EXP

Eagle Materials Inc. - 10-Q Summary (Period Ended Dec 31, 2008)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended December 31, 2008, and the nine-month period ended on the same date. Eagle Materials Inc. is a diversified producer of basic building products, operating in four segments: Gypsum Wallboard, Cement, Recycled Paperboard, and Concrete and Aggregates. The company operates primarily in the United States and is heavily influenced by the cyclical nature of the residential, commercial, and infrastructure construction industries.

Key Financial Metrics

(All figures in thousands, except per share data)

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 20% for the three months and 18% for the nine months compared to the prior year periods. This was driven by significant volume declines across all segments due to the downturn in the residential housing market.
• Profitability Drop: Net earnings fell 50% for the quarter and 63% for the nine-month period. Operating earnings declined 30% (quarter) and 48% (nine months).
• Segment Performance:
  • Gypsum Wallboard: Operating earnings turned negative for the nine-month period ($-3.9M) compared to $49.3M in the prior year, driven by an 8% volume decline and a 15% drop in average sales prices.
  • Cement: Operating earnings declined 17% (quarter) and 21% (nine months) due to reduced sales volumes in Illinois, Nevada, and California markets.
  • Concrete and Aggregates: Operating earnings dropped 87% (quarter) and 66% (nine months) due to lower volumes and a shift in sales mix to lower-margin road base products.
• Interest Expense: Net interest expense increased significantly ($1.9M for the quarter, $10.1M for nine months) due to additional borrowings from a 2007 private placement and accrued interest on unrecognized tax benefits.

Outlook, Risks, and Contingencies

• General Outlook: Management expects the recession and credit crisis to continue impacting demand. Wallboard industry capacity utilization is estimated to be below 60% for the first half of calendar 2009. Cement demand is expected to remain soft due to state budget deficits and slowing non-residential construction.
• Dividend Reduction: The quarterly dividend was reduced from $0.20 to $0.10 per share, effective with the February 2009 payment.
• IRS Tax Dispute: The IRS has proposed adjustments regarding depreciation deductions on assets acquired in 2000. If sustained, this could result in approximately $27.6M in federal taxes, $5.7M in penalties, and interest for years 2001-2003. Potential exposure for subsequent years (2004-2007) could add another $37.0M in taxes and $24.1M in penalties. The company has paid a $45.8M deposit pending the outcome of an administrative appeal.
• Goodwill Impairment: Due to declining earnings in the Gypsum Wallboard segment, an impairment test was performed as of December 31, 2008. No impairment was recorded at this time, but testing will continue quarterly.
• Debt Repurchase: Subsequent to the reporting period (February 5, 2009), the company repurchased $100M of Senior Notes using borrowings from its Bank Credit Facility.

Investor Verification Checklist

• Verify the status and potential outcome of the IRS administrative appeal regarding the $45.8M tax deposit and potential additional liabilities.
• Monitor the Gypsum Wallboard segment for potential future goodwill impairment charges given the continued industry downturn.
• Assess the impact of the reduced dividend ($0.10/share) on shareholder returns and cash flow preservation.
• Review the company's ability to maintain debt covenants (interest coverage and funded indebtedness ratios) amidst declining operating earnings.
• Track the utilization of the $248M remaining capacity under the Bank Credit Facility following the recent debt repurchase.