Eagle Materials Inc. — Q3 FY2017 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2016; comparative periods ended December 31, 2015. Unaudited. Eagle produces cement, gypsum wallboard, recycled paperboard, oil and gas proppants, concrete and aggregates.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Revenue | $302.4 million, up 9% | $932.6 million, up 5% |
| Gross profit / margin | $87.4 million / 29% (26% prior year) | $250.5 million / 27% (20% reported prior year; about 24% excluding prior-year impairment and inventory write-down) |
| Net earnings | $56.4 million, up 23% | $162.0 million, up 43% |
| Diluted EPS | $1.17, versus $0.92 | $3.35, versus $2.26 |
| Operating cash flow | Not separately presented for the quarter | $288.9 million, versus $216.3 million |
| Capital expenditures | Not separately presented for the quarter | $34.0 million, versus $75.5 million |
Quarterly gross-margin improvement reflected higher average selling prices. For the nine-month comparison, the prior period included a $28.4 million proppants intangible-asset impairment and $9.4 million inventory write-down. Interest expense rose 55% for the quarter and 23% year to date, primarily following the August issuance of $350 million of 4.5% senior notes.
Segments and notable changes
- Cement: Quarterly revenue increased 2% and operating earnings 8%; selling prices rose 4%, while volume fell 1%, partly due to early winter in northern markets. Nine-month revenue and operating earnings rose 5% and 10%, respectively.
- Gypsum wallboard: Quarterly revenue and operating earnings rose 12% and 10%; higher volume outweighed a 3% price decline. Nine-month revenue rose 4% and operating earnings 3%.
- Recycled paperboard: Quarterly revenue rose 12% and operating earnings 18%; nine-month revenue rose 15% and operating earnings 40%, driven by volume and lower costs.
- Oil and gas proppants: Nine-month revenue fell 62% to $18.9 million amid weak drilling activity; the segment recorded an $11.7 million operating loss, improved from a $59.4 million loss. Current-period results included $8.5 million of sand inventory write-downs and customer-contract-related receipts and forfeitures; the quarter also included a $4.1 million contract-termination settlement gain.
- Concrete and aggregates: Quarterly revenue increased 29% and operating earnings 202%; nine-month revenue increased 18% and operating earnings 79%, supported by higher sales volumes.
Cash, debt and liquidity
- At December 31, cash and cash equivalents were $164.7 million, compared with $5.4 million at March 31, 2016. Current assets were $508.7 million and current liabilities $207.9 million; reported working capital was $300.8 million.
- Total debt was $467.7 million, including $350 million of 4.5% notes due 2026 and $117.7 million of private-placement notes. The company had no credit-facility borrowings and reported $490.7 million available under its $500 million revolving facility, net of letters of credit. Net debt was approximately $303.0 million, calculated as total debt less cash.
- Debt-to-capitalization and net-debt-to-capitalization were 28.4% and 20.3%, respectively, versus 32.8% and 32.6% at March 31. The company reported compliance with debt covenants.
- Operating cash flow less capital expenditures was approximately $254.8 million for the nine months. Financing cash flows included issuance of $350 million of notes, repayment of $382 million under the credit facility, $60.0 million of share repurchases, and $14.5 million of dividends.
Outlook, risks and contingencies
- Management expects construction-grade cement consumption to increase during calendar 2017, with regional variation; aggregate volumes are expected to rise during the rest of fiscal 2017, while concrete volumes are expected to remain relatively consistent year over year.
- Management cites industry forecasts for approximately 5% growth in U.S. wallboard shipments in calendar 2017 and expects stronger wallboard demand to support recycled-paperboard sales. It anticipates proppant volumes may improve with rig-count recovery and greater sand use per well, while acknowledging current demand and pricing pressure.
- Fiscal 2017 capital expenditures were expected to be approximately $50 million. The planned Fairborn, Ohio cement-plant and Columbus terminal acquisition is for $400 million in cash, subject to inventory adjustment, and was expected to close in Q4 FY2017. Funding was expected from cash and credit-facility borrowings; approximately $4 million of transaction costs were anticipated.
- Key exposures include construction-market cyclicality and seasonality, weather, commodity and energy costs, environmental regulation, debt covenants and oil-and-gas activity. The company states operating cash flow and available facility borrowings should meet anticipated needs for at least 12 months.
- Legal/environmental matters: In January 2017, Nevada Cement agreed to a $0.6 million penalty and approximately $3 million of emissions-control and vehicle investments under a consent decree, subject to court approval. Wallboard antitrust class actions and a related homebuilder case remained pending; the company said reasonably possible loss could not be estimated and denied the allegations. A related DOJ investigation was also ongoing.
- Quarterly dividends were $0.10 per share. The company repurchased 788,800 shares in the nine-month period at an average $76.08 per share; there were no repurchases in the quarter.
Important facts for investors to verify
- Whether the Fairborn acquisition closed as expected, its final purchase price and funding, and the resulting debt and interest burden.
- Whether cement, wallboard and infrastructure demand and pricing met management’s stated expectations, and whether proppants demand recovered.
- Subsequent developments and potential financial exposure in the antitrust litigation, DOJ investigation and Nevada Cement consent decree.
- How much of reported earnings and operating cash flow depended on proppants contract settlements, inventory adjustments, working-capital movements and joint-venture distributions.
- Future capital spending, share repurchases, dividends, debt maturities and ongoing compliance with credit covenants.