Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2010 (fiscal 2011 second quarter). Unaudited results; dollar amounts below are in millions unless stated otherwise. The company makes cement, gypsum wallboard, recycled paperboard, concrete and aggregates for construction markets.
Financial performance
| Metric | Three months 2010 | Three months 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Reported revenue | $132.1 | $138.2 | $262.9 | $266.0 |
| Gross profit | $13.5 | $20.4 | $30.0 | $40.1 |
| Gross margin | 10.3% | 14.8% | 11.4% | 15.1% |
| Operating earnings | $17.9 | $25.4 | $41.5 | $52.5 |
| Earnings before taxes | $10.3 | $14.9 | $25.0 | $32.1 |
| Net earnings | $9.6 | $10.4 | $20.2 | $22.3 |
| Diluted EPS | $0.22 | $0.24 | $0.46 | $0.51 |
Quarterly reported revenue fell 4% and net earnings fell 8%; six-month revenue was nearly flat while net earnings declined 10%. MD&A segment revenue figures include the company’s proportionate share of its cement joint venture and are therefore higher than reported consolidated revenue: $160.3 million versus $165.2 million for the quarter and $321.0 million versus $321.4 million for six months.
- Cash flow: Six-month operating cash flow was $27.0 million, down from $59.0 million. Capital expenditures were $5.5 million, versus $9.9 million; cash increased $6.6 million to $8.0 million.
- Liquidity: Current assets were $170.8 million and current liabilities $84.1 million; working capital was $86.8 million. Management said operating cash flow and available facility borrowings should cover anticipated needs for at least 12 months, subject to market and refinancing risks.
- Debt: Total debt was $295.0 million, including $10.0 million classified as current and $285.0 million in senior notes. Debt-to-capitalization was 38.7%, down from 40.2% at March 31, 2010. The company had $330.8 million available under its $350 million bank facility and was in covenant compliance.
- Dividends: $0.10 per share for the quarter; $0.20 per share for the six-month period. Cash dividends paid over six months were $8.8 million.
Material changes and segment trends
- Cement: Quarterly segment revenue fell 7% and operating earnings 38%; six-month operating earnings fell 30%. Lower prices, maintenance costs and weak construction demand weighed on results. Six-month cement volume rose 2%, but average price fell 8%.
- Gypsum wallboard: Quarterly revenue declined 11%, chiefly on a 15% volume decrease; six-month operating earnings improved 37% as lower operating expenses, including natural gas, partly offset lower volume. Management performed an impairment test and recorded no impairment, but will continue testing.
- Recycled paperboard: Revenue increased 36% for the quarter and 32% for six months, driven by higher volume and prices. Operating earnings nevertheless declined 12% and 19%, respectively, as recycled-fiber costs rose and higher-margin gypsum-paper sales fell.
- Concrete and aggregates: Six-month revenue fell 16% and operating earnings 57%, reflecting lower volumes and prices. Quarterly operating earnings increased from a low prior-year base due to lower ready-mix costs.
Outlook, risks and unusual items
- Management described 2010 as a difficult year for construction. It did not expect significant wallboard-consumption improvement in the remainder of fiscal 2011; anticipated cement demand to remain weak and concrete and aggregate volumes and prices to stay depressed through the remainder of calendar 2010.
- Fiscal 2011 capital expenditures were expected to be approximately $15–$20 million. The expected full-year tax rate was approximately 25%.
- Operating cash flow was reduced by federal and state tax payments related to the Republic Asset Acquisition dispute. The company deposited approximately $98.7 million with the IRS for tax, penalties and interest, filed refund claims for that amount plus interest, and said it would litigate if claims were denied. Recovery and ultimate liability remained uncertain. Discrete tax benefits and an approximately $1.5 million adjustment to previously accrued IRS interest affected current-period results.
- The $10 million bank-facility borrowing was current because the facility expires June 30, 2011. Management expected to arrange a replacement facility before expiry, but disclosed no other committed external financing source and no assurance of refinancing if the facility were terminated.
- On October 5, 2010, the EPA issued a Clean Air Act violation notice to Nevada Cement alleging permit and reporting violations; potential penalties, capital spending and operating costs were not determined. Another subsidiary was responding to a separate EPA information request. The company also cited potential added costs from cement air-emissions rules and possible greenhouse-gas regulation.
- Other principal risks include prolonged construction weakness, commodity pricing and input-cost volatility, seasonality and weather, environmental regulation, production interruptions, and debt covenants. Management reported disclosure controls were effective.
Important facts for investors to verify
- Progress and terms of refinancing the bank facility before its June 2011 maturity, including availability and covenant headroom.
- Status of the IRS refund claims and any litigation, settlement, additional tax payments or accounting adjustments.
- Developments, possible penalties and remediation requirements in the Nevada Cement EPA matter and the other EPA inquiry.
- Wallboard demand, utilization, pricing and impairment-test assumptions, together with recycled-fiber and electricity costs.
- Whether segment earnings and cash generation stabilize despite weak construction markets and planned capital spending.