Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2013 (fiscal 2014 Q2). Financial statements are unaudited. Eagle produces cement, gypsum wallboard, recycled paperboard, concrete and aggregates.
Financial performance
| Metric | Three months ended Sept. 30 | Six months ended Sept. 30 |
|---|---|---|
| Revenue | $252.6 million, up 53% | $479.7 million, up 51% |
| Gross profit / margin | $59.5 million / 24%; prior year 20% | $106.1 million / 22%; prior year 17% |
| Net earnings | $39.9 million, up 122% | $70.0 million, up 119% |
| Diluted EPS | $0.80; prior year $0.40 | $1.40; prior year $0.71 |
| Operating cash flow | Not reported separately for the quarter | $79.3 million; prior year $66.8 million |
- For the six months, operating cash flow increased with earnings but was partly offset by working-capital investment, including higher receivables and inventories. Capital expenditures were $31.6 million, versus $8.6 million a year earlier.
- At September 30, cash was $10.6 million; working capital was $199.0 million. Long-term debt was $455.3 million, down from $489.3 million at March 31, 2013. The company reported $129.6 million of available credit-facility borrowings, net of letters of credit, and compliance with debt covenants.
- Six-month segment operating earnings: cement $51.4 million (up 88%); wallboard $59.5 million (up 95%); paperboard $12.6 million (down 3%); and concrete and aggregates $0.1 million, compared with a loss of $0.2 million.
Material changes and drivers
- The November 2012 Lafarge asset acquisition materially expanded reported results. The acquired assets contributed $52.6 million of second-quarter revenue and $93.7 million for the six months; they contributed $12.3 million and $18.7 million of operating income, respectively. Revenue growth also reflected higher sales volumes and prices in most legacy businesses.
- Wallboard benefited from improved volumes and price increases implemented in January 2013. Cement growth included the acquired plants and higher volumes and prices. Paperboard earnings declined as recycled-fiber and natural-gas costs rose. Concrete and aggregates results included acquired operations and frac-sand start-up costs.
- Interest expense rose 35% in the quarter and 33% for the six months, mainly because acquisition-related credit-facility borrowings increased. The effective tax rate was approximately 32%, up from 31% in the prior-year period, partly reflecting a lower relative benefit from depletion deductions.
Outlook, risks and contingencies
- Management expected construction activity and U.S. cement and wallboard demand to improve during calendar 2013, with regional variation. It announced a 20% wallboard price increase for January 2014. It expected fiscal 2014 interest expense to exceed fiscal 2013.
- Fiscal 2014 capital expenditures were expected to be approximately $50 million, including $20–$30 million for frac sand and $20–$25 million of sustaining expenditures. Management did not expect frac-sand revenue or earnings to be material to fiscal 2014 results.
- Management cited cyclical construction demand, seasonality, weather, commodity-price and input-cost volatility, transportation constraints, environmental regulation, and debt covenants as important risks. A 100-basis-point rise in rates on facility borrowings outstanding at September 30 would increase annual interest expense by approximately $2.6 million.
- The company is pursuing a federal tax-refund lawsuit involving approximately $97.9 million paid in connection with disputed depreciation deductions for earlier tax years; the court had taken summary-judgment motions under advisement and suspended the scheduled trial. Separate IRS assessments for fiscal 2007–2010, including interest, were fully accrued at approximately $12.3 million. The ultimate outcome and recovery, if any, remain uncertain.
- Other disclosed matters include an EPA notice concerning Nevada Cement, which could result in penalties or required capital spending, and consolidated wallboard antitrust class actions. The company said it could not assess the likelihood or amount of potential antitrust losses. It reported no guarantees outstanding; it had $7.4 million of letters of credit and $16.1 million of performance bonds outstanding.
Investor verification points
- Separate acquisition-driven growth from comparable growth in legacy operations, and assess whether improved construction demand and pricing persist.
- Track working-capital conversion, particularly receivables and inventories, against reported earnings and operating cash flow.
- Review acquisition integration, debt reduction, variable-rate exposure, covenant headroom and the stated fiscal 2014 capital-spending plans.
- Monitor the IRS refund litigation and assessments, EPA matter, and wallboard antitrust litigation for changes in exposure or required spending.
- Confirm the source balance-sheet comparison date: the balance sheet uses March 31, 2013, while the table-of-contents text appears to say March 31, 2012.