Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Fiscal 2014 third quarter and first nine months ended December 31, 2013; comparisons are with the corresponding 2012 periods. The statements are unaudited. Dollar amounts below are in millions unless noted.
Business context
Eagle Materials produces cement, gypsum wallboard, recycled paperboard, concrete and aggregates for construction and energy markets. A November 2012 acquisition of Lafarge North America assets added cement, ready-mix, aggregates and related operations in Kansas, Missouri and Oklahoma; those assets materially affect year-over-year comparisons. The company also began operating a frac sand plant in Corpus Christi in fiscal 2014.
Financial performance
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Revenue | $228.8 | $164.7 | $708.5 | $483.4 |
| Gross profit | $49.8 | $31.3 | $155.9 | $86.6 |
| Gross margin | 22% | 19% | 22% | 18% |
| Earnings before income taxes | $48.8 | $27.3 | $152.0 | $73.3 |
| Net earnings | $31.6 | $18.0 | $101.6 | $49.9 |
| Diluted EPS | $0.63 | $0.37 | $2.03 | $1.07 |
For the quarter, revenue rose 39%, net earnings 76% and diluted EPS 70%; for the nine months, revenue rose 47%, net earnings 104% and diluted EPS 90%. Acquired assets contributed approximately $32.1 million of quarterly revenue and $126.0 million of nine-month revenue. Management attributed the remaining revenue growth mainly to higher cement and wallboard prices and increased volumes.
Segment operating earnings for the quarter were cement $26.0 million (up 57%), gypsum wallboard $30.7 million (up 82%), recycled paperboard $6.7 million (down 16%) and concrete and aggregates a $3.7 million loss (versus a $1.3 million loss). For the nine months, cement earned $77.5 million (up 76%), wallboard $90.2 million (up 91%), paperboard $19.3 million (down 8%) and concrete and aggregates recorded a $3.6 million loss.
Revenue and earnings improvement reflected acquisition contribution, better pricing and higher volumes. Paperboard results were pressured by recycled fiber, electricity and natural gas costs. Concrete and aggregates losses included frac sand start-up costs of $2.1 million for the quarter and $3.6 million for the nine months, plus a $0.5 million California litigation settlement.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $144.0 million, versus $107.0 million. Working capital absorbed cash, particularly through a $19.5 million increase in inventories.
- Capital expenditures were $43.2 million; investing cash outflow was also $43.2 million, compared with $477.3 million in the prior-year period, which included the acquisition.
- Financing activities used $97.3 million, principally reflecting $97.0 million of credit-facility repayments. Cash increased $3.5 million to $7.4 million.
- At December 31, total debt was $392.3 million, including $200.0 million under the revolving facility and $192.3 million of senior notes. Debt-to-capitalization was 32.8%, down from 41.3% at March 31, 2013.
- The company reported $192.6 million of available credit-facility borrowings, net of letters of credit, and working capital of $179.2 million. The facility expires December 16, 2015. A $9.5 million senior-note tranche matures in October 2014.
- Nine-month interest expense, net, was $14.2 million, versus $11.1 million. A 100-basis-point increase on facility borrowings outstanding at quarter-end would add approximately $2.0 million of annual interest expense.
Outlook, risks and unusual items
Management expected construction activity, cement and wallboard demand to improve in calendar 2014, while noting recovery would vary by region and depend on U.S. economic growth. It expected stronger cement markets in Texas, the Mountain and Central Plains regions than in Nevada and Illinois; Kansas City demand was expected to remain strong, while northern California concrete and aggregates demand was expected to be flat. The company did not expect frac sand revenue or earnings to be material to fiscal 2014 results.
Fiscal 2014 capital expenditure expectations were approximately $55–$60 million, including $20–$30 million for frac sand; sustaining expenditures were expected to be $20–$25 million. Management also reported a wallboard price increase effective January 2014 and expected moderate increases in fiber and energy costs. It stated that operating cash flow and available credit should meet anticipated needs for at least 12 months, subject to market conditions and covenant compliance.
- Litigation and tax: The company is pursuing a federal tax-refund lawsuit concerning approximately $97.9 million paid for earlier tax years. The court denied both parties’ summary-judgment motions and had not set a new trial date. Separate IRS assessments for 2007–2010, including estimated interest, were accrued at approximately $12.4 million. Ultimate outcomes and any recovery remain uncertain.
- Wallboard antitrust claims: The company and its subsidiary deny allegations of price fixing. Discovery was ongoing; management could not assess the likelihood or amount of potential loss.
- Environmental matters: An EPA notice alleges Clean Air Act violations at Nevada Cement; outcome and financial impact were undetermined. Environmental rules for cement kilns may require significant future capital spending and higher operating costs.
- Other risks: Results are seasonal and cyclical, and exposed to construction demand, regional conditions, weather, fuel and raw-material prices, transportation constraints, interest rates, regulation and debt covenants. The Bernalillo wallboard facility remained temporarily idled; management reported no impairment and anticipated possible future restart as demand improves.
Most important facts for investors to verify
- How much of earnings growth reflects durable pricing, volume and cost performance versus the acquired assets and prior-period comparison effects.
- Whether concrete and aggregates, including the frac sand operation, can improve profitability after start-up costs.
- Progress on debt reduction, the October 2014 note maturity, revolving-facility availability and covenant compliance.
- Developments in the IRS refund litigation, the accrued tax assessments, wallboard antitrust claims and Nevada Cement EPA matter.
- Whether construction recovery, input-cost trends and planned capital spending align with management’s outlook.