Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2012, the first quarter of fiscal 2013. Unaudited results are compared with the three months ended June 30, 2011. Eagle Materials produces cement, gypsum wallboard, recycled paperboard, concrete and aggregates for construction markets.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $154.0 million | $119.8 million |
| Gross profit / margin | $22.9 million / 14.9% | $4.4 million / 3.7% |
| Earnings before income taxes | $19.9 million | $1.0 million |
| Net earnings | $14.0 million | $0.8 million |
| Diluted EPS | $0.31 | $0.02 |
| Operating cash flow | $19.1 million | $1.1 million |
| Capital expenditures | $4.7 million | $3.8 million |
| Cash and total debt at period end | $3.7 million cash; $253.9 million debt | — |
Revenue rose 29%; management attributed the $34.2 million increase to higher sales volumes across businesses and higher wallboard prices. Gross margin improved substantially. Net interest expense fell 18% to $3.8 million, primarily reflecting lower debt balances after senior-note repurchases. The effective tax rate was approximately 30%, versus 22%, with the increase attributed mainly to higher earnings and a smaller relative impact from depletion deductions.
Cash increased by $19.1 million from operations, but debt repayments of $13.0 million, dividends of $4.5 million and capital spending contributed to a $2.8 million net cash decline. Working capital was $117.1 million. Total debt fell $13.0 million from March 31; debt-to-capitalization was 34.4%, versus 36.1%. The $300 million credit facility had $57 million drawn and $234 million nominally unused, but covenant limits left about $150 million available for additional borrowing. The company reported compliance with debt covenants.
Segment developments and changes
- Cement: Revenue increased 26% to $76.0 million, primarily on 26% higher volume; operating earnings rose 12% to $9.9 million. Increased volume gains were largely offset by about $8 million of major maintenance costs and related reduced production.
- Gypsum wallboard: Revenue increased 37% to $70.2 million; operating earnings improved from a $1.8 million loss to $14.0 million. The January 2012 price increase lifted average net price 32%; volume rose 11%. Lower energy and other operating costs also helped.
- Recycled paperboard: Revenue increased 6% to $30.3 million and operating earnings rose 74% to $5.3 million, chiefly due to lower operating costs.
- Concrete and aggregates: Revenue increased 8% to $12.9 million; operating earnings moved from a $0.2 million loss to a $0.2 million profit.
Outlook, risks and unusual items
- Management expected construction activity in calendar 2012 to exceed 2011, while describing residential and commercial construction as weak and infrastructure spending as constrained. Recovery varied by region; Texas and Mountain markets showed more improvement than Nevada and Illinois.
- Fiscal 2013 capital spending was projected at $40–$70 million, including $15–$20 million for maintenance and $25–$50 million to develop a Midwest sand-mining and processing opportunity. These are spending expectations, not earnings guidance.
- The business is cyclical and seasonal, and exposed to construction demand, product prices, regional conditions, weather, fuel and energy costs, transportation, competition, and plant outages. Wallboard industry utilization was described as approximately 50%.
- The Bernalillo, New Mexico wallboard facility remained temporarily idled. Management considered impairment unlikely based on improved industry conditions and current projections; the plant’s carrying value was $3.3 million. A permanent closure was not then contemplated.
- The company is seeking recovery of approximately $97.9 million paid to the IRS for disputed depreciation deductions related to the Republic Asset acquisition, plus interest. It had filed a federal lawsuit; the ultimate outcome and recovery are uncertain.
- An EPA notice alleges Clean Air Act violations at Nevada Cement. Potential outcomes could include capital spending, higher operating costs or penalties; the company said it could not determine the outcome or impact. A separate California lawsuit tied to an adverse arbitration ruling was dismissed with prejudice during the quarter, with no additional loss.
- New cement emissions requirements could materially increase capital and production costs; timing and final requirements remained subject to regulatory developments. The company also cited environmental, regulatory and covenant-compliance risks.
Important facts for investors to verify
- Whether stronger construction demand and wallboard pricing persist, and whether wallboard profitability is sustainable in a low-utilization market.
- Actual fiscal 2013 capital spending and returns from the proposed sand business, including permitting, construction and market-development progress.
- Developments in the IRS refund litigation and EPA proceedings, including potential financial exposure not quantified in the filing.
- Debt reduction, covenant headroom and liquidity against the upcoming $4.7 million senior-note maturity in November 2012 and other scheduled obligations.
- Whether planned cement maintenance, energy and raw-material costs, and regional demand affect subsequent margins and cash generation.