Eagle Materials (NYSE: EXP) faced several headwinds in its fiscal third quarter, which negatively impacted results. Not only was it going up against a tough comparable period, as last year's fiscal third quarter benefited from the enactment of the Tax Cut and Jobs Act, but the diversified materials company faced weather issues and timing shifts in the most recent period. However, the company doesn't anticipate that those problems will persist, which is why it remains positive about what lies ahead over the coming year.
Eagle Materials results: The raw numbers
Fiscal Q3 2019
Fiscal Q3 2018
Data source: Eagle Materials Inc.
What happened with Eagle Materials this quarter?
Several items impacted the quarter:
- Revenue from the company's heavy materials segment slid 3% to $194.2 million, while operating earnings declined 14% to $48.2 million. Cement sales rose 1% thanks to slightly higher prices and volumes, though earnings fell 10% due to higher maintenance costs because the company installed upgraded emissions-control equipment during the quarter. Meanwhile, concrete and aggregate sales plunged 21%, while earnings plummeted 70% due to lower sales volumes as a result of heavy rainfall during the quarter, which hampered its ability to move product.
- Revenue from the light materials sector, which includes gypsum wallboard and paperboard products, fell 5% to $153.8 million. This was due to lower wallboard and paperboard sales volumes that resulted from a shift in the timing of prebuying activity ahead of the company's winter price increase. Operating earnings, however, rose 1% due to lower costs.
- The oil and gas proppants segment's sales plunged 47% to $14.1 million due to lower frack sand sales volumes and prices, leading this segment to report an operating loss of $9.3 million. Plunging oil prices during the quarter impacted drilling activity, which caused demand for frack sand to be lower than the company anticipated.
- Two nonrecurring items in last year's fiscal third quarter affected the comparability of the company's earnings. First, Eagle Materials experienced a $61 million, or $1.25-per-share, tax benefit in the year-ago period due to the enactment of the Tax Cut and Job Act. Meanwhile, the company recorded a litigation settlement charge of $39 million, or $0.56 per share, in the year-ago period, which partially offset this benefit. If we adjust for these one-time items, Eagle Materials would have earned $79.4 million, or $1.39 per share, in last year's fiscal third quarter, reducing the year-over-year earnings decline to 27% for net earnings and 10% on a per-share basis.
- Eagle Materials spent another $69 million repurchasing its stock during the quarter and has now retired 5% of its outstanding shares during fiscal 2019, which helped boost its per-share results.
Image source: Getty Images.
What management had to say
CEO Dave Powers commented on the company's results by saying:
Adjusting for the effects of unusual weather trends during calendar 2018 and a shift in the timing of wallboard price increases and related buying activity, we estimate that the overall market demand for our building materials, notably cement and wallboard, remained in positive territory in calendar 2018, with growth rates in the low single digits. Specific to this quarter's results, our wallboard business continued to perform very well with operating margins improving 440 bps (basis points). Cement prices and volume were up, but margins were affected by higher costs resulting primarily from maintenance outages at two facilities.
Eagle Materials encountered several issues during the quarter that impacted results. Heavy rain made it difficult for the company to move concrete and aggregates to customers, maintenance activities increased costs and reduced cement production, and customers didn't prebuy wallboard late in the year to lock in lower prices as they did in December of 2017. These issues clouded some notable positives, including the improvement in the profitability of the company's wallboard business as well as higher cement volumes and prices.
Powers noted that "the outlook for calendar 2019 continues to be positive as the basic underlying fundamentals of low unemployment, low interest rates, and higher wages remain favorable." Those factors should drive positive future results in the company's heavy and light materials businesses. However, Eagle's oil and gas proppants business will likely remain under pressure due to the steep drop in oil prices at the end of last year, which will likely impact drilling activity levels in the U.S., putting downward pressure on frack sand volumes and pricing.
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