United StatesSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the Quarterly Period Ended
December 31, 2004
Commission File Number 1-12984
Eagle Materials Inc.
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)
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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)Yes þ No o
As of January 31, 2005, the number of outstanding shares of each of the issuer’s classes of common stock was:
Eagle Materials Inc. and SubsidiariesForm 10-QDecember 31, 2004
Table of Contents
Eagle Materials Inc. and Subsidiaries
See notes to unaudited consolidated financial statements.
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See notes to the unaudited consolidated financial statements.
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(A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements as of and for the three and nine month periods ended December 31, 2004, include the accounts of Eagle Materials Inc. and its majority owned subsidiaries (“EXP” the “Company” or “we”) and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 14, 2004.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of the Company, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the information in the following unaudited consolidated financial statements of the Company have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year.
Certain prior period amounts have been reclassified to conform to the current year’s presentation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Share Based Payments. In January 2005, the Financial Accounting Standards Board (“FASB”) finalized Statement of Financial Accounting Standards No. 123 (FAS 123R), “Share-Based Payment,” which requires companies to expense the estimated fair value of employee stock options and similar awards. The accounting provisions of FAS 123R will be effective for the second quarter of fiscal 2006 or July 1, 2005.
We will adopt the provisions of FAS 123R using a modified prospective application. Under the modified prospective application, FAS 123R, which provides among other things certain changes to the method for valuing stock-based compensation, will apply to new awards and to awards that are outstanding on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123 (see Note B). At December 31, 2004, unamortized compensation expense for outstanding awards (variable and non-variable), as determined in accordance with FAS 123, that we expect to record during the second quarter of fiscal 2006 was approximately $354,000, before income taxes.
Inventory Costs. In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (FAS No. 151), Inventory Costs, an amendment of APB No. 43, Chapter 4. The amendments made by FAS No. 151 require that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) be recognized as current-period charges and that the allocation of fixed production overheads to inventory be based on the normal capacity of production facilities. FAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005 or Fiscal 2007 for the Company. We are currently
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evaluating the impact that adoption of SFAS No. 151 will have on our financial position and results of operations.
(B) STOCK-BASED EMPLOYEE COMPENSATION
We account for employee stock options using the intrinsic value method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” as allowed by SFAS No. 123 “Accounting for Stock-Based Compensation.” Except as discussed below, no expense is generally recognized related to the Company’s stock options because the number of shares are fixed at the grant date and each option’s exercise price is set at the stock’s fair market value on the date the option is granted.
Long-Term Compensation Plans
Options. Options granted under the 2005 Long Term Incentive Plan (LTIP) vest over a three year period and become exercisable ratably over a two year period subsequent to vesting. This award has been determined to be a variable award and expense related thereto is recognized over the associated performance period based on the intrinsic value of the options deemed probable of vesting, measured at each quarter and year-end. For the three and nine month periods ended December 31, 2004, we expensed approximately $389,000. No such costs were incurred in the previous corresponding periods.
Restricted Stock Units. For interim reporting purposes, management has estimated the actual number of shares, which will vest and become payable to grantees based on the anticipated achievement of certain operational goals for fiscal year 2005. For the three and nine month periods ended December 31, 2004, we expensed approximately $445,000 and $605,000, respectively. No such costs were incurred in the prior year corresponding periods.
The associated liabilities are reflected in accrued liabilities in the accompanying Consolidated Balance Sheets.
In accordance with SFAS No. 123, as amended by SFAS No. 148, the Company discloses compensation cost based on the estimated fair value at the date of grant. For disclosures purposes, employee stock options are valued at the grant date using the Black-Scholes option-pricing model and compensation expense is recognized ratably over the vesting period.
If the Company had recognized compensation expense for the stock option plans based on the fair value at the grant dates for awards, pro forma net earnings for the three and nine months ended December 31, 2004 and 2003 would be as follows:
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(C) PENSION AND EMPLOYEE BENEFIT PLANS
We sponsor several defined benefit and defined contribution pension plans covering the majority of our employees. Benefits paid under the defined benefit plans covering certain hourly employees are based on years of service and the employee’s qualifying compensation over the last few years of employment.
The following table shows the components of net periodic cost for our plans:
(D) STOCKHOLDERS’ EQUITY
A summary of changes in stockholders’ equity follows:
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(E) CASH FLOW INFORMATION — SUPPLEMENTAL
Cash payments made for interest were $1.6 million and $2.1 million for the nine months ended December 31, 2004 and 2003, respectively. Net payments made for federal and state income taxes during the nine months ended December 31, 2004 and 2003, were $23.9 million and $3.8 million, respectively.
(F) COMPREHENSIVE INCOME
A summary of comprehensive income is presented below:
The unrealized gain on hedging instruments represented the deferral in other comprehensive earnings of the unrealized loss on swap agreements designated as cash flow hedges. During Fiscal 2004, the Company had an interest rate swap agreement with a bank for a total notional amount of $55.0 million. This interest rate swap agreement expired on August 28, 2003, resulting in the reversal of the comprehensive loss recorded at March 31, 2003, and such amounts were reclassified to earnings.
As of December 31, 2004, the Company has an accumulated other comprehensive loss of $1.9 million, net of income taxes of $1.0 million, in connection with recognizing an additional minimum pension liability. The minimum pension liability relates to the accumulated benefit obligation in excess of the fair value of plan assets of the defined benefit retirement plans.
(G) 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:
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(H) COMPUTATION OF EARNINGS PER SHARE
The calculation of basic and diluted common shares outstanding is as follows:
(I) CREDIT FACILITIES
On December 16, 2004, we amended our existing credit facility to increase the facility amount from $250.0 million to $350.0 million, modified certain financial and other covenants and extended the maturity date to 2009. The principal balance of the facility was paid off and replaced with a new $350.0 million credit agreement (the “New Credit Facility”). The New Credit Facility expires on December 16, 2009, at which time all borrowings outstanding are due. The borrowings under the New Credit Facility are guaranteed by all major operating subsidiaries of the Company. At the option of the Company, outstanding principal amounts on the New Credit Facility bear interest at a variable rate equal to: (i) LIBOR, plus an agreed margin (ranging from 87.5 to 162.5 basis points), which is to be established quarterly based upon the Company’s ratio of consolidated EBITDA to its consolidated indebtedness; or (ii) an alternate 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 25 to 100 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. Under the New Credit Facility, we are required to adhere to a number of financial and other covenants, including covenants relating to the Company’s interest coverage ratio and consolidated funded indebtedness ratio. At December 31, 2004 the Company had $343.5 million of borrowings available under the New Credit Facility.
(J) SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage in business activities that earn revenues, incur expenses and prepare separate financial information that is evaluated regularly by our chief operating decision maker in order to allocate resources and assess performance.
We operate in four business segments: Cement, Gypsum Wallboard, Recycled Paperboard, and Concrete and Aggregates, with Cement and Gypsum Wallboard being our principal lines of business. These operations are conducted in the United States 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.
Demand for our products is derived primarily from residential construction, commercial and industrial construction and public (infrastructure) construction, which are highly cyclical and are influenced by prevailing
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economic conditions, including interest rates and availability of public funds. Due to the low value-to-weight ratio of cement, concrete and aggregates, these industries are largely regional and local with demand tied to local economic factors that may fluctuate more widely than those of the nation as a whole.
As further discussed below, we operate four cement plants, ten cement distribution terminals, four gypsum wallboard plants, five gypsum wallboard reload centers, a gypsum wallboard distribution center, a recycled paperboard mill, eight 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 United States. Concrete and aggregates are sold to local readymix producers and paving contractors in the Austin, Texas area and northern California.
During the periods covered by this report we conducted two out of four of our cement plant operations through joint ventures, Texas Lehigh Cement Company, which is located in Buda, Texas and Illinois Cement Company, which is located in LaSalle, Illinois (collectively, the “Joint Ventures”). For segment reporting purposes only, we proportionately consolidate our 50% share of the cement Joint Ventures’ revenues and operating earnings, which is consistent with the way management organizes the segments within the Company for making operating decisions and assessing performance. See Note (M) regarding our purchase of our partner’s 50% share of Illinois Cement Company.
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 Ventures, represent revenues less direct operating expenses, segment depreciation, and segment selling, general and administrative expenses. Corporate assets consist primarily of cash and cash equivalents, general office assets and miscellaneous other assets. Goodwill at December 31, 2004 and 2003 was $40.3 million. The segment breakdown of goodwill at December 31, 2004 and 2003 was Gypsum Wallboard ($33.3 million) and Paperboard ($7.0 million).
Combined summarized financial information for the two jointly owned operations that are not consolidated is set out below (this combined summarized financial information includes the total amounts for the Joint Ventures and not the Company’s 50% interest in those amounts):
(K) NET INTEREST EXPENSE
The following components are included in interest expense, net:
Interest income includes interest on investments of excess cash and interest on notes receivable. Components of interest expense include interest associated with bank borrowings, the accounts receivable securitization facility and commitment fees based on the unused portion of the bank credit facility. Other expenses include amortization of debt issue costs and bank credit facility costs.
(L) COMMITMENTS AND CONTINGENCIES
The Company has certain deductible limits under its workers’ compensation and liability insurance policies for which reserves are established based on the undiscounted estimated costs of known and anticipated claims. We have entered into standby letter of credit agreements relating to workers’ compensation and auto and general liability self-insurance. At December 31, 2004, we had contingent liabilities under these outstanding letters of credit of approximately $6.4 million.
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The following table compares insurance accruals and payments for our operations:
The Company is currently contingently liable for performance under $5.5 million in performance bonds required by certain states and municipalities, and their related agencies. The bonds are principally for certain reclamation obligations and mining permits. We have indemnified the underwriting insurance company against any exposure under the performance bonds. In the Company’s past experience, no material claims have been made against these financial instruments.
In the ordinary course of business, we execute contracts involving indemnifications standard in the industry and indemnifications specific to a transaction such as sale of a business. These indemnifications might include claims relating to any of the following: environmental and tax matters; intellectual property rights; governmental regulations and employment-related matters; customer, supplier, and other commercial contractual relationships; and financial matters. While the maximum amount to which the Company may be exposed under such agreements cannot be estimated, it is the opinion of management that these indemnifications are not expected to have a material adverse effect on our consolidated financial position or results of operations. The Company currently has no outstanding guarantees.
(M) PURCHASE OF ILLINOIS CEMENT JOINT VENTURE
On January 11, 2005 we completed the purchase of the other 50% interest in Illinois Cement Company Joint Venture for approximately $72 million. The Illinois Cement Joint Venture is accounted for under the equity method; however, prospectively the Company will consolidate the results of Illinois Cement in our Consolidated Financial Statements. Revenues for the nine month period ended December 31, 2004 were approximately $48 million.
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Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
OVERVIEW
Eagle Materials Inc. is a diversified producer of basic construction products used in residential, industrial, commercial and infrastructure construction. Information presented for the three and nine months ended December 31, 2004 and 2003, reflects the Company’s four businesses segments, consisting of Cement, Gypsum Wallboard, Recycled Paperboard and Concrete and Aggregates. Certain information for each of Concrete and Aggregates is broken out separately in the segment discussions.
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 occur in a variety of geographic markets, our businesses are subject to the economic conditions in each such geographic market. 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 250 mile radius of the plants. Concrete and aggregates are even more regional as those operations serve the areas immediately surrounding Austin, Texas and north of Sacramento, California. Therefore, demand for cement, concrete and aggregates are tied more closely to the economies of the local and regional markets, which may fluctuate more widely than the nation as a whole. Our Wallboard operations are more national in scope and shipments are made throughout the continental U.S., except for the Northeast; however, our primary markets are in the Southwestern U.S. Demand for wallboard varies between regions with the East and West Coasts representing the largest demand centers.
Nationally trends in the construction industry have been positive as total year-to-date construction spending put in place was 6.9% above the November 2003 estimate and housing starts climbed 10.9% in December, up 5.7% to an annual level of 1.95 million units. Construction spending for the first eleven months of calendar 2004 increased 9.0% compared to the same period in calendar 2003. Wallboard demand has been favorably impacted by strong residential construction due to low interest rates; however, a continued rise in interest rates could impact this demand. Commercial and industrial activity continue to show signs of improvement year-to-date, and improvements, if sustained, may help to offset reduced demand in the residential construction sector if interest rates continue to increase. Cement demand continues to be positively impacted by the strong housing market, an improving non-residential construction market and a continuation of the high level of federal transportation projects. There can be no assurances that the favorable trends will continue in future periods. See “Forward Looking Statements”.
General economic downturns or localized downturns in the regions where we have operations, including any downturns in the construction industry, and 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. Additionally, wallboard operations and to a lesser extent, our other operations are impacted by rising fuel costs, availability and cost of long haul trucking and logistical problems currently being seen in the U.S. rail market. Collectively, these issues could potentially impact our operating earnings and our ability to efficiently distribute our products to the customers we serve.
The Company conducts two of its cement operations through Joint Ventures, Texas Lehigh Cement Company LP, which is located in Buda, Texas, and Illinois Cement Company, which is located in LaSalle, Illinois. The Company owns a 50% interest in each Joint Venture and accounts for its interest under the equity method of accounting. However, for purposes of the Cement segment information presented, we proportionately consolidate our 50% share of the cement Joint Ventures’ revenues and operating earnings, which is the way management organizes the segments within the Company for making operating decisions and assessing performance. See Note J and M of the Notes to the Unaudited Consolidated Financial Statements for additional segment information. On January 11, 2005, we completed the acquisition of the other 50% interest in Illinois Cement. Beginning January 11, 2005 we will fully consolidate the results of Illinois Cement; however, through December 31, 2004 we continued to utilize the equity method of accounting for Illinois Cement.
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RESULTS OF OPERATIONS
Consolidated Results
The following tables lists by line of business the revenues and operating earnings discussed in our operating segments:
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Operating Earnings.
Consolidated operating earnings increased 37% and 49% over the prior year quarter and year-to-date periods, respectively. Continued strong demand in our core markets helped to set record sales volumes in the Wallboard segment both for the quarter and year-to-date periods. Additionally, Cement volumes were at record year-to-date and third quarter levels. During the third quarter, pricing has continued to show stability and improvement in both the Gypsum Wallboard and Cement segments. Pricing improvements have been offset somewhat by increased costs of energy and transportation. The Paperboard segment posted record operating earnings and margins for the quarter and year-to-date periods driven primarily by increased pricing and operating efficiencies at the plant level offset partially by increased fiber costs. Concrete prices have increased approximately 3% and 4%, respectively, for the quarter and year-to-date as compared to the corresponding year ago periods, offset somewhat by the increased costs of cement and fuel delivery costs. Aggregate demand in the northern California and Texas markets remains strong with record quarter and year-to-date sales volumes, offset partially by increased mining and extraction costs.
Other Income.
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. Included in the year-to-date Other Income (Loss) is approximately $1.2 million of cost associated with the relocation of Gypsum Wallboard’s headquarters to Dallas, Texas.
Corporate Overhead.
Corporate general and administrative expenses for the third quarter of Fiscal 2005 were $2.8 million compared to $2.1 million for the comparable prior year period and $7.4 million compared to $6.0 million for the current and prior year-to-date periods. The increase is primarily the result of increased insurance premiums, accounting, legal and outside consultants as well as certain employee related costs including the 2005 LTIP plan further discussed in Note (B) to the Unaudited Consolidated Financial Statements.
Net Interest Expense.
Net interest expense of $0.6 million for the third quarter of Fiscal 2005 and $2.2 million year-to-date has decreased $0.1 and $1.0 million, respectively from last year’s comparable periods due to lower average borrowings.
Income Taxes.
The effective tax rate for Fiscal 2005 is 33.6% versus 34.5% for the comparable periods in Fiscal 2004. The change in the effective tax rate is a result of the revision in certain estimates utilized by the Company for permanent items versus actual amounts included within the corporate tax filings.
Net Income.
Pre-tax earnings of $37.9 million were 38% above last year’s third quarter pre-tax earnings of $27.5 million. Net earnings of $25.9 million increased 44% from net earnings of $18.0 million for last fiscal year’s third quarter. Diluted earnings per share of $1.40 were 47% higher than the $0.95 for last year’s same quarter. Year-to-date net earnings of $79.2 million increased 56% from net earnings of $50.8 million for the comparable year ago period.
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Cement Operations(1)
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Gypsum Wallboard
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Recycled Paperboard
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Concrete
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Aggregates
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare our financial statements. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.
Information regarding our “Critical Accounting Policies and Estimates” can be found in our Annual Report. The four critical accounting policies that we believe are either the most judgmental, or involve the selection or application of alternative accounting policies, and are material to our financial statements are those relating to long-lived assets, goodwill, environmental liabilities and accounts receivable. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm. In addition, Note (A) to the financial statements in our Annual Report contains a summary of our significant policies.
Share Based Payments. In January 2005, the FASB finalized Statement of Financial Accounting Standards No. 123 (FAS 123R), “Share-Based Payment,” which requires companies to expense the estimated fair value of employee stock options and similar awards. The accounting provisions of FAS 123R will be effective for the second quarter of fiscal 2006 or July 1, 2005.
Inventory Costs. In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (FAS No. 151), Inventory Costs, an amendment of APB No. 43, Chapter 4. The amendments made by FAS No. 151 require that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) be recognized as current-period charges and that the allocation of fixed production overheads to inventory be based on the normal capacity of production facilities. FAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005 or Fiscal 2007 for the Company. We are currently evaluating the impact that adoption of SFAS No. 151 will have on our financial position and results of operations.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity.
The following table provides a summary of our cash flows:
The $26.4 million increase in cash flows from operating activities for the nine months of Fiscal 2005 was largely attributable to increased earnings. In addition, changes in working capital items such as decreases in inventory and increases in accounts payable and accrued liabilities and federal taxes payable contributed to the increase in cash flows from operating activities.
Working capital at December 31, 2004, was $7.5 million compared to $12.6 million at March 31, 2004. The decrease resulted primarily from a $2.3 million decrease in inventory; a $4.7 million increase in accounts and notes receivable; a $6.0 million increase in notes payable; a $9.3 million increase in accounts payable and accrued liabilities; and a $7.5 million increase in federal taxes payable, offset against a $15.0 million increase in cash.
Total debt was reduced from $82.9 million at March 31, 2004, to $30.2 at December 31, 2004. Debt-to-capitalization at December 31, 2004, was 6.0% compared to 15.9% at March 31, 2004.
Based on our financial condition and results of operations as of and for the nine months ended December 31, 2004, along with the projected net earnings for the remainder of Fiscal 2005, we believe that our internally generated cash flow coupled with funds available under various credit facilities will enable us to provide adequately for our current operations, dividends, capital expenditures and future growth through the end of Fiscal 2006. The Company was in compliance at December 31, 2004 and during the nine months ended December 31, 2004, with all the terms and covenants of its credit agreements and expects to be in compliance during the next 12 months.
Cash and cash equivalents totaled $18.5 million at December 31, 2004, compared to $3.5 million at March 31, 2004.
Debt Financing Activities.
On December 16, 2004, we amended our existing credit facility to increase the facility amount from $250.0 million to $350.0 million, modified certain financial and other covenants and extended the maturity date to 2009. The principal balance of the facility was paid off and replaced with a new $350.0 million credit agreement (the “New Credit Facility”). The New Credit Facility expires on December 16,
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2009, at which time all borrowings outstanding are due. The borrowings under the New Credit Facility are guaranteed by all major operating subsidiaries of the Company. At the option of the Company, outstanding principal amounts on the New Credit Facility bear interest at a variable rate equal to: (i) LIBOR, plus an agreed margin (ranging from 87.5 to 162.5 basis points), which is to be established quarterly based upon the Company’s ratio of consolidated EBITDA to its consolidated indebtedness; or (ii) an alternate 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 25 to 100 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. Under the New Credit Facility, we are required to adhere to a number of financial and other covenants, including covenants relating to the Company’s interest coverage ratio and consolidated funded indebtedness ratio. At December 31, 2004 the Company had $343.5 million of borrowings available under the New Credit Facility.
Our $50.0 million trade receivables securitization facility (the “Receivables Securitization Facility”), was funded through the issuance of commercial paper and backed by a 364-day committed bank liquidity arrangement. The Receivables Securitization Facility has a termination date of February 20, 2007, subject to a 364-day bank commitment. The Receivables Securitization Facility has been fully consolidated on the accompanying unaudited consolidated balance sheet. Subsidiary company receivables are sold on a revolving basis first to the Company and then to a wholly owned special purpose bankruptcy remote entity of the Company. This entity pledges the receivables as security for advances under the facility. Initially, the borrowed funds have been used to pay down borrowings under the Credit Facility. Outstanding principal amounts under the Receivables Securitization Facility bear interest at the commercial paper rate plus a facility fee. Under the Receivables Securitization Facility, we are required to adhere to certain financial and other covenants that are similar to those in the New Credit Facility. The Company had $30.1 million of borrowings outstanding at December 31, 2004, under the Receivables Securitization Facility.
Other than the Receivables Securitization Facility and the New Credit Facility, the Company has no other source of committed external financing in place. In the event the Receivables Securitization Facility is terminated, funds should be available under the New Credit Facility to repay borrowings. However, if the New Credit Facility were terminated, no assurance can be given as to the Company’s ability to secure a new source of financing. Consequently, if a balance is outstanding on the New Credit Facility at the time of termination, and an alternative source of financing cannot be secured, it would have a material adverse impact on the Company. None of the Company’s debt is rated by the rating agencies.
The Company does not have any off balance sheet debt except for operating leases. Other than the Receivables Securitization Facility, the Company does not have any other transactions, arrangements or relationships with “special purpose” entities. Also, the Company has no outstanding debt guarantees. The Company has available under the New Credit Facility a $25.0 million Letter of Credit Facility. At December 31, 2004, the Company had $6.4 million of letters of credit outstanding that renew annually. We are contingently liable for performance under $5.5 million in performance bonds relating primarily to our mining operations.
On January 11, 2005, we completed the purchase of our partner’s 50% interest in Illinois Cement Company for $72 million of which $65 million was financed through borrowings under the New Credit Facility and the balance was paid with cash on hand. See Note (M) to the Unaudited Consolidated Financial Statements for further discussion.
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Cash used for Share Repurchases.
On July 28, 2004, we announced that our Board of Directors authorized the repurchase of an additional 1,800,000 shares of common stock, raising our repurchase authorization to approximately 2,000,000 shares. As of December 31, 2004, we had remaining authorization to purchase 1,750,000 shares. Share repurchases may be made from time-to-time in the open market or in privately negotiated transactions. The timing and amount of any repurchases of shares will be determined by the Company’s management, based on its evaluation of market and economic conditions and other factors. The repurchase authorization applies to both classes of the Company’s common stock.
Dividends. Dividends paid in the nine months of 2004 and 2003 were $16.7 million and $2.8 million, respectively. Each quarterly dividend payment is subject to review and approval by our Board of Directors, and we intend to evaluate our dividend payment amount on an ongoing basis.
Capital Resources.
The following table compares capital expenditures:
For Fiscal 2005, we expect expenditures of the following: approximately $20 million ($7.5 million higher than our 2004 levels), with the year-over-year increase due to significant equipment upgrades relating to the further automation of our wallboard plants. Historically, we have financed such expenditures with cash from operations and borrowings under our revolving credit facilities.
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GENERAL OUTLOOK
See Outlook discussions in each of our segment operations.
FORWARD-LOOKING STATEMENTS
Certain sections of this report, including Management’s Discussion and Analysis of Results of Operations and Financial Condition 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 the Company is discussing its beliefs, estimates or expectations. These statements involve known and unknown risks and uncertainties that may cause the Company’s actual results to be materially different from planned or expected results. Those risks and uncertainties include, but are not limited to:
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In general, the Company is subject to the risks and uncertainties of the construction industry and of doing business in the U.S. The forward looking statements are made as of the date of this report, and the Company undertakes no obligation to update them, whether as a result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks related to fluctuations in interest rates on our direct debt obligations and receivables securitizations classified as debt. 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. At December 31, 2004, the Company had approximately $30.1 million in variable rate debt under the Company’s accounts receivable securitization program. Accordingly, using the balance of the Company’s variable rate debt as of December 31, 2004, of $30.1 million, if the applicable interest rate on such debt (LIBOR or commercial paper rate) increases by 100 basis points (1%) for a full year, the Company’s pre-tax earnings and cash flows would decrease by approximately $301,000 for such period. On the other hand, if such interest rates decrease by 100 basis points for a full year, the Company’s pre-tax earnings and cash flows would increase by approximately $301,000 for such period. Presently, we do not utilize derivative financial instruments.
The Company is subject to commodity risk with respect to price changes principally in coal, coke, natural gas and power. We attempt to limit our exposure to change in commodity prices by entering into contracts or increasing use of alternative fuels.
Item 4. Controls and Procedures
An evaluation has been performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2004. Based on that evaluation, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2004, to provide reasonable assurance that the information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934 is processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. There have been no changes in the Company’s internal controls over financial reporting during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect the Company’s internal controls over financial reporting.
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Part II. Other Information
Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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