Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2019; filed February 4, 2020. The unaudited results compare with the corresponding periods ended December 31, 2018. Eagle supplies construction and building materials and frac sand in the United States through five reportable segments.
Financial performance
Amounts below are in millions of dollars except per-share data, percentages, and where otherwise noted.
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Revenue, 2019 (change from 2018) | $350.2 (+5%) | $1,135.4 (+2%) |
| Gross profit, 2019 (change from 2018) | $87.5 (+9%); gross margin 25% vs. 24% | $267.3 (-1%); gross margin 24%, flat |
| Net earnings (loss), 2019 | $(114.6), vs. $57.7 | $(1.5), vs. $196.7 |
| Diluted earnings (loss) per share | $(2.77), vs. $1.24 | $(0.04), vs. $4.15 |
| Operating cash flow | Not presented separately for the quarter | $320.6, vs. $294.1 |
The quarter’s loss primarily reflects a $224.3 million impairment charge for Oil and Gas Proppants assets, including property and equipment, lease right-of-use assets, inventory, and other assets. The charge was recorded outside that segment’s reported operating earnings. Nine-month results also included increased corporate costs and interest expense. The nine-month effective tax rate was approximately 403%, largely reflecting the impairment and discrete tax items; the quarter’s effective tax rate was 23%.
Segments and operating trends
- Cement: Revenue rose 12% for the quarter and 11% for the nine months; operating earnings increased 15% and 10%, respectively. Higher volumes and prices were key contributors.
- Concrete and Aggregates: Revenue rose 53% for the quarter and 28% for the nine months, partly reflecting the August 2019 ConAgg acquisition. Operating earnings increased 222% and 41%, respectively.
- Gypsum Wallboard: Revenue declined 4% for the quarter and 6% for the nine months, mainly due to lower prices. Operating earnings fell 12% and 18%.
- Recycled Paperboard: Revenue declined 5% for the quarter and 3% for the nine months, but operating earnings rose 21% and 11%, respectively, largely on lower input costs. A paper-machine project outage added about $1.5 million of quarterly costs.
- Oil and Gas Proppants: Revenue fell 48% for the quarter and 44% for the nine months, amid weak demand and substitution by lower-cost in-basin sand. The segment reported operating losses of $6.8 million and $15.9 million, respectively, before the separate impairment charge.
Liquidity, cash flow, and debt
- At December 31, 2019, cash was $126.3 million, total current assets were $507.8 million, and current liabilities were $163.3 million. Working capital was approximately $344.5 million.
- Nine-month investing cash outflow was $114.5 million, including $84.1 million of cash capital expenditures and $30.4 million for the ConAgg acquisition. Financing cash outflow was $88.5 million, including $313.9 million of share repurchases and $13.1 million of dividends, partly offset by $275.0 million of increased credit-facility borrowings.
- Debt principal totaled $935.0 million: $585.0 million drawn on the revolving credit facility and $350.0 million of 4.5% notes due 2026. The balance-sheet carrying value of long-term debt was $930.6 million after debt issuance costs. Cash less debt principal implies net debt of approximately $808.7 million.
- The $750 million revolving facility had $158.1 million of availability, net of letters of credit, at period-end. Eagle reported compliance with its financial covenants. The facility matures August 2021; its leverage covenant tightens over time. The company also had $6.9 million of letters of credit outstanding.
- Debt-to-capitalization was 50.9%, versus 36.4% at March 31, 2019; net-debt-to-capitalization was 47.3%, versus 36.1%. A 100-basis-point rise in rates on period-end revolver borrowings would increase annual interest expense by an estimated $5.9 million.
Outlook, notable transactions, and risks
- Management described the fiscal 2020 outlook as positive, citing jobs growth, consumer confidence, and low interest rates. It noted that adverse winter and spring weather could weaken cement, concrete, and aggregates demand. Wallboard demand for the first half of calendar 2020 was expected to be similar to the prior-year period; management expected recycled-paper demand to remain strong and OCC prices to rise slightly.
- Fiscal 2020 capital expenditures were expected to be $120–$130 million. The paper-machine expansion was expected to be completed in spring 2020, add about 70,000 tons of annual capacity, and improve efficiency and costs in fiscal 2021.
- The planned $665 million Kosmos cement-asset acquisition was expected to close in fiscal fourth-quarter 2020, subject to customary conditions. Eagle had arranged a $665 million term-loan facility for the transaction, with no borrowing drawn at December 31, 2019. Eagle expected to use cash and the term loan to fund the purchase and related expenses.
- Eagle planned a tax-free separation of its Heavy Materials and Light Materials businesses, then expected in summer 2020, subject to approvals and other conditions. The company was also pursuing alternatives for Oil and Gas Proppants; further losses could arise from a sale or alternative use.
- Key risks include construction-market cyclicality and seasonality, weather, commodity pricing and energy costs, oil-and-gas activity and continued in-basin sand substitution, environmental and permitting requirements, litigation, variable-rate debt and covenant compliance, and execution and financing risks for the Kosmos acquisition and planned separation. Management said operating cash flow and available revolver borrowings should cover anticipated needs for at least 12 months, while noting liquidity depends on market conditions and covenant compliance.
Most important facts for investors to verify
- Whether the $224.3 million proppants impairment is followed by further write-downs or a business disposition, and how the segment performs excluding the impairment.
- Progress, final funding, closing conditions, assumed obligations, and integration costs for the $665 million Kosmos acquisition.
- Execution, costs, tax treatment, and timing of the proposed Heavy/Light Materials separation.
- Revolver availability, leverage covenant headroom, debt maturities, and sensitivity to variable interest rates after planned transactions.
- Whether pricing, volumes, and margins improve in wallboard and paperboard, and whether the paper-machine expansion delivers expected capacity and cost benefits.