Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2015, ended December 31, 2014. The financial statements are unaudited; the comparable periods ended December 31, 2013. Eagle Materials produces cement, gypsum wallboard, recycled paperboard, concrete and aggregates, and oil and gas proppants.
Financial performance
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Revenue | $291.5 million, up 27% | $842.6 million, up 19% |
| Gross profit | $79.1 million, up 59% | $210.6 million, up 35% |
| Gross margin | 27%, versus 22% | 25%, versus 22% |
| Net earnings | $52.0 million, up 65% | $140.1 million, up 38% |
| Diluted EPS | $1.03, versus $0.63 | $2.78, versus $2.03 |
| Operating cash flow | Not provided for the quarter | $183.1 million, versus $144.0 million |
Quarterly revenue growth reflected higher sales volumes and average prices across most businesses; the November CRS Proppants acquisition contributed $9.5 million. For the quarter, management attributed approximately $34.3 million of revenue growth to volume and $18.9 million to price. Cement and wallboard were major earnings contributors. Nine-month interest expense fell to $12.1 million from $14.2 million. The estimated effective tax rate was approximately 33%.
Financial position and liquidity
- At December 31, cash was $13.7 million; current assets were $362.6 million and current liabilities were $172.3 million. Reported working capital was $190.2 million, down from $198.1 million at March 31, 2014.
- Total debt was $517.8 million, compared with $381.3 million at March 31, 2014; cash less debt was approximately $504.1 million net debt. Debt-to-capitalization was 34.7%, versus 31.4% at fiscal year-end.
- The amended credit facility provides up to $500 million and extends to October 30, 2019. Borrowings were $335.0 million, with $155.8 million of availability net of letters of credit. The company reported compliance with debt covenants.
- Operating cash flow of $183.1 million was more than offset by $302.1 million of investing outflows, including the $237.2 million acquisition and $65.0 million of capital expenditures. Financing activities provided $126.2 million, principally from increased credit-facility borrowings.
- Quarterly dividends were $0.10 per share; nine-month dividends paid totaled $15.0 million.
Material changes and business developments
- On November 14, 2014, Eagle acquired CRS Proppants, a frac-sand supplier with a Wisconsin mine and transload network, for approximately $237.2 million, funded with credit-facility borrowings. Purchase accounting remained provisional. CRS contributed $9.5 million of post-acquisition revenue and $0.2 million of operating income through quarter-end; results included acquisition-related depreciation and inventory fair-value step-up effects.
- Oil and Gas Proppants revenue increased to $31.7 million for the quarter from $4.0 million, and segment operating earnings were $3.2 million versus a $2.2 million loss. Growth reflected increased sales from Corpus Christi, the new Illinois mine, and the acquisition.
- Across the quarter, cement revenue rose 17%, wallboard 14%, paperboard 19%, and concrete and aggregates 11%; aggregate volumes declined 4%. Wallboard and cement price increases supported margins.
- The amended credit facility increased capacity from $400 million to $500 million and extended maturity from December 2015 to October 2019. The company repaid $9.5 million of senior notes at maturity; $57.0 million of another tranche is due in November 2015.
Outlook, risks, and contingencies
- Management said construction demand was improving incrementally and expected cement consumption and wallboard demand to increase in calendar 2015, while emphasizing that the pace depends on economic growth and varies by region. The company implemented a wallboard price increase effective January 2015.
- Management expected fiscal 2015 capital expenditures of approximately $85–$100 million, including the New Auburn, Wisconsin frac-sand expansion; sustaining expenditures were expected to be $20–$25 million. The expansion was expected to finish in the first quarter of fiscal 2016 at an additional cost of approximately $25 million. Further fiscal 2015 proppants-related capital expenditures were expected in the $60–$70 million range, including the expansion.
- The company expected higher fourth-quarter interest expense because acquisition borrowings increased debt. A 100-basis-point increase in rates on the $335 million of variable-rate borrowings would raise annual interest expense by approximately $3.4 million.
- Management believed operating cash flow and available credit should cover anticipated needs for at least 12 months, but liquidity remains subject to market conditions, cash generation, and covenant compliance. The company identified construction cyclicality, seasonality, weather, commodity pricing and input costs, environmental regulation, transportation, and oil-and-gas activity as key risks.
- IRS matter: In January 2015, the Department of Justice approved a settlement of the company’s tax litigation. Eagle agreed to dismiss its lawsuit seeking recovery of $97.9 million previously paid, in exchange for recovery of 40% of penalties and related interest. It expected to recognize approximately $5.8 million of penalties and $3.4 million of related interest in fiscal Q4.
- EPA matter: Nevada Cement faces Clean Air Act notices alleging permitting, reporting, and emissions-standard violations. Discussions continued; potential penalties, capital spending, and operating costs were not quantifiable by the company.
- Wallboard antitrust litigation: Eagle and its subsidiary deny allegations of price-fixing; discovery was ongoing and potential loss could not be estimated. A co-defendant’s announced settlement did not resolve Eagle’s claims.
- Management stated no impairment was considered likely for goodwill at December 31, 2014. The Bernalillo, New Mexico wallboard plant remained idled, with no current plan for permanent closure.
Most important facts for investors to verify
- Whether construction demand, pricing, and margins continued to improve, and whether seasonal patterns affected subsequent results.
- CRS Proppants integration, completion cost and timing of the New Auburn expansion, and the acquired business’s contribution to cash flow and earnings.
- Debt levels, credit-facility availability, covenant headroom, and refinancing or repayment plans for the November 2015 note maturity.
- Actual fiscal 2015 capital spending and the sensitivity of earnings and cash flow to interest rates, energy and raw-material costs, and oil-and-gas activity.
- Developments and financial exposure in the EPA and antitrust matters, and confirmation of the expected IRS settlement recovery.