Eagle Materials Inc. — Form 10-Q Summary
Business context and period. This unaudited report covers the three and six months ended September 30, 2015, Eagle Materials’ fiscal second quarter and first half of fiscal 2016. The company produces cement, gypsum wallboard, recycled paperboard, oil and gas proppants, concrete and aggregates. Comparisons below are with the corresponding 2014 periods.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $329.0 million, up 16% | $614.0 million, up 11% |
| Gross profit / margin | $44.3 million / 13%, versus $75.1 million / 26% | $105.4 million / 17%, versus $131.5 million / 24% |
| Earnings before tax | $42.8 million, down 43% | $98.7 million, down 24% |
| Net earnings | $29.8 million, down 41% | $67.6 million, down 23% |
| Diluted EPS | $0.59, versus $1.00 | $1.34, versus $1.75 |
| Operating cash flow | $107.6 million, compared with $117.7 million in the prior-year half |
Cash, debt and liquidity at September 30, 2015. Cash was $6.3 million. Total debt was $509.8 million, including $327.0 million drawn on the $500 million revolving facility; $164.0 million of additional borrowing capacity was available, net of letters of credit. Working capital was $212.2 million. The company reported compliance with its financial covenants. A $57.0 million senior-note tranche was scheduled to mature November 15, 2015.
First-half capital expenditures were $55.9 million; investing cash outflow also included $32.4 million of acquisition spending. Financing cash outflow was $20.5 million, including $10.1 million of dividends and $10.7 million of share repurchases. Cash declined by $1.2 million over the half. Management expected fiscal 2016 capital expenditures of approximately $65–75 million, including $20–25 million for sustaining needs.
Material changes and operating drivers
- Proppants impairment and inventory write-down. The oil and gas proppants segment recorded a $28.4 million impairment of customer-contract intangible assets and a $9.4 million raw-sand inventory write-down. Together, these pre-tax charges totaled about $37.8 million and were recorded in cost of goods sold. Management said that excluding these charges, gross margin would have been relatively consistent with the prior-year comparable period.
- Proppants weakness. The segment reported operating losses of $44.6 million for the quarter and $50.2 million for the half, versus operating income of $0.7 million and $0.1 million, respectively, in the prior-year periods. Lower oil prices and drilling activity reduced demand and pricing; management also cited amendments to customer contracts. The acquired CRS Proppants business contributed $12.5 million of quarterly revenue and $31.2 million for the half, but reported operating losses of $41.3 million and $46.1 million, respectively.
- Construction businesses generally improved. Cement segment operating earnings rose 26% in both periods, supported by higher prices, while first-half cement volumes were down 3%, which management attributed in part to unusually heavy spring rainfall. Wallboard revenue increased 7% for the quarter and 5% for the half, mainly on higher volumes. Concrete and aggregates operating earnings increased, although aggregate volumes fell 12% for the quarter and 15% for the half.
- Acquisitions and costs. CRS Proppants was acquired in November 2014. In July 2015, Eagle acquired the Skyway slag-grinding plant for approximately $29.9 million; it added about $9.2 million of quarterly revenue. Higher acquisition-related depreciation and amortization, operating costs and interest expense also affected results. Interest expense increased 11% in both comparative periods.
Outlook, risks and contingencies
Management said construction demand was improving incrementally and expected cement, wallboard and certain concrete markets to benefit from continued recovery, while noting differences by region and uncertainty in the pace of economic growth. It expected weak oil and gas activity and proppant demand and pricing to persist through calendar 2015 and into 2016, and said it would continue to assess whether further asset impairments were needed. The filing provides no specific earnings or EPS guidance.
Key exposures include construction cyclicality, weather and regional demand, commodity pricing and energy costs, and environmental regulation. A 100-basis-point increase in interest rates on variable-rate borrowings outstanding at period-end would increase annual interest expense by approximately $3.3 million. The company said operating cash flow and available facility borrowings should meet anticipated needs for at least 12 months, but noted dependence on the revolving facility and risks from covenant compliance and credit availability.
Contingencies include EPA notices alleging Clean Air Act violations at Nevada Cement, with potential penalties, capital spending and higher operating costs; and wallboard antitrust litigation and a related Department of Justice investigation. Eagle said it could not estimate a reasonably possible loss range for the antitrust lawsuits or determine the ultimate outcome of the EPA matter or investigation. Management stated that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether proppant demand, customer-contract amendments and sand pricing lead to further impairment charges or operating losses.
- How the November 2015 $57.0 million note maturity was addressed, and subsequent revolver borrowings, liquidity and covenant headroom.
- Whether the expected fiscal 2016 capital-spending range remains appropriate given first-half spending and acquisition needs.
- Developments, potential costs and any estimable exposure in the EPA matter, wallboard litigation and DOJ investigation.
- Whether construction-market recovery and pricing gains persist, particularly in light of regional weather, lower aggregate volumes and higher input costs.