Eagle Materials Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended March 31, 2014. The filing also reports unaudited fourth-quarter results for the three months ended March 31, 2014. Eagle Materials produces cement, gypsum wallboard, recycled paperboard, concrete and aggregates, and is developing a frac-sand business.
Key financial results
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $898.4 million | $642.6 million |
| Gross profit | $185.5 million | $103.2 million |
| Gross margin | 20.6% | 16.1% |
| Earnings before income taxes | $181.8 million | $84.1 million |
| Net earnings | $124.2 million | $57.7 million |
| Diluted EPS | $2.49 | $1.22 |
| Net cash from operating activities | $170.6 million | $124.4 million |
| Capital expenditures | $59.5 million | $53.0 million |
| Total debt at year-end | $381.3 million | $489.3 million |
Net margin was approximately 13.8%, compared with 9.0% in FY2013. Cash and cash equivalents were $6.5 million. Working capital was $198.1 million. The company reported $203.6 million of available credit-facility borrowings, net of outstanding letters of credit, and debt-to-capitalization of 31.4%.
Business performance and changes
- Revenue increased 40%; management attributed approximately $129.9 million of the increase to the acquired Lafarge assets. Higher prices and volumes across most historical businesses also contributed.
- The 2012 acquisition added two cement plants and a Kansas City-area concrete and aggregates business. Acquired assets contributed $158.8 million of net sales and $25.2 million of operating income in FY2014; FY2013 included only a partial-year contribution.
- Cement operating earnings rose to $89.5 million from $46.2 million, helped by higher prices and volumes and lower per-unit operating costs. Cement sales volume increased 39% and average net selling price rose 5%.
- Gypsum wallboard operating earnings increased to $114.9 million from $69.7 million. Average net selling price rose 18% and volume increased 11%; reported gross margin improved to 30% from 23%.
- Recycled paperboard operating earnings declined to $23.6 million from $25.2 million as recycled-fiber and energy costs increased.
- Concrete and aggregates recorded an operating loss of $4.7 million, versus a $5.4 million loss. Results included approximately $4.9 million of losses from the frac-sand start-up.
- Fourth-quarter revenue was $189.9 million, net earnings were $22.6 million and diluted EPS was $0.45, compared with $159.1 million, $7.8 million and $0.16, respectively, a year earlier. The quarter included a $4.5 million Illinois cement-plant maintenance outage and higher wallboard legal, maintenance and natural-gas costs.
Cash, debt and liquidity
- Operating cash flow rose to $170.6 million. Investing activities used $59.5 million, principally for capital expenditures; operating cash flow less capital expenditures was approximately $111.1 million.
- The company repaid $108.0 million under its credit facility during FY2014. Year-end debt comprised $189.0 million under the revolving facility and $192.3 million of senior notes.
- The $400 million revolving credit facility expires in December 2015; $189.0 million was drawn at year-end. The company reported compliance with financial covenants throughout FY2014. Covenants include maximum consolidated indebtedness ratio of 3.5:1 and minimum interest coverage of 2.5:1.
- Management stated that 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 covenant compliance.
Outlook, risks and contingencies
- Management described a gradual construction-market recovery and expected further improvement in cement, wallboard and certain regional concrete and aggregates markets during calendar 2014. These are expectations, not financial guidance.
- The company expected calendar-2014 U.S. cement consumption to increase; the Portland Cement Association forecast an 8% increase. Management also expected higher wallboard shipments and announced a 15% wallboard price increase effective January 2015.
- FY2015 capital expenditures were estimated at $50–$70 million, including $30–$40 million for frac sand and $20–$25 million for sustaining investment. The company expected to begin mining frac sand at its Illinois quarry in the latter half of FY2015, subject to permits.
- Key operating risks include construction cyclicality, seasonality and weather; commodity pricing and excess wallboard capacity; fuel, energy, raw-material and transportation costs; operational interruptions; and environmental permitting and compliance costs. Cement and wallboard emissions rules may require additional spending.
- Pending matters include an IRS refund lawsuit involving $97.9 million paid in taxes, penalties and interest, with trial scheduled for September 2014; EPA violation notices concerning the Nevada cement plant, for which penalties and required modifications were undetermined; and wallboard antitrust class actions, for which the company could not estimate a reasonably possible loss.
- Other notable exposures include $15.8 million of potential IRS tax liabilities and $7.3 million of potential state tax liabilities disclosed in contractual obligations. The filing does not establish that these amounts will be payable.
Investor verification points
- Separate underlying growth from the acquisition’s contribution and confirm the durability of higher cement and wallboard prices and volumes.
- Track frac-sand permitting, mine start-up, planned capital spending and start-up losses.
- Review debt maturities, particularly the credit-facility expiry in December 2015 and the senior-note maturities, alongside covenant headroom and refinancing plans.
- Follow developments and potential financial effects of the IRS case, Nevada EPA notices and wallboard antitrust litigation.
- Assess whether the construction recovery, announced wallboard pricing and forecast capital program are borne out by subsequent results.