Eagle Materials(EXP) - 2022 Q4 - Annual Report

Part I Business Eagle Materials Inc. manufactures heavy and light construction materials, emphasizing low-cost production, decentralized operations, and profitable growth in key US markets Overview Eagle Materials Inc. manufactures essential construction materials, leveraging its integrated network, low-cost position, and strategic growth initiatives - The company's primary products are Portland Cement and Gypsum Wallboard, which are essential commodities for commercial, residential, and public construction[5] - Key competitive strengths include a broad geographic reach in high-growth U.S. markets, a low-cost producer position, production flexibility, and substantial raw material reserves (25 to 50 years for cement and wallboard facilities)[7] - The company's strategy focuses on being a low-cost producer, maintaining a decentralized operating structure, operating in diverse U.S. markets, and achieving growth through acquisitions and organic development[9] - Capital allocation priorities are: 1) growth opportunities, 2) investments to maintain low-cost positions, and 3) returning cash to shareholders. Over the past three years, the company invested nearly $700 million in acquisitions, $260 million in capex, and returned $956 million to shareholders[18] Fiscal 2022 Events Fiscal 2022 saw record revenue and earnings, significant share repurchases, debt refinancing, and a post-year-end acquisition Fiscal 2022 Financial Highlights (vs. Fiscal 2021) | Metric | Fiscal 2022 | Change | |---|---|---| | Revenue | $1,861.5 million | +15% | | Net Earnings from Continuing Operations | $374.2 million | +12% | | Diluted EPS from Continuing Operations | $9.14 | +14% | | Gross Profit Margin | 27.9% | +270 bps | | Shares Repurchased | ~4.0 million | - | - In July 2021, the company refinanced its debt by issuing $750.0 million of 2.5% 10-year senior notes, replacing existing 4.5% notes and a term loan[22] - Subsequent to fiscal year-end, on April 22, 2022, the company acquired a readymix concrete and aggregates business in northern Colorado for approximately $121.2 million[24] Human Capital Eagle Materials employed approximately 2,200 people as of March 31, 2022, prioritizing employee health and safety, which resulted in a total recordable incident rate below industry averages - The company had approximately 2,200 employees as of March 31, 2022, with about 700 hourly employees represented by unions[25] - Management prioritizes employee health and safety, implementing initiatives that resulted in a total recordable incident rate (TRIR) below the industry average for all business segments in fiscal 2022[26][27] Industry Segment Information The company operates in two sectors: Heavy Materials (Cement, Concrete and Aggregates) serving infrastructure, and Light Materials (Gypsum Wallboard, Recycled Paperboard) serving residential construction - The business is organized into two sectors: Heavy Materials (Cement, Concrete and Aggregates) and Light Materials (Gypsum Wallboard, Recycled Paperboard)[28] Heavy Materials The Heavy Materials sector, comprising Cement and Concrete & Aggregates, supplies essential materials for infrastructure and construction, benefiting from strong demand Cement The Cement segment produces portland cement for public infrastructure, operating eight plants with substantial limestone reserves and facing significant environmental regulations - The company operates eight cement plants with a net annual clinker capacity of 6.7 million tons and net annual grinding capacity of 8.15 million tons[43][45] Limestone Reserves and Resources (as of March 31, 2022) | Category | Tons (in millions) | |---|---| | Proven & Probable Reserves | 321.0 | | Measured & Indicated Resources (exclusive of reserves) | 679.2 | - Total net cement sales were 7.5 million short tons in both fiscal 2022 and 2021[46] - The business faces environmental risks from regulations on Cement Kiln Dust (CKD), potential Greenhouse Gas (GHG) rules, and air quality standards for ozone, which could require significant capital outlays[64][66][68] Concrete and Aggregates The Concrete and Aggregates segment produces readymix concrete and construction aggregates, with operations expanded by a recent $121.2 million acquisition in Colorado - As of March 31, 2022, the company operated 26 readymix concrete plants with 213 trucks[75] Aggregate Reserves and Resources (as of March 31, 2022) | Category | Tons (in millions) | |---|---| | Proven & Probable Reserves | 90.9 | | Measured & Indicated Resources (exclusive of reserves) | 20.8 | - Net aggregates sales were 1.5 million tons in fiscal 2022, down from 2.0 million tons in fiscal 2021, primarily due to project delays in Central Texas[80] - On April 22, 2022, the company acquired a concrete and aggregates business in northern Colorado for approximately $121.2 million, adding three concrete plants and two aggregate mining operations[74] Light Materials The Light Materials sector, comprising Gypsum Wallboard and Recycled Paperboard, serves residential and commercial markets, benefiting from vertical integration Gypsum Wallboard The Gypsum Wallboard segment manufactures wallboard for residential construction, operating five plants with 3.875 billion square feet annual capacity and significant gypsum reserves - The company operates five gypsum wallboard plants with a total approximate annual capacity of 3.875 billion square feet (MMSF)[94] Gypsum Reserves and Resources (as of March 31, 2022) | Category | Tons (in millions) | |---|---| | Proven & Probable Reserves | 62.5 | | Measured & Indicated Resources (exclusive of reserves) | 141.9 | - Total Gypsum Wallboard sales were 2,944 MMSF in fiscal 2022, an increase from 2,857 MMSF in fiscal 2021[95] - Two customers accounted for approximately 30% of the Gypsum Wallboard segment's sales during fiscal 2022[99] Recycled Paperboard The Recycled Paperboard segment operates a paper mill with 390,000 tons annual capacity, producing gypsum liner from recycled paper, with 40% internal consumption - The paper mill has an estimated annual capacity of 390,000 tons and produces lighter-weight gypsum liner from 100% recycled fiber[113][114] - In fiscal 2022, approximately 40% of the recycled paperboard sold was consumed internally by the company's Gypsum Wallboard operations[115] - The primary raw material is old corrugated containers (OCC), the price of which increased approximately 50% during fiscal 2022[116][118] Risk Factors The company faces diverse risks including cyclical industry demand, commodity pricing, public health emergencies, extensive environmental regulations, operational challenges, financial covenants, and cybersecurity threats - COVID-19 Risk: A pandemic could adversely affect business, operations, and financial conditions through supply chain disruptions, reduced demand, and market volatility[125][127] - Industry Risks: The business is affected by the cyclical demand in the construction industry, seasonality, unfavorable weather, and commodity price fluctuations[129][131][137] - Regulatory & Legal Risks: Operations are subject to extensive and costly governmental regulations, particularly environmental laws concerning emissions (including GHGs), land use, and potential cleanup liabilities. Climate change legislation could disproportionately affect the capital-intensive cement business[139][141][145] - Financial & Operational Risks: The cement business is capital intensive and sensitive to volume changes. The company faces risks from rising costs of fuel, energy, and transportation, as well as potential equipment failures. Debt agreements contain restrictive covenants that limit flexibility[165][170][180] - Cyber Risk: A cyber-attack or data security breach could negatively affect business operations, leading to reputational harm, financial loss, and regulatory scrutiny[160][162][163] Properties The company owns most of its operating facilities across the U.S., with no properties pledged as security for debts - The company's operating facilities are located across the U.S. and are all owned, except for the leased Dallas headquarters and certain terminals. No facilities are pledged as security for debts[207] Legal Proceedings Management believes no currently pending legal proceedings will materially affect the company's financial condition, results of operations, or liquidity - Management believes that no currently pending legal proceedings will have a material effect on the company's financial condition, results, or liquidity[210] Mine Safety Disclosures Mine safety violation disclosures, as required by the Dodd-Frank Act, are included in Exhibit 95 of this Form 10-K - Mine safety violation disclosures required by Section 1503(a) of the Dodd-Frank Act are included in Exhibit 95 to this Form 10-K[212] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Eagle Materials' common stock trades on the NYSE under EXP, with the Board authorizing additional share repurchases and the company repurchasing 4.0 million shares in fiscal 2022 - On May 17, 2022, the Board authorized the repurchase of an additional 7.5 million shares of common stock[215] - During fiscal 2022, the company repurchased 3,982,657 shares at an average price of $148.08 per share. No shares were repurchased in fiscal 2021[216] Share Repurchases for Quarter Ended March 31, 2022 | Period | Total Shares Purchased | Average Price Paid Per Share | |---|---|---| | Jan 2022 | 362,211 | $155.98 | | Feb 2022 | 418,000 | $142.16 | | Mar 2022 | 286,000 | $132.34 | | Q4 Total | 1,066,211 | $144.22 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion analyzes fiscal 2022 performance, highlighting strong revenue growth driven by price and volume, a positive outlook supported by infrastructure spending, and strategic debt management Market Conditions and Outlook The company anticipates strong cement demand from infrastructure and robust gypsum wallboard demand from housing, despite expected increases in energy and freight costs - Cement demand is expected to be supported by the Infrastructure Investment and Jobs Act, with the PCA forecasting a slight increase in consumption for calendar 2022[235] - Gypsum Wallboard demand is expected to remain strong, driven by favorable demographics, an undersupply of homes, and a population shift to the suburbs, despite rising inflation and mortgage rates[236] - The company anticipates further increases in energy and freight costs throughout fiscal 2023 due to global supply disruptions and limited transportation capacity[238] Results of Operations Fiscal 2022 revenue increased 15% to $1.86 billion, with gross profit up 27% and net earnings from continuing operations rising 12%, driven by higher prices and volumes Consolidated Results of Operations (Fiscal Year Ended March 31) | (in thousands, except per share) | 2022 | 2021 | % Change | |---|---|---|---| | Revenue | $1,861,522 | $1,622,642 | 15% | | Gross Profit | $519,614 | $408,355 | 27% | | Net Earnings From Continuing Operations | $374,247 | $334,166 | 12% | | Diluted EPS from Continuing Operations | $9.14 | $7.99 | 14% | - Revenue increased by $238.9 million (15%), primarily due to higher gross sales prices ($211.2 million) and sales volume ($27.7 million)[242] - Gross margin increased to 28% from 25% in fiscal 2021, mainly due to higher gross sales prices[245] - Interest expense decreased by 30% to $30.9 million, primarily due to debt refinancing at a lower interest rate[251] Results by Segment Heavy Materials saw Cement earnings rise 11% while Concrete and Aggregates declined; Light Materials had Gypsum Wallboard earnings surge 56%, offset by a 50% drop in Recycled Paperboard earnings due to higher costs Cement Segment Performance (FY2022 vs FY2021) | Metric | FY2022 | FY2021 | % Change | |---|---|---|---| | Revenue (incl. JV) | $1,007.1M | $944.6M | +7% | | Sales Volume (M Tons) | 7.53 | 7.47 | +1% | | Avg. Net Sales Price/ton | $119.13 | $111.19 | +7% | | Operating Earnings | $259.6M | $234.0M | +11% | Concrete and Aggregates Segment Performance (FY2022 vs FY2021) | Metric | FY2022 | FY2021 | % Change | |---|---|---|---| | Revenue | $177.1M | $168.7M | +5% | | Operating Earnings | $18.5M | $19.1M | -3% | Gypsum Wallboard Segment Performance (FY2022 vs FY2021) | Metric | FY2022 | FY2021 | % Change | |---|---|---|---| | Revenue | $692.2M | $539.0M | +28% | | Sales Volume (MMSF) | 2,944 | 2,857 | +3% | | Avg. Net Sales Price/MSF | $190.76 | $149.62 | +27% | | Operating Earnings | $261.5M | $167.3M | +56% | Recycled Paperboard Segment Performance (FY2022 vs FY2021) | Metric | FY2022 | FY2021 | % Change | |---|---|---|---| | Revenue (incl. intersegment) | $194.1M | $163.5M | +19% | | Operating Earnings | $12.6M | $25.4M | -50% | Critical Accounting Policies Critical accounting policies involve significant judgment, including impairment testing of long-lived assets and goodwill, and the valuation of assets and liabilities in business combinations - Key critical accounting policies include impairment of long-lived assets, goodwill impairment testing, and accounting for business combinations[278] - Goodwill is assessed for impairment annually in Q4. For fiscal 2022, a qualitative assessment was performed on all reporting units, and it was determined that it was not more likely than not that an impairment existed[280][363] - The total goodwill on the balance sheet as of March 31, 2022, was $329.1 million, allocated across the Cement, Concrete and Aggregates, Gypsum Wallboard, and Paperboard segments[286] Liquidity and Capital Resources The company maintains strong liquidity, actively managing its capital structure through debt refinancing and credit facility amendments, with projected capital expenditures of $115.0 million to $125.0 million for fiscal 2023 - Net cash provided by operating activities was $517.2 million in FY2022, a decrease from $643.1 million in FY2021, mainly because FY2021 included a $125.6 million income tax refund[296] - Subsequent to year-end, on May 5, 2022, the company amended its credit facility to add a $200 million term loan, extend the maturity to May 2027, and switch from a LIBOR-based to a SOFR-based reference rate[307][420] - The debt-to-capitalization ratio was 45.6% at March 31, 2022, compared to 42.8% at March 31, 2021[303] - Capital expenditures are expected to be between $115.0 million and $125.0 million in fiscal 2023[315] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk on variable-rate debt, where a 100 basis point increase would raise annual interest expense by $3.6 million, and commodity price risk for key inputs - The company is exposed to interest rate risk on its variable-rate debt. A hypothetical 100 basis point increase in rates would increase annual interest expense by $3.6 million[325] - The company is subject to commodity price risk for key inputs like coal, petroleum coke, natural gas, and power[326] Financial Statements and Supplementary Data This section presents the consolidated financial statements for fiscal years 2020-2022, including an unqualified auditor's opinion from Ernst & Young LLP, and details on the Texas Lehigh Cement Company LP joint venture Consolidated Financial Summary (Fiscal Year 2022) | Metric | Amount (in thousands) | |---|---| | Total Revenue | $1,861,522 | | Net Earnings | $374,247 | | Total Assets | $2,579,652 | | Total Liabilities | $1,446,096 | | Total Stockholders' Equity | $1,133,556 | - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements, stating they are presented fairly in all material respects[487] - The auditor's report identified the existence of raw materials and materials-in-progress inventory as a critical audit matter due to the complex judgments involved in measuring stockpile volumes and converting them to tonnage[493][494] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure were reported during the period - None reported[568] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2022, a conclusion affirmed by Ernst & Young LLP's unqualified opinion - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[569] - Management concluded that the company's internal control over financial reporting was effective as of March 31, 2022. This assessment was audited by Ernst & Young LLP, who also issued an unqualified opinion[571][573] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the 2022 Proxy Statement, and the company has adopted a code of ethics, 'The Eagle Way' - Most information for this item is incorporated by reference from the 2022 EXP Proxy Statement[583] - The company has a code of ethics, 'The Eagle Way,' which is published on the corporate governance section of its website[584] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2022 Proxy Statement, detailing securities available for issuance under the 2013 Incentive Plan Equity Compensation Plan Information as of March 31, 2022 | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | |---|---|---|---| | Equity compensation plans approved by stockholders | 456,849 | $83.81 | 3,377,416 | Part IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, referencing financial statements and noting the omission of inapplicable schedules - This section contains the index to all exhibits filed with the Form 10-K, including governance documents, material contracts, and certifications[594] Form 10-K Summary No Form 10-K summary is provided - None[615]