Eagle Materials Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the quarter and six months ended September 30, 2019, the second quarter and first half of fiscal 2020. Eagle Materials supplies cement, concrete and aggregates, gypsum wallboard, recycled paperboard, and frac sand in the United States. Results are seasonal and exposed to construction and energy-market cycles.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Three months ended Sep. 30, 2019 | Year-over-year | Six months ended Sep. 30, 2019 | Year-over-year |
|---|---|---|---|---|
| Revenue | $414.5 | +9% | $785.1 | +1% |
| Gross profit | $104.5 | +7% | $179.8 | -5% |
| Gross margin | 25% | Down from 26% | 23% | Down from 24% |
| Earnings before income taxes | $94.2 | +3% | $149.1 | -16% |
| Net earnings | $71.8 | -1% | $113.1 | -19% |
| Diluted EPS | $1.72 | +12% | $2.63 | -9% |
| Operating cash flow | Not provided for quarter | — | $184.7 | Up from $174.9 |
- Cash and liquidity: Cash was $53.7 at September 30, compared with $8.6 at March 31. Current assets were $487.1 and current liabilities $194.8.
- Debt: Debt totaled $971.5 gross ($930.4 reported long-term debt, net of issuance costs), versus $696.5 gross at March 31. This included $585.0 drawn on the revolving facility, $350.0 of 4.5% notes due 2026, and $36.5 of private notes due October 2, 2019. The private notes were repaid on October 2. Facility availability was $158.1, net of letters of credit; the company was in compliance with covenants.
- Cash deployment: First-half investing cash outflow was $90.9, including $60.0 of property and equipment additions and $30.9 for an acquisition. Financing cash outflow was $48.7, including $313.9 of share repurchases and $8.8 of dividends, partly offset by $275.0 of increased credit-facility borrowings. The company repurchased 3.57 million shares at an average $87.82.
- Other balance-sheet items: Operating lease liabilities were $67.9 following adoption of the new lease standard. Debt-to-capitalization was 48.9%, up from 36.4% at March 31.
Material changes and segment results
- Quarterly revenue growth reflected higher volumes and an $8.5 contribution from the acquired readymix and aggregates business, partly offset by lower realized prices. For the first half, higher volume was largely offset by lower prices.
- Cement was a principal growth driver: quarterly segment operating earnings increased 16% to $66.5; first-half earnings rose 8% to $102.6. First-half cement sales volume increased 8%.
- Concrete and Aggregates operating earnings rose 77% to $7.3 for the quarter and 22% to $11.7 for the first half; the acquisition contributed to the increase.
- Gypsum Wallboard operating earnings fell 16% to $38.5 for the quarter and 21% to $76.4 for the first half, primarily due to lower selling prices. First-half volume was essentially flat.
- Recycled Paperboard operating earnings increased 17% to $10.1 for the quarter and 8% to $20.0 for the first half, helped by lower input costs despite lower prices.
- Oil and Gas Proppants remained loss-making: quarterly revenue fell 41% to $14.0 and the operating loss was $5.5; first-half revenue fell 43% to $29.2 and the operating loss was $9.1. Weak completion activity, pricing pressure, and in-basin sand competition weighed on results.
Outlook, management commentary, and risks
- Management described the remainder of fiscal 2020 outlook as positive, citing employment growth, consumer confidence, and low interest rates. It cited an industry estimate of approximately 2% growth in calendar-2019 cement consumption. Adverse fall or winter weather could reduce construction demand.
- Management expected wallboard demand for the rest of fiscal 2020 to be similar to the comparable prior-year period, and anticipated lower recycled-paperboard input costs than in fiscal 2019. It expected frac-sand conditions to remain weak and was pursuing alternatives for that business.
- Fiscal-2020 capital expenditures were expected to be $140–$155 million. A roughly $70 million papermill project was expected to be completed in spring 2020 and add approximately 70,000 tons of annual capacity; approximately $25 million of further spending on the project was anticipated.
- The company planned to separate Heavy Materials and Light Materials through a tax-free spin-off, then expected in the first half of calendar 2020, subject to approvals and other conditions. It was also reviewing alternatives for Oil and Gas Proppants; a change in use or disposition could require further impairment assessments.
- Corporate general and administrative expense increased substantially in the first half, including approximately $8.6 for strategic portfolio review costs, $1.1 for legal expense, and $5.3 of accelerated stock compensation associated with the CEO’s retirement. First-half interest expense increased 41%, mainly due to higher credit-facility borrowings used in part to fund repurchases.
- Key risks include construction and regional economic cycles, weather, commodity pricing and excess wallboard capacity, weak frac-sand demand, energy and raw-material costs, environmental and climate regulation, litigation, and debt covenants. A 100-basis-point rise in rates on the $585.0 of facility borrowings would add approximately $5.9 of annual interest expense. Management said current cash, operating cash flow, and available facility borrowings should meet anticipated needs for at least 12 months.
- Contingencies included $6.9 of outstanding letters of credit and $28.9 of performance bonds, principally related to reclamation and mining permits. Management reported no outstanding guarantees and believed ordinary-course indemnifications would not have a material adverse effect.
Important facts for investors to verify
- Whether the planned Heavy/Light Materials separation proceeds on the announced timetable, terms, and tax-free basis, and what costs or standalone liabilities result.
- Whether the Oil and Gas Proppants review leads to a sale, alternative use, or impairment, given continued price and demand weakness.
- Whether cement and other construction volumes and pricing support management’s outlook, particularly if weather or regional construction activity weakens.
- Whether repurchases, capital spending, and acquisition activity are supportable without further material increases in debt and interest expense; confirm post-quarter repayment of the $36.5 private notes.
- Progress, cost, timing, and expected returns of the papermill expansion, as well as final purchase-price allocation for the readymix and aggregates acquisition.
- Facility covenant headroom and variable-rate exposure, alongside the reported $158.1 of available borrowing capacity.