Eagle Materials Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2019. The filing also reports fourth-quarter results; this is not a fiscal 2018 fourth-quarter filing.
Business context
Eagle Materials supplies U.S. construction materials and oil-and-gas proppants through Heavy Materials (cement, concrete and aggregates), Light Materials (gypsum wallboard and recycled paperboard), and Oil and Gas Proppants (frac sand). Demand is cyclical and seasonal, with significant exposure to regional construction markets and oil-and-gas completion activity.
Financial results and liquidity
- Revenue: $1,393.2 million, up 0.5% from $1,386.5 million in fiscal 2018. Gross profit was $326.6 million, down 3.6%; gross margin declined to approximately 23% from 24%.
- Earnings: Earnings before income taxes were $79.7 million, down 71%; net earnings were $68.9 million, down 73%. Diluted EPS was $1.47 versus $5.28. Fiscal 2019 included a $220.3 million non-cash impairment charge, principally in Oil and Gas Proppants.
- Cash flow and investment: Operating cash flow was $350.3 million, compared with $337.7 million. Capital expenditures were $168.9 million, up from $132.0 million. Cash and cash equivalents were $8.6 million at year-end; working capital was $248.3 million.
- Debt: Gross debt was $696.5 million at March 31, 2019 (balance-sheet debt, net of issuance costs, was $691.6 million), versus gross debt of $626.5 million a year earlier. Debt-to-capitalization was 36.4%, compared with 30.5%. The $500 million revolving facility had $310 million drawn at year-end; borrowings rose to $425 million by May 21, 2019, leaving $67.3 million available net of letters of credit. The $36.5 million private-placement note tranche was due October 2019.
- Capital returns: The company repurchased 3.31 million shares for approximately $272.0 million in fiscal 2019 and paid $18.9 million in dividends. Quarterly dividends remained $0.40 per share.
Material changes versus fiscal 2018
- The largest earnings impact was the $220.3 million impairment of Oil and Gas Proppants assets and goodwill; fiscal 2018 had no impairment charge.
- Gypsum Wallboard improved: revenue rose 8% and operating earnings rose 14% to $180.8 million, with margin increasing to 34% from 32%.
- Cement revenue rose 1%, but operating earnings fell 8% to $164.8 million as freight, maintenance and energy costs increased.
- Concrete and Aggregates revenue fell 11% and operating earnings fell 28%, reflecting lower volumes and higher material costs.
- Recycled Paperboard operating earnings increased 8% to $35.3 million on lower input and energy costs, despite lower revenue and sales prices.
- Oil and Gas Proppants revenue fell 16% to $83.0 million, and operating loss widened to $28.7 million. Lower prices and weaker demand outweighed higher sales volume.
Outlook, risks and unusual items
- Management described the calendar 2019 outlook for Heavy and Light Materials as positive, citing low unemployment, low interest rates and higher wages. It cited a PCA forecast of approximately 2% U.S. cement-consumption growth in 2019 and expected strong wallboard-related demand; these are expectations, not company earnings guidance.
- Management expected fiscal 2020 capital expenditures of $140–$155 million, including about $70 million to expand and upgrade the paper mill. Completion was expected by late spring 2020, adding approximately 70,000 tons of annual paper capacity.
- Management said frac-sand market conditions were not expected to recover in the near term. Lower-cost in-basin sand, reduced completion activity and Permian pipeline constraints were key pressures. A strategic portfolio review could prompt additional impairment testing and charges.
- On April 18, 2019, the company announced a strategic portfolio review that could include a business separation, third-party transactions or other alternatives; no outcome or timetable was assured. A shareholder also proposed two director nominees for the 2019 annual meeting, creating a proxy contest and potential costs and disruption.
- Key broader risks include construction cyclicality, weather, commodity and energy costs, environmental regulation, interest rates, customer concentration in paperboard and proppants, and debt covenants. The company reported compliance with its financial covenants at March 31, 2019 and stated that expected cash flow and available borrowing capacity should cover anticipated needs for at least 12 months.
- Fiscal 2018 included a $45.1 million litigation-settlement expense related to wallboard claims; those settlements were paid by March 31, 2019. The related DOJ investigation was closed in August 2018. Fiscal 2019 also included $1.8 million of litigation losses for a separate property-damage matter.
Most important facts for investors to verify
- Whether the strategic portfolio review or proxy contest leads to a transaction, material costs, further impairments or changes in capital allocation.
- Oil and Gas Proppants pricing, contract performance, customer demand and asset values, including the possibility of additional impairment charges.
- Whether Heavy and Light Materials volumes and pricing support management’s outlook while freight, energy and other operating costs evolve.
- Near-term debt refinancing and liquidity: repayment of the October 2019 note maturity, the increased credit-facility draw and covenant headroom.
- Execution, cost and expected returns of the paper-mill investment and the fiscal 2020 capital-expenditure plan.