Eagle Materials Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended March 31, 2012; filed May 25, 2012. The filing is an annual report, not a standalone calendar-quarter filing. Its fourth-quarter figures cover the three months ended March 31, 2012.
Business context
Eagle Materials manufactures and distributes cement, gypsum wallboard, recycled paperboard, ready-mix concrete and aggregates. These cyclical, seasonal businesses serve construction markets across the U.S.; cement, concrete and aggregates are particularly exposed to regional conditions. The company operated four cement plants, four active wallboard plants, one recycled-paperboard mill, nine concrete batch-plant locations and two aggregates facilities. Its Bernalillo, New Mexico wallboard plant remained idled.
Financial and operating performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $495.0 million | $462.2 million |
| Gross profit / gross margin | $40.5 million / 8.2% | $35.6 million / 7.7% |
| Operating earnings before corporate G&A and other corporate charges | $69.4 million | $60.7 million |
| Earnings before income taxes | $21.9 million | $16.8 million |
| Net earnings | $18.7 million | $14.8 million |
| Diluted earnings per share | $0.42 | $0.34 |
| Net cash from operating activities | $60.9 million | $44.1 million |
| Capital expenditures | $26.1 million | $17.2 million |
| Total debt at year-end | $266.9 million | $287.0 million |
Revenue rose 7%, reflecting higher average selling prices and increased volumes in most businesses. Net earnings increased 26%; the effective tax rate was 14.5%, versus 11.4% in FY2011, with both years affected by tax-related discrete benefits. Operating cash flow increased by $16.8 million. Cash was $6.5 million, working capital was $114.8 million, and the current ratio was approximately 2.5 at year-end. Cash flow less capital expenditures was approximately $34.8 million.
Segment operating earnings were $46.9 million for cement (up 3%), $6.3 million for wallboard (up from $1.2 million), $17.0 million for paperboard (up 41%), and a $1.1 million loss for concrete and aggregates (versus $0.8 million of earnings). Cement sales volume increased 7%; wallboard volume declined 2%; paperboard volume increased 6%; aggregate volume declined 13%. Wallboard’s average net selling price increased 8%, and paperboard’s increased 7%.
Fourth quarter: Revenue was $116.8 million, versus $95.4 million a year earlier. Gross profit was $14.9 million, compared with a $2.2 million gross loss; net earnings were $9.0 million, versus a $10.8 million net loss. Management attributed the improvement mainly to higher wallboard prices and cement volumes, favorable weather, and lower year-over-year cement shutdown costs.
Material changes and financing
- Total debt declined by $20.1 million, but the company repurchased $88.1 million of senior notes in December 2011 using its bank credit facility. It had $70.0 million drawn on the $300 million facility at year-end; although $221.0 million was nominally unused, covenant limits left approximately $100 million of additional borrowing capacity.
- The debt-to-capitalization ratio improved to 36.1% from 38.4%. The company reported compliance with its debt financial tests at March 31, 2012.
- Dividends were $0.40 per share for FY2012, or $17.9 million in total. No shares were repurchased under the public program; 14,883 shares were reacquired to cover employee option-exercise costs and withholding.
- Capital spending included approximately $11.6 million for Midwest land and mineral reserves intended for a proposed sand-mining and processing business serving oilfield and industrial customers.
Outlook, risks and contingencies
- Management described construction conditions as difficult and did not expect significant infrastructure-spending growth or a material wallboard-demand recovery in calendar 2012. It expected concrete and aggregates markets to remain soft and competitive. Industry wallboard utilization was about 50%.
- For fiscal 2013, management anticipated $25 million to $50 million of additional spending to develop the sand opportunity, beyond maintenance capital expenditures expected to be consistent with FY2012. Management anticipated lower interest expense after the senior-note repurchase and expected to reduce revolver borrowings; these are expectations, not guarantees.
- Key risks include construction-market weakness, commodity pricing and industry capacity, fuel, power and raw-material costs, weather and transportation availability, environmental rules (including greenhouse-gas and cement-kiln emissions requirements), and debt covenants. A 100-basis-point increase in rates on the year-end revolver balance would add approximately $0.7 million of annual interest expense.
- The company paid $97.9 million in federal taxes, penalties and interest relating to an IRS dispute over depreciation deductions for acquired assets and sued to recover the payment. It said recovery was uncertain; the filing also disclosed potential future federal and state tax payments.
- An arbitration ruling resulted in $6.9 million of damages plus approximately $1.2 million of attorneys’ fees and arbitration costs, paid in February 2012. A related state-court lawsuit remained pending; management said further material loss was remote but could not determine the outcome.
- EPA alleged Clean Air Act permitting and reporting violations at the Nevada cement plant. The company stated it had defenses and was seeking resolution; penalties, facility modifications and higher operating costs remained possible. A separate EPA information request concerned the Wyoming plant.
- A material weakness in interim-period controls over assessing materiality when correcting prior-period errors had been identified for the first three fiscal 2012 quarters. Management revised its review process and concluded disclosure controls and internal control over financial reporting were effective at March 31, 2012; the auditor gave an unqualified opinion on the annual financial statements and internal controls.
Important facts for investors to verify
- Whether improved FY2012 pricing and fourth-quarter performance persisted, particularly in wallboard, and how volumes and capacity utilization evolved.
- Actual capital requirements, permitting, customer demand and returns for the proposed sand business, against the stated $25 million to $50 million FY2013 spending range.
- Available revolver capacity under covenants, upcoming debt maturities, interest costs and compliance with credit-agreement tests.
- Developments in the IRS refund litigation and the Nevada EPA matter, related state lawsuit, and possible environmental compliance costs.
- Whether the remedial controls addressed the prior-period error materiality weakness effectively in subsequent interim reporting.