Eagle Materials Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended March 31, 2017; filed May 24, 2017. This is an annual report, not a fiscal 2016 fourth-quarter filing. Eagle Materials supplies cement, concrete and aggregates, gypsum wallboard, recycled paperboard, and oil-and-gas proppants.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $1,211.2 million | $1,143.5 million | +6% |
| Gross profit | $312.0 million | $231.6 million | +35% |
| Gross margin | 25.8% | 20.3% | +5.5 percentage points |
| Earnings before income taxes | $294.5 million | $219.3 million | +34% |
| Net earnings | $198.2 million | $152.6 million | +30% |
| Diluted EPS | $4.10 | $3.05 | +34% |
| Operating cash flow | $331.6 million | $265.8 million | +$65.8 million |
Net margin rose to 16.4% from 13.3%. Full-year growth reflected higher volumes and prices in most construction and building-material segments, lower oil-and-gas proppants losses, and the Fairborn and Skyway acquisitions. The filing reports fourth-quarter FY2017 revenue of $278.7 million and net earnings of $36.3 million, versus $252.1 million and $39.2 million, respectively, in fourth-quarter FY2016.
Segments and material changes
- Cement: Revenue increased 7% to $566.3 million and operating earnings rose 11% to $153.5 million. Sales volume increased 2% and average net sales price rose 4%. Fairborn contributed only from its February 10, 2017 acquisition date.
- Gypsum wallboard: Revenue rose 3% to $473.7 million; operating earnings were essentially flat at $159.9 million. Volume increased 4%, while average net price declined 1%.
- Recycled paperboard: Revenue increased 12% to $167.1 million and operating earnings rose 17% to $37.6 million, supported by higher volume and price.
- Concrete and aggregates: Revenue increased 21% to $154.6 million and operating earnings rose 84% to $18.1 million, with higher volumes and prices.
- Oil and gas proppants: Revenue declined 40% to $34.6 million; the segment reported a $14.6 million operating loss, improved from a $68.5 million loss. FY2017 included $12.9 million of customer settlement payments and a $2.0 million forfeited prepayment recorded as reductions to cost of goods sold, as well as an $8.5 million sand-inventory write-down. FY2016 included a $35.0 million customer-contract impairment and an $11.5 million sand-inventory write-down.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $6.6 million at March 31, 2017. Working capital was $171.1 million, down from $259.4 million, primarily because of higher current liabilities, including debt maturities.
- Operating cash flow was $331.6 million; capital expenditures were $56.9 million. Investing cash outflow totaled $457.4 million, including $400.5 million for Fairborn.
- Debt principal totaled $692.7 million: $225.0 million drawn on a $500.0 million revolving facility, $350.0 million of 4.5% notes due 2026, and $117.7 million of private-placement notes. The balance sheet reports $686.5 million of total debt in selected financial data; the debt note reconciles principal to carrying amounts after current debt and issuance costs.
- The company had $266.2 million of available revolver borrowings, net of outstanding letters of credit. It reported compliance with debt covenants. Debt-to-capitalization was 36.3%, versus 32.8% a year earlier.
- $81.2 million of private-placement notes were current at year-end and due in FY2018. Dividends were $0.40 per share for the year; the company also repurchased 788,000 shares during FY2017.
Outlook, risks, and unusual items
- Management expected FY2018 cement, concrete, and aggregates volumes and operating income to increase. It anticipated gypsum wallboard industry shipments to rise approximately 6%–8% in calendar 2017 and planned to restart the Bernalillo wallboard plant during FY2018 as demand warranted.
- Management expected recycled-paperboard volumes to remain near capacity, but warned that higher recycled-fiber costs could pressure earnings before contractual price adjustments. It expected improved frac-sand demand as drilling activity and sand intensity increased, while noting the recovery was uncertain.
- The company planned approximately $30–$35 million of FY2018 sustaining capital expenditures and a roughly $70 million Utica, Illinois frac-sand facility build-out, expected to finish in summer 2018. Management expected interest expense to increase in FY2018.
- Key exposures include cyclical and seasonal construction demand, weather and operational interruptions, commodity pricing and input costs, oil-and-gas activity, customer concentration in proppants and paperboard, environmental regulation and permitting, and debt covenant and refinancing risks.
- American Gypsum faces wallboard antitrust class actions, a homebuilder lawsuit, and a U.S. Department of Justice investigation. The company denies the allegations and said it could not estimate reasonably possible losses. Nevada Cement agreed to a $0.6 million penalty and approximately $3.0 million of control-equipment and vehicle expenditures under a consent decree, subject to court approval.
- FY2017 included $5.5 million of acquisition and litigation expense related to Fairborn. Fairborn’s provisional purchase-price allocation included $64.5 million of goodwill; its acquired assets represented approximately 18% of year-end assets but 1% of FY2017 revenue. The auditors issued unqualified opinions on the financial statements and internal control, but the acquired assets were excluded from management’s and the auditor’s internal-control assessment.
Important facts for investors to verify
- Whether the construction-market recovery and management’s FY2018 volume and earnings outlook materialized, particularly by region.
- Whether proppants demand recovered and whether customer settlements, contract terms, and inventory valuations are sustainable; FY2017 segment revenue remained sharply lower.
- How the Fairborn acquisition performed after the short post-acquisition reporting period, and whether its provisional asset values and goodwill changed.
- How the $81.2 million FY2018 debt maturity was refinanced or repaid, and the effect of higher debt and interest expense on liquidity and covenant headroom.
- Developments in the wallboard antitrust cases and DOJ investigation, and the cost and timing of environmental compliance obligations.