increase in sales volumes positively impacted revenues by approximately $7.7 million in the fourth quarter of fiscal 2012, as compared to the fourth quarter of fiscal 2011, due to favorable weather in fiscal 2012, as compared to fiscal 2011, as discussed above. Additionally, average selling prices increased 2% during the fourth quarter of fiscal 2012, as compared to the fourth quarter of fiscal 2011, which positively impacted revenues by approximately $1.3 million. Operating earnings for the cement business increased to $7.5 million from $4.7 million for the fourth quarter of fiscal 2012 and 2011, respectively, while the gross margin increased to 15% in fiscal 2012 from 12% in fiscal 2011. The increase in operating earnings is due primarily to an increase in average net sales price, which positively impacted operating earnings by approximately $1.1 million, and an increase in sales volumes, which positively impacted operating earnings by approximately $1.0 million. Additionally, operating costs declined due to increased production in fiscal 2012, primarily due to the extended shut down during fiscal 2011, which increased operating costs in that quarter by approximately $5.0 million, partially offset by increased maintenance costs of approximately $2.0 million in fiscal 2012. Gypsum Wallboard Operations. Revenues increased 6% to $217.6 million in fiscal 2012, from $204.6 million in fiscal 2011. The increase in sales revenue in fiscal 2012, as compared to fiscal 2011, was primarily due to increased sales prices, which positively impacted revenue by $16.9 million, partially offset by a reduction of approximately $3.9 million due to lower sales volumes. The increase in net sales price was due to our implementing a price increase for calendar 2012. We do not believe our market share increased significantly during fiscal 2012, as compared to fiscal 2011. Operating earnings increased to $6.3 million in fiscal 2012, from $1.2 million in fiscal 2011, primarily due to the increase in average net sales prices, which positively impacted operating earnings by approximately $11.4 million, partially offset by increased operating costs during fiscal 2012, as compared to fiscal 2011. The increase in operating costs in fiscal 2012, as compared to fiscal 2011, was primarily due to increases in the cost paper and other raw materials of approximately $4.1 million and $3.0 million, respectively, partially offset by reduced natural gas costs of approximately $1.9 million. Despite low overall utilization at all but one of our operating facilities, fixed costs are not a significant part of the overall cost of wallboard; therefore, the low utilization of our facilities had a relatively minor impact on our operating results. Sales revenues increased 21% to $61.2 million in the fourth quarter of fiscal 2012, from $50.7 million in the fourth quarter of fiscal 2011, primarily due to a 39% increase in the average net sales price. The increase in the average net sales price positively impacted revenues by approximately $14.3 million, partially offset by a decline in sales volumes which adversely impacted revenues by approximately $3.8 million in the fourth quarter of fiscal 2012, as compared to fiscal 2011. Operating earnings increased to $10.3 million in the fourth quarter of fiscal 2012, from a loss of $2.7 million in the fourth quarter of fiscal 2011, primarily due to the increase in average net sales prices, which positively impacted operating earnings by approximately $13.1 million, partially offset by increased operating costs of approximately $0.4 million, which was comprised of increases in the cost of freight and paper of approximately $1.1 million and $0.5 million, respectively, partially offset by reduced natural gas costs of approximately $1.2 million.
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Recycled Paperboard Operations. Revenues increased 13% to $118.8 million in fiscal 2012, from $104.8 million in fiscal 2011. The increase in net revenue during fiscal 2012 as compared to fiscal 2011 is due to increases in both average net sales price and sales volumes. The increase in the average net sales price per ton during 2012, as compared to the similar periods in 2011, is primarily due to the price escalators in our long-term sales agreement, which positively impacted revenue by approximately $7.2 million, and the increase in sales volume that positively impacted revenues by approximately $6.8 million. Operating earnings increased 41% to $17.0 million in fiscal 2012, as compared to $12.1 million in fiscal 2011, while gross margin increased to 14% in fiscal 2012, as compared to 12% in fiscal 2011. The increase in operating earnings and improvement in gross margin is due primarily to the increase in average net sales price, which positively impacted operating earnings by approximately $7.6 million, partially offset by increased operating costs. The increase in operating costs during fiscal 2012, as compared to fiscal 2011, was primarily related to increases in chemicals, dyes and finishing materials, maintenance, and clothing and production supplies of approximately $1.1 million, $0.8 million and $0.7, respectively, partially offset by reduced natural gas costs of approximately $0.3 million. Concrete and Aggregates Operations. Concrete and aggregates revenues increased 3% to $45.5 million in fiscal 2012, as compared to $44.2 million in fiscal 2011. Concrete and aggregate price increases in fiscal 2012, as compared to fiscal 2011, positively impacted revenues by approximately $0.5 million and $0.7 million, respectively, with the impact of increased sales volumes in concrete offset by decreased sales volumes in aggregates. Operating earnings decreased to a loss of $1.1 million in fiscal 2012, as compared to a profit of $0.8 million in fiscal 2011. Operating profit was adversely impacted by increased cost of sales in fiscal 2012, as compared to fiscal 2011, primarily due to increased operating costs of approximately $1.9 million. The impact of increased sales volumes for concrete and decreased sales volumes for aggregates did not have significant impact on cost of goods sold in fiscal 2012, as compared to fiscal 2011. The increase in operating costs during fiscal 2012, as compared to fiscal 2011, was primarily related to increases in plant, delivery and purchased materials of approximately $0.5 million, $0.9 million and $0.6 million, respectively. GENERAL OUTLOOK Calendar 2011 was another difficult year for construction in the United States, particularly in the building materials and construction products businesses. Commercial and residential construction activity remains at cyclic low levels and infrastructure spending has been less than anticipated. Many of the states that comprise our markets are experiencing budget deficits, and have reduced infrastructure spending in response to these shortfalls. We do not expect a significant increase in government spending for infrastructure in calendar 2012. Cement demand in all U.S. regions continues to be impacted by reduced residential housing construction, continued weakness in the commercial construction market and expanded state government budget deficits, which are expected to continue to limit cement consumption. Although cement consumption increased in calendar 2011 over calendar 2010, and may increase again in calendar 2012, these increases are minimal. We anticipate concrete and aggregate sales prices and sales volumes will remain at historically low levels as demand for residential and infrastructure projects in both of our markets is expected to remain soft, and continue to be competitive. The U.S. wallboard industry continues to be adversely impacted by the current downturn in the residential and commercial construction markets, which has resulted in the industry operating at a utilization rate of approximately 50%. Although a price increase was instituted in January 2012, low sales volumes and low capacity utilization remain, and we do not anticipate wallboard demand to improve significantly during the remainder of calendar year 2012.
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Our recycled paperboard segment continues to identify sales opportunities in each of its markets to enable our paper operation to maximize its operating earnings. Fiber prices, which are our largest operating cost, remained fairly consistent in fiscal 2012, as compared to fiscal 2011, but any increase in this cost will impact the cost of manufacturing and product margins. We anticipate the cost of natural gas and electricity to remain consistent during the rest of calendar year 2012. Fiscal Year 2011 Compared to Fiscal Year 2010
Revenues. Consolidated revenues for fiscal 2011 decreased 1% from fiscal 2010. The decrease in sales revenues was due primarily to the decrease in revenues for all of our segments except recycled paperboard. During fiscal 2011, negative volume variances, primarily in our cement and gypsum wallboard segments, accounted for approximately $3.4 million and $10.2 million, respectively, less in revenue as compared to fiscal 2010, partially offset by the positive price variance of approximately $12.4 million and $4.1 million, which was primarily due to increased average net sales price in our recycled paperboard segment and increased prices for gypsum wallboard freight, respectively, partially offset by approximately $8.6 million of reduced revenue from a decrease in the average sales price for cement. The reduction in sales volumes was due primarily to the continued depressed levels of demand in the residential and commercial sectors, which has been adversely impacted by the decline in the overall economic environment in the United States. Cost of Goods Sold. Cost of goods sold increased during fiscal 2011, as compared to fiscal 2010, principally due to increased operating costs and increased sales volumes on cost of goods sold for fiscal 2011. The increase in operating costs during fiscal 2011, as compared to fiscal 2010, was primarily related to our recycled paperboard business, which increased approximately $15.4 million, offset by reduced costs in our other businesses, primarily cement and gypsum wallboard, of approximately $3.5 million and $4.3 million, respectively. Additionally, cost of sales increased due to increased volumes, primarily related to our cement business, which adversely impacted cost of sales in fiscal 2011, as compared to fiscal 2010, by approximately $4.1 million, partially offset by the impact of reduced volumes of approximately $1.7 million in our gypsum wallboard business. Gross Profit. Gross profit declined during fiscal 2011, as compared to fiscal 2010, primarily due to reduced revenues and increased manufacturing costs, as described above. Equity in Earnings of Unconsolidated Joint Venture. Equity in Earnings of Unconsolidated Joint Venture remained relatively flat in fiscal 2011 as compared to fiscal 2010. During fiscal 2011, revenues increased 14% due primarily to an increase in sales volumes of 15%, or approximately $10.1 million, partially offset by the impact of lower average sales price of approximately $0.7 million. Despite the increase in sales volumes, income remained relatively flat as the vast majority of the increase in sales volume related to lower margin purchased cement. During fiscal 2011, purchased cement tons increased from 6% of total sales in fiscal 2010 to 15% of total sales in fiscal 2011, which negatively impacted net earnings by approximately $7.0 million, while increased sales volumes negatively impacted earnings by approximately $2.6 million.
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Other Operating Income, net. Other income consists of a variety of items that are non-segment operating in nature and includes non-inventoried aggregates income, gypsum wallboard distribution center income, asset sales and other miscellaneous income and cost items. Other income declined in fiscal 2011 as compared to fiscal 2010, as we realized a gain on the sale of land of approximately $2.5 million during fiscal 2010. Corporate General and Administrative. Corporate general and administrative expenses for fiscal 2011 increased to $16.7 million from $15.9 million in fiscal 2010. The increase in corporate general and administrative expense in fiscal 2011, as compared to fiscal 2010, was primarily the result of increased compensation, which totaled approximately $0.8 million and increased profit sharing, which totaled approximately $0.3 million, partially offset by reduced legal and professional fees of approximately $0.3 million. Other Non-Operating Expense. During fiscal 2011, we determined that we would not move forward with the planned expansion of Nevada Cement Company. This decision was based on the economic impact of new environmental regulations combined with the challenging market conditions in northern Nevada and Northern California. As a result of this decision, we wrote-off approximately $8.9 million during fiscal 2011. The remaining expense consists of the write-down of unused aggregate equipment at our Texas operation and other miscellaneous write-downs. In the prior year, the $2.5 million included in this account related to costs written-off after we decided not to proceed with the modernization of our Mountain Cement facility. Interest Expense, Net. Net interest expense of $16.5 million for fiscal 2011 decreased from the $21.5 million incurred in fiscal 2010. Interest expense from our Senior Notes and Bank Credit Facility decreased approximately $0.7 million during fiscal 2011, as compared to fiscal 2010, while interest expense related to our unrecognized tax benefit and amortization of debt issuance costs increased approximately $4.2 million and $0.1 million, respectively. The decrease in interest expense related to our Senior Notes and Bank Credit Facility is due primarily to lower outstanding balances and interest rates on our Bank Credit Facility as well as the repayment of $15.0 million of Senior Notes in April 2010. The decrease in interest expense related to our unrecognized tax benefit is primarily related to the payments made to the IRS for assessed taxes during fiscal 2010 and 2011, as well as receiving an interest credit of $2.0 million in fiscal 2011 due to our ability to participate in several state amnesty programs. The reduction in amortization of debt issuance costs declined in fiscal 2011, as compared to fiscal 2010, primarily due to the repayment of $15.0 million of Senior Notes in April 2010. Earnings Before Income Taxes. Earnings before income taxes decreased to $16.8 million during fiscal 2011, as compared to $39.3 million in fiscal 2010, primarily due to the decrease in gross profit and increased corporate general and administrative expense and other non-operating expense, partially offset by decreased interest expense. Income Taxes. The effective tax rate declined to 11.4% for fiscal 2011 from 26.3% during fiscal 2010. The reduction in the tax rate is due primarily to the application of the deposits to payments and the filing of amended state returns; we were able to deduct certain items paid for state and federal taxes during the year, which provided a tax benefit of approximately $2.8 million during fiscal 2011. Excluding this tax benefit our effective tax rate would have been approximately 28%. See Footnote (G) of the Consolidated Financial Statements for more information. Net Earnings and Diluted Earnings per Share. Fiscal 2011 net earnings of $14.8 million decreased 49% from net earnings of $29.0 million in fiscal 2010. Diluted earnings per share in fiscal 2011 of $0.34 were 48% lower than the $0.66 for fiscal 2010.
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The following table highlights certain operating information related to our four business segments:
Cement Operations. Revenues declined to $225.8 million in fiscal 2011, as compared to $228.5 million in fiscal 2010. The decline in sales revenues is due primarily to reduced average sales prices, which adversely impacted revenues by approximately $9.2 million, partially offset by increased sales volumes, which positively impacted revenues by approximately $6.8 million during fiscal 2011, as compared to fiscal 2010. The decline in average sales prices during fiscal 2011 as compared to fiscal 2010 was consistent across all markets, except the Texas market where average sales prices were relatively stable, and such declines were primarily due to continued weakness in demand in all of our markets, except Texas. Operating earnings declined 21%, to $45.9 million in fiscal 2011, from $58.0 million in fiscal 2010, while the operating margin declined to 20% in fiscal 2011 from 25% in fiscal 2010. The decline in operating earnings and operating margin was primarily due to the reduction in average net sales prices, as noted above, and certain increased operating costs. The primary reason for the increased operating costs in fiscal 2011, as compared to fiscal 2010, was related to increases in fuel costs of approximately $3.1 million, and purchased raw materials of approximately $2.5 million, partially offset by lower power costs of approximately $2.4 million.
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Gypsum Wallboard Operations. Sales revenues declined 3% to $204.6 million in fiscal 2011, from $210.7 million in 2010, primarily due to the reduction in sales volumes, partially offset by increased gross sales prices. The decline in sales volumes adversely impacted revenues by approximately $10.2 million, partially offset by approximately $4.1 million due to increases in gross sales price. The decline in sales volumes was primarily due to weak residential construction and the decline in commercial construction, while the increased gross sales price was primarily due to the increase in delivery costs. Operating earnings were $1.2 million and $1.4 million in fiscal 2011 and 2010, respectively. The relatively flat operating earnings, despite the reduction in revenue during fiscal 2011, as compared to fiscal 2010, are primarily due to a reduction in operating costs. The decline in operating costs was primarily due to reduced labor, natural gas and other operating costs of approximately $0.6 million, $3.0 million and $1.8 million, respectively, offset by increased paper costs of approximately $1.6 million. Despite low overall utilization of all but one of our operating facilities, fixed costs are not a significant part of the overall cost of wallboard; therefore the low utilization of our facilities had a relatively minor impact on our operating results. Recycled Paperboard Operations. Revenues increased 16% to $104.8 million in fiscal 2011, as compared to $90.2 million in fiscal 2010. The increase in net revenue during fiscal 2011, as compared to fiscal 2010, is due primarily to the increase in average net sales price. The increase in the average net sales price per ton during 2011 as compared to the similar periods in fiscal 2010 is primarily due to the price escalators in our long-term sales agreement, and accounted for approximately $14.2 million of the increase in revenue. Operating earnings decreased 18% to $12.1 million for fiscal 2011, from $14.8 million in fiscal 2010, primarily due to a reduction in the operating margin from 16.4% to 11.5%. The decrease in the operating margin was primarily due to a decrease in the percentage of higher margin gypsum paper sales and increases in the cost of recycled fiber, our primary raw material. The decline in the sales of gypsum paper is due primarily to the overall decline in the gypsum wallboard market. During fiscal 2011, sales of gypsum paper declined to 47% of total paperboard sales from 51% during fiscal 2010 and the cost of recycled fiber, plus related freight, increased 53% as OCC remained elevated throughout the fiscal year. The increase in the cost of recycled fiber, chemicals and dyes and electricity adversely impacted operating earnings by increasing manufacturing costs by approximately $15.9 million, $0.7 million and $1.3 million, respectively, partially offset by the decrease in natural gas and repair and maintenance costs of approximately $0.5 million and $0.8 million, respectively. Additionally, the decline in the percentage of gypsum paper sales adversely impacted operating earnings by approximately $0.2 million. Concrete and Aggregates Operations. Concrete and aggregate revenues declined to $44.2 million in fiscal 2011, from $45.6 million in fiscal 2010. The decrease in revenues was due primarily to lower average net sales prices, offset slightly by increased sales volumes. Sales volumes increased 3% and 11% for concrete and aggregates in fiscal 2011 as compared to fiscal 2010, respectively. The adverse impact on revenues of the decreased sales prices was approximately $3.9 million, partially offset by the positive impact of the increased sales volumes of $2.5 million. The increase in volume of aggregates sold was primarily due to increased sales in the Texas market, which generally have a lower average sales price than the northern California market. Operating earnings declined 57% to $0.8 million in fiscal 2011, from $1.8 million in fiscal 2010. The decline in operating earnings was primarily due to the change in sales mix to more base tons sold in the Texas market, which adversely impacted aggregates operating earnings by approximately $0.5 million, and the reduction in the average sales price, which adversely impacted operating earnings by $0.6 million. CRITICAL ACCOUNTING POLICIES Certain of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Although our accounting policies are in compliance with generally accepted accounting principles, a change in the facts and circumstances of the underlying transactions could significantly change the application of the accounting policies and the resulting financial statement impact. Listed below are those policies that we believe are critical and require the use of complex judgment in their application. Impairment of Long-Lived Assets. We assess our long-lived assets, including mining and related assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
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not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. These evaluations for impairment are significantly impacted by estimates of revenues, costs and expenses, and in the case of our mining assets, changes in the costs and availability of extraction of our mineral assets and other factors. If these assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Although our concrete and aggregates segment experienced an operating loss in fiscal 2012, the segment generated positive cash flows from operations. We temporarily idled our gypsum manufacturing facility in Bernalillo, N.M. beginning in December 2009, due to cyclical low gypsum wallboard demand. The carrying value of the Bernalillo plant and equipment at March 31, 2012 was $3.4 million and $4.0 million, respectively, and we continue to depreciate the assets over their estimated useful life. We currently have a strong market position in New Mexico, and our Albuquerque gypsum wallboard facility is operating at close to capacity. We plan on resuming manufacturing at the Bernalillo facility in the future when demand for our products improves. Costs of maintaining the facility during the idling are not significant, and the facility was generating positive cash flow prior to being idled; therefore, we have determined that the value of the plant and equipment is not impaired. We are not currently considering the permanent closure of the Bernalillo facility. Any decision to permanently close Bernalillo would be the result of future changes in the building materials industry in the southwest United States and Rocky Mountain region, including changes in the production capacity or operations of our competitors, demand for gypsum wallboard or general macro-economic conditions, which we do not foresee at the present time. If we were to permanently close the Bernalillo facility, or if our expectations as to its use changed such that we project the future undiscounted cash flows from its operations would be insufficient to recover its carrying value due to the factors described above, or for any other reason, we would recognize impairment at that time. All of our other wallboard facilities are currently generating positive cash flow from operations. Goodwill. Goodwill is subject to an annual assessment at least annually for impairment by applying a fair-value-based test. We have elected to test for goodwill impairment in the fourth quarter of each fiscal year. The goodwill impairment test is a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of each reporting unit based on a discounted cash flow model using revenues and profit forecasts and comparing those estimated fair values with the carrying value; a second step is performed, if necessary, to compute the amount of the impairment by determining an “implied fair value” of goodwill. Similar to the review for impairment of other long-lived assets, evaluations for impairment are significantly impacted by estimates of future prices for our products, capital needs, economic trends and other factors. The segment breakdown of goodwill at March 31, 2012 and 2011 is as follows:
Impairment testing for the cement business is done at the plant level because the relatively low value-to-weight ratio limits the geographic area in which a company can market its products profitably; therefore, the U.S. cement industry is fragmented into regional geographic areas rather than a national selling area. Impairment testing for the gypsum wallboard and paperboard segments is done at the segment level because of the national nature of the businesses and customer base. Given the relative weakness in the gypsum wallboard industry utilization, coupled with the slow recovery in residential housing, we have elected to perform impairment tests at the end of each quarter on our gypsum wallboard assets and related goodwill. See Note (A) of the Notes to the Consolidated Financial Statements for more information. The results of the first step of the annual impairment tests performed in the fiscal fourth quarter of 2012 and 2011 indicated that the fair values of the reporting units with goodwill substantially exceeded their carrying values. Determining the fair value of our reporting units involves the use of significant estimates and assumptions and considerable management judgment. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. The most important assumptions underlying our estimates is a cyclical recovery in U.S. construction activity from the current low levels. Actual results may differ materially from those estimates. Changes in key assumptions or management judgment
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with respect to a reporting unit or its prospects, which may result from a change in market conditions, market trends, interest rates or other factors outside of our control, or significant underperformance relative to historical or projected future operating results, could result in a significantly different estimate of the fair value of our reporting units, which could result in an impairment charge in the future. Environmental Liabilities. Our operations are subject to state, federal and local environmental laws and regulations, which impose liability for clean up or remediation of environmental pollution and hazardous waste arising from past acts and require pollution control and prevention, site restoration and operating permits and/or approvals to conduct certain of its operations. We record environmental accruals when it is probable that a reasonably estimable liability has been incurred. Environmental remediation accruals are based on internal studies and estimates, including shared financial liability with third parties. Environmental expenditures that extend the life, increase the capacity, improve the safety or efficiency of assets or mitigate or prevent future environmental contamination may be capitalized. Other environmental costs are expensed when incurred. Estimation of Reserves and Valuation Allowances. We evaluate the collectability of accounts receivable based on a combination of factors. In circumstances when we are aware of a specific customer’s inability to meet its financial obligation to the Company, the balance in the reserve for doubtful accounts is evaluated, and if it is determined to be deficient, a specific amount will be added to the reserve. For all other customers, the reserve for doubtful accounts is determined by the length of time the receivables are past due or the customer’s financial condition. Income Taxes. In determining net income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax provisions and the resultant tax liabilities, and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. In the ordinary course of business, there may be many transactions and calculations where the ultimate tax outcome is uncertain. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws. We recognize potential liabilities for anticipated tax audit issues in both the U.S. and state tax jurisdictions based on an estimate of the ultimate resolution of whether, and the extent to which, additional taxes will be due. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. As part of our process for preparing financial statements, we must assess the likelihood that our deferred tax assets can be recovered. If recovery is not likely, the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to be ultimately recoverable. In this process, certain relevant criteria are evaluated including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior years that can be used to absorb net operating losses and credit carrybacks, and taxable income in future years. Our judgment regarding future taxable income may change due to market conditions, changes in U.S. tax laws and other factors. These changes, if any, may require material adjustments to the deferred tax assets and an accompanying reduction or increase in net income in the period when such determinations are made.
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LIQUIDITY AND CAPITAL RESOURCES Cash Flow. The following table provides a summary of our cash flows:
Cash flows from operating activities increased $16.8 million during fiscal 2012 from fiscal 2011. This increase was largely attributable to increased net earnings of approximately $3.9 million, and increases in cash flows from changes in operating assets and liabilities. Cash flows from operations were positively impacted in fiscal 2012 by approximately $50.1 million of depreciation, depletion and amortization, collection of approximately $9.1 million of income taxes receivable, and an increase of approximately $3.5 million in accounts payable and accrued liabilities, partially offset by an increase of approximately $10.5 million and 8.4 million in accounts and notes receivable and inventories. The increase in accounts and notes receivable and inventories was due primarily to the relatively mild winter, which resulted in increased sales volumes in our cement segment during fiscal 2012, as compared to a relatively harsh winter in fiscal 2011. During fiscal 2011, cash flows from operating activities were positively impacted by depreciation, depletion and amortization of approximately $49.2 million, a decrease in accounts and notes receivable of approximately $11.1 million, partially offset by tax payments of approximately $29.4 million, primarily related to our IRS audit. See below for more information. The reduction in accounts and notes receivable was primarily due to the repayment of a $6.0 million note receivable and lower sales volumes due to harsh winter weather. Working capital increased to $114.8 million at March 31, 2012, compared to $105.1 million at March 31, 2011, primarily due to increased cash, accounts and notes receivable and inventories and decreased accrued expenses, partially offset by increased accounts payable, current portion of long-term debt and decreased income taxes receivable. The decrease in income tax receivable is due to our receiving payment from the IRS in January 2012, while the increase in accounts payable is due to timing. The decrease in accrued liabilities is due to the reduction in accrued interest due to the payment of approximately $88.1 million of Senior Notes, a reduction in insurance payable due to the payment of certain workers compensation claims and the reduction of our current deferred tax liability. The increase in accounts and notes receivable at March 31, 2012 as compared to March 31, 2011 is primarily due to the unseasonably mild winter, which primarily benefitted our cement business. During the fiscal fourth quarter of 2012, the weather across the northern part of the United States, where most of our cement plants are located, was unseasonably mild, which enabled many construction projects to be started or continued during the winter months. The increase in accounts receivable at March 31, 2012, as compared to March 31, 2011, was consistent with the increase in revenues during the same periods. As a percentage of quarterly sales generated in the quarter then ended, accounts receivable were 48% and 46% at March 31, 2012 and 2011, respectively. Accounts receivable also increased at March 31, 2012, as compared to March 31, 2011, as a result of the price
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increase for gypsum wallboard, which went into effect on January 1, 2012. As a result of this price increase, average net sales prices increased by approximately 35% in the fourth quarter of fiscal 2012, as compared to fiscal 2011. 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 March 31, 2012. Notes receivable are monitored on an individual basis, and no significant deterioration in the collectability of notes receivable was identified at March 31, 2012. Our inventory balance at March 31, 2012 increased approximately 7% from the inventory balance at March 31, 2011, with the vast majority of that increase being in raw materials and materials in progress at our cement plants. We expect inventory to decline over the next two quarters, as demand for cement increases during the normal construction cycle. Generally, we build cement inventories over the winter to meet our demand during the spring and summer. At March 31, 2011, cement inventories were lower than usual, as we had an extended shutdown at our Illinois plant due to poor economic and weather conditions. Given the relatively mild winter in fiscal 2012, all of our cement plants remained operational as they built inventory for the upcoming season. 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 greater level of repair parts inventory. We believe all of these repair parts are necessary and we perform semi-annual analysis to identify obsolete parts. We have less than one year’s sales of all product inventories, and our inventory has a low risk of obsolescence due our products being basic construction materials. In June 2010, we received a Notice of Deficiency (“Notice”) (commonly referred to as a “90 Day Letter”) from the IRS claiming $71.5 million of taxes and penalties for the fiscal years ended March 31, 2001 through 2006, inclusive, related to an IRS audit of the acquisition of certain Republic Assets. The Notice was in substantial agreement with our financial accruals including interest. The total amount related to the Notice, including interest, was approximately $98.7 million, of which $75 million had previously been deposited with the IRS. We deposited the remaining $23.7 million with the IRS in July 2010 and asked the IRS to apply all $98.7 million of deposits to the payment of the tax, penalties and interest. Subsequent review of the IRS interest billing produced a refund of $0.8 million reducing the net outlay to $97.9 million. Refund claims were filed with the IRS in October 2010 to recover all $97.9 million, plus interest, and we have filed a lawsuit in Federal District Court to recover the requested refunds. Additionally, as a result of the notice, we paid $8.4 million in state taxes, penalties and interest during the fiscal year ended March 31, 2011 and an additional $0.3 million in state taxes and interest during the fiscal year ended March 31, 2012. See Notes (G) and (H) of the Notes to the Consolidated Financial Statements. Net cash used in investing activities during fiscal 2012 was approximately $26.1 million, as compared to net cash used in investing activities of $16.6 million in fiscal 2011, an increase of $9.5 million. The majority of the increase is associated with expenditures of approximately $11.6 million to acquire land with mineral reserves in the Midwest for purpose of business development involving the mining and processing of sand that could be used by the oil services business. Net cash used in financing activities increased to $30.1 million during fiscal 2012, as compared to $27.0 million during fiscal 2011. This increase is primarily due to the increase in net repayments of debt to $20.0 million during fiscal 2012 from $16.0 million in fiscal 2011, offset by increased proceeds from stock option exercises during fiscal 2012 as compared to fiscal 2011. Our debt-to-capitalization ratio and net-debt-to-capitalization ratio improved to 36.1% and 35.5%, respectively, at March 31, 2012 as compared to 38.4% and 38.3%, respectively, at March 31, 2011. Debt Financing Activities. On December 16, 2010, we entered into an amended and restated $300.0 million credit facility (“the “Credit Facility”) that expires on December 16, 2015. Borrowings under the Credit Facility are guaranteed by all major operating subsidiaries of the Company. At the option of the Company, outstanding principal amounts on the Credit Facility bear interest at a variable rate equal to (i) LIBOR, plus an agreed margin (ranging from 100 to 225 basis points), which is to be established quarterly based upon the Company’s ratio of consolidated EBITDA, which is defined as earnings before interest, taxes, depreciation and amortization, to its consolidated indebtedness, or (ii) an
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alternative base rate which is the higher of (a) the prime rate or (b) the federal funds rate plus 1/2%, per annum plus an agreed margin (ranging from 0 to 125 basis points). Interest payments are payable monthly or at the end of the LIBOR advance periods, which can be up to a period of six months at the option of the Company. The Credit Facility contains customary covenants that restrict our ability to incur additional debt, encumber our assets, sell assets, make or enter into certain investments, loans or guaranties and enter into sale and leaseback arrangements. The Credit Facility also requires us to maintain a consolidated funded indebtedness ratio (consolidated indebtedness to consolidated earnings before interest, taxes, depreciation, amortization and other non-cash deductions) of 3.5 or less and an interest coverage ratio (consolidated earnings before interest, taxes, depreciation, amortization and other non-cash deductions to interest expense) of at least 2.5. The Credit Facility also limits our ability to make certain restricted payments, such as paying cash dividends; however, there are several exceptions to this restriction, including: (i) the Company may pay cash dividends in an aggregate amount of up to $50.0 million each fiscal year; and (ii) the Company may make restricted payments not otherwise permitted so long as no default would result therefrom and our consolidated funded indebtedness ratio does not exceed 3.0. We had $70.0 million of borrowings outstanding under the Credit Facility at March 31, 2012, and had $221.0 million of unused borrowings under the Credit Facility at March 31, 2012; however, due to certain covenants contained in the Credit Facility, namely the requirement for our consolidated funded debt ratio to remain at 3.50 to 1.0 or less, and other outstanding debt instruments only approximately $100.0 million in additional borrowings were available to us at March 31, 2012 without exceeding this ratio. We entered into a Note Purchase Agreement on November 15, 2005 (the “2005 Note Purchase Agreement”) related to our sale of $200 million of senior, unsecured notes, designated as Series 2005A Senior Notes (the “Series 2005A Senior Notes”) in a private placement transaction. The Series 2005A Senior Notes, which are guaranteed by substantially all of our subsidiaries, were sold at par and issued in three tranches on November 15, 2005. Since entering into the 2005 Note Purchase Agreement, we have repurchased $81.1 million in principal of the Series 2005A Senior Notes. Following these repurchases, the amounts outstanding for each of the three tranches are as follows:
Interest for each tranche of Notes is payable semi-annually on May 15 and November 15 of each year until all principal is paid for the respective tranche. We entered into an additional Note Purchase Agreement on October 2, 2007 (the “2007 Note Purchase Agreement”) related to our sale of $200 million of senior, unsecured notes, designated as Series 2007A Senior Notes (the “Series 2007A Senior Notes”) in a private placement transaction. The Series 2007A Senior Notes, which are guaranteed by substantially all of our subsidiaries, were sold at par and issued in four tranches on October 2, 2007. Since entering into the 2007 Note Purchase Agreement, we have repurchased $122.0 million in principal of the Series 2007A Senior Notes. Following the repurchase, the amounts outstanding for each of the four tranches are as follows:
Interest for each tranche of Notes is payable semi-annually on April 2 and October 2 of each year until all principal is paid for the respective tranche. Our obligations under the 2005 Note Purchase Agreement and the 2007 Note Purchase Agreement (collectively referred to as the “Note Purchase Agreements”) and the Series 2005A Senior Notes and the Series 2007A Senior Notes (collectively referred to as “the Senior Notes”) are equal in right of payment with all other senior, unsecured indebtedness of the Company, including our debt under the Credit Facility. The Note Purchase
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Agreements contain customary restrictive covenants, including covenants that place limits on our ability to encumber our assets, to incur additional debt, to sell assets, or to merge or consolidate with third parties, as well as certain cross covenants with the Credit Facility, namely the maintenance of certain financial ratios. On August 31, 2011, we entered into an Uncommitted Master Shelf Agreement (the “Shelf Agreement”) with John Hancock Life Insurance Company (U.S.A.) (“Hancock”). The Shelf Agreement provides the terms under which the Company may offer up to $75 million of its senior unsecured notes for purchase by Hancock or Hancock’s affiliates that become parties to the Shelf Agreement (collectively, “Purchasers”). The Shelf Agreement does not obligate the Company to sell, or the Purchasers to buy, any such notes, and has a term of two years. We have not sold any notes pursuant to the Shelf Agreement as of March 31, 2012. Other than the Credit Facility, we have no other source of committed external financing in place. In the event the Credit Facility was terminated, no assurance can be given as to our ability to secure a new source of financing. Consequently, if a balance was outstanding on the Credit Facility at the time of termination, and an alternative source of financing cannot be secured, it would have a material adverse impact on us. None of our debt is rated by the rating agencies. We do not have any off balance sheet debt except for operating leases. Also, we have no outstanding debt guarantees. We have available under the Credit Facility a $50 million Letter of Credit Facility. At March 31, 2012, we had $9.0 million of letters of credit outstanding that renew annually. We are contingently liable for performance under $10.4 million in performance bonds relating primarily to our mining operations. We believe that our cash flow from operations and available borrowings under our Credit Facility should be sufficient to meet our currently anticipated operating needs, capital expenditures and dividend and debt service requirements for at least the next twelve 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 Credit Facility, the level of competition and general and economic factors beyond our control. We cannot predict what effect these factors will have on our future liquidity. For additional information on factors impacting our liquidity and capital resources, please refer to Part I, Item 1A, “Risk Factors” above. Cash Used for Share Repurchases and Stock Repurchase Program. See table under Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” on page 20 for additional information. On November 7, 2006, we announced that our Board of Directors authorized the repurchase of an additional 5,156,800 shares of common stock, raising our repurchase authorization to approximately 6,000,000 shares, of which 717,300 remained available at March 31, 2012. Share repurchases may be made from time-to-time in the open market or in privately negotiated transactions. The timing and amount of any repurchases of shares will be determined by the Company’s management, based on its evaluation of market and economic conditions and other factors. Repurchases may also be effected pursuant to plans or instructions that meet the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934. We did not repurchase any shares during the fiscal years ended March 31, 2012, 2011 and 2010.
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Capital Expenditures. The following table compares capital expenditures:
Historically, we have financed such expenditures with cash from operations and borrowings under our revolving credit facility. Capital expenditures in fiscal 2012 were primarily related to necessary replacements and upgrading of equipment, as well as acquisitions of additional reserves. We anticipate maintenance capital expenditures during fiscal 2013 will be consistent with the amount spent in fiscal 2012. During fiscal 2012, we purchased land with mineral reserves in the Midwest for the purpose of developing a business for mining and processing of sand that could be used by oil services businesses and other industrial users. Our pursuit of this opportunity is currently in the initial stages with the focus on permitting, plant design, logistics and market development; however, during fiscal 2013, as we continue to develop this business, we anticipate additional capital expenditures in the range of $25 million to $50 million. See Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Executive Summary on page 23 for more information. Dividends. Dividends paid in fiscal years 2012 and 2011 were $17.9 million and $17.7 million, respectively. Each quarterly dividend payment is subject to review and approval by our Board of Directors. Contractual and Other Obligations. We have certain contractual obligations arising from indebtedness, operating leases and purchase obligations. Future payments due, aggregated by type of contractual obligation are set forth as follows:
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Additionally, we are subject to potential tax liabilities where we potentially may owe $15.8 million to the IRS and $7.3 million to certain states in the next 1 to 5 year period. See Notes (D), (G) and (H) of the Notes to the Consolidated Financial Statements for more information. Based on our current actuarial estimates, we anticipate making contributions of approximately $0.5 million to $1.0 million to our defined benefit plans for fiscal year 2013. Inflation and Changing Prices. The Consumer Price Index rose approximately 3.0% in calendar 2011, 1.5% in 2010, and 2.7 % in 2009. Prices of materials and services, with the exception of power, natural gas, coal, petroleum coke, and transportation freight, have remained relatively stable over the three year period. During calendar 2011, the Consumer Price Index for energy and transportation increased approximately 6.6 and 7.7%, respectively. The increases impacted our business by raising prices of energy, but the overall impact was small due to improving efficiencies. Additional inflationary increases could have an adverse impact on all of our businesses. The ability to increase sales prices to cover future increases varies with the level of activity in the construction industry, the number, size, and strength of competitors and the availability of products to supply a local market. GENERAL OUTLOOK See “General Outlook” within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 28-29. RECENT ACCOUNTING PRONOUNCEMENTS In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This guidance is effective for interim and annual periods beginning on or after December 15, 2011, applied prospectively. The adoption of this guidance did not have a material impact on our consolidated financial statements. In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires comprehensive income to be reported in either a single statement of comprehensive income or in separate, consecutive statements reporting net income and other comprehensive income. In December 2011, the FASB issued ASU 2011-12 which defers the effective date of the requirement in ASU 2011-05 to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income. Retrospective application is required and both ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We will adopt this Standard during our fiscal first quarter ended June 30, 2012. FORWARD-LOOKING STATEMENTS Certain information included in this report or in other materials we have filed or will file with the SEC, as well as information included in oral statements or other written statements made or to be made by us, contains or may 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 Litigation Reform Act of 1995. Forward-looking statements may be identified by the context of the statement and generally arise when we are discussing our beliefs, estimates or expectations. From time to time, forward-looking statements also are included in our other periodic reports on Forms 10-K, 10-Q and 8-K, press releases and presentations, on our web site and in other material released to the public. We specifically disclaim any duty to update any of the information set forth in this report, including any forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future events and, therefore, involve a number of risks and uncertainties. Management cautions that forward-looking statements are not guarantees, and our actual results could differ materially from those expressed or implied in the forward looking statements. See Item 1A for a more detailed discussion of specific risks and uncertainties.
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We are exposed to market risks related to fluctuations in interest rates on our Credit Facility. From time-to-time we have utilized derivative instruments, including interest rate swaps, in conjunction with our overall strategy to manage the debt outstanding that is subject to changes in interest rates. We have a $300.0 million Credit Facility available at March 31, 2012 under which borrowings bear interest at a variable rate. A hypothetical 100 basis point increase in interest rates on the $70.0 million of borrowings at March 31, 2012 would increase our interest expense by $0.7 million on an annual basis. At present, we do not utilize derivative financial instruments. We are subject to commodity risk with respect to price changes principally in coal, coke, natural gas and power. We attempt to limit our exposure to changes in commodity prices by entering into contracts or increasing use of alternative fuels.
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Financial Information Index to Financial Statements and Related Information
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Eagle Materials Inc. and Subsidiaries Consolidated Statements of Earnings (dollars in thousands, except share and per share data)
See notes to consolidated financial statements.
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Eagle Materials Inc. and Subsidiaries (dollars in thousands)
See notes to consolidated financial statements.
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Eagle Materials Inc. and Subsidiaries Consolidated Statements of Cash Flows (dollars in thousands)
See notes to consolidated financial statements.
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Eagle Materials Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity (dollars in thousands)
See notes to consolidated financial statements.
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Eagle Materials Inc. and Subsidiaries Notes to Consolidated Financial Statements (dollars in thousands, except per share data) (A) Significant Accounting Policies Basis of Presentation – The consolidated financial statements include the accounts of Eagle Materials Inc. and its majority-owned subsidiaries (“EXP” or the “Company”), which may be referred to as “our”, “we”, or “us”. All intercompany balances and transactions have been eliminated. EXP is a holding company whose assets consist of its investments in its subsidiaries, joint venture, intercompany balances and holdings of cash and cash equivalents. The businesses of the consolidated group are conducted through EXP’s subsidiaries. The Company conducts one of its cement plant operations through a joint venture, Texas Lehigh Cement Company L.P., which is located in Buda, Texas (the “Joint Venture”). Investments in the Joint Venture and affiliated companies owned 50% or less are accounted for using the equity method of accounting. The Equity in Earnings of Unconsolidated Joint Venture has been included for the same period as our March 31 year end. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We evaluated all events or transactions that occurred after March 31, 2012 through the filing of these financial statements. Reclassifications – Certain prior period reclassifications have been made to conform to the current period presentation. Cash and Cash Equivalents – Cash equivalents include short-term, highly liquid investments with original maturities of three months or less and are recorded at cost, which approximates market value. Accounts and Notes Receivable – Accounts and notes receivable have been shown net of the allowance for doubtful accounts of $5.0 million and $4.6 million at both March 31, 2012 and 2011, respectively. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral from our customers. The allowance for non-collection of receivables is based upon analysis of economic trends in the construction industry, detailed analysis of the expected collectability of accounts receivable that are past due and the expected collectability of overall receivables. We have no significant credit risk concentration among our diversified customer base. We had notes receivable totaling approximately $4.3 million at March 31, 2012, of which approximately $0.9 million has been classified as current and presented with accounts receivable on the balance sheet. We lend funds to certain companies in the ordinary course of business, and the notes bear interest, on average, at the prime rate plus 1.5%. Remaining unpaid amounts, plus accrued interest, mature on various dates between 2012 and 2017. The notes are collateralized by certain assets of the borrowers, namely property and equipment. We monitor the credit risk of each borrower by focusing on the timeliness of payments, review of credit history and credit metrics and interaction with the borrowers. At March 31, 2012, approximately $0.6 million of our allowance for doubtful accounts is related to our notes receivable.
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Inventories – Inventories are stated at the lower of average cost (including applicable material, labor, depreciation, and plant overhead) or market. Inventories consist of the following:
Property, Plant and Equipment – Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized and depreciated. Annual maintenance is expensed as incurred. Depreciation is provided on a straight-line basis over the estimated useful lives of depreciable assets and totaled $48.9 million, $48.2 million and $49.7 million for the years ended March 31, 2012, 2011 and 2010, respectively. Raw material deposits are depleted as such deposits are extracted for production utilizing the units-of-production method. Costs and accumulated depreciation applicable to assets retired or sold are eliminated from the accounts and any resulting gains or losses are recognized at such time. The estimated lives of the related assets are as follows:
We periodically evaluate whether current events or circumstances indicate that the carrying value of our depreciable assets may not be recoverable. At March 31, 2012 and 2011, management believes no events or circumstances indicate that the carrying value may not be recoverable. We temporarily idled our gypsum manufacturing facility in Bernalillo, N.M. beginning in December 2009, due to cyclical low gypsum wallboard demand. The carrying value of the Bernalillo plant and equipment at March 31, 2012 was $3.4 million and $4.0 million, respectively and we continue to depreciate the assets over their estimated useful life. We currently have a strong market position in New Mexico, and our Albuquerque gypsum wallboard facility is operating at close to capacity. We plan on resuming manufacturing at the Bernalillo facility in the future when demand for our products improves. Costs of maintaining the facility during the idling are not significant, and the facility was generating positive cash flow prior to being idled; therefore, we have determined that the value of the plant and equipment is not impaired. We are not currently considering the permanent closure of the Bernalillo facility. Any decision to permanently close Bernalillo would be the result of future changes in the building materials industry in the southwest United States and Rocky Mountain region, including changes in the production capacity or operations of our competitors, demand for gypsum wallboard or general macro-economic conditions, which we do not foresee at the present time. If we were to permanently close the Bernalillo facility, or if our expectations as to its use changed such that we project the future undiscounted cash flows from its operations would be insufficient to recover its carrying value due to the factors described above, or for any other reason, we would recognize impairment at that time. All of our other wallboard facilities are currently generating positive cash flow from operations.
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Impairment or Disposal of Long-Lived Assets – We evaluate the recoverability of our long-lived assets and certain identifiable intangibles, such as permits and customer contracts, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets, such as plants, buildings and machinery and equipment, including mining assets, is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Such evaluations for impairment are significantly impacted by estimates of future prices for our products, capital needs, economic trends in the construction sector and other factors. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of by sale are reflected at the lower of their carrying amount or fair value less cost to sell. Goodwill and Intangible Assets – Goodwill. Goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test. We have elected to test for goodwill impairment in the fourth quarter of each fiscal year. The goodwill impairment test is a two-step process, which requires us to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of each reporting unit based on a discounted cash flow model using revenues and profit forecasts and comparing those estimated fair values with the carrying value; a second step is performed, if necessary, to compute the amount of the impairment by determining an “implied fair value” of goodwill. Similar to the review for impairment of other long-lived assets, evaluations for impairment are significantly impacted by estimates of future prices for our products, capital needs, economic trends and other factors. Given the relative weakness in the gypsum wallboard industry utilization, coupled with the slow recovery in residential housing, we expect to continue to perform impairment tests at the end of each quarter on our gypsum wallboard assets and related goodwill, which we began during fiscal 2009, during fiscal 2013, unless we determine that an impairment loss is not reasonably likely to occur.
Amortization expense of intangibles was $0.6 million for each of the years ended March 31, 2012, 2011 and 2010. Other Assets – Other assets are primarily composed of loan fees and financing costs, deferred expenses, and deposits.
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Income Taxes – Income taxes are accounted for using the asset and liability method. Deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, we recognize future tax benefits to the extent that such benefits are more likely than not to be realized. Stock Repurchases – Our Board of Directors has approved the repurchase of a cumulative total of 31,610,605 shares, of which approximately 717,300 shares remain available for repurchase at March 31, 2012. We did not repurchase any shares during the years ended March 31, 2012, 2011 and 2010. Revenue Recognition – Revenue from the sale of cement, gypsum wallboard, paperboard, concrete and aggregates is recognized when title and ownership are transferred upon shipment to the customer. Fees for shipping and handling are recorded as revenue, while costs incurred for shipping and handling are recorded as expenses. We classify amounts billed to customers for freight as revenues and freight costs as cost of goods sold, respectively, in the Consolidated Statements of Earnings. Approximately $66.0 million, $62.0 million and $59.1 million were classified as cost of goods sold in the years ended March 31, 2012, 2011 and 2010, respectively. Other operating income includes lease and rental income, asset sale income, non-inventoried aggregates sales income, distribution center income and trucking income as well as other miscellaneous revenue items and costs which have not been allocated to a business segment. Comprehensive Income/Losses – A summary of comprehensive income for the fiscal years ended March 31, 2012, 2011 and 2010 is presented below:
As of March 31, 2012, we have an accumulated other comprehensive loss of $5.5 million, which is net of income taxes of $3.0 million, in connection with recognizing the difference between the fair value of the pension assets and the projected benefit obligation. Consolidated Cash Flows – Supplemental Disclosures – Interest payments made during the years ended March 31, 2012, 2011 and 2010 were $18.8 million, $18.1 million and $21.4 million, respectively. We received a refund of $8.0 million, and made net payments of $61.9 million and $6.8 million for federal and state income taxes in the years ended March 31, 2012, 2011 and 2010, respectively. Certain deposits made with the IRS in fiscal year 2010 were converted to payments in fiscal 2011, and are shown as payments in fiscal 2011.
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Statements of Consolidated Earnings – Supplemental Disclosures – Maintenance and repair expenses are included in each segment’s costs and expenses. We incurred $37.6 million, $34.5 million and $38.9 million in the years ended March 31, 2012, 2011 and 2010, respectively, which is included in Cost of Goods Sold on the Consolidated Statement of Earnings. Selling, general and administrative expenses of the operating units are included in Cost of Goods Sold on the Consolidated Statements of Earnings. Corporate general and administrative (“G&A”) expenses include administration, financial, legal, employee benefits and other corporate activities and are shown separately in the consolidated statements of earnings. Corporate G&A also includes stock compensation expense. See Note (I) for more information. Total selling, general and administrative expenses for each of the periods are summarized as follows:
During fiscal 2012, we repurchased $88.1 million of our senior debt at a premium, which was recorded inclusive of transaction costs. The amount of the premium plus transaction costs was $2.1 million. Earnings Per Share –
There were 2,773,279, 1,904,637 and 2,738,219 stock options at an average exercise price of $42.17 per share, $44.45 per share and $39.15 per share that were excluded from the computation of diluted earnings per share for the years ended March 31, 2012, 2011 and 2010, respectively, because such inclusion would have been anti-dilutive. Fair Value Measures Certain assets and liabilities are required to be recorded at fair value. The estimated fair values of those assets and liabilities have been determined using market information and valuation methodologies. Changes in assumptions or estimation methods could affect the fair value estimates; however, we do not believe any such changes would have a material impact on our financial condition, results of operations or cash flows. There are three levels of inputs that may be used to measure fair value: Level 1 – Quoted prices for identical assets and liabilities in active markets; Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and
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Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. New Accounting Standards – In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This guidance is effective for interim and annual periods beginning on or after December 15, 2011, applied prospectively. The adoption of this guidance did not have a material impact on our consolidated financial statements. In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires comprehensive income to be reported in either a single statement of comprehensive income or in separate, consecutive statements reporting net income and other comprehensive income. In December 2011, the FASB issued ASU 2011-12 which defers the effective date of the requirement in ASU 2011-05 to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income. Retrospective application is required and both ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We will adopt this Standard during our fiscal first quarter ended June 30, 2012. Other Non Operating Expense – Other non-operating expense consists primarily of significant non-business expenses. Amounts classified as other non-operating expenses related to our loss on arbitration ruling, and our decision not to move forward with planned expansions of our Mountain Cement and Nevada Cement facilities. During January 2012, an arbitration panel announced an adverse decision against the Company in a dispute between one of our aggregates mining subsidiaries and another mining company over the right to mine certain areas. As a result of the adverse ruling, the other mining company was awarded $6.9 million, plus attorney’s fees of $1.2 million. All amounts were paid during February 2012. This amount, together with our legal expenses incurred defending this claim, is classified as Other Non-Operating Expense in our Consolidated Statements of Earnings for the fiscal year ended March 31, 2012. See Note (H), Commitments and Contingencies, on pages 61-63 for more information about the arbitration ruling. During February 2011, we determined that we would not move forward with the planned expansion of our Nevada Cement facility. As a result of this decision, we wrote-off approximately $8.9 million related to the planned expansion during fiscal 2011. The remaining expense consists of the write-down of unused aggregate equipment in our Texas operation and other miscellaneous write-downs. During fiscal 2010, due to improved operational efficiencies and reduced costs, we withdrew our permit application with the Wyoming Department of Environmental Quality. In connection with the withdrawal, we expensed approximately $2.5 million relating to the planned expansion. Adjustment for Reversal of Accrual During January 2012, we determined that our previous treatment of a reversal of a $3.0 million accrual, which related to a prior year, should have been treated as a correction of an error in the prior period rather than a reduction of Cost of Goods Sold during the three month period ended June 30, 2011, as it was previously reported. The accrual was originally recorded in fiscal 2001 as a contra account in the fixed asset subledger, and related to expected costs to improve certain manufacturing equipment at our Duke, Oklahoma gypsum wallboard facility. The amount was recorded in order to properly state the acquired assets at fair value; however, the accrual was not released as the original assets were depreciated over their useful life. The adjustment increased Property
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Plant and Equipment by $3.0 million, with a corresponding increase in Deferred Income Taxes of $1.05 million and Retained Earnings of $1.95 million at March 31, 2009. This adjustment did not have a significant impact on our net income or financial position in fiscal 2011 and 2010, and did not impact cash flows from operating activities during fiscal 2012, 2011 or 2010. (B) Property, Plant and Equipment Cost by major category and accumulated depreciation are summarized as follows:
Included in Property, Plant and Equipment are $46.0 million and $34.9 million of mining and related assets (net of accumulated depreciation) at March 31, 2012 and 2011, respectively. (C) Accrued Expenses Accrued expenses at March 31, 2012 and 2011 consist of the following:
(D) Indebtedness Long-term debt consists of the following:
On December 16, 2011, we accepted for repurchase $59.1 million in aggregate principal amount of our Series 2007A Senior Notes for $60.2 million, plus accrued interest of $0.3 million, and $29.0 million in aggregate principal amount of our Series 2005A Senor Notes for $29.6 million, plus accrued interest of $0.4 million. The purchase of the Senior Notes was funded through borrowings under our Bank Credit Facility. The premium paid on these repurchases has been included in Loss on Debt Retirement in our Consolidated Statement of Earnings for the fiscal year ended March 31, 2012.
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The weighted-average interest rate of Senior Notes during fiscal 2012 and 2011 was 5.78% and 5.75%, respectively. The weighted average interest rate of Senior Notes was 5.80% and 5.75% at March 31, 2012 and 2011, respectively. The weighted-average interest rate of bank debt borrowings during fiscal 2012, 2011 and 2010 was 2.6%, 1.7% and 1.6%, respectively. The interest rate on the bank debt was 2.5% and 2.3% at March 31, 2012 and 2011, respectively. Our maturities of long-term debt during the next five fiscal years and thereafter are as follows:
Senior Notes – We entered into a Note Purchase Agreement on November 15, 2005 (the “2005 Note Purchase Agreement”) related to our sale of $200 million of senior, unsecured notes, designated as Series 2005A Senior Notes (the “Series 2005A Senior Notes”) in a private placement transaction. The Series 2005A Senior Notes, which are guaranteed by substantially all of our subsidiaries, were sold at par and issued in three tranches on November 15, 2005. Since entering the 2005 Note Purchase Agreement, we have repurchased $81.1 million in principal of the Series 2005A Senior Notes. As of March 31, 2012, the amounts outstanding for each of the three tranches are as follows:
Interest for each tranche of Notes is payable semi-annually on the 15th day of May and the 15th day of November of each year until all principal is paid for the respective tranche. We entered into an additional Note Purchase Agreement on October 2, 2007 (the “2007 Note Purchase Agreement”) related to our sale of $200 million of senior, unsecured notes, designated as Series 2007A Senior Notes (the “Series 2007A Senior Notes”) in a private placement transaction. The Series 2007A Senior Notes, which are guaranteed by substantially all of our subsidiaries, were sold at par and issued in four tranches on October 2, 2007. Since entering into the 2007 Note Purchase Agreement, we have repurchased $122.0 million in principal of the Series 2007A Senior Notes. As of March 31, 2012, the amounts outstanding for each of the four tranches are as follows:
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Interest for each tranche of Notes is payable semi-annually on the second day of April and the second day of October of each year until all principal is paid for the respective tranche. Our obligations under the 2005 Note Purchase Agreement and the 2007 Note Purchase Agreement (collectively referred to as the “Note Purchase Agreements”) and the Series 2005A Senior Notes and the Series 2007A Senior Notes (collectively referred to as “the Senior Notes”) are equal in right of payment with all other senior, unsecured debt of the Company, including our debt under the Credit Facility. The Note Purchase Agreements contain customary restrictive covenants, including covenants that place limits on our ability to encumber our assets, to incur additional debt, to sell assets, or to merge or consolidate with third parties, as well as certain cross covenants with the Credit Facility. We were in compliance with all financial ratios and tests at March 31, 2012 and throughout the fiscal year. Pursuant to a Subsidiary Guaranty Agreement, substantially all of our subsidiaries have guaranteed the punctual payment of all principal, interest, and Make-Whole Amounts (as defined in the Note Purchase Agreements) on the Senior Notes and the other payment and performance obligations of the Company contained in the Senior Notes and in the Note Purchase Agreements. We are permitted, at our option and without penalty, to prepay from time to time at least 10% of the original aggregate principal amount of the Senior Notes at 100% of the principal amount to be prepaid, together with interest accrued on such amount to be prepaid to the date of payment, plus a Make-Whole Amount. The Make-Whole Amount is computed by discounting the remaining scheduled payments of interest and principal of the Senior Notes being prepaid at a discount rate equal to the sum of 50 basis points and the yield to maturity of U.S. treasury securities having a maturity equal to the remaining average life of the Senior Notes being prepaid. Bank Debt – On December 16, 2010, we entered into a $300.0 million credit agreement (“the “Credit Facility”) that expires on December 16, 2015. Borrowings under the Credit Facility are guaranteed by all major operating subsidiaries of the Company. At the option of the Company, outstanding principal amounts on the Credit Facility bear interest at a variable rate equal to (i) LIBOR, plus an agreed margin (ranging from 100 to 225 basis points), which is to be established quarterly based upon the Company’s ratio of consolidated EBITDA, which is defined as earnings before interest, taxes, depreciation and amortization, to its consolidated indebtedness, or (ii) an alternative base rate which is the higher of (a) the prime rate or (b) the federal funds rate plus 1/2%, per annum plus an agreed margin (ranging from 0 to 125 basis points). Interest payments are payable monthly or at the end of the LIBOR advance periods, which can be up to a period of six months at the option of the Company. The Credit Facility contains customary covenants that restrict our ability to incur additional debt, encumber our assets, sell assets, make or enter into certain investments, loans or guaranties and enter into sale and leaseback arrangements. The Credit Facility also requires us to maintain a consolidated funded indebtedness ratio (consolidated indebtedness to consolidated earnings before interest, taxes, depreciation, amortization and other non-cash deductions) of 3.5 or less and an interest coverage ratio (consolidated earnings before interest, taxes, depreciation, amortization and other non-cash deductions to interest expense) of at least 2.5. The Credit Facility also limits our ability to make certain restricted payments, such as paying cash dividends; however, there are several exceptions to this restriction, including: (i) the Company may pay cash dividends in an aggregate amount of up to $50.0 million each fiscal year; and (ii) the Company may make restricted payments not otherwise permitted so long as no default would result therefrom and our consolidated funded indebtedness ratio does not exceed 3.0. The Credit Facility has a $50.0 million letter of credit facility. Under the letter of credit facility, the Company pays a fee at a per annum rate equal to the applicable margin for Eurodollar loans in effect from time to time plus a one-time letter of credit fee in an amount equal to 0.125% of the initial stated amount. At March 31, 2012, we had $9.0 million of letters of credit outstanding. We had $70.0 million of borrowings outstanding under the Credit Facility at March 31, 2012, and had $221.0 million of unused borrowings under the Credit Facility at March 31, 2012; however, due to certain covenants contained in the Bank Credit Facility, namely the requirement for our consolidated funded indebtedness ratio to remain at 3.50 to 1.0 or less, and other outstanding debt instruments, only approximately $100.0 million in additional borrowings were available to us at March 31, 2012 without exceeding this ratio.
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On August 31, 2011, we entered into an Uncommitted Master Shelf Agreement (the “Shelf Agreement”) with John Hancock Life Insurance Company (U.S.A.) (“Hancock”). The Shelf Agreement provides the terms under which the Company may offer up to $75 million of its senior unsecured notes for purchase by Hancock or Hancock’s affiliates that become bound by the Shelf Agreement (collectively, “Purchasers”). The Shelf Agreement does not obligate the Company to sell, or the Purchasers to buy, any such notes, and has a term of two years. We have not sold any notes pursuant to the Shelf Agreement as of March 31, 2012. (E) Fair Value of Financial Instruments The fair value of our senior notes has been estimated based upon our current incremental borrowing rates for similar types of borrowing arrangements. The fair value of our Senior Notes at March 31, 2012 is as follows:
All assets and liabilities which are not considered financial instruments have been valued using historical cost accounting. The carrying values of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities approximate their fair values due to the short-term maturities of these assets and liabilities. Outstanding amounts under our Credit Facility also approximate fair value due to the variable rate of interest charged on outstanding amounts. (F) Business Segments Operating segments are defined as components of an enterprise that engage in business activities that earn revenues, incur expenses and prepare separate financial information that is evaluated regularly by our chief operating decision maker in order to allocate resources and assess performance. We operate in four business segments: Cement, Gypsum Wallboard, Recycled Paperboard, and Concrete and Aggregates, with Gypsum Wallboard and Cement being our principal lines of business. These operations are conducted in the U.S. and include the mining of limestone and the manufacture, production, distribution and sale of Portland cement (a basic construction material which is the essential binding ingredient in concrete), the mining of gypsum and the manufacture and sale of gypsum wallboard, the manufacture and sale of recycled paperboard to the gypsum wallboard industry and other paperboard converters, the sale of readymix concrete and the mining and sale of aggregates (crushed stone, sand and gravel). These products are used primarily in commercial and residential construction, public construction projects and projects to build, expand and repair roads and highways. As further discussed below, we operate four cement plants, eleven cement distribution terminals, five gypsum wallboard plants, including the plant temporarily idled in Bernalillo, N.M., a gypsum wallboard distribution center, a recycled paperboard mill, nine readymix concrete batch plant locations and two aggregates processing plant locations. The principal markets for our cement products are Texas, northern Illinois (including Chicago), the Rocky Mountains, northern Nevada, and northern California. Gypsum wallboard and recycled paperboard are distributed throughout the continental U.S. Concrete and aggregates are sold to local readymix producers and paving contractors in the Austin, Texas area and northern California.
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We conduct one of our four cement plant operations, Texas Lehigh Cement Company LP in Buda, Texas, through a Joint Venture. For segment reporting purposes only, we proportionately consolidate our 50% share of the Joint Venture’s revenues and operating earnings, which is consistent with the way management reports the segments within the Company for making operating decisions and assessing performance. We account for intersegment sales at market prices. The following table sets forth certain financial information relating to our operations by segment:
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Segment operating earnings, including the proportionately consolidated 50% interest in the revenues and expenses of the Joint Venture, represent revenues less direct operating expenses, segment depreciation, and segment selling, general and administrative expenses. We account for intersegment sales at market prices. Corporate assets consist primarily of cash and cash equivalents, general office assets and miscellaneous other assets.
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The basis used to disclose Identifiable Assets, Capital Expenditures and Depreciation, Depletion conforms with the equity method, and is similar to how we disclose these accounts in our Consolidated Balance Sheets and Consolidated Statements of Earnings. The segment breakdown of goodwill at March 31, 2012 and 2011 is as follows:
During fiscal 2012, we provided approximately $12.0 million to our Joint Venture for its capital needs, which has been offset against distributions received from the Joint Venture during fiscal 2012 on the Consolidated Statement of Cash Flows. (G) Income Taxes The provision for income taxes includes the following components:
The effective tax rates vary from the federal statutory rates due to the following items:
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During the quarter ended December 31, 2011, the Federal statute of limitations for assessment for the years ended March 31, 2004, March 31, 2005 and March 31, 2006 expired. Also during the quarter, we participated in amnesty programs in Arizona, Colorado and California. These events were treated as discrete items in the tax provision and a benefit totaling $2.5 million on an after-tax basis was recognized. During January 2012, we received payment of the $9.1 million owed to us by the IRS at March 31, 2011 due to carryback of net operating loss for tax purposes. The deferred income tax provision results from the following temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes:
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