Eagle Materials Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended March 31, 2015. The filing is an annual report, not a report for calendar 2014 Q4; quarterly results are included separately. Eagle Materials produces cement, concrete and aggregates, gypsum wallboard, recycled paperboard, and frac sand in the United States.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $1,066.4 million | $898.4 million |
| Gross profit / gross margin | $254.1 million / 23.8% | $185.5 million / 20.6% |
| Earnings before income taxes | $252.9 million | $181.8 million |
| Net earnings | $186.9 million | $124.2 million |
| Diluted EPS | $3.71 | $2.49 |
| Operating cash flow | $234.1 million | $170.6 million |
| Capital expenditures | $111.6 million | $59.5 million |
| Cash and cash equivalents | $7.5 million | $6.5 million |
| Total debt | $512.8 million | $381.3 million |
| Working capital | $182.1 million | $198.1 million |
Revenue rose 19%; net earnings increased 50%. Growth reflected higher prices and volumes across most historical businesses, plus $28.0 million of revenue from the CRS Proppants acquisition. Cement revenue increased 12%, wallboard 13%, paperboard 10%, concrete and aggregates 11%, and proppants 316% (including the acquisition and ramp-up). Segment operating earnings improved in cement, wallboard, paperboard, and concrete and aggregates; proppants continued to report a loss of $2.5 million.
The reported 26% effective tax rate and earnings benefited from the IRS settlement: a $16.6 million income-tax benefit and approximately $4.4 million of interest refund/benefit were recorded in Q4. Management said the effective tax rate would have been approximately 33% excluding the settlement. Operating cash flow less capital expenditures was approximately $122.5 million; this simple measure does not include acquisition spending or other investing items.
Liquidity, debt, and capital allocation
- Cash was $7.5 million at year-end; the company reported $182.1 million of working capital. Current assets were $366.6 million and current liabilities $184.6 million.
- Debt comprised $330.0 million outstanding under the revolving credit facility and $182.8 million of senior notes. The credit facility was increased to $500 million and extended to October 2019; $160.8 million of availability remained, net of letters of credit.
- The credit facility requires a maximum consolidated indebtedness ratio of 3.5:1 and minimum interest coverage of 2.5:1. The company reported compliance with its financial tests at March 31, 2015.
- Operating cash flow increased to $234.1 million. Investing cash use was $348.7 million, including $237.2 million for CRS Proppants; financing provided $115.7 million, primarily through increased credit-facility borrowings.
- Cash dividends were $0.40 per share for the year, or $20.1 million in total. No open-market share repurchases occurred.
Material changes, outlook, and notable items
- CRS acquisition: Completed November 14, 2014 for approximately $237.2 million, funded with credit-facility borrowings. The acquired operation contributed $28.0 million of revenue and reported a $5.0 million operating loss for the period included in FY2015. Purchase accounting included substantial acquired customer-contract amortization and depreciation; final working-capital and tax-basis adjustments remained pending.
- Skyway transaction: The company agreed to acquire a 600,000-ton-per-year slag plant in South Chicago for about $30 million cash, subject to customary adjustments and the closing of the Lafarge-Holcim merger. Management expected to fund it with operating cash flow.
- Construction outlook: Management described a gradual U.S. construction recovery. It expected cement consumption and wallboard shipments to increase in calendar 2015, with regional differences; it anticipated stronger Austin concrete and aggregates activity, while Kansas City demand was expected to be stable and northern California volumes not expected to rise significantly. These are management expectations, not formal company earnings guidance.
- Proppants outlook: Falling rig counts and well-completion activity had reduced frac-sand demand and pricing. Management expected these conditions to persist through calendar 2015 and emphasized cost reductions and expanding low-delivered-cost access to shale markets. Some customer contracts had been renegotiated to lower near-term volumes and prices.
- Investment plans: FY2016 total capital expenditures were estimated at $65–75 million, including the New Auburn frac-sand expansion; sustaining expenditures were estimated at $20–25 million. The expansion was expected to cost about $8 million. A separate estimate called for $30 million to fund the Skyway purchase if completed.
- Seasonality and costs: Construction demand and results are seasonal, typically strongest April through November, and vulnerable to weather, operating outages, commodity pricing, fuel, energy, and transportation costs.
- Contingencies and regulation: The EPA had issued notices alleging Clean Air Act violations at Nevada Cement; potential penalties, compliance spending, or operating changes were not estimable. Eagle and its wallboard subsidiary faced consolidated antitrust litigation alleging price fixing; the company denied the claims and could not estimate a possible loss. Cement operations also face significant environmental-rule uncertainty, including emissions, greenhouse-gas, and ozone requirements.
- Reporting controls: Management and the auditor reported effective internal control over financial reporting, but CRS Proppants—about 17% of year-end assets and 3% of FY2015 revenue—was excluded from the control assessment.
Most important facts for investors to verify
- How much FY2015 earnings growth was recurring operating improvement versus the IRS settlement benefit.
- Whether construction recovery, pricing, and volumes continued as management expected, particularly across regional cement and wallboard markets.
- Whether frac-sand demand, pricing, contract volumes, and CRS integration improved, and whether the acquired business achieved expected returns.
- Current debt, covenant headroom, upcoming senior-note maturities, and liquidity after capital spending and any Skyway acquisition.
- Developments and potential financial exposure from the Nevada Cement EPA notices and wallboard antitrust litigation.
- Whether CRS purchase accounting was finalized and whether controls over the acquired business were brought into the company-wide assessment.