Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2013, the first quarter of fiscal 2014; compared with the three months ended June 30, 2012. Filed August 8, 2013. The company produces cement, gypsum wallboard, recycled paperboard, concrete and aggregates. Financial statements are unaudited.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $227.0 million | $154.0 million | +47% |
| Gross profit | $46.6 million | $22.9 million | +104% |
| Gross margin | 20.5% | 14.9% | +5.6 percentage points |
| Earnings before tax | $44.5 million | $19.9 million | +124% |
| Net earnings | $30.1 million | $14.0 million | +115% |
| Diluted EPS | $0.60 | $0.31 | +94% |
| Operating cash flow | $18.9 million | $19.1 million | Nearly unchanged |
- Net margin was 13.3%, compared with 9.1% a year earlier. The estimated effective tax rate was about 32%, versus 30%; management attributed the increase primarily to higher earnings and a lower relative impact from depletion deductions.
- Revenue growth reflected the acquired Lafarge assets, higher volumes across the businesses, and higher average selling prices in all businesses except recycled paperboard. Management attributed approximately $41.1 million of quarterly revenue to the acquisition.
- Segment revenue and operating earnings: cement, $117.7 million and $19.0 million; gypsum wallboard, $96.0 million and $29.6 million; recycled paperboard, $32.2 million and $5.7 million; concrete and aggregates, $25.2 million and $0.2 million. Cement and wallboard earnings rose substantially; concrete and aggregates earnings were essentially flat.
- Acquisition effects limit year-over-year comparability: the acquired assets contributed $41.1 million of sales and $6.4 million of operating income in the quarter. The filing also presents prior-year pro forma results assuming the acquisition occurred April 1, 2012: revenue of $208.5 million and net income of $7.8 million, excluding $6.1 million of specified acquisition-related charges.
Cash flow, liquidity and debt
- Cash was $6.7 million at June 30, 2013, versus $3.9 million at March 31. Current assets were $298.4 million and current liabilities $102.2 million; reported working capital was $196.2 million.
- Operating cash flow was $18.9 million; capital expenditures were $21.2 million, resulting in approximately $2.4 million of negative operating cash flow after capital expenditures. The working-capital build included higher receivables and inventories, partly offset by higher income taxes payable.
- Total debt was $497.3 million, comprising $305.0 million drawn on the revolving credit facility and $192.3 million of senior notes. Debt increased $8.0 million during the quarter. The company reported $88.0 million of available facility borrowings, net of outstanding letters of credit, and compliance with financial covenants.
- Debt-to-capitalization and net-debt-to-capitalization ratios were 40.7% and 40.3%, respectively. Interest expense was $5.0 million, up 32%, primarily reflecting acquisition-related borrowings. A 100-basis-point interest-rate increase on period-end facility borrowings would add approximately $3.1 million of annual interest expense.
- Cash dividends were $0.10 per share; $5.0 million was paid during the quarter. 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 business conditions and covenant compliance.
Outlook, risks and contingencies
- Management expected U.S. construction activity and cement and wallboard demand to improve in calendar 2013, with a recovery underway but uneven by region. Residential construction was expected to lead improvement; commercial cement demand and government budget constraints remained headwinds. The company expected northern California concrete and aggregate demand to remain flat and did not expect the new frac sand business to be material to fiscal 2014 results.
- Management expected fiscal 2014 total capital expenditures of approximately $50 million, including $20–25 million of sustaining expenditures. It also anticipated $20–30 million of frac sand capital expenditures. Management expected fiscal 2014 interest expense to exceed fiscal 2013 because of higher facility borrowings. A 20% wallboard price increase was announced for January 2014.
- Key business risks include construction cyclicality and seasonality, weather and operating interruptions, commodity pricing and fuel/energy/raw-material costs, transportation constraints, environmental regulation, and debt covenants and interest-rate exposure. Management noted that environmental rules affecting cement operations may require material capital spending and higher operating costs.
- Contingencies include an IRS dispute over depreciation deductions for the Republic asset acquisition. The company sued to recover approximately $97.9 million paid, including interest; trial was scheduled for December 2013. A separate approximately $12.1 million assessment, including estimated interest, for fiscal 2007–2010 was fully accrued, and the IRS suspended that audit pending the court case. The ultimate outcome and recoveries were uncertain.
- The company and its wallboard subsidiary faced consolidated class-action antitrust claims alleging price-fixing; they denied the allegations and said potential loss could not yet be assessed. Nevada Cement also faced an EPA Clean Air Act notice alleging permit and reporting violations; possible outcomes could include penalties, capital expenditures or higher costs, but the impact was not determinable. The company reported $9.3 million of outstanding letters of credit and $13.2 million of performance bonds, principally related to workers’ compensation, liability and reclamation obligations.
- Management reported effective disclosure controls and procedures at quarter-end. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of the reported earnings and growth is attributable to the Lafarge acquisition versus organic volume, pricing and cost changes.
- Whether working-capital investment converts to cash as receivables are collected and inventory normalizes, and how planned capital expenditures affect cash needs.
- Debt levels, unused revolver capacity, interest costs and continued compliance with credit-facility and senior-note covenants.
- Progress and financial consequences of the IRS case, wallboard antitrust litigation and Nevada Cement environmental matter.
- Whether the construction recovery, announced wallboard pricing and frac sand investment deliver the outlook management described.