Eagle Materials(EXP) - 2023 Q4 - Annual Report

Part I Business Eagle Materials Inc. is a leading U.S. manufacturer of heavy and light construction materials, emphasizing low-cost production, decentralized operations, and strategic growth Overview, Competitive Strengths, and Strategy The company manufactures essential construction materials, leveraging a low-cost plant network and substantial raw material reserves, while pursuing growth and responsible operations - The company's primary products are portland Cement and Gypsum Wallboard, which are essential commodities for commercial, residential, and public construction[13] - Key competitive strengths include a strategically located plant network, a low-cost producer position, and substantial owned raw material reserves (25 to 50 years of supply for cement and wallboard facilities)[15][16][19] - The company's strategy emphasizes being a low-cost producer, maintaining a decentralized operating structure, focusing on attractive U.S. markets, and growing through strategic acquisitions and organic development[21] - Capital allocation priorities are: 1) growth opportunities, 2) operating capital investments to maintain low-cost positions, and 3) returning excess cash to shareholders via buybacks and dividends; over the past five years, the company has returned approximately $1.7 billion to shareholders[32] Fiscal 2023 Events Fiscal 2023 saw record financial performance with 15% revenue growth and 36% diluted EPS increase, alongside strategic acquisitions and ESG advancements Fiscal 2023 Financial Highlights (vs. Fiscal 2022) | Metric | Value (USD) | Change | | :--- | :--- | :--- | | Revenue | $2.1 billion | +15% | | Net Earnings | $461.5 million | +23% | | Gross Profit Margin | 29.8% | +190 bps | | Diluted EPS | $12.46 | +36% | | Share Repurchases | $387.7 million (3.1M shares) | - | - Completed the ConAgg Acquisition (readymix concrete and aggregates) in Colorado for approximately $120.2 million and the Terminal Acquisition (cement distribution) in Nashville for approximately $39.5 million[35][36] - Advanced ESG initiatives by increasing Portland Limestone Cement (PLC) sales to approximately 30% of cement sales volume in fiscal 2023[38] - Amended its Revolving Credit Facility, adding a $200.0 million term loan and extending the maturity to May 2027[40] Human Capital The company employed approximately 2,400 people as of March 31, 2023, prioritizing employee health and safety, with all segments achieving TRIRs below industry averages - The company had approximately 2,400 employees as of March 31, 2023, with about 700 hourly employees covered by collective bargaining agreements[42] - Management emphasizes employee health and safety through comprehensive processes, training, and an annual safety conference; in fiscal 2023, all business segments achieved TRIR averages lower than the applicable industry average[43][44][45] Industry Segment Information The company operates in Heavy Materials (infrastructure) and Light Materials (residential) sectors, both benefiting from strong demand in their respective markets - The business is organized into two sectors: Heavy Materials (Cement, Concrete and Aggregates) and Light Materials (Gypsum Wallboard, Recycled Paperboard)[46] - The primary end market for Heavy Materials is infrastructure, while the primary end market for Light Materials is residential construction[46] Risk Factors The company faces diverse risks including cyclical construction demand, seasonality, commodity price volatility, environmental regulations, operational challenges, and financial risks Industry Risk Factors The company's performance is tied to the cyclical, seasonal construction industry, facing risks from government spending, inflation, interest rates, weather, and commodity price fluctuations - Demand is directly related to the cyclical construction industry, which is affected by government infrastructure spending, inflation, and interest rates[167][169] - The business is seasonal, with peak revenue and profits typically occurring from April through November[170] - As a producer of commodity products, the company is subject to price fluctuations based on supply, demand, and general economic conditions[175] Economic, Political, and Legal Risk Factors The company faces extensive and costly governmental regulations, especially environmental laws on GHG emissions, along with ESG scrutiny, mining permit dependencies, and potential litigation costs - Operations are subject to extensive and costly governmental regulations, including environmental laws that can be burdensome[179] - Climate change legislation and regulation of greenhouse gases (GHGs) could have a material adverse effect, particularly on the cement manufacturing process, which is inherently carbon-intensive[182][184] - Operations are dependent on the ability to mine properties and renew required permits and approvals from governmental authorities[190] Financial and Operational Risk Factors The company faces operational risks from capital-intensive cement operations, fluctuating fuel and raw material costs, transportation dependencies, and financial risks from debt covenants and rising interest rates - The Cement business is capital intensive with significant fixed costs, making earnings sensitive to changes in sales volume[201] - Results are subject to significant changes in the cost and availability of fuel, energy, and raw materials[204] - Debt agreements contain restrictive covenants and require meeting financial ratios, which could limit flexibility and lead to default if not met[213] - Increases in interest rates and inflation could adversely affect the business by increasing borrowing costs and potentially decreasing demand for products[217] Properties The company owns most of its diverse operating facilities across the U.S., including plants, quarries, and terminals, with none pledged as debt security - The company's operating facilities, which include plants, quarries, and terminals, are located across the U.S.[234] - All facilities are owned except for the Dallas headquarters and certain terminals, which are leased; no facilities are pledged as security for debt[234] Legal Proceedings The company is involved in ordinary course litigation not expected to be material, but has commenced litigation against the EPA regarding ozone standards, with an unpredictable outcome - The company is involved in litigation in the ordinary course of business, which management does not expect to have a material effect[237] - The company has commenced litigation against the EPA in response to the disapproval of State Implementation Plans (SIPs) for Nevada, Oklahoma, and Texas concerning ozone standards; the outcome is currently uncertain[238] Mine Safety Disclosures Mine safety disclosure information, as required by the Dodd-Frank Act, is included in Exhibit 95 of this Annual Report - Mine safety disclosure information required by Section 1503(a) of the Dodd-Frank Act is included in Exhibit 95 to this Annual Report[240] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under EXP; in fiscal 2023, 3.1 million shares were repurchased for $387.7 million, with an additional 7.5 million shares authorized - In fiscal 2023, the company repurchased 3,075,788 shares at an average price of $126.05 per share[243] - On May 17, 2022, the Board of Directors authorized the repurchase of an additional 7,500,000 shares[242] Share Repurchases for Quarter Ended March 31, 2023 | Period | Total Shares Purchased | Average Price Paid Per Share (USD) | | :--- | :--- | :--- | | Jan 1 - Jan 31, 2023 | 240,000 | $139.60 | | Feb 1 - Feb 28, 2023 | — | — | | Mar 1 - Mar 31, 2023 | 288,000 | $139.98 | | Quarter 4 Totals | 528,000 | $139.81 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Fiscal 2023 saw 15% revenue growth to $2.1 billion and 23% net earnings increase to $461.5 million, driven by strong pricing; the company maintains liquidity for operations and planned capital expenditures despite residential construction headwinds Market Conditions and Outlook The company anticipates strong cement demand from infrastructure, but expects higher mortgage rates to impact residential construction; solid fuel costs for cement are projected to rise, while OCC prices for paperboard should remain stable - Demand for cement is expected to remain strong due to increased federal and state infrastructure funding, with the company's cement network operating at high utilization levels[261] - Tighter fiscal policy and higher mortgage rates are expected to have some adverse impact on residential construction, affecting the Gypsum Wallboard segment[262] - Solid fuel costs for cement are expected to increase in fiscal 2024, while OCC (recycled paperboard raw material) prices are expected to remain stable[264][265] Results of Operations (FY2023 vs FY2022) Fiscal 2023 saw 15% revenue growth to $2.15 billion and 23% net earnings increase to $461.5 million, driven by higher sales prices, resulting in a 30% gross margin and $12.46 diluted EPS Consolidated Results of Operations (in thousands, except per share) | Metric | FY 2023 (USD) | FY 2022 (USD) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $2,148,069 | $1,861,522 | 15% | | Gross Profit | $639,266 | $519,614 | 23% | | Net Earnings | $461,540 | $374,247 | 23% | | Diluted EPS | $12.46 | $9.14 | 36% | - Revenue increase was largely due to higher gross sales prices of approximately $261.8 million, partially offset by lower sales volume of $19.7 million[268] - Gross margin increased to 30% in fiscal 2023 from 28% in fiscal 2022, primarily due to higher gross sales prices[271] Results by Segment (FY2023 vs FY2022) In fiscal 2023, all segments showed strong pricing power; Cement operating earnings rose 7%, Gypsum Wallboard surged 35%, and Recycled Paperboard doubled, while Concrete and Aggregates revenue grew 35% with flat earnings Cement Segment Performance (FY2023 vs FY2022) | Metric | FY 2023 (USD) | FY 2022 (USD) | % Change | | :--- | :--- | :--- | :--- | | Revenue (incl. JV) | $1,074.1M | $1,007.1M | +7% | | Sales Volume (M Tons) | 7,133 | 7,534 | -5% | | Avg. Net Sales Price/ton | $134.36 | $119.13 | +13% | | Operating Earnings | $278.8M | $259.6M | +7% | Concrete and Aggregates Segment Performance (FY2023 vs FY2022) | Metric | FY 2023 (USD) | FY 2022 (USD) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $239.5M | $177.1M | +35% | | Concrete Volume (M Cubic Yds) | 1,545 | 1,333 | +16% | | Aggregate Volume (M Tons) | 2,909 | 1,525 | +91% | | Operating Earnings | $18.3M | $18.5M | -1% | Gypsum Wallboard Segment Performance (FY2023 vs FY2022) | Metric | FY 2023 (USD) | FY 2022 (USD) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $872.5M | $692.2M | +26% | | Sales Volume (MMSF) | 3,065 | 2,944 | +4% | | Avg. Net Sales Price/MSF | $232.31 | $190.76 | +22% | | Operating Earnings | $352.5M | $261.5M | +35% | Recycled Paperboard Segment Performance (FY2023 vs FY2022) | Metric | FY 2023 (USD) | FY 2022 (USD) | % Change | | :--- | :--- | :--- | :--- | | Revenue (incl. Intersegment) | $201.3M | $194.1M | +4% | | Sales Volume (M Tons) | 326 | 334 | -2% | | Operating Earnings | $25.2M | $12.6M | +100% | Critical Accounting Policies The company's critical accounting policies involve significant judgment, particularly in impairment testing of long-lived assets and goodwill, and in valuing assets and liabilities during business combinations - Key critical accounting policies include impairment of long-lived assets, goodwill impairment testing, and accounting for business combinations[294] - Goodwill is tested for impairment annually in Q4 at the reporting unit level; in fiscal 2023, a qualitative assessment was performed, and it was determined that it was not more likely than not that an impairment existed[296][367] - Business combinations are accounted for using the acquisition method, which requires estimating the fair values of acquired assets and liabilities, a process involving significant management judgment[303] Liquidity and Capital Resources The company maintains sufficient liquidity through cash flow and its $750 million revolving credit facility; fiscal 2023 saw $541.7 million in operating cash flow, with FY2024 capital expenditures projected at $145-$165 million Summary of Cash Flows (in thousands) | Cash Flow Activity | FY 2023 (USD) | FY 2022 (USD) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $541,726 | $517,171 | | Net Cash Used in Investing Activities | ($268,594) | ($74,121) | | Net Cash Used in Financing Activities | ($277,306) | ($692,154) | - The debt-to-capitalization ratio was 48.1% at March 31, 2023, up from 45.6% at March 31, 2022[317] - As of March 31, 2023, the company had $586.6 million of available borrowings under its Revolving Credit Facility[319] - Capital expenditures for fiscal 2024 are expected to range from $145.0 million to $165.0 million[327] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on its $349.5 million variable-rate debt, where a 100 basis point increase would raise annual interest expense by $3.5 million, and from commodity price changes - The company is exposed to interest rate risk on its variable-rate debt, which totaled $349.5 million at March 31, 2023[338] - A hypothetical 100 basis point (1%) increase in interest rates would increase annual interest expense by $3.5 million[338] - The company is subject to commodity risk from price changes in coal, petroleum coke, natural gas, and power[339] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal years 2021-2023, including key financial statements and notes, along with an unqualified audit opinion from Ernst & Young LLP Consolidated Statements of Earnings The Consolidated Statement of Earnings shows significant fiscal 2023 performance, with revenue growing to $2.15 billion, net earnings rising to $461.5 million, and diluted EPS increasing to $12.46 Key Earnings Data (in thousands, except per share data) | Metric | 2023 (USD) | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | :--- | | Revenue | $2,148,069 | $1,861,522 | $1,622,642 | | Gross Profit | $639,266 | $519,614 | $408,355 | | Net Earnings | $461,540 | $374,247 | $339,444 | | Diluted EPS | $12.46 | $9.14 | $8.12 | Consolidated Balance Sheets As of March 31, 2023, the Consolidated Balance Sheet shows total assets of $2.78 billion, total liabilities of $1.60 billion, and total stockholders' equity of $1.19 billion Key Balance Sheet Data (in thousands) | Metric | March 31, 2023 (USD) | March 31, 2022 (USD) | | :--- | :--- | :--- | | Total Current Assets | $521,503 | $442,727 | | Property, Plant, and Equipment, net | $1,662,061 | $1,616,539 | | Goodwill and Intangible Assets, net | $466,043 | $387,898 | | Total Assets | $2,781,002 | $2,579,652 | | Total Current Liabilities | $212,889 | $207,551 | | Long-term Debt | $1,079,032 | $938,265 | | Total Liabilities | $1,595,308 | $1,446,096 | | Total Stockholders' Equity | $1,185,694 | $1,133,556 | Notes to Consolidated Financial Statements The notes detail accounting policies and financial data, including fiscal 2023 acquisitions, $1.1 billion in total debt, segment performance, stock-based compensation, and no goodwill impairment charge - Acquisitions (Note B): In FY2023, the company completed the ConAgg Acquisition for ~$120.2 million and the Nashville Terminal Acquisition for ~$39.5 million, both funded primarily through its Revolving Credit Facility[392][396] - Debt (Note G): As of March 31, 2023, total debt was $1.1 billion, consisting of a $750 million 2.500% Senior Unsecured Note due 2031, a $192.5 million Term Loan, and $157.0 million outstanding on the Revolving Credit Facility[409] - Goodwill (Note A): A qualitative assessment on all reporting units in Q4 FY2023 determined it was not more likely than not that an impairment existed, so no quantitative test was performed[367] - Stock Repurchases (Note A): In FY2023, the company repurchased 3,075,788 shares for an average price of $126.05; as of March 31, 2023, 7,747,204 shares remained authorized for repurchase[375] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2023, confirmed by an unqualified audit opinion from Ernst & Young LLP - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2023[483] - Management concluded that the company's internal control over financial reporting was effective as of March 31, 2023, based on the COSO 2013 framework[485] - Ernst & Young LLP, the independent registered public accounting firm, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of March 31, 2023[487] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement; the company maintains a code of ethics, 'The Eagle Way' - Most information for Items 10-14 is incorporated by reference from the Company's Proxy Statement for the August 3, 2023 Annual Meeting of Stockholders[497] - The company has a code of ethics, 'The Eagle Way,' which applies to the principal executive officer, principal financial officer, and other employees, and is published on its website[499] Part IV Exhibits, Financial Statement Schedules This item lists all exhibits filed with the Form 10-K, including governance documents, debt agreements, compensation plans, and certifications; financial statement schedules are omitted - This section provides an index of all exhibits filed with the Form 10-K, including governance documents, debt agreements, compensation plans, and various certifications[507][509] - Financial statement schedules are omitted because they are not applicable or the required information is included within the main financial statements[506]