Eagle Materials Inc. — Fiscal 2019 Third-Quarter 10-Q
Reporting period: Three and nine months ended December 31, 2018; comparative periods ended December 31, 2017. Unaudited. Eagle Materials supplies cement, concrete, aggregates, wallboard, recycled paperboard and frac sand in the United States.
Financial performance and liquidity
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $333.3 million, down 7% | $1,108.5 million, up 1% |
| Gross profit / margin | $80.4 million / about 24%, down 15% in profit | $270.0 million / about 24%, down 3% in profit |
| Pretax earnings | $74.5 million, up 45% | $251.3 million, up 13% |
| Net earnings | $57.7 million, down 43% | $196.7 million, down 10% |
| Diluted EPS | $1.24, versus $2.08 | $4.15, versus $4.52 |
| Operating cash flow | Not separately stated | $294.1 million, versus $275.1 million |
Quarterly revenue fell mainly on lower sales volume; gross margin contracted as operating costs rose and average net sales prices declined. Nine-month revenue was broadly flat excluding the Wildcat acquisition, which added about $10.3 million. Prior-year earnings were affected by a roughly $61 million tax benefit from the U.S. tax-rate change; the current nine-month effective tax rate was about 22%, versus 2% in the prior-year period.
Segment trends: For the quarter, gypsum wallboard operating earnings rose 9% to $43.5 million, while cement earnings fell 10% to $47.2 million. Concrete and aggregates earnings declined 70% to $1.0 million. Recycled paperboard earnings fell 31% to $7.5 million. Oil and gas proppants recorded a $9.3 million operating loss, versus a $0.7 million loss a year earlier. Nine-month proppants operating loss widened to $19.6 million; wallboard earnings rose 13% to $139.7 million.
At December 31, cash was $17.1 million and total debt was $631.5 million, including $36.5 million due in October 2019. The $500 million revolving credit facility had $245 million drawn and $247.2 million of availability, net of letters of credit. The company reported compliance with its debt financial tests; debt-to-capitalization was 30.6%. Nine-month capital expenditures were $126.4 million. Operating cash flow exceeded investing outflows of $124.2 million, while financing outflows were $200.9 million, principally reflecting $191.8 million of share repurchases.
Changes, outlook and notable items
- Management described the calendar 2019 outlook for heavy and light materials as positive, citing low unemployment, low interest rates and higher wages. It expects fiscal 2019 capital expenditures of $150–160 million, including $40–45 million of sustaining expenditures.
- Frac sand sales prices and volumes were pressured by weaker-than-anticipated completion activity and seasonal softness. Management expects challenges into calendar 2019, is evaluating cost reductions and business size, and may assess recoverability of long-lived assets.
- Rail and trucking congestion raised freight costs about 10–12% in the first three quarters of fiscal 2019. Cement also incurred higher maintenance and energy costs; wallboard benefited from price increases but faced higher freight expense.
- The company repurchased 2.19 million shares for $191.8 million during the nine months at an average $87.62 per share, and bought another 340,000 shares through January 25, 2019 at an average $64.94. The quarterly dividend remained $0.10 per share.
- Wallboard antitrust and homebuilder claims were settled for approximately $39.1 million in total; the homebuilder settlement was paid in May 2018, the direct-purchaser settlement in July 2018, and the related DOJ investigation was closed in August 2018. A separate $1.8 million third-party property-damage loss was recorded in fiscal 2019.
- Management said operating cash flow and available facility borrowings should cover anticipated operating needs, capital expenditures, dividends and debt service for at least 12 months. Risks include cyclical and seasonal construction demand, weather, fuel/energy and freight costs, environmental requirements, interest-rate exposure, debt covenants and continued weakness in oil-and-gas activity. A 100-basis-point rate increase on outstanding revolver borrowings would add about $2.5 million of annual interest expense.
Important facts for investors to verify
- The MD&A narrative says nine-month diluted EPS “increased 8%,” but the financial statements show $4.15 versus $4.52, a decline of about 8%; confirm the intended disclosure.
- Track frac sand pricing, utilization, costs and any impairment assessment, given the widening segment loss and management’s stated review.
- Assess the October 2019 maturity of the $36.5 million private-placement note, revolver availability, covenant headroom and variable-rate exposure.
- Compare forecast capital spending with actual spending and cash generation, while accounting for the substantial repurchases and post-quarter buybacks.
- Monitor construction demand, freight and input costs, and any new environmental or litigation developments that could affect results or cash flow.