Eagle Materials Inc. — Form 10-Q summary
Reporting period: Three and six months ended September 30, 2011 (fiscal 2012 second quarter and first half). Filed November 4, 2011. The company produces cement, gypsum wallboard, recycled paperboard, concrete and aggregates. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended Sep. 30, 2011 | Year-over-year | Six months ended Sep. 30, 2011 | Year-over-year |
|---|---|---|---|---|
| Revenue | $134.8 | Up 2% | $254.6 | Down 3% |
| Gross profit / margin | $8.7 / 6.5% | $13.5 / 10.3% prior year | $16.1 / 6.3% | $30.0 / 11.4% prior year |
| Operating earnings | $16.8 | Down 6% | $29.5 | Down 29% |
| EBIT / margin | $12.3 / 9.1% | $13.5 / 10.2% prior year | $20.9 / 8.2% | $33.4 / 12.7% prior year |
| Net earnings | $6.0 | Down 37% | $9.1 | Down 55% |
| Diluted EPS | $0.14 | $0.22 prior year | $0.20 | $0.46 prior year |
| Net interest expense | $4.6 | $3.1 prior year | $9.1 | $8.4 prior year |
The segment revenue figures in management’s discussion include the company’s proportionate share of its cement joint venture and are not the same as consolidated revenue reported in the income statement.
- Cash flow: First-half operating cash flow was $27.5, versus $27.0 a year earlier. Capital expenditures were $7.5, leaving $20.0 of operating cash flow after capital spending. Cash increased to $10.7 from $1.9 at March 31, 2011.
- Liquidity and debt: Working capital was $114.6, up from $104.3 at fiscal year-end. Long-term debt was $285.0, all senior notes; there were no revolver borrowings. The company reported $289.8 available under its $300 million credit facility, after letters of credit. Debt-to-capitalization was 38.2%; management said it was in compliance with debt covenants.
- Other metrics: First-half dividends were $0.20 per share, or $9.0 in total. The effective tax rate for the first half was approximately 23%.
Changes versus the prior comparable period
- Quarterly revenue rose modestly, but gross profit and net income declined as operating costs grew faster than revenue. First-half revenue was broadly flat on the segment basis used in MD&A, while consolidated revenue fell 3%.
- Cement quarterly revenue increased 7% and operating earnings increased 25%; first-half cement operating earnings fell 7% on higher maintenance, fuel and power costs.
- Wallboard remained weak: first-half revenue fell 6%, and the segment reported a $1.3 operating loss, compared with $6.5 earnings a year earlier. Lower prices and volume and higher input costs contributed.
- Paperboard revenue rose 9% for the quarter and 4% for the first half, supported by higher prices, but first-half operating earnings declined 7% due to higher recycled-fiber and other costs.
- Concrete and aggregates first-half operating results turned to a $0.2 loss from $0.8 earnings, reflecting transportation costs and weaker aggregate volumes.
Outlook, commentary and material risks
- Management described 2011 as economically difficult, with residential and commercial construction at cyclical lows and infrastructure spending below expectations. It anticipated no significant increase in infrastructure spending or wallboard demand for the rest of fiscal 2012; cement consumption for calendar 2011 was expected to be flat with 2010.
- Management expected fiscal 2012 capital expenditures of approximately $15–$20 million and an effective tax rate of about 23%. It said operating cash flow and available credit should cover anticipated needs, debt service and dividends for at least 12 months, subject to market conditions and covenant compliance.
- Wallboard goodwill and asset impairment tests found no impairment, but the company planned quarterly testing through fiscal 2012 while industry conditions remained weak. A $3.0 million reversal of a prior-period accrual boosted wallboard first-half operating earnings. Second-quarter stock-option expense included a $1.3 million credit related to performance-condition estimates.
- The company is pursuing a federal lawsuit to recover $97.9 million of taxes, penalties and interest paid in connection with the IRS’s challenge to depreciation deductions for acquired assets. Recovery and timing are uncertain; the company said it could not predict the outcome.
- An EPA notice alleges Clean Air Act violations at Nevada Cement Company. Potential outcomes could include substantial facility spending, higher operating costs or penalties; the company said the impact could not yet be determined. A separate EPA information request went to Mountain Cement.
- Key exposures include construction-market cyclicality, commodity pricing, fuel, energy, fiber and transportation costs, seasonality and adverse weather, environmental requirements—including cement-emissions rules—and the possibility of impairment or covenant pressure. The company said it had no outstanding guarantees; it had $10.2 million of letters of credit and $10.3 million of performance bonds outstanding.
Important facts for investors to verify
- Whether wallboard pricing, demand and segment profitability stabilize, and the results of continued impairment testing.
- Developments in the IRS refund lawsuit and the EPA matter involving Nevada Cement, including any resulting cash, capital or operating impacts.
- Quarterly cement and other segment volumes, realized prices and input-cost trends against management’s outlook.
- Availability under the credit facility, covenant headroom, debt maturities and the company’s ability to fund capital spending and dividends in a prolonged downturn.
- How the $3.0 million wallboard accrual reversal and the $1.3 million option-expense credit affect comparability of reported segment and earnings trends.