Eagle Materials Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2010; filed February 4, 2011. All financial amounts below are in U.S. dollars. The company produces cement, concrete and aggregates, gypsum wallboard, and recycled paperboard.
Financial performance and condition
| Metric | Three months ended Dec. 31, 2010 | Prior year | Nine months ended Dec. 31, 2010 | Prior year |
|---|---|---|---|---|
| Revenue | $103.9 million | $104.5 million | $366.8 million | $370.5 million |
| Gross profit | $7.8 million | $8.3 million | $37.8 million | $48.5 million |
| Gross margin | 7.5% | 8.0% | 10.3% | 13.1% |
| Operating earnings | $15.2 million | $14.3 million | $56.8 million | $66.8 million |
| Net earnings | $5.5 million | $4.7 million | $25.7 million | $27.0 million |
| Diluted EPS | $0.12 | $0.11 | $0.58 | $0.61 |
| Operating cash flow | Not presented for the quarter | $38.1 million | $81.7 million |
- Quarterly net earnings rose 17% and diluted EPS rose 9%; year-to-date net earnings and diluted EPS each declined 5%.
- Quarterly gross profit fell despite slightly lower revenue. For the nine-month period, operating costs rose 4% while revenue increased 1%, contributing to lower gross profit and operating earnings.
- Cash and cash equivalents were $4.1 million at December 31, 2010, versus $1.4 million at March 31, 2010. Working capital was $93.4 million, up from $89.4 million.
- Total debt was $290 million, down from $303 million at March 31, 2010. Debt-to-capitalization was 38.2%, versus 40.2%. The company reported compliance with debt covenants.
- Capital expenditures were $11.7 million for the nine months. Dividends were $0.10 per share for the quarter and $0.30 year to date.
Material changes and operating trends
- Quarterly segment operating earnings improved in cement to $15.3 million from $13.4 million; the nine-month figure fell 18% to $41.0 million, primarily reflecting lower cement prices and higher fuel costs.
- Gypsum wallboard recorded a quarterly operating loss of $2.5 million, compared with a $2.3 million loss. Year-to-date earnings improved to $4.0 million from $2.5 million, aided by lower natural-gas costs. Year-to-date wallboard volume fell 5%.
- Paperboard revenue increased 23% year to date, supported by higher selling prices, but operating earnings declined 22% as recycled-fiber costs rose and higher-margin gypsum-paper sales weakened. The company said old cardboard container costs were up 81% year to date.
- Concrete and aggregates operating earnings fell 45% year to date to $0.9 million, with lower prices outweighing higher aggregate volume.
- Net interest expense declined 23% year to date, mainly reflecting debt repurchases in February 2010 and lower interest rates. The estimated fiscal 2011 tax rate was 19%, versus 26% for fiscal 2010, largely due to depletion benefits.
- Operating cash flow fell by $43.6 million year to date. Management attributed the decline principally to $29.5 million of federal and state tax payments related to the IRS matter and changes in operating assets and liabilities.
Outlook, risks and contingencies
- Management expected fiscal 2011 capital expenditures of approximately $15–$20 million and said operating cash flow and available credit should cover anticipated needs for at least the next 12 months. No quantified earnings or revenue guidance is provided.
- Management expected wallboard demand to remain weak through the rest of fiscal 2011, with industry utilization around 50% and limited near-term consumption improvement. Cement demand was expected to remain weak and broadly consistent with the prior fiscal year; concrete and aggregate prices and volumes were expected to stay historically low.
- Management cited elevated fiber prices, expected electricity-cost increases, and continued construction-market weakness. It expected natural-gas costs to remain relatively stable for the rest of fiscal 2011.
- The company amended and extended its $300 million credit facility to December 2015. At quarter-end, $5 million was drawn and $285.8 million was available; $9.2 million of letters of credit were outstanding. The facility includes financial covenants and restrictions, including on dividends.
- The IRS dispute concerns the Republic Asset Acquisition for tax years 2001–2006. The company deposited approximately $98.7 million for taxes, penalties, and interest, filed refund claims for the full amount plus interest, and said it would litigate if claims are denied. The ultimate recovery and outcome are uncertain.
- EPA issued a Clean Air Act violation notice to Nevada Cement, alleging permitting and reporting violations. Potential outcomes could include penalties, capital spending, and higher operating costs; the company said it could not estimate the outcome or financial impact. Mountain Cement received a separate EPA information request.
- A third-quarter impairment test found no impairment of gypsum wallboard assets or goodwill, but the company planned continued quarterly testing during fiscal 2011. Other significant risks include construction cyclicality and seasonality, product-price and input-cost volatility, environmental regulation, and debt covenant compliance.
Important facts for investors to verify
- Progress and potential financial impact of the IRS refund claims and related litigation, including any change in accrued interest or penalties.
- Resolution of the Nevada Cement EPA notice and the separate Mountain Cement inquiry, including possible compliance costs or penalties.
- Wallboard segment performance, utilization, pricing, and results of subsequent impairment assessments.
- Whether cash generation, debt levels, and covenant headroom remain adequate as construction markets and input costs evolve.
- Actual fiscal 2011 capital spending versus the $15–$20 million estimate and any change to the quarterly dividend.