Eagle Materials Inc. — Form 10-Q Summary
Business context and period. Eagle Materials produces cement, gypsum wallboard, recycled paperboard, oil and gas proppants, concrete and aggregates in the United States. This unaudited report covers the fiscal third quarter and nine months ended December 31, 2015, compared with the corresponding 2014 periods. The quarter was affected by weaker frac-sand demand amid falling oil prices, while construction markets generally showed gradual recovery.
Key financial results
| Metric | Three months ended Dec. 31, 2015 | Change year over year | Nine months ended Dec. 31, 2015 | Change year over year |
|---|---|---|---|---|
| Revenue | $277.4 million | Down 5% | $891.4 million | Up 6% |
| Gross profit | $68.9 million | Down 13% | $174.3 million | Down 17% |
| Gross margin | 25% | 27% prior year | 20% | 25% prior year |
| Net earnings | $45.8 million | Down 12% | $113.4 million | Down 19% |
| Diluted EPS | $0.92 | Down from $1.03 | $2.26 | Down from $2.78 |
| Operating cash flow | Not separately stated for quarter | $216.3 million | Up from $183.1 million | |
| Capital expenditures | Not separately stated for quarter | $75.5 million | Up from $65.0 million |
For the nine-month period, pretax earnings were $166.9 million, down 20%; net interest expense was $12.8 million, up from $12.1 million. The estimated effective tax rate was approximately 32%, versus 33% in the prior-year period. The filing does not provide a clear consolidated EBITDA figure.
Balance sheet and liquidity at December 31, 2015
- Cash and equivalents were $15.8 million; current assets were $365.4 million and current liabilities $116.1 million, for reported working capital of $249.3 million.
- Total debt was $500.7 million, comprising $375.0 million under the revolving credit facility and $125.7 million in senior notes. Debt was $512.8 million at March 31, 2015. Cash less debt implies approximate net debt of $485.0 million.
- The $500 million credit facility had $116 million of borrowing availability, net of outstanding letters of credit. The company reported compliance with its debt covenants.
- Debt-to-capitalization was 32.3%, compared with 33.7% at March 31, 2015. The company stated operating cash flow and available credit should cover anticipated needs for at least 12 months.
- Dividends were $0.10 per share for the quarter and $0.30 per share for the nine months, unchanged from the prior-year periods.
Material changes and segment performance
- Oil and gas proppants: Revenue fell 73% in the quarter to $8.5 million and segment operating results shifted to a $9.2 million loss. For nine months, the segment recorded a $59.4 million operating loss versus $3.3 million income a year earlier. Lower drilling activity, pricing and sales volumes drove the decline. The nine-month loss included a $28.4 million customer-contract intangible impairment and a $9.4 million raw-sand inventory write-down.
- Cement: Segment revenue increased 9% for the quarter and 8% for nine months; operating earnings rose 11% and 20%, respectively. Higher prices and the Skyway acquisition supported results, while weather reduced volumes in some markets.
- Gypsum wallboard: Quarterly revenue declined 8% and operating earnings declined 7%, primarily on lower sales volumes and pricing. Nine-month operating earnings increased 3%, helped by lower input and freight costs.
- Recycled paperboard: Revenue and operating earnings declined 8% and 13% in the quarter; nine-month operating earnings fell 10%, reflecting lower volumes and higher maintenance and recycled-fiber costs.
- Concrete and aggregates: Quarterly revenue rose 17%, while operating earnings fell 7% due to higher costs. Nine-month revenue and operating earnings increased 14% and 23%, respectively.
Quarterly consolidated revenue fell despite the Skyway contribution because of lower wallboard, paperboard and proppants volumes and lower wallboard pricing. Nine-month revenue growth reflected acquisitions and stronger cement and concrete pricing, but profitability was weighed down by proppants. Excluding the proppants impairment and inventory write-down, management reported nine-month gross margin of approximately 23%, versus 25% in the prior year.
Cash flow, capital allocation and unusual items
- Nine-month operating cash flow was $216.3 million. Investing used $108.0 million, including $75.5 million of capital expenditures and $32.4 million of acquisition spending. Financing used $100.1 million, including $76.2 million for share repurchases, $15.1 million of dividends and net debt repayments.
- The company repurchased 1.124 million shares for $76.2 million at an average $67.84 per share during the nine months; 6.376 million shares remained authorized for repurchase at December 31.
- The July 2015 Skyway acquisition added a 600,000-ton-per-year slag grinding plant in South Chicago for approximately $29.9 million, net of an expected seller refund.
- Cash generation improved year over year, while capital expenditures increased. A $57.0 million senior-note tranche matured and was repaid in November 2015; credit-facility borrowings increased during the period.
Outlook, risks and contingencies
- Management expected construction-product demand to improve gradually, with cement consumption anticipated to increase during calendar 2016. The company expected wallboard industry demand to improve approximately 5% in calendar 2016 and anticipated continued improvement in certain Texas and Kansas City markets.
- Management expected weak oil and gas activity, proppants demand and pricing to persist through calendar 2016. Further deterioration could prompt additional impairment testing of proppants assets.
- Fiscal 2016 sustaining capital expenditures were estimated at $20–25 million; total capital expenditures, including sustaining spending, were estimated at $80–85 million.
- Variable-rate credit-facility borrowings expose the company to interest-rate risk: a 100-basis-point increase would raise annual interest expense by approximately $3.8 million, based on the period-end $375 million balance. The company reported no interest-rate derivatives in use.
- Principal disclosed legal matters include EPA notices alleging Clean Air Act violations at Nevada Cement, with potential penalties and capital or operating costs not estimable, and wallboard antitrust class actions plus a Department of Justice investigation. The company denied the allegations and said the potential loss from the antitrust cases could not be reasonably estimated.
- Other risks include cyclical construction markets, weather and seasonality, commodity and energy costs, environmental regulation, acquisition integration, customer credit exposure, and debt covenants. Management reported effective disclosure controls and procedures.
Most important facts for investors to verify
- Whether the proppants downturn persists and whether further asset impairments, inventory charges or customer-credit losses arise.
- Whether construction-market recovery, pricing and expected wallboard demand gains materialize, including the effects of weather and regional conditions.
- Progress on EPA and antitrust matters, including any rulings, settlements, penalties, required capital spending or other material financial impact.
- Debt-facility availability, covenant compliance, refinancing needs and sensitivity to variable interest rates.
- Actual capital spending, cash generation, share repurchases and dividends relative to management’s stated expectations.