Eagle Materials Inc. — Form 10-Q Summary
Business context and period. This unaudited filing covers the fiscal quarter and six months ended September 30, 2018 (fiscal Q2 and first half of fiscal 2019), compared with the periods ended September 30, 2017. Eagle supplies cement, concrete and aggregates, gypsum wallboard, recycled paperboard, and frac sand in the United States. Results are seasonal and sensitive to construction activity, weather, and commodity markets.
Financial performance
| Metric | Three months ended Sept. 30 | Six months ended Sept. 30 |
|---|---|---|
| Revenue | $381.5 million, up 1% | $775.3 million, up 4% |
| Gross profit | $97.9 million, up 1%; gross margin about 26% | $189.6 million, up 4%; gross margin about 25% |
| Earnings before income taxes | $91.8 million, down 1% | $176.8 million, up 3% |
| Net earnings | $72.6 million, up 15% | $138.9 million, up 18% |
| Diluted EPS | $1.53, up 17% | $2.90, up 19% |
| Operating cash flow | Not separately presented for the quarter | $174.9 million, versus $152.7 million |
The earnings increase was aided materially by the lower effective tax rate, approximately 21% versus 31% in the prior-year periods, following the U.S. Tax Cuts and Jobs Act. Six-month interest expense fell 10% to $13.4 million. Gross margin was broadly flat year over year.
Segment trends
- Gypsum Wallboard: Six-month revenue rose 9% to $272.0 million and operating earnings increased 15% to $96.2 million, supported by stronger pricing. Quarterly volume was affected by Hurricane Florence; higher freight costs were a partial offset to earnings gains.
- Recycled Paperboard: Six-month revenue declined 4% to $86.4 million as average net prices fell 6%; operating earnings rose 62% to $18.6 million as lower recycled-fiber input costs more than offset lower prices.
- Cement: Six-month revenue increased 1% to $379.9 million, while operating earnings fell 7% to $94.9 million. Higher maintenance, freight, and energy costs weighed on results.
- Concrete and Aggregates: Six-month revenue fell 8% to $80.6 million and operating earnings declined 18% to $9.6 million, mainly due to lower volumes and higher costs.
- Oil and Gas Proppants: Six-month revenue was nearly flat at $40.8 million, but operating loss widened to $10.6 million from $3.8 million. Price pressure, higher costs, and $1.6 million of Utica facility start-up costs were factors.
Cash, debt, and capital allocation
- Cash and cash equivalents were $10.0 million at September 30, 2018; restricted cash was zero, compared with $38.8 million at March 31, 2018. Current assets were $437.1 million and current liabilities $154.7 million.
- Gross debt was $636.5 million: $250.0 million under the revolving facility, $350.0 million of 4.50% notes due 2026, and $36.5 million of private-placement notes due October 2019. Carrying long-term debt, net of issuance costs, was $631.3 million.
- The $500 million revolver had $242.2 million of available borrowings, net of letters of credit. The company reported compliance with its financial covenants. It stated cash flow and available borrowing capacity should cover anticipated operating needs, capital expenditures, dividends, and debt service for at least 12 months.
- First-half capital expenditures were $93.4 million, versus $50.1 million in the comparable period; operating cash flow less capital expenditures was approximately $81.4 million. The company projected fiscal 2019 total capital expenditures of $120–$135 million, including the Utica project and distribution and operating investments. It also cited maintenance expenditures of $40–$45 million and sustaining expenditures of $30–$35 million; the filing does not clearly reconcile these descriptions.
- Financing cash outflow was $121.8 million, principally reflecting $122.4 million of share repurchases and $9.6 million of dividends, partly offset by $10.0 million of additional revolver borrowing. The company repurchased 1.24 million shares at an average $98.77 during the half and another 300,000 shares through October 26 at an average $80.15.
Outlook, risks, and unusual items
- Management described construction-product demand as modestly improving and expected support from U.S. economic expansion and population growth. It cautioned that wet weather was affecting cement markets and could continue to weigh on demand.
- Frac-sand demand and pricing weakened, particularly in the Permian Basin amid pipeline constraints and excess supply; management expected these conditions to persist into calendar 2019. Higher freight utilization increased first-half freight costs by approximately 10%–12%.
- Key exposures include construction cyclicality and seasonality, adverse weather, fuel and raw-material costs, transport availability and cost, variable interest rates, environmental and mining regulation, and customer and commodity-price risks. A 100-basis-point increase on the $250 million revolver balance would add about $2.5 million to annual interest expense.
- Wallboard antitrust claims were settled for approximately $39.1 million, and a separate homebuilder settlement was $6.0 million; the latter was paid in May 2018. The related Department of Justice investigation was closed in August 2018. The company denied wrongdoing. A $1.8 million litigation charge for an unrelated recycled-paperboard property-damage matter was recorded in the six-month period.
- Revenue-standard adoption had no financial-statement impact. Management said disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Whether construction demand, weather, and freight costs support or constrain pricing and volume in the second half.
- How quickly frac-sand pricing and utilization respond to Permian supply and pipeline conditions, and the operating trajectory of the completed Utica facility.
- The composition, timing, and funding of projected fiscal 2019 capital expenditures, including the differing maintenance and sustaining-capex estimates in the filing.
- The October 2019 maturity of the $36.5 million private-placement notes and ongoing revolver availability, interest costs, and covenant headroom.
- The remaining status and final cash cost of the wallboard settlements, including the indirect-purchaser settlement approved October 26, 2018.