Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2020, the first quarter of fiscal 2021. Figures are unaudited; comparisons are with the three months ended June 30, 2019 unless stated otherwise. Eagle supplies cement, concrete, aggregates, gypsum wallboard, recycled paperboard and frac sand.
Key financial results
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $428.0 million | $370.6 million | +15% |
| Gross profit | $101.0 million | $75.3 million | +34% |
| Gross margin | 23.6% | 20.3% | +3.3 percentage points |
| Earnings before income taxes | $128.8 million | $54.9 million | +135% |
| Net earnings | $96.2 million | $41.3 million | +133% |
| Diluted EPS | $2.31 | $0.94 | +146% |
| Operating cash flow | $95.3 million | $50.7 million | +$44.6 million |
Reported net earnings included a $52.0 million gain on the sale of Western Aggregates and Mathews Readymix. Revenue also reflected the Kosmos and ConAgg acquisitions; management said revenue excluding acquisitions and dispositions rose 2%. Gross profit excluding those transactions increased 21%. Interest expense rose 59% to $14.0 million, primarily reflecting borrowing for the Kosmos acquisition.
Cash and cash equivalents were $199.4 million at June 30, up from $118.6 million at March 31, 2020. Capital expenditures were $26.0 million. Cash provided by investing activities was $67.5 million, including $93.5 million of sale proceeds; financing activities used $82.0 million, including a $75.0 million reduction in credit-facility borrowings.
Total debt was $1.50 billion before $7.9 million of debt issuance costs, compared with $1.575 billion at March 31. The company reported $485.0 million outstanding on its revolving facility, $665.0 million on its term loan and $350.0 million of 4.5% notes due 2026. It had $260.0 million of revolver availability, $199.4 million of cash and approximately $459.0 million of total liquidity. Debt-to-capitalization was 58.3%; net-debt-to-capitalization was 54.8%. The company was in compliance with its financial covenants. A $123.7 million income-tax receivable was on the balance sheet; $103.7 million was received in July, and management anticipated using it to reduce revolver borrowings.
Segment performance and changes
- Cement: Revenue increased 34% to $261.4 million and operating earnings rose 67% to $60.5 million, including Kosmos contribution. Excluding Kosmos, revenue increased 10% and operating earnings 39%. Sales volume rose 35%, while average net sales price per ton declined 1%.
- Concrete and Aggregates: Revenue rose 11% to $44.2 million and operating earnings increased 22% to $5.4 million. Aggregate volume fell 41%, partly reflecting the business sale.
- Gypsum Wallboard: Revenue grew 3% to $130.2 million; operating earnings increased 9% to $41.3 million. Sales volume rose 7%, partly offset by lower average net price.
- Recycled Paperboard: Revenue fell 14% to $36.7 million and operating earnings declined 71% to $2.9 million. Lower prices and volume, mill start-up inefficiencies and higher recycled-fiber costs weighed on results.
- Oil and Gas Proppants: Revenue fell 93% to $1.0 million as sales volume dropped 89%; the segment reported a $1.3 million operating loss. Operations were significantly curtailed and headcount reduced.
Outlook, risks and notable items
- Management said COVID-19 had not materially affected operations or financial position through the quarter, but expected it could negatively affect future results. Risks include weaker construction demand, public-project delays or cancellations, customer payment delays, operating disruptions and additional health and safety costs.
- Management expected cement demand to remain strong in its markets during calendar 2020 but noted possible weakening later in the year. It anticipated wallboard demand to remain consistent for the next two quarters, while warning that pandemic uncertainty could weaken demand. These are expectations, not formal earnings guidance.
- The collapse in oil and gas activity sharply reduced frac-sand demand. Eagle was exploring strategic alternatives for the business and said a disposition or alternative use could result in additional impairment or other losses.
- Fiscal 2021 capital expenditures were expected to be $60–$70 million, focused on critical maintenance, safety and regulatory projects. Approximately $6 million of cement maintenance costs were deferred to the second and third fiscal quarters.
- Eagle remained committed to separating its Heavy Materials and Light Materials businesses through a tax-free spin-off, but timing was uncertain; preparations continued while the company awaited market recovery.
- On April 17, 2020, Eagle sold Western and Mathews for approximately $93.5 million, generating the $52.0 million gain. The $669 million Kosmos cement acquisition, completed March 6, was funded primarily by a $665 million term loan and cash.
- The company announced suspension of future quarterly dividends on April 13, 2020. The quarter’s reported dividend was $0.10 per share, paid before the suspension.
- Variable-rate revolver and term-loan borrowings totaled $1.15 billion. Management estimated a 100-basis-point rate increase would add approximately $11.5 million to annual interest expense.
Important facts for investors to verify
- How much of earnings growth reflects recurring segment performance versus the $52.0 million disposal gain and acquired operations.
- Whether COVID-19, housing and public construction trends affect volumes, pricing, collections and liquidity in subsequent quarters.
- Progress and potential costs of the Heavy/Light Materials separation, and the outcome of strategic alternatives for Oil and Gas Proppants.
- Debt reduction following receipt of the tax refund, revolver availability, covenant headroom and refinancing needs ahead of the August 2022 facility maturities.
- Whether the $60–$70 million capital-spending expectation and dividend suspension remain in effect.