Eagle Materials Inc. — Form 10-Q Summary
Business context and period: The filing reports unaudited results for the quarter and six months ended September 30, 2014 (fiscal 2015 second quarter and first half), compared with the same periods in 2013. Eagle produces cement, gypsum wallboard, recycled paperboard, concrete and aggregates, and oil and gas proppants. Results are seasonal and exposed to construction and energy-market cycles.
Key financial results
| Metric | Three months ended Sept. 30 | Six months ended Sept. 30 |
|---|---|---|
| Revenue | $284.8 million, up 13% | $551.1 million, up 15% |
| Gross profit / margin | $75.1 million / 26%, versus $59.5 million / 24% | $131.5 million / 24%, versus $106.1 million / 22% |
| Net earnings | $50.3 million, up 26% | $88.0 million, up 26% |
| Diluted earnings per share | $1.00, versus $0.80 | $1.75, versus $1.40 |
| Operating cash flow | Not presented separately for the quarter | $117.7 million, versus $79.3 million |
| Capital expenditures | Not presented separately for the quarter | $40.0 million, versus $31.6 million |
For the first half, cash flow from operations exceeded capital expenditures by approximately $77.6 million. Cash increased to $11.1 million from $6.5 million at March 31, 2014. Working capital was $208.0 million. At September 30, total debt was $312.3 million, including $120.0 million under the credit facility and $192.3 million of senior notes. Debt-to-capitalization was 25.3%, down from 31.4% at March 31. The company reported $272.4 million of available borrowings, net of letters of credit, and compliance with applicable financial covenants.
Quarterly net interest expense fell to $3.9 million from $4.8 million; first-half expense fell to $8.0 million from $9.8 million, mainly because of lower credit-facility borrowings. The effective tax rate was approximately 32% in both first-half periods. Dividends were $0.10 per share in the quarter and $0.20 per share for the first half.
Performance changes and business segments
- Revenue growth reflected higher prices and volumes. Management attributed the quarterly increase to approximately $18.6 million from pricing and $13.6 million from volume; first-half increases were approximately $34.5 million and $36.9 million, respectively.
- Cement first-half revenue rose 9% and operating earnings rose 15%, supported by higher prices and volumes, partly offset by increased maintenance, purchased-cement and power costs.
- Gypsum wallboard first-half revenue rose 15% and operating earnings rose 25%; higher pricing, including the January 2014 increase, and stronger volumes outweighed higher freight, maintenance and input costs.
- Recycled paperboard first-half revenue rose 9% and operating earnings rose 23%, aided by higher volume and lower recycled-fiber costs.
- Concrete and aggregates first-half revenue rose 9% and segment operating earnings rose to $4.3 million from $2.0 million. Aggregate volume declined 12%, partly offset by higher prices and concrete growth.
- Oil and gas proppants revenue increased to $21.6 million from $2.2 million for the first half; segment operating earnings were $0.1 million versus a $1.8 million loss. The business remained in start-up, with Corpus Christi sales including purchased sand.
The company changed its segment presentation during the quarter to report Oil and Gas Proppants separately; prior-period segment information was reclassified for comparison. Corporate general and administrative expense increased, mainly due to higher long-term incentive compensation. The $2.1 million acquisition and litigation expense included approximately $1.7 million of IRS litigation fees and $0.4 million of acquisition costs.
Outlook, transactions and risks
- Management said construction demand was improving incrementally and expected cement consumption to increase through calendar 2014 and into 2015, with regional variation. It expected continued improvement in selected concrete markets, while not anticipating significant aggregate volume gains in northern California.
- Wallboard demand was expected to improve with housing and repair activity. Eagle announced a 15% wallboard price increase effective January 2015. Management expected fiscal 2015 total capital expenditures of approximately $50–$70 million, including $20–$25 million of sustaining expenditures, and $30–$40 million of proppants-related capital expenditures.
- On October 16, 2014, after quarter-end, a subsidiary agreed to acquire CRS Proppants for approximately $225 million, subject to adjustments. The acquisition was expected to close in fiscal third quarter and be funded with operating cash flow and credit-facility borrowings. CRS had a Wisconsin frac-sand mine, a transload network and multi-year contracts covering approximately 85% of current and prospective production volumes.
- On October 30, 2014, the credit facility was amended: capacity increased from $400 million to $500 million and maturity was extended to October 30, 2019. Management expected acquisition-related borrowing to increase interest expense during the second half of fiscal 2015. The acquisition’s completion and anticipated benefits were not assured.
- The IRS and Eagle reached a tentative settlement, subject to government approvals. If finalized, the IRS would concede 40% of penalties, estimated at approximately $5.8 million, plus related interest; otherwise, the company said it would continue its court case. Separately, IRS assessments for fiscal 2007–2010, including estimated interest, were accrued at approximately $12.9 million.
- Material unresolved matters include EPA Clean Air Act notices involving Nevada Cement, which could entail significant capital spending, higher operating costs or civil penalties, and wallboard antitrust class actions for which potential losses could not be estimated. The company denied the allegations in both matters.
- Principal risks include construction-cycle and seasonal demand, commodity pricing and input-cost volatility, environmental regulation and compliance costs, litigation, operational interruptions, interest-rate exposure, and the risks of acquiring and integrating CRS Proppants. A 100-basis-point increase in rates on the $120 million quarter-end facility borrowing would increase annual interest expense by approximately $1.2 million.
Investor verification priorities
- Confirm whether the CRS Proppants acquisition closed, its final purchase price and funding, and the effect of additional debt on leverage, interest costs and covenants.
- Track approval and accounting for the IRS settlement, including the penalty recovery and treatment of accrued 2007–2010 tax assessments.
- Monitor outcomes and possible financial exposure from the EPA notices and wallboard antitrust litigation; disclosed potential losses are not quantified.
- Assess whether announced wallboard pricing and construction-demand expectations translated into sustained volume, margins and cash generation.
- Verify fiscal 2015 capital spending, particularly proppants investment, and whether the new frac-sand capacity and contracted volumes generate expected returns.
The filing states that interim results are not necessarily indicative of full-year results. Financial statements are unaudited.