Eagle Materials Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended March 31, 2011; comparisons are to fiscal 2010. The filing also reports fourth-quarter results. Eagle Materials manufactures cement, gypsum wallboard and recycled paperboard, and produces ready-mix concrete and aggregates.
Financial performance and liquidity
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Consolidated revenue | $462.2 million | $467.9 million | Down 1% |
| Gross profit | $35.6 million | $51.9 million | Down 31% |
| Operating earnings | $60.7 million | $79.2 million | Down 23% |
| Earnings before tax | $16.8 million | $39.3 million | Down 57% |
| Net earnings | $14.8 million | $29.0 million | Down 49% |
| Diluted EPS | $0.34 | $0.66 | Down 48% |
| Operating cash flow | $44.1 million | $64.6 million | Down 32% |
- Gross margin was approximately 7.7% of consolidated revenue. Net margin was approximately 3.2%.
- Cash and equivalents were $1.9 million; working capital was $104.3 million, versus $89.4 million a year earlier. Current assets were $174.6 million and current liabilities $70.4 million.
- Total debt was $287.0 million, down from $303.0 million. The company reported $2.0 million drawn on its $300 million credit facility and $288.8 million available. Debt-to-capitalization was 38.4%.
- Capital expenditures were $17.2 million; dividends paid were $17.6 million ($0.40 per share). Management expected FY2012 capital expenditures to be broadly consistent with FY2011.
- The filing’s segment table shows $579.4 million of gross segment revenue, including intersegment sales and the company’s proportionate share of its cement joint venture. This is not directly comparable to $462.2 million of consolidated revenue.
Material changes and segment trends
- Performance remained pressured by weak residential and commercial construction, depressed product prices and low industry utilization. Consolidated revenue was nearly flat, but operating costs rose 4% in the MD&A presentation and operating earnings declined.
- Cement: segment revenue fell 1% and operating earnings fell 21%; sales volume rose 3%, while average net price declined 6%.
- Gypsum wallboard: segment revenue fell 3% and operating earnings fell 10%; sales volume declined 5%. Production utilization was approximately 50%, and the Bernalillo, New Mexico plant remained idled.
- Recycled paperboard: segment revenue rose 16% on higher average selling prices, but operating earnings fell 18%. Recycled-fiber cost rose 64%, from $114 to $188 per ton, and higher-margin gypsum paper was a smaller share of sales.
- Concrete and aggregates: segment revenue fell 3% and operating earnings fell 57%; lower average prices outweighed higher volumes.
- The company recorded $10.7 million of other non-operating expense, principally an $8.9 million write-off after abandoning the planned Nevada cement expansion. The decision reflected environmental-rule costs and difficult market conditions. FY2010 included a $2.5 million write-off for a canceled Mountain Cement modernization.
- Fourth-quarter FY2011 net loss was $10.8 million, versus net earnings of $1.9 million in Q4 FY2010, with the FY2011 quarter including the write-offs.
Outlook, risks and contingencies
- Management anticipated U.S. cement consumption in calendar 2011 would be flat with 2010, with no significant near-term rebound in infrastructure spending. It expected concrete and aggregate pricing and volumes to remain low and wallboard consumption not to improve significantly during the remainder of calendar 2011.
- Management expected slightly improved residential housing conditions in FY2012, but not enough to materially lift wallboard industry utilization. Fiber prices were expected to remain elevated; natural-gas costs were expected to be relatively steady and electricity costs to rise in FY2012. These are expectations, not guarantees.
- Construction cyclicality, seasonality, weather, commodity pricing and fuel, energy, raw-material and transportation costs could materially affect demand and margins. Wallboard sales are concentrated: two customers represented approximately 20% of FY2011 wallboard sales.
- Environmental regulation is a significant uncertainty. Cement greenhouse-gas requirements and Portland cement hazardous-air-pollutant rules taking full effect in 2013 could require investment and raise costs. EPA proposals concerning coal combustion products could also affect synthetic gypsum used at the Georgetown wallboard plant.
- The IRS tax dispute is material: the company paid $97.9 million in taxes, penalties and interest relating to depreciation deductions for acquired assets and filed a federal lawsuit in May 2011 seeking recovery, plus interest. Recovery and final outcome were uncertain. The balance sheet reported a $9.1 million income-tax receivable; uncertain tax positions were $83.9 million.
- The EPA issued a Clean Air Act violation notice to Nevada Cement alleging permitting and reporting violations. Potential outcomes include penalties, capital expenditures and higher operating costs; the company said the outcome could not be determined. Mountain Cement also received a separate EPA information request.
- The company reported compliance with debt covenants at year-end. Its new credit facility matures in December 2015 and includes leverage and interest-coverage tests and other restrictive covenants. Management believed cash flow and available borrowing capacity were adequate for anticipated needs for at least 12 months.
Investor verification points
- Review the full financial statements and segment disclosures, especially the distinction between consolidated revenue and gross segment revenue.
- Track the IRS refund lawsuit, related tax receivable and uncertain-tax-position balances, and any cash or earnings impact from the resolution.
- Monitor Nevada Cement’s EPA matter, the separate Mountain Cement inquiry and the costs and timing of applicable environmental rules.
- Assess whether construction demand, wallboard utilization and selling prices recover, and whether fiber, energy and freight costs pressure margins further.
- Check subsequent filings for covenant headroom, debt maturities, liquidity, pension funding and any change in the dividend or capital-spending plans.
The filing reports unqualified audit opinions on the consolidated financial statements and internal control over financial reporting.