Eagle Materials Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the fiscal second quarter and six months ended September 30, 2012, compared with the same periods in 2011. Eagle Materials operates Cement, Gypsum Wallboard, Recycled Paperboard, and Concrete and Aggregates businesses, serving cyclical construction markets.
Financial performance
| Metric | Three months ended Sep. 30, 2012 | Three months ended Sep. 30, 2011 | Six months ended Sep. 30, 2012 | Six months ended Sep. 30, 2011 |
|---|---|---|---|---|
| Revenue | $164.7 million | $134.8 million | $318.7 million | $254.6 million |
| Gross profit | $32.5 million | $8.7 million | $55.4 million | $13.1 million |
| Net earnings | $18.0 million | $6.0 million | $31.9 million | $6.8 million |
| Diluted EPS | $0.40 | $0.14 | $0.71 | $0.15 |
| Operating cash flow | Not presented separately | Not presented separately | $66.8 million | $27.5 million |
Revenue increased 22% for the quarter and 25% for the six-month period. Calculated gross margin rose to approximately 19.7% from 6.5% for the quarter and to 17.4% from 5.1% for the six months. Earnings growth reflected higher wallboard prices and volumes, increased sales volumes in most businesses, and lower interest expense. Acquisition and litigation expense was $5.7 million for the quarter and $6.4 million for the six months; the quarter’s charge included about $3.5 million in acquisition costs, $1.0 million for abandoning a greenfield cement project, and $1.2 million in IRS litigation fees.
Segment highlights: quarterly wallboard operating earnings improved to $16.5 million from a $2.5 million loss, on a 30% increase in average net price and 24% higher volume. Cement operating earnings rose 15% to $17.4 million; paperboard earnings rose 91% to $7.7 million. Concrete and Aggregates posted a $0.4 million quarterly operating loss.
Cash, debt, and liquidity
At September 30, 2012, cash was $8.1 million; current assets were $193.8 million and current liabilities $93.5 million. Working capital was $100.3 million, down from $114.8 million at March 31, 2012. Six-month capital expenditures were $8.6 million, and cash dividends paid were $9.1 million. Operating cash flow less capital expenditures was approximately $58.1 million, calculated from reported figures.
Total debt was $216.9 million, down from $266.9 million at March 31; this included $20.0 million drawn on the amended credit facility and $196.9 million in senior notes. The $400 million facility had $373 million of nominal unused capacity, although covenant limits left approximately $265 million of additional borrowing capacity. The company reported compliance with its financial covenants at September 30. Net interest expense for the six months declined 20% to $7.3 million.
Material changes, outlook, and risks
- Pending acquisition and equity offering: On September 26, Eagle agreed to acquire Lafarge cement, concrete, aggregates, and related assets in Kansas, Missouri, and Oklahoma for approximately $446 million in cash, subject to customary adjustments. Closing was expected in fiscal Q3 and remained subject to conditions and consents. A subsequent October 3 stock offering of 3.45 million shares generated approximately $154.4 million net proceeds; the company expected to fund the balance and expenses with credit-facility borrowings.
- Outlook and investment: Management expected 2012 construction activity to exceed 2011, while emphasizing continued weakness and regional variation. It anticipated fiscal 2013 maintenance capital spending of $15–$20 million and total capital expenditures of approximately $40–$70 million, including $25–$50 million for frac-sand development across fiscal 2013 and 2014. Management expected the full-year fiscal 2013 tax rate to be about 31%, versus 15% in fiscal 2012.
- Key operating sensitivities: Demand, selling prices, weather, regional construction activity, fuel, energy, raw-material, and transportation costs may materially affect results. Wallboard industry utilization remained below 60%. The company also cited seasonal results and potential environmental compliance costs, including changing cement-emissions requirements.
- Contingencies: Eagle is pursuing a refund lawsuit concerning approximately $97.9 million paid for earlier IRS assessments. For fiscal 2007–2010, the IRS assessed about $8.1 million of tax and $1.9 million of penalties, with estimated interest of $1.8 million; these amounts were accrued and the company intended to contest them. A Nevada Cement EPA Clean Air Act matter could require capital spending, higher operating costs, or penalties; outcome and impact were not predictable.
- Acquisition risks: The filing cautioned that the deal might not close, integration and assumed liabilities could exceed expectations, and acquisition financing would increase debt and interest-rate exposure. The acquired operations could also face significant emissions-control requirements.
Important facts for investors to verify
- Whether the Lafarge acquisition closed on the anticipated timetable and at what final price, and the resulting debt, shares outstanding, and covenant headroom.
- Whether improved wallboard prices and volumes, and broader construction recovery, persisted after the reporting period.
- Progress, costs, and expected returns for the frac-sand project and fiscal 2013 capital-spending plan.
- Developments in the IRS refund litigation, the 2007–2010 tax assessment, and the Nevada Cement EPA matter.
- Actual liquidity and covenant capacity after acquisition funding; reported facility availability is subject to covenant limits.