Eagle Materials Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited filing covers the three months ended June 30, 2017, Eagle Materials’ first quarter of fiscal 2018; comparisons are with the three months ended June 30, 2016. The company produces cement, gypsum wallboard, recycled paperboard, oil and gas proppants, concrete and aggregates. Results include the Fairborn cement acquisition, completed February 10, 2017.
Financial results and liquidity
- Revenue: $366.1 million, up 23% year over year. Fairborn contributed approximately $22.2 million; legacy businesses also grew.
- Profit: Gross profit was $86.1 million, up 20%; management reported gross margin of approximately 24%, consistent with the prior-year quarter. Earnings before tax rose 18% to $79.5 million. Net earnings increased 21% to $54.9 million; diluted EPS was $1.13 versus $0.93.
- Cash flow: Operating cash flow was $53.7 million, compared with $54.1 million. Capital expenditures were $16.2 million, up from $9.0 million. Cash increased $5.7 million to $12.2 million.
- Debt and liquidity: Total debt was $667.7 million, including $81.2 million current debt; cash was $12.2 million. The $500 million revolving facility had $200 million drawn and $290.6 million of available borrowings, net of letters of credit. The company reported debt-to-capitalization of 34.7% and net-debt-to-capitalization of 34.3%, and said it was in compliance with financial covenants.
- Balance sheet: Current assets were $440.3 million and current liabilities $239.7 million, or approximately 1.8 times current-asset coverage. Stockholders’ equity was $1.26 billion.
- Dividend: $0.10 per share, unchanged from the prior-year quarter.
Material changes versus the prior-year quarter
- Cement revenue increased 26% and operating earnings 37%, reflecting Fairborn and higher prices and volumes. Cement sales volume rose 21%.
- Gypsum wallboard revenue rose 12% and operating earnings 11%, primarily on 11% higher volume.
- Paperboard operating earnings fell 56% to $4.9 million, as higher recycled-fiber, maintenance and energy costs more than offset better pricing.
- Oil and gas proppants revenue rose to $18.9 million from $5.1 million; the operating loss narrowed to $2.0 million from $5.9 million as volumes and production improved.
- Concrete and aggregates operating earnings rose 63% to $6.0 million. Concrete volumes increased 24%, while aggregates volumes declined 5%.
- Net interest expense increased 92% to $7.5 million, primarily reflecting the $350 million of 4.5% senior notes issued in August 2016. The effective tax rate declined to approximately 31% from 33%, including a $1.0 million share-based compensation tax benefit.
Outlook, risks and unusual items
- Management expected construction-product demand to improve through the remainder of calendar 2017 and forecast higher fiscal 2018 cement, concrete and aggregates volumes and operating income. It expected calendar-2017 wallboard shipments to increase approximately 6%–8% and planned to restart the Bernalillo plant during fiscal 2018.
- Frac-sand demand had improved; management expected activity and proppant intensity to continue increasing. The planned Utica, Illinois facility build-out was estimated at approximately $70 million, with completion expected in summer 2018. Fiscal 2018 sustaining capital expenditures were estimated at $30–$35 million.
- On July 27, 2017, after quarter-end, the company acquired Wildcat Minerals LLC for approximately $37 million, funded with operating cash flow and credit-facility borrowings.
- Recycled-fiber costs were expected to remain higher in fiscal 2018; sales-price adjustments under customer contracts occur only at specified times. Results remain exposed to construction cycles, seasonality, weather, commodity and energy costs, operating interruptions, oil and gas activity, interest rates and environmental regulation.
- Wallboard antitrust class actions, a homebuilder lawsuit and a related Department of Justice investigation remained unresolved. The company denied the allegations and said it could not estimate reasonably possible losses.
- A Nevada Cement consent decree required emissions-control equipment and vehicle replacements, estimated to cost approximately $3 million over about two years, and a $0.6 million penalty; court approval was pending. The filing also disclosed $20.1 million of performance bonds and $9.4 million of letters of credit.
Important facts for investors to verify
- How much revenue and earnings growth is attributable to Fairborn versus underlying pricing, volume and cost trends.
- Whether paperboard cost pressures ease and whether proppants can return to operating profitability.
- Funding, timing and expected returns for the Wildcat acquisition and the planned $70 million Utica build-out, alongside sustaining capital needs.
- Repayment or refinancing of approximately $81.2 million of current debt, including private-placement note maturities in October and November 2017, and continued covenant compliance.
- Developments in the wallboard litigation and investigation, the EPA consent decree’s approval and implementation, and any resulting costs or liabilities.
- Whether management’s demand and shipment expectations are realized; the filing cautions that interim results are seasonal and are not necessarily indicative of full-year results.