Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2010 (first quarter of fiscal 2011), compared with the three months ended June 30, 2009. The company produces gypsum wallboard, cement, recycled paperboard, concrete and aggregates for construction markets. Segment revenue and operating earnings include the company’s proportionate share of its cement joint venture; consolidated financial statements account for the venture under the equity method.
Financial results
| Metric | 2010 quarter | 2009 quarter | Change |
|---|---|---|---|
| Consolidated revenue | $130.8 million | $127.8 million | +2% |
| Gross profit | $16.4 million | $19.7 million | −17% |
| Operating earnings, including proportionate joint-venture results | $23.7 million | $27.1 million | −13% |
| Earnings before income taxes | $14.7 million | $17.2 million | −15% |
| Net earnings | $10.5 million | $11.9 million | −12% |
| Diluted earnings per share | $0.24 | $0.27 | −11% |
| Operating cash flow | $15.6 million | $19.8 million | −21% |
In management’s segment presentation, gross revenue before freight and delivery costs, including the joint venture share, was $160.7 million, up 3%. Gross margin on consolidated revenue was approximately 12.6%, versus 15.4% a year earlier. Net interest expense declined 6% to $5.3 million; the estimated effective tax rate for the quarter was approximately 28%.
Segments and material changes
- Gypsum wallboard: Revenue rose 2% to $58.2 million; operating earnings increased 53% to $5.2 million, primarily on lower natural-gas and labor costs. Volume increased 2%, while average net price fell 2%.
- Cement: Revenue increased 1% to $62.5 million, but operating earnings fell 20% to $13.6 million. Sales volume rose 8%, while average net price declined 8% amid competitive pressure.
- Recycled paperboard: Revenue grew 28% to $28.7 million on 5% higher volume and a 20% increase in average price. Operating earnings decreased 25% to $3.8 million as recycled-fiber costs rose sharply and higher-margin gypsum paper made up a smaller share of sales.
- Concrete and aggregates: Revenue declined 23% to $11.3 million and operating earnings fell 79% to $0.3 million. Concrete volume declined 25%, reflecting weak market conditions, particularly in northern California.
Overall revenue growth was outweighed by higher operating costs and lower selling prices in most segments. Corporate general and administrative expense fell 14% to $3.7 million, and net interest expense also declined, partly offsetting weaker segment performance.
Cash, debt and liquidity
- Cash was $3.0 million at June 30, 2010, up from $1.4 million at March 31, 2010. Operating activities provided $15.6 million; investing activities used $2.6 million, including $3.2 million of capital expenditures; financing activities used $11.4 million.
- Total debt was $295 million: $285 million of senior notes and $10 million drawn on the bank facility. Debt declined from $303 million at March 31. Debt-to-capitalization was 39.4%, compared with 40.5% at March 31.
- Working capital was $87.0 million, down from $89.4 million, partly because the $10 million bank-facility balance was classified as current. The facility expires June 30, 2011; $330.8 million of borrowing capacity remained available, and management expected to arrange a replacement facility before expiry.
- The company reported compliance with debt covenants. The facility requires a funded-debt ratio of no more than 3.5 and interest coverage of at least 2.5. Management stated that operating cash flow and available borrowing capacity should cover anticipated needs for at least 12 months.
- Quarterly dividends were $0.10 per share; cash dividends paid were $4.4 million. Fiscal 2011 capital expenditures were estimated at $15–$20 million.
Outlook, risks and unusual items
- Management described 2010 as economically difficult, with residential and commercial construction at cyclical lows. It did not expect a significant wallboard-demand recovery during calendar 2010. It expected cement demand to remain pressured, while stimulus-related infrastructure activity might support demand later in the year. Concrete and aggregate prices and volumes were expected to remain depressed.
- Management expected recycled-fiber prices to exceed fiscal 2010 levels; natural-gas costs were expected to remain relatively consistent. Electrical costs could rise after prior-year credits expired, subject to a pending Oklahoma rate review. No earnings or revenue guidance was provided.
- The company performed an early impairment test on gypsum wallboard assets and goodwill because of weak segment earnings; it found no impairment and planned continued quarterly monitoring during fiscal 2011.
- In June 2010, the company received an IRS Notice of Deficiency covering fiscal 2001–2006, involving $71.5 million of taxes and penalties and approximately $98.7 million including interest. It had previously deposited $75 million and deposited the remaining $23.7 million in July 2010. It intends to seek a refund of the deposits and, if necessary, litigate. Management said the notice was substantially consistent with its accruals but could not predict the outcome or recovery.
- Key risks include construction-market cyclicality, commodity prices and input costs, seasonal weather, regulatory and environmental requirements (including potential greenhouse-gas rules), customer credit, and debt covenant or refinancing risk. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Reconcile the $130.8 million consolidated revenue figure with the $160.7 million segment gross-revenue presentation, which includes the company’s proportionate joint-venture share and is before freight and delivery costs.
- Track cement and paperboard margins: higher volumes and prices did not prevent lower segment earnings, owing to pricing pressure and rising recycled-fiber costs.
- Monitor progress toward refinancing the $350 million bank facility before its June 2011 maturity, covenant headroom, and actual borrowing availability.
- Review developments in the IRS dispute, including the treatment of the $98.7 million deposited and any eventual refund or settlement.
- Follow wallboard impairment assessments, construction-market demand, and the timing and scale of any stimulus-related infrastructure activity.