Eagle Materials Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended June 30, 2016; unaudited. Comparisons are with the three months ended June 30, 2015, unless otherwise noted. Eagle produces cement, wallboard, recycled paperboard, oil and gas proppants, concrete and aggregates.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $297.5 million | $285.0 million | +4% |
| Gross profit / margin | $72.0 million / 24% | $61.1 million / 21% | +18% gross profit |
| Earnings before income taxes | $67.3 million | $55.9 million | +20% |
| Net earnings | $45.3 million | $37.8 million | +20% |
| Diluted EPS | $0.93 | $0.75 | +24% |
| Operating cash flow | $54.1 million | $20.6 million | +$33.5 million |
| Capital expenditures | $9.0 million | $27.1 million | Down $18.1 million |
Revenue growth reflected approximately $8.6 million from the July 2015 Skyway slag-plant acquisition and about $3.9 million of growth in legacy businesses. Higher prices and volumes supported results; reported net earnings also benefited from lower net interest expense. The effective tax rate was approximately 33% in both periods. Average diluted shares fell to 48.5 million from 50.5 million, contributing to per-share growth.
Business segments
- Cement: Segment revenue rose 13% to $144.8 million and operating earnings increased 23% to $31.6 million. Results included the Skyway acquisition; legacy pricing, volume and acquisition contribution supported earnings.
- Gypsum wallboard: Revenue declined 2% to $113.3 million and operating earnings fell 4% to $39.3 million. Lower average net selling prices more than offset higher volume and lower costs.
- Recycled paperboard: Revenue rose 21% to $42.8 million and operating earnings increased 86% to $11.2 million, with higher volume and lower costs; the prior-year quarter included an extended maintenance outage.
- Oil and gas proppants: Revenue fell 78% to $5.1 million; operating loss widened to $5.9 million. Lower prices and volumes reflected weakness in oil and gas markets.
- Concrete and aggregates: Revenue increased 21% to $34.8 million and operating earnings rose to $3.7 million, supported by higher sales volumes and lower costs.
Segment revenue and operating earnings include Eagle’s proportionate 50% share of its Texas Lehigh cement joint venture, consistent with management’s segment presentation.
Financial position and liquidity
- At June 30, 2016, cash was $9.2 million, current assets $400.5 million and current liabilities $119.8 million; reported working capital was $280.7 million.
- Total debt was $498.7 million, including $8.0 million classified as current; debt was down $9.0 million from March 31, 2016. Debt-to-capitalization was 32.1%. The company reported $116.3 million of available credit-facility borrowings, net of letters of credit.
- Operating cash flow was $54.1 million. Investing used $9.0 million, while financing used $41.3 million, including $39.1 million for share repurchases and $4.8 million of dividends. Cash increased $3.8 million.
- The $500 million revolving credit facility expires October 30, 2019. Eagle reported compliance with financial covenants at quarter-end. It expects fiscal 2017 sustaining capital expenditures of $20–25 million and total capital expenditures of approximately $40–50 million.
Outlook, risks and unusual items
Management described construction demand as gradually improving and expected cement consumption, wallboard demand, and activity in certain concrete and aggregates markets to improve during calendar 2016. It cited the FAST Act as a potential support for future infrastructure demand. These are expectations, not guarantees; the filing provides no earnings or EPS guidance.
Management expected weak proppant demand and pricing to persist through calendar 2016. The segment recorded a $1.3 million customer-contract write-off, partly offset by $2.0 million recognized from forfeiture of a customer prepayment; no other customer prepayments remained at quarter-end. In fiscal 2016, Eagle had written down customer contracts by $35.0 million and frac-sand inventory by approximately $11.5 million. Further impairment testing may be required if market conditions worsen.
Material contingencies include EPA Clean Air Act notices involving Nevada Cement, which could result in capital spending, higher operating costs or penalties; and wallboard antitrust litigation and a related Department of Justice investigation. Eagle denied the allegations, but said it could not estimate a reasonably possible loss or range for the litigation. The EPA matter’s outcome and financial impact were also undetermined. The company additionally disclosed $14.4 million of performance bonds and $10.7 million of letters of credit related to contingencies.
On July 25, 2016, after quarter-end, Eagle launched an offering of $300 million of senior unsecured notes due 2026; the filing does not provide final offering terms. Subsequent to quarter-end, it also repurchased 182,500 shares at an average $77.48. Key ongoing risks include cyclical construction demand, seasonality and weather, commodity pricing, energy and transportation costs, environmental regulation, litigation, proppant-market weakness, variable-rate debt and covenant compliance. Management stated that cash flow and available credit should cover anticipated needs for at least 12 months, subject to business and market conditions.
Most important facts for investors to verify
- Whether construction-market recovery and the expected calendar 2016 demand improvements materialized, particularly across Eagle’s regional cement and aggregates markets.
- Proppant-market trends, customer contract exposure, and whether further asset or inventory impairments were recorded.
- Final terms and proceeds of the proposed $300 million notes, and the resulting debt, interest expense and liquidity position.
- Progress and potential financial exposure in the Nevada Cement EPA matter, wallboard antitrust cases and DOJ investigation.
- Execution of the $40–50 million fiscal 2017 capital-spending plan, share repurchases and dividends, while maintaining debt covenants and credit availability.