Eagle Materials Inc. — Form 10-Q Summary
Business context and period: Eagle Materials produces cement, gypsum wallboard, recycled paperboard, oil and gas proppants, concrete and aggregates. This unaudited report covers the fiscal second quarter and six months ended September 30, 2017, compared with the corresponding 2016 periods.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $376.3 million, up 13% | $742.4 million, up 18% |
| Gross profit | $96.8 million, up 6%; gross margin 26% vs. 27% | $182.8 million, up 12%; gross margin 25% vs. 26% |
| Net earnings | $63.4 million, up 5% | $118.2 million, up 12% |
| Diluted EPS | $1.31 vs. $1.25 | $2.43 vs. $2.18 |
| Interest expense, net | $7.5 million vs. $5.7 million | $14.9 million vs. $9.6 million |
| Operating cash flow | Not reported separately for the quarter | $152.7 million vs. $160.2 million |
For the six months, capital expenditures were $44.9 million and acquisition spending was $36.8 million, resulting in net investing cash use of $81.6 million. Financing activities used $46.6 million. Cash increased by $24.5 million to $31.1 million.
At September 30, 2017, current assets were $446.8 million and current liabilities $221.4 million. Total debt was $662.7 million, including $81.2 million current debt; the debt-to-capitalization ratio was 33.3% and net-debt-to-capitalization was 32.2%. The $500 million revolving facility had $195 million drawn and $295.6 million available, net of letters of credit. The company reported compliance with financial covenants.
Changes and segment trends
- Cement: Quarterly revenue rose 15% and operating earnings 16%, with Fairborn acquisition contributions. Excluding Fairborn, quarterly revenue was slightly lower as higher prices were offset by lower volume; wet weather, Texas hurricane flooding and Nevada plant outages affected activity and costs. Six-month operating earnings rose 24%.
- Gypsum wallboard: Quarterly revenue was essentially flat and operating earnings fell 5%, partly due to Bernalillo plant start-up costs and Hurricane Irma disruption. Six-month revenue rose 6% and operating earnings 3%.
- Recycled paperboard: Quarterly operating earnings fell 36%; six-month earnings fell 47%, as higher recycled-fiber and other costs outweighed price gains. Sales volume declined, and the mill was near capacity.
- Oil and gas proppants: Revenue rose sharply from a low prior-year base as frac-sand demand and volumes recovered. The segment remained loss-making, though its operating loss narrowed to $1.8 million for the quarter and $3.8 million for the six months.
- Concrete and aggregates: Revenue and operating earnings improved, supported by higher prices and concrete volumes.
Fairborn, acquired in February 2017 for approximately $400.5 million, contributed $25.3 million of quarterly and $47.4 million of six-month revenue. Wildcat Minerals, acquired in July for approximately $36.8 million, operates oil-and-gas transload facilities.
Outlook, risks and unusual items
- Management described construction demand fundamentals as promising, expected U.S. cement consumption and wallboard shipments to increase in calendar 2017, and anticipated improving frac-sand demand. These are expectations, not quantified earnings guidance.
- Fiscal 2018 sustaining capital expenditures were estimated at $30–35 million. The Utica, Illinois frac-sand facility buildout was estimated at approximately $70 million, with completion expected in summer 2018. Bernalillo wallboard production restarted in September 2017.
- Management expected recycled-fiber costs to remain higher in fiscal 2018 than fiscal 2017; contract timing may delay passing cost increases through to customers.
- Seasonality, weather, construction cycles, commodity pricing and input-cost volatility are material risks. Hurricane flooding and Hurricane Irma disrupted operations and shipments during the quarter. A Nevada Cement kiln outage related to pollution-control installation increased costs.
- The wallboard antitrust litigation remains significant: direct-purchaser class certification was granted, the company’s appeal was pending, and management could not estimate a reasonably possible loss. The company said an adverse outcome could materially affect financial position or results. A related Justice Department investigation was also unresolved.
- Nevada Cement’s EPA consent decree was entered in October 2017. It requires emission-control work and vehicle replacements estimated at approximately $3.0 million over about two years; the $0.6 million penalty was paid in October.
- One $24 million private-placement note matured and was repaid in October 2017; another $57.2 million tranche was due November 15, 2017. The company said operating cash flow and available credit should meet anticipated needs for at least 12 months, subject to market conditions and covenant compliance.
Investor verification priorities
- Track whether volume and pricing improvements persist, particularly in cement and construction markets, and whether growth is attributable to acquisitions or existing operations.
- Monitor recycled-fiber, energy and other operating costs against price pass-throughs, and assess whether paperboard margins recover.
- Verify frac-sand demand, segment profitability and the cost, timing and utilization of the Utica buildout.
- Review debt maturities, variable-rate exposure and liquidity after the October repayment and November 2017 note maturity; a 100-basis-point rate increase was estimated to add about $2.0 million of annual interest expense on then-outstanding facility borrowings.
- Follow the wallboard antitrust appeals, related proceedings and any updates to potential loss estimates, as well as completion and costs under the EPA consent decree.