Eagle Materials Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended March 31, 2013; comparative period is fiscal 2012. The filing also reports fourth-quarter results. Eagle Materials manufactures and distributes cement, gypsum wallboard, recycled paperboard, concrete and aggregates, primarily for construction markets.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $642.6 million | $495.0 million |
| Gross profit | $103.2 million | $40.5 million |
| Gross margin | 16.1% | 8.2% |
| Operating earnings before corporate G&A and other corporate charges | $99.9 million | $40.6 million |
| Earnings before income taxes | $84.1 million | $21.9 million |
| Net earnings | $57.7 million | $18.7 million |
| Diluted EPS | $1.22 | $0.42 |
| Net cash from operating activities | $124.4 million | $60.9 million |
| Capital expenditures, excluding acquisition | $53.0 million | $26.1 million |
| Cash and cash equivalents at year-end | $3.9 million | $6.5 million |
| Total debt at year-end | $489.3 million | $266.9 million |
| Working capital at year-end | $161.0 million | $114.8 million |
Revenue rose 30%, reflecting higher average selling prices and greater volumes, as well as four months of results from the Lafarge asset acquisition. Net earnings increased 208%. The effective tax rate was approximately 31%, versus 15% in FY2012; prior-year tax benefits from state amnesty programs and expired tax limitations contributed to the comparison.
Segments and material changes
- Gypsum wallboard: Revenue increased 41% to $306.5 million; operating earnings rose to $69.7 million from $6.3 million. Average net selling price increased 27% and sales volume increased 17%, driving the improvement.
- Cement: Revenue increased 25% to $304.1 million; operating earnings slipped 1% to $46.2 million. Sales volume rose 21% and average net price rose 3%, but maintenance and other operating costs increased; cement operating margin fell to 15% from 19%.
- Recycled paperboard: Revenue rose 3% to $121.9 million and operating earnings increased 48% to $25.2 million, helped by lower recycled-fiber and energy costs and a richer product mix.
- Concrete and aggregates: Revenue increased 24% to $56.3 million, but operating loss widened to $5.4 million from $1.1 million. Higher maintenance, purchased-material, fuel and power costs, winter weather and an inventory write-down weighed on results.
Fourth-quarter FY2013 net earnings were $7.8 million, down from $9.0 million a year earlier, despite higher revenue. The quarter included approximately $14.0 million of maintenance and repair costs at the acquired cement plants during extended outages.
Acquisition, cash flow, debt and liquidity
On November 30, 2012, Eagle acquired Lafarge North America assets for approximately $453.4 million, funded with credit-facility borrowings and an October 2012 equity offering that generated $154.8 million net. The assets expanded Eagle’s cement, aggregates and ready-mix footprint in the central U.S. From acquisition through fiscal year-end, the assets contributed $28.9 million in net sales and an operating loss of $12.5 million, including substantial plant maintenance and repair expense.
Operating cash flow was $124.4 million. Investing cash outflow was $506.4 million, including the acquisition and $53.0 million in property, plant and equipment additions. Financing cash inflow was $379.4 million, including $227.0 million of increased credit-facility borrowings and the equity offering. Debt-to-capitalization was 41.3%, compared with 36.1% a year earlier.
The $400 million revolving credit facility had $297.0 million drawn and $96.0 million available, net of letters of credit, at March 31, 2013; it expires in December 2015. Senior notes totaled $192.3 million. The company reported compliance with financial covenants. Management said operating cash flow and available borrowings should cover anticipated operating needs, capital expenditures, dividends and debt service for at least 12 months. Current assets were $261.3 million and current liabilities $100.2 million.
Outlook, risks and unusual items
- Management expected U.S. construction activity and cement and wallboard demand to improve in calendar 2013, with recovery varying by region and dependent on broader economic growth. Industry wallboard shipments were expected to exceed 20 billion square feet, versus 18.9 billion in calendar 2012.
- Eagle announced a 20% wallboard price increase to take effect in January 2014. It expected natural-gas costs to rise in FY2014 and electricity costs to remain broadly consistent.
- FY2014 capital spending was estimated at $40–70 million, including $20–25 million for frac-sand development and $20–25 million for sustaining capital. Management did not expect frac-sand revenue or earnings to be material in FY2014.
- Major risks include cyclical and seasonal construction demand, regional economic conditions, commodity pricing, fuel and energy costs, weather and operating interruptions, interest-rate exposure and debt covenants. A 100-basis-point increase in rates on year-end credit-facility borrowings would add approximately $3.0 million to annual interest expense.
- Environmental regulation may require additional capital or operating costs, particularly rules affecting cement-kiln emissions, greenhouse gases and alternative fuels. The acquired Tulsa and Sugar Creek facilities also face environmental and consent-decree requirements.
- Contingencies include the IRS dispute over depreciation deductions: Eagle had paid $97.9 million for earlier tax years and was seeking refunds; additional assessed amounts for later years were accrued. The company said it could not predict the outcome. American Gypsum faces consolidated class-action antitrust claims alleging wallboard price fixing; Eagle could not estimate the likelihood or amount of loss. Nevada Cement also received an EPA notice alleging Clean Air Act violations, with potential penalties, capital spending and operating costs not yet determined.
- Other notable items include $10.7 million of acquisition, litigation and other expense in FY2013, including $6.1 million of acquisition costs and $3.7 million of IRS-litigation legal fees. The Bernalillo, New Mexico wallboard plant remained temporarily idle. The auditor issued unqualified opinions on the financial statements and internal controls; acquired-asset controls were excluded from management’s and the auditor’s internal-control assessment.
Most important facts for investors to verify
- Whether acquired plants’ maintenance needs, integration and operating performance improve after the FY2013 outages and initial operating loss.
- Whether wallboard price gains and construction-volume recovery persist, and whether announced pricing is realized without renewed capacity or competitive pressure.
- Debt reduction, covenant headroom, interest-rate sensitivity and cash available after planned capital spending and dividends.
- Potential resolution and financial consequences of the IRS litigation, EPA notice and wallboard antitrust lawsuits.
- Actual FY2014 spending and commercial progress in frac sand, alongside natural-gas and other input-cost trends.