Eagle Materials Inc. — Form 10-Q Summary
Business context and period: This unaudited report covers the three months ended June 30, 2019, Eagle Materials’ fiscal 2020 first quarter, compared with the three months ended June 30, 2018. The U.S.-based company operates in cement, concrete and aggregates, gypsum wallboard, recycled paperboard, and oil and gas proppants. Results are seasonal and sensitive to construction activity, weather, commodity pricing, and regional conditions.
Financial performance
| Metric | Quarter ended June 30, 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $370.6 million | $393.8 million | Down 6% |
| Gross profit / gross margin | $75.3 million / 20% | $91.6 million / 23% | Profit down 18% |
| Pre-tax earnings | $54.9 million | $85.0 million | Down 35% |
| Net earnings | $41.3 million | $66.3 million | Down 38% |
| Diluted EPS | $0.94 | $1.38 | Down 32% |
| Operating cash flow | $50.7 million | $81.9 million | Down $31.2 million |
| Cash capital expenditures | $21.8 million | $53.1 million | Down $31.3 million |
Revenue fell mainly because lower gross selling prices reduced revenue by approximately $18.9 million; lower sales volume reduced it by approximately $4.3 million. Gross margin contracted as lower prices outweighed lower costs. Interest expense rose 33% to $8.8 million, primarily because of increased Credit Facility borrowings. The effective tax rate increased to approximately 25% from 22%, due mainly to discrete tax expenses related to valuation allowances and limits on certain officer compensation deductions.
Segment results
- Cement: Revenue rose 5% to $195.3 million, with sales volume up about 3%; operating earnings declined 3% to $36.1 million as fixed and freight costs increased.
- Concrete and Aggregates: Revenue declined 3% to $39.8 million and operating earnings fell 19% to $4.4 million, reflecting lower volumes and higher costs.
- Gypsum Wallboard: Revenue declined 11% to $126.7 million and operating earnings fell 25% to $37.9 million, primarily due to lower volume and selling prices and higher operating costs.
- Recycled Paperboard: Revenue declined 5% to $42.7 million; operating earnings were nearly flat at $9.9 million as lower input costs partly offset weaker pricing and volume.
- Oil and Gas Proppants: Revenue fell 45% to $15.2 million and operating loss widened to $3.7 million. Pricing fell sharply amid weak completion activity and increased use of local sand, partly offset by higher volume and lower costs.
Balance sheet, liquidity and capital allocation
At June 30, 2019, cash was $19.2 million, total debt was $881.5 million before debt issuance costs, and net debt was approximately $862.3 million. Long-term debt carrying value was $840.3 million, with $36.5 million classified as current. The company had $495.0 million drawn on its expanded $750.0 million revolving credit facility and $248.1 million of available borrowing capacity, net of letters of credit. It reported compliance with debt covenants. Current assets were $466.5 million and current liabilities were $193.0 million.
During the quarter, Eagle repurchased 2.24 million shares for $198.4 million, averaging $88.56 per share; the buyback was a major driver of the $185.0 million increase in credit-facility borrowings. It paid $4.5 million in dividends, or $0.10 per share. The board authorized an additional 10 million-share repurchase program in April. The filing reports an additional 881,000 shares repurchased through July 26, 2019, at an average $87.26.
Operating cash flow was lower year over year, primarily due to reduced earnings and distributions from the joint venture. Management said cash flow and available credit should be sufficient for anticipated operating needs, capital expenditures, dividends, and debt service for at least the next 12 months. The company reported no off-balance-sheet debt or outstanding debt guarantees. It had $6.9 million of letters of credit and $26.2 million of performance-bond exposure, principally related to reclamation and mining permits.
Outlook, developments and risks
- Management described the outlook for the remainder of calendar 2019 as positive, citing job and wage growth, consumer confidence, and low interest rates. The Portland Cement Association forecast calendar-year cement consumption growth of approximately 2% over 2018.
- Fiscal 2020 capital expenditures were expected to total $140–155 million. A key project is a roughly $70 million paper-mill expansion and upgrade, expected to add about 70,000 tons of capacity and finish in spring 2020.
- The company planned to separate Heavy Materials and Light Materials into two publicly traded companies through a tax-free spin-off, then expected in the first half of calendar 2020, subject to approvals and other conditions. It was also evaluating alternatives for Oil and Gas Proppants; any alternative use or disposal could require impairment testing and result in future charges.
- Management cited flooding-related transportation disruption and higher cement freight costs, with some effects expected to continue into fall. Weather, construction cycles, commodity pricing, input and transport costs, and interest rates remain important sensitivities.
- Corporate general and administrative expense increased approximately $13.3 million, including about $5.9 million of strategic portfolio review costs and $5.3 million from accelerated stock compensation associated with the CEO’s retirement. No litigation settlement expense was recorded in the quarter, versus $1.8 million in the prior-year quarter; the filing says the related amount was paid in the current quarter.
- The company adopted the new lease accounting standard on April 1, 2019, recognizing approximately $66.7 million of right-of-use assets and $71.1 million of lease liabilities at adoption. At June 30, lease liabilities were $67.9 million.
- Variable-rate debt exposes the company to interest-rate risk: a hypothetical 100-basis-point increase on quarter-end facility borrowings would increase annual interest expense by approximately $5.0 million. Other significant risks include regulatory and environmental compliance, potential litigation, and the proppants business’s exposure to oil and gas activity and local-sand competition.
Important facts for investors to verify
- Whether construction demand, selling prices, and margins recover, particularly in wallboard and cement, and whether weather and freight disruptions persist.
- Whether the announced spin-off proceeds on the expected timetable and terms, and what strategic alternative is pursued for Oil and Gas Proppants, including any impairment consequences.
- How continued share repurchases, debt levels, variable-rate exposure, and the October 2019 maturity of $36.5 million of private-placement notes affect liquidity and capital allocation.
- Whether the paper-mill investment stays within budget and schedule and delivers the projected capacity and cost benefits.
- The source filing’s period is fiscal 2020 Q1 (ended June 30, 2019), despite the request metadata labeling it “2019 Q1”; confirm period convention when comparing filings.