Eagle Materials Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended June 30, 2015. Unaudited consolidated results; comparisons are with the three months ended June 30, 2014. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance and condition
- Revenue: $285.0 million, up 7% from $266.3 million. The CRS Proppants acquisition contributed approximately $18.7 million; management said legacy-business revenue was flat.
- Profit: Gross profit was $61.1 million, up 8%, with a reported gross margin of 21%, consistent with the prior-year quarter. Pretax earnings were $55.9 million versus $55.8 million; net earnings were $37.8 million versus $37.7 million. Basic EPS was $0.76 and diluted EPS was $0.75, both unchanged year over year.
- Segment operating earnings: Cement $25.7 million, up 25%; Gypsum Wallboard $40.9 million, up 9%; Recycled Paperboard $6.0 million, down 20%; Oil and Gas Proppants loss of $5.6 million versus a $0.6 million loss; Concrete and Aggregates $1.9 million, up 42%. Segment presentation includes the company’s proportionate share of its cement joint venture.
- Cash flow and investment: Operating cash flow was $20.6 million, down from $40.3 million. Capital expenditures were $27.1 million, compared with $23.2 million; investing cash outflow equaled capital expenditures. Cash increased by $0.04 million to $7.6 million.
- Liquidity and debt: Working capital was $222.0 million at June 30, versus $182.1 million at March 31. Total debt was $523.8 million, including $341.0 million drawn on the revolving facility; cash was $7.6 million. The company reported $149.6 million of available revolver capacity, net of letters of credit. It was in compliance with debt financial tests.
- Other metrics: Net interest expense was $4.5 million, up 11%. The effective tax rate was approximately 32%, unchanged. The quarterly dividend was $0.10 per share.
Material changes and drivers
- Higher average selling prices supported Cement, Wallboard, Concrete and Aggregates results. Management estimated that higher prices added approximately $9.2 million to legacy-business revenue, offset by an equivalent revenue impact from lower volumes.
- Above-average April and May rainfall reduced cement and aggregate volumes in several markets and lowered joint-venture cement earnings. Management expected some lost cement volume to be recovered during the rest of calendar 2015.
- Wallboard earnings benefited from higher prices and lower freight, natural gas and raw-material costs. Paperboard earnings declined amid lower volume and price and higher maintenance costs.
- Oil and Gas Proppants revenue included CRS acquisition sales, but the segment loss widened. CRS contributed $18.8 million of revenue and a $4.8 million operating loss in the quarter; acquisition-related depreciation and amortization and acquired-inventory fair-value charges weighed on results. The legacy Corpus Christi operation also had lower sales volumes.
- Debt and interest costs remained higher following borrowings used to fund the November 2014 CRS acquisition. Credit-facility debt increased by $11.0 million from March 31.
Outlook, risks and contingencies
- Management described a gradual construction-market recovery and expected cement consumption to increase during calendar 2015, with regional variation. It anticipated continued improvement in wallboard demand and Austin-area concrete and aggregate pricing and volumes; greater Kansas City demand was expected to remain stable.
- Management expected weaker oil and gas activity, proppant demand and pricing to persist through calendar 2015. It said it would monitor the proppants business for indicators of potential impairment; no impairment test was considered necessary at June 30.
- Fiscal 2016 sustaining capital spending was estimated at $20–25 million; total capital expenditures were expected to be $65–75 million, including completion of the New Auburn mine expansion. The company said operating cash flow and available revolver capacity should meet anticipated needs for at least 12 months, subject to market conditions and covenant compliance.
- On July 10, 2015, after quarter-end, the company completed the Skyway acquisition of a Chicago-area slag plant for approximately $30 million in cash, subject to adjustments, with certain liabilities assumed. Funding was through operating cash flow and credit-facility borrowings.
- Legal and regulatory matters: Nevada Cement faces EPA Clean Air Act notices that could lead to required capital spending, higher operating costs or penalties; the company could not determine the outcome or impact. American Gypsum and the company face wallboard antitrust litigation seeking unspecified damages, including potentially treble damages; American Gypsum also received a DOJ grand jury subpoena concerning a related investigation. The company could not estimate a reasonably possible loss or determine the investigation’s outcome.
- Other risks: Results are seasonal and exposed to construction cycles, regional weather, commodity prices and energy costs, environmental requirements, litigation, and oil and gas activity. A 100-basis-point rate increase on June 30 revolver borrowings would raise annual interest expense by approximately $3.4 million. The company reported no use of interest-rate derivatives.
Most important facts for investors to verify
- Whether price gains and construction recovery can offset weather-related or other volume weakness.
- CRS Proppants’ ongoing operating performance, integration costs and impairment exposure amid weak energy markets.
- Operating cash conversion, working-capital movements, capital spending and debt levels after the Skyway acquisition.
- Developments and potential financial exposure in the EPA matter, wallboard antitrust litigation and DOJ investigation.
- Progress against fiscal 2016 capital-spending expectations and compliance with credit-facility covenants.