Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2017; filed January 31, 2018. The financial statements are unaudited. Eagle Materials produces cement, wallboard, recycled paperboard, frac sand, concrete and aggregates.
Key financial results
| Metric | Three months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2017 |
|---|---|---|
| Revenue | $359.4 million, up 19% | $1,101.8 million, up 18% |
| Gross profit / margin | $94.6 million / 26%; prior year 29% | $277.4 million / 25%; prior year 27% |
| Earnings before income taxes | $51.4 million, down 39% | $223.2 million, down 7% |
| Net earnings | $101.4 million, up 80% | $219.6 million, up 36% |
| Diluted EPS | $2.08; prior year $1.17 | $4.52; prior year $3.35 |
| Operating cash flow | Not presented separately for the quarter | $275.1 million; prior year $288.9 million |
Quarterly net earnings included a substantial tax benefit despite lower pretax earnings: the tax line reflects a benefit of approximately $50.0 million. For the nine months, income tax expense was $3.6 million and the reported effective rate was approximately 2%, versus 33% a year earlier. The primary factors were a one-time, noncash $61.0 million benefit from U.S. tax-law changes and a $2.5 million benefit from adopting share-based payment accounting guidance. Thus, reported earnings growth was not solely operating-driven.
For the nine months, capital expenditures were $83.7 million and acquisition spending was $36.8 million, resulting in net investing cash outflow of $120.5 million. Financing cash outflow was $139.6 million; cash increased $15.1 million to $21.7 million.
Balance sheet, debt and liquidity
- At December 31, 2017, total debt was $571.5 million: $185.0 million drawn on the revolving credit facility, $350.0 million of 4.5% notes due 2026, and $36.5 million of private-placement notes due 2019. Cash was $21.7 million.
- The $500.0 million credit facility had $305.6 million available, net of outstanding letters of credit. The company reported compliance with its debt financial tests.
- Current assets were $425.3 million and current liabilities $174.6 million; working capital was $250.7 million. Debt-to-capitalization was 28.5%, down from 36.3% at March 31, 2017.
- During the period, Eagle repaid $81.2 million of maturing private-placement notes and reduced credit-facility borrowings by $40.0 million. The company reported $9.4 million of letters of credit and $25.6 million of performance bonds.
Changes versus the prior comparable period
- Revenue growth reflected acquisitions, higher prices and higher volumes. Fairborn and Wildcat added approximately $26.1 million of quarterly revenue and $73.5 million for the nine months. Fairborn, acquired in February 2017, was a major contributor; Wildcat, acquired in July 2017, operates oil-and-gas transload facilities.
- Gross margins declined as costs rose faster than revenue. Management attributed the increase to operating costs, including energy, raw materials, freight, paper and maintenance, depending on the segment.
- Segment performance was mixed. Nine-month cement operating earnings rose 21% to $154.5 million; wallboard earnings rose 1% to $123.2 million; paperboard earnings fell 27% to $22.4 million; proppants remained loss-making at $4.8 million; and concrete and aggregates earnings rose 15% to $15.1 million.
- Oil and gas proppants revenue rose sharply with higher frac-sand volumes, but the segment still recorded operating losses. Paperboard faced higher input costs, while wallboard quarterly earnings were affected by higher costs despite stronger volume.
- Interest expense increased to $21.6 million for the nine months from $15.8 million, primarily reflecting the 2016 issuance of $350 million of senior notes and credit-facility borrowing.
Outlook, commentary and risks
- Management described construction demand fundamentals as promising and expected U.S. cement consumption, wallboard shipments and frac-sand demand to increase during calendar 2018. It expected regional differences in cement volume and pricing; no company-wide earnings or revenue guidance was provided.
- Management expected recycled-paperboard sales volume to remain near capacity. Recycled-fiber costs could remain above fiscal 2017 levels, and contractual price adjustments may lag cost increases.
- The company was building out its Utica, Illinois frac-sand facility, including a dry plant and distribution system. Estimated project cost was approximately $70 million, with completion expected in summer 2018. Fiscal 2018 sustaining capital expenditures were estimated at $30–$35 million.
- A $39.1 million wallboard antitrust settlement charge was accrued at December 31 and expected to be paid within twelve months. The direct-purchaser settlement was subject to court approval; the indirect-purchaser agreement was entered into in January 2018 and was also subject to approval. A separate homebuilder suit remained ongoing, and management could not estimate a reasonably possible loss; a related DOJ investigation also remained unresolved.
- Other key exposures include cyclical construction and energy markets, adverse weather, commodity and transportation costs, operational outages, environmental regulation and permitting, customer performance, and debt covenants. A 100-basis-point rise in rates on outstanding variable-rate borrowings would increase annual interest expense by about $1.9 million.
- Management stated that operating cash flow and available credit should cover anticipated operating needs, capital spending, dividends and debt service for at least twelve months, while noting that market conditions and covenant compliance could affect future liquidity. Disclosure controls were reported effective.
Investor facts to verify
- How much of reported earnings growth reflects ongoing operations versus the $61.0 million tax-law benefit and other tax items?
- Will operating-cost pressures ease enough to stabilize or improve gross margins, particularly in paperboard and wallboard?
- What are the final court approvals, payment timing and remaining exposure, if any, from the wallboard antitrust matters, homebuilder litigation and DOJ investigation?
- Will the Utica buildout meet its approximately $70 million budget and summer 2018 completion target, and what returns will it generate?
- Can Eagle sustain forecast cash needs while funding investment and dividends, and how sensitive are results to variable interest rates and construction or frac-sand demand?