Eagle Materials Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, the three months ended June 30, 2014; comparative period is the three months ended June 30, 2013. Statements are unaudited. Eagle Materials produces cement, gypsum wallboard, recycled paperboard, concrete and aggregates, and oil and gas proppants.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $266.3 million | $227.0 million | +17% |
| Gross profit | $56.4 million | $46.6 million | +21% |
| Gross margin | 21.2% | 20.5% | +0.7 percentage points |
| Earnings before income taxes | $55.8 million | $44.5 million | +25% |
| Net earnings | $37.7 million | $30.1 million | +25% |
| Diluted EPS | $0.75 | $0.60 | +25% |
| Operating cash flow | $40.3 million | $18.9 million | +$21.4 million |
| Capital expenditures | $23.2 million | $21.2 million | +$1.9 million |
Revenue growth reflected higher sales volumes, contributing about $24.4 million, and higher average selling prices, contributing about $14.9 million. Cost of goods sold rose 16%, including higher volume-related costs and operating expenses. Net interest expense fell 18% to $4.1 million, primarily because of lower credit-facility borrowings. The effective tax rate was approximately 32.4%, up from the prior year as the depletion deduction had less impact. Cash dividends were $0.10 per share.
Segments and material changes
- Cement: Revenue increased 9% to $127.9 million; segment operating earnings rose 8% to $20.5 million. Volume increased 4% and average net price rose 5%. Higher maintenance and purchased-cement costs partly offset gains.
- Gypsum wallboard: Revenue rose 17% to $112.7 million and operating earnings increased 26% to $37.4 million. Average net price increased 11% and volume 7%; reported gross margin improved to 33.2% from 30.8%.
- Recycled paperboard: Revenue rose 17% to $37.5 million and operating earnings increased 33% to $7.5 million, supported by higher volume and a more favorable product mix.
- Oil and gas proppants: Revenue increased to $11.2 million from $0.9 million, while the operating loss narrowed to $0.6 million from $0.9 million. The business remained in start-up, selling purchased sand while preparing to supply mined sand.
- Concrete and aggregates: Revenue increased 8% to $26.2 million and operating earnings rose to $1.4 million. Concrete volume increased 4%, while aggregate volume declined 9%; selling prices rose for both.
The company presented Oil and Gas Proppants as a separate segment this quarter and adjusted the prior-period presentation for comparison. It also reported that approximately 1.27 million stock options expired after performance criteria were not met.
Liquidity, debt and capital
Cash was $6.5 million at June 30, 2014. Working capital was $209.3 million, versus $198.1 million at March 31, 2014. Total debt was $368.3 million, including $176.0 million drawn on the revolving credit facility and $192.3 million of senior notes; debt was down $13.0 million from March 31. The company had $216.3 million of available credit-facility borrowing capacity, net of letters of credit. Debt-to-capitalization was 29.8%, compared with 31.4% at March 31. The company reported compliance with its debt covenants.
Operating cash flow benefited in part from a $19.7 million increase in income taxes payable, while higher receivables used $31.3 million of cash. The company repaid $13.0 million under its credit facility and paid approximately $5.0 million in dividends. Management said operating cash flow and available borrowings should cover anticipated operating needs, capital expenditures, dividends and debt service for at least the next 12 months.
Outlook, risks and contingencies
- Management said construction demand was gradually improving and expected cement consumption, wallboard shipments, and demand in certain concrete markets to increase during calendar 2014. Recovery pace and regional performance remained uncertain.
- A 15% wallboard price increase had been announced for January 2015. Management expected total fiscal 2015 capital expenditures of approximately $50–$70 million, including $20–$25 million for sustaining capital and $30–$40 million related to proppants.
- The company received a final permit needed to start its Illinois frac-sand mine and expected mined sand sales from Corpus Christi no later than the end of fiscal Q3. Proppants performance remains dependent on oil and gas activity, permitting, and successful start-up.
- Major risks include cyclical construction markets, seasonality and weather, commodity pricing, fuel and transportation costs, environmental regulation, operational interruptions, and debt covenants and refinancing access. A hypothetical 100-basis-point increase in rates on credit-facility borrowings outstanding would add about $1.8 million to annual interest expense.
- Legal contingencies include a federal tax dispute seeking recovery of $97.9 million paid to the IRS, with trial scheduled for September 2014; EPA notices alleging Clean Air Act violations at Nevada Cement, for which potential penalties and required capital costs were not estimable; and wallboard antitrust litigation, in which damages were unspecified and the company could not estimate a reasonably possible loss.
- The Bernalillo, New Mexico wallboard plant remained temporarily idle; management said it intended to resume production when demand improved and did not consider the facility impaired at quarter-end.
Important facts for investors to verify
- Whether price and volume gains persisted, particularly in wallboard and cement, and how maintenance, freight, energy and purchased-material costs affected margins.
- Whether the Illinois mine and Corpus Christi mined-sand supply began on schedule, and whether the proppants segment achieved profitable operations.
- Actual fiscal 2015 capital spending versus the $50–$70 million outlook, including the planned proppants investment.
- Progress and financial effects, if any, from the IRS lawsuit, EPA proceedings and wallboard antitrust litigation.
- Credit-facility availability, covenant compliance, upcoming debt maturities, and sensitivity to variable interest rates.