Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2017, ended September 30, 2016; comparisons are with the corresponding 2015 periods. Financial statements are unaudited. Eagle produces cement, gypsum wallboard, recycled paperboard, oil and gas proppants, concrete and aggregates.
Financial performance
| Metric | Three months ended Sep. 30, 2016 | Year-over-year change | Six months ended Sep. 30, 2016 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $332.7 million | +1% | $630.2 million | +3% |
| Gross profit | $91.2 million | +106% | $163.2 million | +55% |
| Gross margin | 27% | 13% reported in 2015 | 26% | 17% reported in 2015 |
| Earnings before income taxes | $89.4 million | +109% | $156.6 million | +59% |
| Net earnings | $60.2 million | +102% | $105.6 million | +56% |
| Diluted EPS | $1.25 | vs. $0.59 | $2.18 | vs. $1.34 |
| Operating cash flow | Not reported as a quarterly figure in the filing text | $160.2 million | vs. $107.6 million |
Prior-year gross margin was approximately 25% for the quarter and 23% for the six-month period after excluding the 2015 proppants impairment and inventory write-downs. Thus, reported earnings growth partly reflects the absence of those prior-year charges, as well as improved pricing and operating performance.
For the quarter, cement operating earnings were $50.7 million (+4%), wallboard $41.7 million (+4%), recycled paperboard $10.2 million (+26%), concrete and aggregates $4.8 million (+25%), and oil and gas proppants a loss of $4.1 million versus a $44.6 million loss. Six-month segment operating earnings were $82.3 million for cement, $81.0 million for wallboard, $21.4 million for paperboard, $8.5 million for concrete and aggregates, and a $10.0 million proppants loss.
Cash flow, liquidity and debt
- Operating cash flow was $160.2 million for the first six months, up from $107.6 million. Capital expenditures were $18.2 million; investing cash outflow was also $18.2 million. Cash ended the period at $54.5 million, up from $5.4 million at March 31, 2016.
- Cash provided by operations exceeded investing outlays; financing used $92.8 million, including $60.0 million for share repurchases, $9.7 million of dividends, and net debt repayment/refinancing activity. The company issued $350 million of 4.50% senior notes due 2026 and repaid $382 million of credit-facility borrowings during the six months.
- Total debt was $475.7 million, compared with $507.7 million at March 31; the balance included $350 million of 2026 notes and $125.7 million of private-placement notes. There were no revolver borrowings at September 30. The $500 million revolving facility had $489.3 million available after letters of credit; $10.7 million of letters of credit was outstanding.
- Working capital was $310.9 million. Debt-to-capitalization and net-debt-to-capitalization ratios were 30.0% and 27.4%, respectively. The company reported compliance with its financial covenants.
- Management said operating cash flow and available revolver capacity should cover anticipated operating needs, capital expenditures, dividends and debt service for at least 12 months. Fiscal 2017 capital expenditure expectations were $55–$65 million, including $30–$35 million of sustaining expenditures.
Material changes and notable items
- Revenue growth was modest overall, but product mix and segment trends varied. Six-month revenue benefited by approximately $9.9 million from the 2015 Skyway slag-plant acquisition; legacy-business revenue increased approximately 1%.
- Cement pricing improved 3% in both reported periods. Quarterly cement volume fell 3%, which management attributed mainly to above-average Midwest rainfall. Wallboard volume rose 5% in the quarter and 3% year to date, while average prices declined 2% and 3%, respectively. Paperboard volume grew 15% in the quarter and 17% year to date. Proppants revenue fell 64% in the quarter and 71% year to date.
- Proppants results included an approximately $8.5 million write-down of Corpus Christi raw and finished sand inventory in the six months, and a $1.3 million customer-contract write-off. The segment also recorded $8.8 million in customer settlement payments and a $2.0 million forfeited prepayment as reductions of cost of sales. The 2015 comparison included a $28.4 million intangible-asset impairment and a $9.4 million raw-sand inventory write-down.
- In September 2016, Eagle agreed to acquire a cement plant in Fairborn, Ohio, a Columbus distribution terminal and related assets for $400 million in cash, subject to an inventory adjustment, and certain assumed liabilities. Closing was expected in the fourth quarter of calendar 2016 or shortly thereafter, funded with cash and revolver borrowings. Management expected interest expense to rise as a result of acquisition financing.
- The company repurchased 788,800 shares year to date for approximately $60.0 million; 4,817,200 shares remained authorized for repurchase at September 30. The quarterly dividend was $0.10 per share.
Outlook, risks and contingencies
- Management described construction demand as improving incrementally and expected cement consumption to continue increasing during calendar 2016, with regional variation. It anticipated higher aggregate volumes and relatively steady concrete volumes for the rest of fiscal 2017, and expected wallboard and related paperboard demand to benefit from improving construction activity. No consolidated earnings or EPS guidance was provided.
- Management expected weak oil and gas activity and proppants pricing to persist through calendar 2016 and into 2017. Further deterioration in oil prices or rig counts could prompt additional impairment testing of proppants assets.
- Key business risks include construction cyclicality and seasonality, weather-related disruption, commodity pricing and fuel/energy costs, regional market concentration, and continued weakness in oil and gas proppants. Cement operations are capital intensive, and debt agreements impose restrictive covenants and financial tests.
- The EPA’s notices to Nevada Cement allege Clean Air Act violations; the company disputes the allegations, but an adverse outcome could require substantial capital spending, higher costs or penalties. The company stated that the outcome and financial impact could not be determined.
- Wallboard antitrust class actions and a related homebuilder lawsuit remain pending; class-certification proceedings and discovery were ongoing. Eagle denied the allegations and said it could not estimate a reasonably possible loss or range. A related Department of Justice investigation was also ongoing, and the company said it would cooperate.
- Environmental regulations may require future investment or constrain operations. The filing also identifies litigation, permitting, customer nonperformance, financing access, operational interruptions and interest-rate changes as risks.
Most important facts for investors to verify
- How much of earnings growth reflects sustainable pricing, volume and cost improvements versus the prior-year proppants impairment and inventory charges, and the current-period proppants settlements and inventory write-down.
- Whether the Fairborn acquisition closes on the anticipated timetable and how its financing, assumed obligations and subsequent operating results affect leverage and interest expense.
- Proppants demand, pricing, inventory valuation and asset impairment exposure if oil and gas activity remains weak.
- Progress and potential exposure in the EPA matter, wallboard antitrust litigation and DOJ investigation; the filing provides no clear estimate of potential loss.
- Whether construction-market recovery, regional weather conditions, and input and transportation costs support the company’s stated outlook and capital-spending plans.