Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 31, 2012; comparative periods ended December 31, 2011. Financial statements are unaudited. Amounts are in U.S. dollars.
Business context and results
Eagle Materials produces cement, gypsum wallboard, recycled paperboard, and concrete and aggregates. On November 30, 2012, it acquired Lafarge assets serving Kansas, Missouri, and Oklahoma for an estimated $453.4 million. The acquired business contributed $7.9 million of sales and $0.7 million of operating income during the quarter; the acquisition therefore affected only the final month of the reported quarter.
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Revenue | $164.7 million | $123.6 million | $483.4 million | $378.2 million |
| Gross profit | $31.3 million | $12.5 million | $86.6 million | $25.6 million |
| Gross margin | 19.0% | 10.1% | 17.9% | 6.8% |
| Net earnings | $18.0 million | $2.9 million | $49.9 million | $9.7 million |
| Diluted EPS | $0.37 | $0.07 | $1.07 | $0.22 |
| Operating cash flow | Not stated separately | Not stated separately | $107.0 million | $43.7 million |
Quarterly revenue rose 33% and nine-month revenue rose 28%; net earnings increased substantially in both comparisons. Management attributed improvement mainly to higher wallboard prices and higher volumes across segments, with acquisition contributions also affecting cement and concrete/aggregates. Wallboard was a major earnings driver: nine-month segment operating earnings were $47.4 million versus a $4.1 million loss. Cement earnings rose more modestly; paperboard improved, while concrete and aggregates remained loss-making.
Cash, debt, and liquidity
- At December 31, cash was $9.2 million, current assets $243.3 million, and current liabilities $110.5 million; working capital was $132.9 million. Long-term debt totaled $483.3 million, comprising $291.0 million under the credit facility and $192.3 million of senior notes. Total liabilities were $769.3 million.
- Cash increased by $2.8 million over the nine months. Operating cash flow of $107.0 million was more than offset by $477.3 million of investing outflows, primarily the $448.4 million acquisition payment. Financing supplied $373.1 million, including $221.0 million of additional credit-facility borrowings and $154.8 million net proceeds from an equity offering.
- The credit facility was expanded from $300 million to $400 million; $291.0 million was drawn and $102.0 million remained available net of letters of credit. The company reported compliance with its financial covenants. Debt-to-capitalization was 41.3%, compared with 36.1% at March 31, 2012.
- Management said operating cash flow and available facility borrowings should cover anticipated operating needs, capital spending, dividends, and debt service for at least 12 months, subject to market conditions and covenant compliance. Quarterly dividends were $0.10 per share.
Outlook, risks, and unusual items
- Management expected construction activity in calendar 2013 to improve over 2012, but described recovery as uneven by region and segment. It expected cement consumption to increase regionally, wallboard shipments to improve, and infrastructure spending to exceed 2012 levels, while noting continuing government budget constraints and softness in some markets. No earnings or revenue forecast was provided.
- Fiscal 2013 capital expenditures were expected at approximately $40 million to $70 million, including $15 million to $20 million for maintenance and spending on the developing frac-sand business. Management anticipated an additional $25 million to $50 million for frac sand across fiscal 2013 and 2014.
- Acquisition and litigation expense was $2.5 million for the quarter and $8.9 million for nine months. The nine-month amount included $5.2 million of acquisition costs, a $1.0 million write-off of a cement development opportunity, and $2.7 million of IRS litigation fees. The 2011 comparative included a $9.1 million arbitration loss. The acquisition purchase-price allocation remained preliminary, with completion expected in fiscal Q4 2013.
- The IRS dispute concerns depreciation deductions on assets acquired in 2000. Eagle seeks recovery of approximately $97.9 million previously paid and deposited for earlier tax years; the IRS denied the refund claim, and litigation was pending. For fiscal years 2007–2010, the company reported an assessment of approximately $8.1 million tax, $1.9 million penalties, and estimated $1.9 million interest, fully accrued; outcome and timing remain uncertain.
- New purported class actions accused American Gypsum and other manufacturers of wallboard price-fixing. Damages were unspecified; the company said it could not assess likelihood or amount of loss and denied the allegations. An EPA Clean Air Act matter involving Nevada Cement could entail penalties, capital spending, or higher operating costs; outcome was uncertain.
- Risks include construction cyclicality and seasonality, regional demand, fuel and raw-material costs, interest-rate exposure, environmental regulation, debt covenants, and integration and indebtedness risks from the acquisition. A 100-basis-point rate increase on facility borrowings outstanding at period-end would increase annual interest expense by about $2.9 million.
Most important facts for investors to verify
- Whether stronger wallboard pricing and construction volumes persist, and how much reported growth reflects underlying demand versus the acquisition.
- Final acquisition working-capital adjustments and purchase-price allocation, as well as integration results and acquired-asset environmental obligations.
- Cash generation, debt levels, facility availability, covenant headroom, and the effect of variable rates on interest expense.
- Developments and potential financial exposure in the IRS, wallboard antitrust, and EPA matters.
- Whether the expected 2013 market recovery and planned frac-sand investment deliver the anticipated returns and remain within the stated capital-spending range.