Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended September 30, 2020. The report was filed October 29, 2020. Eagle supplies cement, concrete and aggregates, gypsum wallboard, and recycled paperboard in the United States.
Financial performance
| Metric | Three months ended September 30, 2020 | Six months ended September 30, 2020 |
|---|---|---|
| Revenue | $447.7 million; up 12% year over year | $874.7 million; up 16% |
| Gross profit / gross margin | $122.8 million / 27%, versus $109.0 million / 28% | $225.1 million / 26%, versus $187.1 million / 25% |
| Continuing-operations earnings | $89.9 million; diluted EPS $2.16 | $187.0 million; diluted EPS $4.49 |
| Net earnings / diluted EPS | $96.0 million / $2.31 | $192.2 million / $4.62 |
| Operating cash flow | Not separately stated for the quarter | $358.4 million, versus $184.7 million |
Six-month continuing-operations earnings increased 58%; net earnings rose 70%. The six-month results include a $52.0 million gain on the sale of Western Aggregates and Mathews in continuing operations and a $9.2 million gain on the Proppants Business sale in discontinued operations. These gains are not recurring operating performance.
Segments and operating trends
- Cement: Quarterly revenue rose 22% and operating earnings 20%, including $14.4 million of Kosmos earnings. Excluding Kosmos, quarterly operating earnings declined 2%, mainly due to maintenance costs and product mix. For six months, reported operating earnings increased 37%; excluding Kosmos, they rose 12%.
- Concrete and Aggregates: Quarterly operating earnings fell 28%; excluding the sold businesses, they declined 8%. Sales volume was weaker, partly offset by higher prices.
- Gypsum Wallboard: Quarterly shipments increased 6%, but lower prices contributed to a 2% decline in operating earnings. Six-month operating earnings increased 3%.
- Recycled Paperboard: Quarterly operating earnings increased 6%; six-month operating earnings fell 32%, reflecting mill start-up inefficiencies and higher fiber costs.
On a consolidated basis, management said revenue excluding acquisitions and dispositions increased 2% in the quarter and 4% for six months. The quarter’s gross margin declined year over year, while the six-month margin improved.
Financial position, cash flow and liquidity
- At September 30, cash and cash equivalents were $200.9 million, plus $5.0 million restricted cash. Current assets were $648.4 million and current liabilities $163.1 million.
- Debt was $1.260 billion before $7.3 million of debt issuance costs: $245 million drawn on the revolving facility, a $665 million term loan, and $350 million of 4.5% notes due 2026. Debt was down from $1.575 billion at March 31, 2020. The revolving facility and term loan mature in August 2022.
- The company reported $500 million of available revolving capacity, net of letters of credit, and total liquidity of approximately $700.9 million including cash. It was in compliance with its financial covenants.
- Six-month investing cash flow was positive $50.3 million, including $91.0 million in proceeds from business sales; capital expenditures were $40.7 million. Financing cash outflow was $321.5 million, including a $315 million reduction in credit-facility borrowings.
- Operating cash flow benefited from a $99.7 million income-tax refund and other working-capital movements. The reported increase should not be viewed as solely earnings-driven.
Transactions, outlook and risks
- Eagle acquired Kosmos Cement in March 2020 for approximately $669 million, funded primarily with a term loan. Its provisional purchase-price allocation included $129.1 million of goodwill and remained subject to further review of asset-retirement obligations.
- In April 2020, Eagle sold Western Aggregates and Mathews for approximately $93.5 million, recognizing a $52.0 million gain. In September, it sold its Oil and Gas Proppants business for $2.0 million in buyer shares; the sale generated a $9.2 million gain. Eagle also placed up to $5.0 million in escrow for a potential working-capital loan to the buyer; no borrowing was outstanding at quarter-end.
- Management described end markets as resilient and said it had not experienced a material COVID-19 impact to date. It highlighted stronger regional markets, higher wallboard shipments, and 1% organic cement volume growth in the quarter. It cautioned that pandemic effects, including a possible second wave, remained difficult to predict.
- Fiscal 2021 capital expenditures were expected to be $60–$70 million, focused on critical maintenance, safety, and regulatory projects. The planned separation of Heavy Materials and Light Materials into two public companies remained a goal, but timing was uncertain due to COVID-19.
- Future quarterly dividends were suspended in April 2020. Key risks include construction-market cyclicality, pandemic-related demand and collection impacts, operational interruptions, commodity costs, and variable-rate debt exposure. A 100-basis-point rate increase on the reported $910 million of revolving-facility and term-loan borrowings would increase annual interest expense by approximately $9.1 million.
- Other disclosed exposures include $27.8 million of performance bonds and $5.0 million of outstanding letters of credit. Management stated it had no outstanding debt guarantees and did not expect ordinary-course legal matters to have a material adverse effect.
Most important facts for investors to verify
- How much of revenue and earnings growth reflects acquired businesses, disposals, and one-time gains versus comparable continuing operations.
- Whether cash generation remains strong after the tax refund and other working-capital effects, and whether planned capital spending stays within the $60–$70 million range.
- Progress on debt reduction, covenant headroom, variable-rate exposure, and the August 2022 maturities.
- Whether COVID-19 changes regional construction demand, customer collections, plant operations, or the timing of the proposed business separation.
- Whether paperboard input costs and mill performance recover, and whether announced cement and wallboard price increases sustain margins.