Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 31, 2011; filed February 9, 2012. Financial statements are unaudited. Amounts below are in millions of dollars unless noted.
Business context and results
Eagle Materials produces cement, gypsum wallboard, recycled paperboard, and concrete and aggregates. Its markets are cyclical and tied to construction activity. Cement and wallboard are principal businesses; cement segment results include the company’s proportionate 50% share of its Texas Lehigh joint venture.
| Metric | Three months ended Dec. 31, 2011 | Prior-year quarter | Nine months ended Dec. 31, 2011 | Prior-year period |
|---|---|---|---|---|
| Revenue | $123.6 | $103.9 | $378.2 | $366.8 |
| Gross profit | $12.5 | $7.8 | $25.6 | $37.8 |
| Gross margin | 10.1% | 7.5% | 6.8% | 10.3% |
| Net earnings | $2.9 | $5.5 | $9.7 | $25.7 |
| Diluted earnings per share | $0.07 | $0.12 | $0.22 | $0.58 |
| Operating cash flow | Not separately presented | Not separately presented | $43.7 | $38.1 |
| Capital expenditures | Not separately presented | Not separately presented | $22.9 | $11.7 |
Financial position and liquidity
- At December 31, cash was $3.7; working capital was $100.1, down from $104.3 at March 31, 2011. Current assets were $183.9 and current liabilities $83.9.
- Total debt was $280.9, compared with $287.0 at March 31, 2011. Debt-to-capitalization was 37.8%, versus 38.4%; net-debt-to-capitalization was 37.5%, versus 38.3%.
- Cash provided by operations of $43.7 less capital expenditures of $22.9 was approximately $20.8. The company paid $13.4 in dividends during the nine-month period.
- Borrowings under the $300 million bank facility were $84.0. The filing reports approximately $55 million of additional borrowing capacity after covenant and other debt constraints. It also reports $9.4 million of outstanding letters of credit in one section, but $10.2 million in another.
- The company said operating cash flow and available facility borrowings should cover anticipated operating needs, capital spending, dividends, and debt service for at least 12 months, subject to market conditions and covenant compliance.
Material changes and management commentary
- Quarterly revenue rose 19%, reflecting higher prices for most businesses and increased volumes across most segments. Nine-month revenue increased 3%.
- Quarterly gross profit improved, but nine-month gross profit fell 32%, principally due to higher fuel, power, fiber, and maintenance costs and a larger share of lower-margin purchased cement.
- Quarterly net earnings declined 47%; nine-month net earnings declined 62%. Nine-month results included an $8.1 million arbitration-related accrual and a $2.1 million debt-retirement loss. Earnings were also affected by higher manufacturing costs.
- Recycled paperboard operating earnings improved to $5.1 million for the quarter and $12.2 million year to date. Gypsum wallboard returned to a small quarterly operating profit of $0.2 million but recorded a $4.1 million year-to-date operating loss. Cement operating earnings were $15.5 million for the quarter and $39.4 million year to date; concrete and aggregates reported losses in both periods.
- Operating cash flow increased year over year, mainly because income-tax payments were lower; capital expenditures approximately doubled. Approximately $11.6 million of the nine-month capital spending was for Midwest land with mineral reserves.
- On December 16, the company repurchased about $88.1 million principal amount of senior notes, funding the purchases with bank-facility borrowings. The premium and related fees contributed to the $2.1 million debt-retirement loss. Management expected interest expense to decline subsequently as lower-rate facility debt replaced notes, and said it expected to reduce facility borrowings in the fiscal fourth quarter.
Outlook, risks, and unusual items
- Management described construction markets as weak and did not expect a significant increase in infrastructure spending in calendar 2012. It expected only a slight increase in U.S. cement consumption and no significant wallboard-demand improvement during the remainder of fiscal 2012; concrete and aggregate demand and prices were expected to remain low.
- Fiscal 2012 capital expenditures were estimated at $25 million to $30 million, approximately $10 million to $15 million above fiscal 2011. Management expected lower natural-gas costs and relatively stable electricity costs for the remainder of the fiscal year.
- The January 2012 arbitration decision awarded a claimant $6.9 million. Eagle accrued $8.1 million, including estimated claimant fees and company legal expenses; the claimant-fee estimate was uncertain. Payment was expected in the quarter ending March 31, 2012. A related state lawsuit remained pending, and its outcome was uncertain. Management did not expect the ruling to materially affect continuing operations.
- The company was seeking recovery of approximately $97.9 million, plus interest, paid in connection with an IRS dispute over depreciation deductions for acquired assets. It had filed a federal lawsuit and said recovery and the ultimate outcome could not be predicted. Separately, it received the $9.1 million income-tax receivable reported at year-end in January 2012.
- An EPA notice alleged Clean Air Act violations at Nevada Cement; potential consequences could include penalties, capital spending, and higher operating costs. The final outcome was not estimable. A separate EPA information request had been received by Mountain Cement.
- The company restated its June and September 2011 quarterly reports after determining that a prior-year $3.0 million accrual reversal should have been treated as a prior-period error correction, not as a reduction of current-period cost of goods sold. The restatement did not affect operating cash flow. Management identified a material weakness in disclosure controls concerning interim-period materiality assessments and said it enhanced controls.
- Additional risks include construction-market cyclicality and seasonality, commodity and energy-cost volatility, environmental and emissions regulation, facility interruptions, potential wallboard goodwill or asset impairment, and restrictive debt covenants. The company reported no wallboard impairment at December 31, 2011, but continued quarterly testing.
Important facts for investors to verify
- Reconcile the reported letters-of-credit amounts ($9.4 million versus $10.2 million) and confirm current available borrowing capacity under the credit facility.
- Track final arbitration fees and payment, and the status and possible exposure of the related state lawsuit.
- Monitor the IRS refund litigation and distinguish the disputed historical tax payment from the $9.1 million receivable collected in January 2012.
- Review the restated prior-quarter filings, the material weakness disclosure, and remediation of disclosure controls.
- Assess whether construction demand, wallboard pricing and utilization, input costs, and planned capital spending align with management’s outlook and covenant capacity.