Eagle Materials(EXP) - 2021 Q4 - Annual Report

Part I Business Eagle Materials Inc. is a leading US supplier of heavy construction and light building materials, achieving record revenue of $1.62 billion in fiscal 2021 through strategic growth and portfolio optimization Overview - Eagle Materials is a leading U.S. supplier of heavy construction and light building materials, essential for commercial, residential, and public construction projects[6] - The company's competitive strengths include a diversified geographic reach in high-growth U.S. markets, a low-cost producer position, production flexibility, substantial raw material reserves (25-50 years), and an experienced management team with a conservative balance sheet strategy[8] - On May 19, 2021, the Board of Directors decided not to pursue the previously announced separation of its Heavy and Light Materials businesses, concluding that a combined company offers greater financial scale and flexibility for strategic growth[12] - The company's strategy focuses on four objectives: being a low-cost producer, maintaining a decentralized operating structure, operating in diverse and attractive U.S. markets, and achieving profitable growth through acquisitions and organic development[13] - Capital allocation priorities are: 1) growth investments, 2) operating capital investments to maintain low-cost positions, and 3) returning excess cash to shareholders, primarily via share repurchases[21] Fiscal 2021 Events Fiscal 2021 Financial Highlights (vs. Fiscal 2020) (in thousands) | Metric | FY 2021 | Change | Note | | :--- | :--- | :--- | :--- | | Revenue | $1,622.6M | +16% | Record revenue; organic revenue up 5% | | Net Income from Continuing Operations | $334.2M | +45% | - | | Cement Sales Volume | - | +26% | - | | Gypsum Wallboard Sales Volume | - | +6% | - | | Cash Flow from Operations | $643.1M | +61% | Enabled $560.0M of debt repayment | - The company successfully completed the integration of Kosmos Cement Company, acquired in March 2020 for approximately $669 million[24] - Divested non-core assets, including Western Aggregates and Mathews Readymix operations for $93.5 million and the Oil and Gas Proppants business for approximately $2.0 million in stock[26][27] Human Capital - As of March 31, 2021, the company had approximately 2,200 employees, with about 700 of the 1,550 hourly employees covered by collective bargaining agreements[30] - The company prioritizes employee health and safety, holding annual safety conferences and reviewing safety metrics monthly[31] - During the COVID-19 pandemic, the company was designated an essential business and implemented enhanced health and safety protocols to continue production while safeguarding employees[32] Industry Segment Information The company operates in two sectors, Heavy Materials and Light Materials, serving infrastructure and residential construction markets respectively - The business is organized into two sectors: Heavy Materials (Cement, Concrete and Aggregates segments) and Light Materials (Gypsum Wallboard and Recycled Paperboard segments)[33] - The primary end market for the Cement and Concrete and Aggregates segments is infrastructure, while for Gypsum Wallboard and Recycled Paperboard it is residential construction[33] Risk Factors The company faces significant risks from the COVID-19 pandemic, cyclical construction demand, extensive environmental regulations, capital-intensive operations, and restrictive debt covenants - COVID-19 Risks: The pandemic continues to pose a high degree of uncertainty, potentially causing adverse macroeconomic conditions, delays in construction projects, increased compliance costs, and disruptions to manufacturing operations and supply chains[119][121][128] - Industry Risks: Demand is tied to the cyclical construction industry. The business is seasonal, and unfavorable weather can adversely affect results. Many products are commodities, subject to price fluctuations from changes in supply and demand[129][132][137] - Regulatory & Legal Risks: Operations are subject to extensive and costly environmental regulations, including potential future legislation on greenhouse gas (GHG) emissions which could materially impact the cement industry. The company also faces risks from litigation and permitting requirements for mining[141][143][148] - Financial & Operational Risks: The cement business is capital-intensive, making earnings sensitive to volume changes. Results are subject to significant changes in the cost of fuel, energy, and transportation. Debt agreements contain restrictive covenants that limit financial flexibility[158][164][171] - Acquisition Risks: Future acquisitions, a key part of the growth strategy, involve risks such as integration difficulties, assumption of unanticipated liabilities, and failure to achieve expected profitability[180][181] Unresolved Staff Comments The company reports no unresolved comments from the SEC Staff - There are no unresolved Staff comments[191] Properties The company owns most of its U.S. operating facilities, including cement, concrete, aggregate, gypsum wallboard, and recycled paperboard plants, with none pledged as debt security - The company's U.S. facilities include cement plants, quarries, concrete/aggregate plants, gypsum wallboard plants, a recycled paperboard mill, and distribution terminals[192] - All facilities are owned except for the Dallas headquarters (leased through May 2029) and certain terminals. No facilities are pledged as security for debt[192] Legal Proceedings The company does not anticipate any material adverse effects on its financial condition or operations from current legal proceedings - Management does not believe any currently pending legal proceedings will have a material effect on the company's financial condition, results of operations, or liquidity[195] Mine Safety Disclosures Mine safety violation information, as required by the Dodd-Frank Act, is provided in Exhibit 95 of this Annual Report - Mine safety violation information required by Section 1503(a) of the Dodd-Frank Act is included in Exhibit 95 to this Annual Report[197] 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 an active share repurchase program, and its 5-year total return significantly outperformed its initial value - The company's common stock trades on the NYSE under the symbol EXP[199] - No shares were repurchased in fiscal 2021. In fiscal 2020, 3,574,109 shares were repurchased at an average price of $87.82, and in fiscal 2019, 3,309,670 shares were repurchased at an average price of $82.18[201] - On April 18, 2019, the Board authorized an additional 10,000,000 shares for repurchase[200] 5-Year Cumulative Total Return Comparison | Index | 3/31/16 | 3/31/17 | 3/31/18 | 3/31/19 | 3/31/20 | 3/31/21 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Eagle Materials Inc. | $100.00 | $139.25 | $148.30 | $121.90 | $84.86 | $195.54 | | Russell 1000 | $100.00 | $117.43 | $133.84 | $146.29 | $134.55 | $216.07 | | Dow Jones US Building Materials & Fixtures | $100.00 | $115.17 | $121.77 | $119.99 | $110.34 | $214.37 | Selected Financial Data This section is no longer required by SEC Release No. 33-10890, thus no data is presented - The requirement for selected financial data (previously Item 301 of Regulation S-K) has been eliminated by SEC Release No. 33-10890[210] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2021, Eagle Materials achieved $1.62 billion in revenue and $334.2 million in net earnings, driven by strong segment performance and strategic acquisitions, while generating $643.1 million in operating cash flow despite winter storm impacts Executive Summary - The company's business is organized into two sectors: Heavy Materials (Cement, Concrete and Aggregates) and Light Materials (Gypsum Wallboard, Recycled Paperboard)[213] - On September 18, 2020, the company sold its Oil and Gas Proppants business, which is now reported as discontinued operations[212] - Key transactions include the acquisition of Kosmos Cement Company in March 2020 for ~$669 million and the sale of Western Aggregates LLC and Mathews Readymix LLC in April 2020 for $93.5 million[219][220] Market Conditions and Outlook - Fiscal 2021 results were strong despite COVID-19 uncertainty, with Gypsum Wallboard shipments up 6% and organic Cement sales volume up 1%[222] - The company expects freight costs to increase in fiscal 2022 due to continued high demand for construction products[223] - Demand for Gypsum Wallboard is expected to remain strong, driven by residential housing starts which increased 7% in calendar 2020[227] - Winter Storm Uri in February 2021 adversely affected operations, increasing costs for natural gas and electric power and reducing construction activity in affected regions during the fourth quarter[229] Results of Operations Consolidated Results of Operations (Fiscal Year Ended March 31) (in thousands) | (in thousands) | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $1,622,642 | $1,404,033 | 16% | | Gross Profit | $408,355 | $342,666 | 19% | | Earnings from Continuing Operations Before Income Taxes | $424,112 | $255,695 | 66% | | Net Earnings From Continuing Operations | $334,166 | $231,191 | 45% | | Diluted EPS from Continuing Operations | $7.99 | $5.47 | 46% | - Revenue increased 16% to $1.6 billion, with acquisitions contributing approximately $177.7 million. Organic revenue grew 5% due to higher sales prices and volumes[232] - Gross profit increased 19% to $408.4 million, with the gross margin improving to 25% from 24% in fiscal 2020[234] - Corporate G&A expenses decreased 24% to $49.5 million, primarily due to lower legal/professional fees related to the prior year's strategic review and lower acquisition-related expenses[236] - A gain on sale of businesses of $52.0 million was recognized in fiscal 2021 from the sale of Western Aggregates and Mathews Readymix[238] - The effective tax rate increased to 21% from 10%, as the prior year included a one-time $31.7 million benefit from the CARES Act allowing for a net operating loss carryback[243] Results by Segment Cement Segment Performance (FY2021 vs FY2020) | Metric | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Gross Revenue | $944.6M | $752.0M | 26% | | Sales Volume (M Tons) | 7,466 | 5,931 | 26% | | Avg. Net Sales Price/ton | $111.19 | $109.96 | 1% | | Operating Earnings | $234.0M | $181.3M | 29% | Concrete and Aggregates Segment Performance (FY2021 vs FY2020) | Metric | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Gross Revenue | $168.8M | $182.8M | (8)% | | Concrete Volume (M Cubic Yds) | 1,300 | 1,388 | (6)% | | Aggregate Volume (M Tons) | 1,956 | 3,313 | (41)% | | Operating Earnings | $19.1M | $17.6M | 9% | Gypsum Wallboard Segment Performance (FY2021 vs FY2020) | Metric | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Gross Revenue | $539.0M | $508.1M | 6% | | Sales Volume (MMSF) | 2,857 | 2,694 | 6% | | Avg. Net Sales Price/MMSF | $149.62 | $148.03 | 1% | | Operating Earnings | $167.3M | $154.6M | 8% | Recycled Paperboard Segment Performance (FY2021 vs FY2020) | Metric | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Gross Revenue | $163.5M | $160.0M | 2% | | Sales Volume (M Tons) | 325 | 326 | (0)% | | Avg. Net Sales Price/ton | $486.15 | $476.20 | 2% | | Operating Earnings | $25.4M | $35.0M | (27)% | Critical Accounting Policies - Impairment of Long-Lived Assets: Assets are assessed for impairment when events indicate the carrying amount may not be recoverable, by comparing the carrying amount to future undiscounted net cash flows[268] - Goodwill: Goodwill is assessed for impairment annually in the fourth quarter at the reporting unit level. The company may perform a qualitative analysis first, or proceed directly to a quantitative test comparing the reporting unit's fair value (estimated using market and income approaches) to its carrying value[269][270][271] - Business Combinations: The company uses the acquisition method of accounting, recognizing assets acquired and liabilities assumed at their fair values. This requires significant management judgment and estimates, particularly for property, plant, equipment, and intangible assets[276] Liquidity and Capital Resources Summary of Cash Flows (Fiscal Year Ended March 31) (in thousands) | (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $643,073 | $399,301 | | Net Cash Provided by (Used in) Investing Activities | $37,089 | ($831,080) | | Net Cash (Used in) Provided by Financing Activities | ($530,290) | $541,826 | - Operating cash flow increased by $243.8 million, primarily due to a $258.7 million positive change in working capital, which included receiving income tax refunds of $125.6 million[285] - Net cash from investing activities was positive due to $91.0 million in proceeds from business sales and lower capital and acquisition spending compared to the prior year[290] - Net cash used in financing activities was driven by a $560.0 million reduction in the Revolving Credit Facility balance[291] - Total liquidity at March 31, 2021 was approximately $1.01 billion, consisting of $263.5 million in cash and $745.7 million available under the Revolving Credit Facility[297] - Capital expenditures for fiscal 2022 are expected to range from $80 million to $100 million[306] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on its variable-rate debt and commodity price changes, with a 100 basis point rate increase impacting annual interest expense by $6.7 million - The company is exposed to interest rate risk on its variable-rate Revolving Credit Facility and Term Loan. A hypothetical 100 basis point increase in interest rates on the $665.0 million Term Loan would increase annual interest expense by $6.7 million[315] - The company is subject to commodity risk from price changes in coal, coke, natural gas, and power, which it attempts to mitigate through contracts and the use of alternative fuels[316] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for Eagle Materials Inc., including the independent auditor's unqualified opinion on both the financial statements and internal control over financial reporting Consolidated Financial Statements Consolidated Statement of Earnings (FY 2021) (in thousands) | (in thousands) | Amount | | :--- | :--- | | Revenue | $1,622,642 | | Gross Profit | $408,355 | | Earnings from Continuing Operations | $334,166 | | Net Earnings | $339,444 | | Diluted EPS | $8.12 | Consolidated Balance Sheet (As of March 31, 2021) (in thousands) | (in thousands) | Amount | | :--- | :--- | | Total Current Assets | $661,689 | | Total Assets | $2,838,681 | | Total Current Liabilities | $169,354 | | Long-term Debt | $1,008,616 | | Total Liabilities | $1,479,691 | | Total Stockholders' Equity | $1,358,990 | Notes to Consolidated Financial Statements - The sale of the Oil and Gas Proppants business on September 18, 2020, for $2.0 million resulted in a gain of $9.2 million and is accounted for as a discontinued operation[332][398] - The acquisition of Kosmos Cement Company was completed on March 6, 2020, for a purchase price of approximately $668.9 million. The transaction generated $129.1 million in goodwill[380][382][385] - At March 31, 2021, the company had $1.015 billion in total debt, consisting of a $665 million Term Loan and $350 million in Senior Unsecured Notes. There were no borrowings outstanding under the $750 million Revolving Credit Facility[410][414] - The company has authorization to repurchase an additional 7,305,649 shares as of March 31, 2021[359] Report of Independent Registered Public Accounting Firm - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements, stating they are presented fairly in all material respects in conformity with U.S. GAAP[494] - The auditors also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of March 31, 2021[495] - A critical audit matter was identified related to the existence of materials-in-progress (clinker) inventory, due to the complexity and judgment involved in evaluating the company's process for measuring stockpile volumes and converting them to tonnage[500] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None reported[566] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of March 31, 2021, a conclusion affirmed by the independent auditor's unqualified opinion - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2021[567] - Management concluded that internal control over financial reporting was effective as of March 31, 2021, based on the COSO framework[569] - Ernst & Young LLP, the independent registered public accounting firm, audited and issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of March 31, 2021[571] Other Information The company reports no other information - None[578] Part III Information for Items 10 through 14, covering directors, executive officers, corporate governance, executive compensation, security ownership, and principal accounting fees, is incorporated by reference from the company's August 3, 2021 Proxy Statement Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership Information for Items 10-14 is incorporated by reference from the Company's August 3, 2021 Proxy Statement, with the code of ethics available on its website - Information for Items 10-14 is incorporated by reference from the 2021 EXP Proxy Statement[580] - The company's code of ethics, "The Eagle Way," is published on the corporate governance section of its website[581] Part IV This section lists the financial statements, schedules, and exhibits filed with the report, with financial statements referenced under Item 8 and a detailed exhibit index provided Exhibits, Financial Statement Schedules This section lists all documents filed as part of the report, referencing financial statements under Item 8 and providing a detailed index of exhibits - The financial statements are filed as part of this report and are indexed under Item 8[590] - Financial statement schedules are omitted as they are not applicable or the required information is included elsewhere[591] - A detailed index to exhibits is provided on pages 120-125 of the report[591]