Business context and reporting period
Eagle Materials Inc. (NYSE: EXP) filed this Form 10-K for the fiscal year ended March 31, 2018, with fiscal 2017 as the primary comparable period. Although the request identifies “2017 Q4,” this is an annual filing; it also reports fourth-quarter results. The company supplies cement, concrete and aggregates, gypsum wallboard, recycled paperboard, and frac sand across the United States. Its construction businesses are seasonal and cyclical, while proppants demand depends on oil and gas drilling activity.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $1,386.5 million | $1,211.2 million | +14% |
| Gross profit | $338.8 million | $312.0 million | +9% |
| Gross margin | 24% | 26% | Down 2 percentage points |
| Income before taxes | $272.0 million | $294.5 million | -8% |
| Net earnings | $256.6 million | $198.2 million | +29% |
| Diluted EPS | $5.28 | $4.10 | +29% |
| Cash from operations | $337.7 million | $331.6 million | +$6.1 million |
| Capital expenditures | $132.0 million | $56.9 million | +$75.0 million |
The net earnings increase was driven substantially by a 6% effective tax rate, compared with 33% in FY2017. FY2018 tax expense included an estimated $61.7 million benefit from the Tax Cuts and Jobs Act and $4.1 million of share-based compensation tax benefits. Pretax earnings were lower primarily because of $45.1 million in legal settlement expense and higher corporate costs; gross profit growth partly offset these items.
At March 31, 2018, total assets were $2.37 billion and stockholders’ equity was $1.42 billion. Reported total debt was $620.9 million net of debt issuance costs; gross principal debt was $626.5 million, comprising $240.0 million drawn on the revolving facility, $350.0 million of 4.5% notes due 2026, and $36.5 million of private-placement notes due 2019. The company reported $9.3 million cash and $38.8 million restricted cash, $279.4 million working capital, and $252.5 million of available credit facility borrowings net of letters of credit. The restricted cash was deposited for the wallboard settlement. Debt-to-capitalization was 30.5%, down from 36.3%.
Material changes and segment trends
- Cement: Revenue rose 15% to $651.8 million and operating earnings rose 17% to $179.2 million. The Fairborn, Ohio acquisition contributed meaningfully; pricing also improved. The Nevada plant outage and higher energy and purchased-cement costs weighed on results.
- Concrete and aggregates: Revenue increased 2% to $157.0 million, while operating earnings slipped 1% to $17.9 million. Higher prices were offset by lower volumes and increased input, delivery, and maintenance costs.
- Gypsum wallboard: Revenue rose 4% to $491.8 million, but operating earnings fell 1% to $158.6 million and operating margin declined to 32% from 34%, mainly reflecting higher paper and freight costs.
- Recycled paperboard: Revenue increased 9% to $181.7 million on higher prices with flat volume. Operating earnings declined 13% to $32.8 million as fiber and energy costs rose faster than selling prices.
- Oil and gas proppants: Revenue increased 147% to $85.5 million as frac-sand sales volume rose 170%; the segment nevertheless recorded a $6.4 million operating loss, improved from a $14.6 million loss. Lower selling prices remained a headwind.
Revenue growth included $75.7 million from the Fairborn acquisition, completed in February 2017, and $12.7 million from the Wildcat Minerals acquisition, completed in July 2017. The company also restarted its Bernalillo wallboard plant and recommissioned the Corpus Christi frac-sand plant on a part-time basis.
Outlook, risks, and unusual items
Management anticipated continued growth in U.S. construction activity and calendar 2018 cement and wallboard shipments, while acknowledging that market and regional growth rates could vary. It expected recycled paperboard volume to remain near capacity and waste-paper prices to ease from FY2018 levels but remain above historical averages. Management expected freight costs to rise 10%–12% in FY2019 because of rail and trucking congestion. FY2019 capital expenditures were projected at $110–$125 million, including completion of the approximately $70 million Utica, Illinois frac-sand expansion; $45 million had been spent by year-end. Maintenance capital expenditures were estimated at $30–$35 million. Management also expected tax reform to increase cash flow, without quantifying the expected increase.
Key risks include construction-cycle and weather exposure, commodity pricing and input-cost volatility, freight availability and expense, oil and gas activity and frac-sand pricing, customer concentration in paperboard and proppants, and environmental permitting and compliance. Potentially material environmental issues include air-quality and greenhouse-gas rules, including ozone nonattainment designations; the company cannot yet assess their effects. FY2018 environmental compliance capital expenditures were $12.0 million for cement and $2.8 million for wallboard; FY2019 estimates were $2.4 million and $1.0 million, respectively.
Wallboard antitrust settlements totaled approximately $39.1 million for direct and indirect purchaser claims; about $38.8 million was deposited in a qualified settlement fund pending court approval. A separate $6.0 million homebuilder settlement was accrued at year-end and paid May 18, 2018. The company denied wrongdoing. A related Department of Justice investigation remained preliminary, with the outcome unclear. Other unusual items included the large FY2018 tax benefit and prior-year frac-sand inventory write-downs and customer settlement receipts, which affect year-over-year comparisons.
Liquidity was described by management as sufficient for anticipated operating needs, capital spending, dividends, and debt service for at least twelve months. The revolving facility has covenants and a maximum consolidated indebtedness ratio of 3.5:1.0; the company reported compliance at year-end. Variable-rate borrowings expose results to interest-rate changes: a hypothetical 100-basis-point increase on the $240 million drawn would add about $2.4 million of annual interest expense.
Important facts for investors to verify
- How much of FY2018 earnings growth persists excluding the $61.7 million tax-reform benefit and the share-based compensation tax benefit?
- Whether the wallboard class settlements receive final court approval and whether the Department of Justice investigation produces further exposure.
- Whether forecast construction demand, cement and wallboard pricing, and proppants recovery materialize, and whether freight inflation reaches the projected 10%–12%.
- Utica expansion completion, remaining funding needs, and the proppants segment’s path to profitability.
- Debt covenant headroom, refinancing of the $36.5 million 2019 maturity, and liquidity after planned capital expenditures and shareholder returns.
- Potential costs or operating constraints from environmental rules, permits, and nonattainment designations.