Eagle Materials Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the three months ended June 30, 2011, the first quarter of fiscal 2012, with comparison to the three months ended June 30, 2010. Eagle Materials produces cement, gypsum wallboard, recycled paperboard, and concrete and aggregates, businesses exposed to construction cycles. The company operates four segments and accounts for its 50% Texas Lehigh cement joint venture using the equity method in its consolidated financial statements; segment results include its proportionate share.
Financial performance and position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Consolidated revenue | $119.8 million | $130.8 million | Down 8% |
| Gross profit | $7.4 million | $16.4 million | Down 55% |
| Operating earnings | $12.7 million | $23.7 million | Down 46% |
| Earnings before income taxes | $4.0 million | $14.7 million | Down 72% |
| Net earnings | $3.1 million | $10.5 million | Down 71% |
| Diluted EPS | $0.07 | $0.24 | Down 71% |
| Net cash from operating activities | $1.1 million | $15.6 million | Down $14.5 million |
Consolidated revenue in the table excludes the joint venture’s revenue. Management’s segment presentation, which includes Eagle’s proportionate share of the venture and is before freight and delivery costs, reports gross revenue of $152.1 million versus $160.7 million, down 5%. Gross margin on consolidated revenue was approximately 6.2%, versus 12.6% a year earlier. Net margin was approximately 2.6%, versus 8.0%.
Results weakened as cement and wallboard volumes fell and wallboard prices declined, while operating costs rose overall. A $3.0 million reversal of a prior-period wallboard repair accrual partially offset the earnings decline. Net interest expense was $4.6 million, down from $5.3 million, and the estimated effective tax rate was approximately 24% versus 28%.
Segment changes: Cement revenue was $60.1 million, down 4%, and operating earnings were $8.8 million, down 36%; lower volume and higher fuel, power, parts, and service costs weighed on results. Wallboard revenue fell 12% to $51.3 million and operating earnings fell 76% to $1.2 million, reflecting lower volume and selling prices and higher input costs, partly offset by the accrual reversal. Paperboard revenue was essentially flat at $28.7 million, but operating earnings declined 20% to $3.0 million as recycled-fiber and operating-supply costs increased. Concrete and aggregates revenue rose 5% to $11.9 million, while the segment reported a $0.2 million operating loss versus $0.3 million earnings.
Operating cash flow fell substantially, principally because earnings and joint-venture distributions were lower and receivables increased. Capital expenditures were $3.8 million; operating cash flow less capital expenditures was negative $2.7 million. Cash increased to $3.5 million, from $1.9 million at March 31, 2011. Working capital was $116.1 million. Long-term debt was $296.0 million ($11.0 million drawn on the bank facility and $285.0 million of senior notes), compared with $287.0 million at March 31. Management reported debt-to-capitalization of 39.2%, versus 38.4% at March 31. The company had $278.8 million available under its $300 million credit facility after borrowings and outstanding letters of credit; it was in compliance with debt covenants.
Outlook, risks, contingencies, and unusual items
- Management described 2011 as a difficult economic year and expected construction activity and infrastructure spending to remain weak. It anticipated U.S. cement consumption to be flat with 2010 and no significant wallboard-demand improvement during the remainder of calendar 2011. No earnings or revenue guidance was provided.
- Fiscal 2012 capital expenditures were estimated at approximately $15–$20 million. Management expected natural-gas costs to remain relatively steady and electricity costs to increase during fiscal 2012; recycled-fiber prices remained elevated.
- The company tested wallboard assets and goodwill because of weak segment earnings and found no impairment. It planned to continue quarterly impairment assessments during fiscal 2012 while industry conditions remained weak.
- The company sued to recover approximately $97.9 million of taxes, penalties, and interest paid in connection with the IRS’s Republic Asset Acquisition dispute, plus interest. The ultimate recovery was uncertain.
- An EPA notice alleges Clean Air Act violations at Nevada Cement’s facility. The filing says a resolution could require substantial capital expenditures, higher operating costs, and significant penalties; the outcome and impact could not be determined. Mountain Cement also received a separate EPA information request.
- Key risks include prolonged construction weakness, commodity-price competition and excess capacity, fuel, energy and raw-material costs, seasonal and weather-related disruptions, environmental regulation (including greenhouse-gas and cement-emissions rules), and debt covenant or refinancing constraints. Management stated that cash flow and available borrowing capacity should meet anticipated needs for at least twelve months, subject to market and covenant conditions.
- The $3.0 million wallboard accrual reversal was a favorable nonrecurring item in the quarter. Disclosure controls and procedures were judged effective.
Most important facts for investors to verify
- Whether construction demand, particularly wallboard and cement volumes and pricing, stabilizes as management expected.
- Whether operating cash flow recovers and receivables convert to cash, given the sharp year-over-year cash-flow decline.
- Whether the wallboard segment avoids impairment as weak conditions continue.
- The outcome and potential recovery from the IRS refund lawsuit, and the financial consequences of the Nevada Cement EPA matter.
- Debt-facility availability, covenant compliance, and the company’s ability to fund capital spending and dividends through the downturn.