Eagle Materials Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended March 31, 2016. Although the request specifies “2015 Q4,” this filing reports the full fiscal year; fourth-quarter data are noted separately below. Eagle Materials supplies cement, concrete and aggregates, gypsum wallboard, recycled paperboard, and oil-and-gas proppants.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $1,143.5 million | $1,066.4 million | +7% |
| Gross profit | $231.6 million | $254.1 million | -9% |
| Gross margin | 20.3% | 23.8% | -3.5 percentage points |
| Earnings before tax | $219.3 million | $252.9 million | -13% |
| Net earnings | $152.6 million | $186.9 million | -18% |
| Diluted EPS | $3.05 | $3.71 | -18% |
| Operating cash flow | $265.8 million | $234.1 million | +$31.7 million |
- Revenue growth reflected acquisitions, stronger pricing in cement and concrete/aggregates, and higher wallboard, paperboard and concrete volumes. Skyway slag contributed about $21.3 million of revenue; CRS Proppants contributed about $18.7 million.
- Cement operating earnings rose 17% to $137.9 million; wallboard rose 9% to $159.4 million; paperboard rose 2% to $32.2 million; concrete and aggregates rose 46% to $9.8 million. Oil and gas proppants recorded a $68.5 million operating loss, versus a $2.5 million loss.
- Cash and cash equivalents were $5.4 million; working capital was $259.4 million, versus $179.8 million. Current assets were $380.0 million and current liabilities $120.6 million.
- Total debt was $507.7 million, including $382.0 million drawn on a $500 million revolving facility and $125.7 million of senior notes. Available facility borrowings, net of letters of credit, were $109.0 million. Debt-to-capitalization was 32.8%.
- Capital expenditures were $89.6 million. The company paid $20.0 million in dividends and repurchased $123.5 million of stock during the year. Quarterly dividends were $0.10 per share.
Material changes and unusual items
- Proppant market deterioration led to idling the Utica, Illinois mine, Corpus Christi processing plant, and Kenedy and Fowlerton, Texas trans-load facilities. The segment recorded $35.0 million of customer-contract intangible impairment, an $11.5 million raw-sand inventory write-down, and $2.0 million in bad-debt reserves. A customer’s forfeiture of $10.7 million in prepaid sand partially offset the charges; a further $2.0 million could be forfeited if required purchases were not made by June 30, 2016.
- Fiscal 2015 earnings benefited from a $16.6 million IRS-related tax benefit and a $4.4 million interest refund. The effective tax rate was 30% in FY2016 versus 26% in FY2015; excluding the prior-year settlement, FY2015’s rate would have been 33%.
- Fourth-quarter FY2016 revenue was $252.1 million, versus $223.8 million; net earnings were $39.2 million, versus $46.8 million; diluted EPS was $0.80, versus $0.93. Q4 results included $6.6 million of contract impairment, $4.1 million of inventory write-down, and $1.0 million of additional bad-debt reserve, partly offset by the $10.7 million prepaid-sand forfeiture.
Outlook, risks and contingencies
- Management expected construction recovery to continue and forecast improving wallboard demand and varying cement-market volume and pricing gains in calendar 2016. It expected Austin concrete and aggregates conditions to improve, while northern California volumes were not expected to increase significantly.
- Management expected weak oil-and-gas drilling and proppant demand and pricing to persist through calendar 2016, and stated further asset impairment testing may be required if conditions deteriorate. The company did not expect a meaningful increase in drilling activity during calendar 2016.
- Key exposures include cyclical construction markets, weather and seasonality, commodity pricing and imports, energy and transport costs, customer concentration in proppants, floating-rate debt, environmental regulation and permitting, and execution and integration risks.
- Pending matters include EPA notices alleging Clean Air Act violations at Nevada Cement, with potential penalties and required capital or operating costs, and drywall antitrust litigation and a related DOJ investigation. The company denied the antitrust allegations; it could not estimate a reasonably possible loss. The ultimate EPA outcome and financial impact were also undetermined.
- Management said operating cash flow and available credit should cover anticipated operating needs, capital spending, dividends and debt service for at least the next 12 months, subject to market conditions and continued covenant compliance. FY2017 sustaining capital spending was estimated at $20–25 million.
Investor verification priorities
- Review proppant customer-contract volumes, pricing amendments, customer creditworthiness, remaining prepaid-sand liability, and the assumptions behind any future impairment tests.
- Track the Nevada Cement EPA matter and drywall antitrust litigation/DOJ investigation, including any settlement, penalties, capital requirements, or loss accruals.
- Verify credit-facility availability, covenant headroom, variable-rate exposure, and upcoming note maturities; a 100-basis-point rate increase was estimated to add about $3.8 million to annual cash interest expense.
- Compare construction-market outlook with realized segment pricing, sales volumes, and margins, particularly given weather-related cement volume weakness and the decline in wallboard pricing.
- Confirm planned capital spending, share repurchases, and dividend capacity against cash generation and debt obligations.
The financial statements received an unqualified audit opinion, and the auditors reported effective internal control over financial reporting as of March 31, 2016.