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| EXP > SEC Filings for EXP > Form 10-Q on 8-Feb-2013 | All Recent SEC Filings |
8-Feb-2013
Quarterly Report
EXECUTIVE SUMMARY
Eagle Materials Inc. is a diversified producer of basic building products used in residential, industrial, commercial and infrastructure construction. Information presented for the three and nine month periods ended December 31, 2012 and 2011, respectively, reflects the Company's four business segments, consisting of Cement, Gypsum Wallboard, Recycled Paperboard and Concrete and Aggregates. Certain information for Concrete and Aggregates is broken out separately in the segment discussions.
On November 30, 2012, the Company completed the previously announced acquisition (the "Acquisition") of certain assets of Lafarge North America Inc. ("Lafarge North America"), Lafarge Building Materials Inc., Quicksilver 2005, LLC and Lafarge Midwest, Inc. (together with Lafarge North America, the "Sellers"). The Acquisition was completed pursuant to an Asset Purchase Agreement (the "Asset Purchase Agreement") dated September 26, 2012 by and among the Company and the Sellers. The Purchase Price in the Acquisition is estimated to be approximately $453.4 million in cash, subject to certain post-closing adjustments to working capital.
The assets acquired by the Company in the Acquisition were used by the Sellers in connection with producing, marketing and selling Portland cement and concrete in Kansas, Missouri and Oklahoma, and include the following:
• two cement plants located in Sugar Creek, Missouri and Tulsa, Oklahoma;
• the related cement distribution terminals located in Sugar Creek and Springfield, Missouri; Omaha, Nebraska; Iola and Wichita, Kansas; and Oklahoma City, Oklahoma;
• two aggregates quarries near Sugar Creek, Missouri;
• eight ready-mix plants located in or near Kansas City, Missouri;
• certain fly ash operations conducted in the Kansas City, Missouri area; and
• certain related assets such as equipment, accounts receivable and inventory.
In most cases, we acquired ownership of these assets from the Sellers. However, the cement plant located in Sugar Creek, Missouri was leased by Lafarge North America pursuant to a long-term lease containing a purchase option exercisable by payment of a nominal fee. This lease, including the purchase option, was transferred to us at the closing of the Acquisition. In addition, we assumed certain liabilities in the Acquisition, including accounts payable, contractual obligations, reclamation obligations and other liabilities related to the Lafarge Target Business.
We operate in cyclical commodity businesses that are affected by changes in market conditions and the overall construction environment. Our operations, depending on each business segment, range from local in nature to national businesses. We have operations in a variety of geographic markets, which subjects us to the economic conditions in such geographic market as well as the national market. General economic downturns or localized downturns in the regions where we have operations generally have a material adverse effect on our business, financial condition and results of operations. Our Cement companies are located in geographic areas west of the Mississippi river and the Chicago, Illinois metropolitan area. Due to the low value-to-weight ratio of cement, cement is usually shipped within a 150 mile radius of the plants by truck and up to 400 miles by rail. Concrete and Aggregates are even more regional as those operations serve the areas immediately surrounding Austin, Texas, north of Sacramento, California and the Kansas City, Missouri area. Cement, concrete and aggregates demand may fluctuate more widely because local and regional markets and economies may be more sensitive to changes than the national markets. Our Wallboard and Paperboard operations are more national in scope and shipments are made throughout the continental United States.
We continue to pursue opportunities in businesses which are naturally adjacent to our existing core businesses and would allow us to leverage our core competencies and existing infrastructure and customer relationships. During fiscal 2012, we purchased land with mineral reserves in the Midwest for the purpose of developing a frac sand business to serve the oil services and other industrial end markets. We have finalized permitting and plant design and are now focused on plant construction. We anticipate additional capital expenditures in the range of $25 million to $50 million during fiscal years 2013 and 2014 to support development of our frac sand business. We are also continuing to increase our production of specialty oil and gas well cement. This specialty cement generates higher profit margins than other cement sales and we are among the few companies that produce it.
We conduct one of our cement operations through a joint venture, Texas Lehigh Cement Company LP, which is located in Buda, Texas (the "Joint Venture"). We own a 50% interest in the joint venture and account for our interest under the equity method of accounting. We proportionately consolidate our 50% share of the Joint Venture's revenues and operating earnings in the presentation of our cement segment, which is the way management organizes the segments within the Company for making operating decisions and assessing performance.
RESULTS OF OPERATIONS
Consolidated Results
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
2012 2011 2012 2011
(In thousands except per share) Change (In thousands except per share) Change
Revenues $ 164,743 $ 123,596 33 % $ 483,444 $ 378,222 28 %
Cost of Goods Sold (133,482 ) (111,125 ) 20 % (396,797 ) (352,661 ) 13 %
Gross Profit 31,261 12,471 151 % 86,647 25,561 239 %
Equity in Earnings of Unconsolidated Joint
Venture 8,852 7,776 14 % 24,070 21,160 14 %
Corporate General and Administrative (6,268 ) (4,928 ) 27 % (16,942 ) (13,518 ) 25 %
Acquisition and Litigation Expense (2,485 ) (9,117 ) (73 %) (8,859 ) (9,117 ) (3 %)
Other Income (Expense) (223 ) 591 (138 %) (427 ) 627 (169 %)
Interest Expense, net (3,836 ) (4,210 ) (9 %) (11,149 ) (13,352 ) (17 %)
Loss on Debt Retirement - (2,094 ) (100 %) - (2,094) (100 %)
Earnings Before Income Taxes 27,301 489 5483 % 73,340 9,267 691 %
Income Tax (Expense) Benefit (9,321) 2,408 409 % (23,429) 462 4971 %
Net Earnings $ 17,980 $ 2,897 521 % $ 49,911 $ 9,729 413 %
Diluted Earnings per Share $ 0.37 $ 0.07 429 % $ 1.07 $ 0.22 386 %
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Revenues. Revenues were $164.7 million and $123.6 million for the three month periods ended December 31, 2012 and 2011, respectively. The $41.1 million increase in revenues was due primarily to increased average sales prices in our gypsum wallboard segment and increased sales volumes in all our segments. Increased sales volumes in our cement and concrete and aggregates businesses during the three months ended December 31, 2012, as compared to December 31, 2011, was positively impacted by the Acquisition, which contributed approximately $7.9 million of revenues during the three month period ended December 31, 2012. Including the businesses acquired in the Acquisition, the impact of the increased net sales prices and sales volumes on revenues for the quarter ended December 31, 2012, as compared to December 31, 2011, was approximately $16.5 million and $24.6 million, respectively.
Revenues were $483.4 million and $378.2 million for the nine month periods ended December 31, 2012 and 2011, respectively. The $105.2 million increase in revenues was due primarily to increased average sales prices in our gypsum wallboard segment and increased sales volumes in all our segments. Increased sales volumes in our cement and concrete and aggregates businesses during the nine months ended December 31, 2012, as compared to December 31, 2011, was positively impacted by the Acquisition, which contributed approximately $7.9 million of revenues during the nine month period ended December 31, 2012. Including the business acquired in the Acquisition, the impact of the increased net sales prices and sales volumes on revenues for the quarter ended December 31, 2012, as compared to December 31, 2011, was approximately $44.7 million and $60.6 million, respectively.
Cost of Goods Sold. Cost of goods sold was $133.5 million and $111.1 million during the three month periods ended December 31, 2012 and 2011, respectively. The $22.4 million increase in cost of goods sold was related primarily to an increase in volumes, which increased cost of goods sold by approximately $23.6 million, partially offset by an approximate $1.2 million net decrease in operating costs. The increase in cost related to increased volumes was primarily related to our wallboard and cement businesses, which comprised approximately $12.5 million and $6.2 million, respectively. The decrease in operating costs in the third quarter of fiscal 2013, as compared to fiscal 2012, was primarily related to our gypsum wallboard and paperboard businesses and was approximately $2.5 million and $4.1 million, respectively, partially offset by an increase of approximately $4.9 million in our cement business.
Cost of goods sold was $396.8 million and $352.7 million during the nine month periods ended December 31, 2012 and 2011, respectively. The $44.1 million increase in cost of goods sold was related primarily to an increase in volumes, which increased cost of goods sold by approximately $57.6 million, partially offset by an approximate $13.5 million decrease in net operating costs. The increase in cost primarily related to volume increases in our wallboard and cement businesses of approximately $31.1 million and $23.9 million, respectively. Approximately $7.2 million of the increase in cost of sales related to volumes is due to the Acquisition. The decrease in operating costs for the nine months ended December 31, 2012, as compared to nine months ended December 31, 2011, was primarily related to our gypsum wallboard and paperboard businesses and was approximately $10.6 million and $10.5 million, respectively, partially offset by an increase of approximately $8.3 million in our cement business.
Gross Profit. Gross profit was $31.3 million and $12.5 million during the three month periods ended December 31, 2012 and 2011, respectively. The 151% increase was due primarily to increased average sales prices, increased sales volumes and the addition of the Lafarge Target Business, partially offset by increased cost of goods sold related to the increased sales volumes, as noted above.
Gross profit was $86.6 million and $25.6 million during the nine month periods ended December 31, 2012 and 2011, respectively. The 239% increase was due primarily to increased average sales prices, increased sales volumes and the addition of the Lafarge Target Business, partially offset by increased cost of goods sold related to the increased sales volumes, as noted above.
Equity in Earnings of Joint Venture. Equity in earnings of our unconsolidated joint venture increased $1.1 million, or 14%, for the three months ended December 31, 2012, as compared to the similar period in 2011. The increase is primarily due to increases in both the average net sales price and sales volume of cement. The impact of the increases in average net sales price and sales volumes on equity in earnings of unconsolidated joint venture during the three month period ended December 31, 2012 was approximately $1.0 million and $2.3 million, respectively, partially offset by increased cost of sales of approximately $2.3 million. The increase in cost of sales was primarily due to the increase in sales volumes, which increased cost of sales by approximately $1.5 million, and increased operating costs, primarily purchased cement and depreciation, which increased operating cost by approximately $0.2 million and $0.3 million, respectively.
Equity in earnings of our unconsolidated joint venture increased $2.9 million, or 14%, for the nine months ended December 31, 2012, as compared to the similar period in 2011. The increase is primarily due to increases in the average net sales price and sales volume. The impact of the increases in average net sales price and sales volumes on equity in earnings of unconsolidated joint venture during the nine month period ended December 31, 2012 was approximately $5.1 million and $2.1 million, respectively, partially offset by increased cost of sales of approximately $4.3 million. The increase in cost of sales was primarily due to the increase in sales volumes, which increased cost of sales by approximately $1.5 million and increased operating costs of $0.7 million in maintenance and $0.8 million in purchased cement.
Corporate General and Administrative. Corporate general and administrative expenses increased 27% and 25% for the three and nine month periods ended December 31, 2012, respectively, compared to the similar periods in 2011. The approximately $1.3 million and $3.4 million increase in corporate general and administrative expenses for the three and nine month periods ended December 31, 2012, respectively, as compared to 2011, is due primarily to increased long-term incentive compensation expenses. Long-term incentive compensation, which is comprised primarily of stock compensation, increased approximately $1.0 million and $2.9 million during the three and nine month periods ended December 31, 2012, respectively, as compared to similar periods in 2011. The increase in stock compensation expense during the three and nine month periods ended December 31, 2012, as compared to the similar period in 2011, is due our issuance of additional equity awards in June 2012, which increased expense during the second and third quarters of fiscal 2013, and our re-assessment of future satisfaction of performance conditions associated with certain stock option grants, which resulted in the reversing of approximately $1.3 million of previously recognized expense during the nine month period ended December 31, 2011.
Acquisition and Litigation Expense. Acquisition and litigation expense consists of expenses related to the Acquisition, the write-off of a greenfield cement opportunity that will no longer be pursued due to the Acquisition, legal fees related to our lawsuit against the IRS and a loss in an arbitration. Acquisition related expenses incurred in the three and nine month periods ended December 31, 2012 were $1.7 million and $5.2 million, respectively. Expense related to the write-off of the greenfield opportunity during the nine month period ended December 31, 2012, was $1.0 million. Legal fees related to our lawsuit against the Internal Revenue Service (the "IRS") were approximately $0.8 million and $2.7 million during the three and nine month periods ended December 31, 2012, respectively, while the loss in an arbitration (including legal expense) in the nine month period ended December 31, 2011 was $9.1 million. This expense represents the adverse ruling by an arbitration panel in January 2012 in a contract dispute between one of our aggregate mining subsidiaries and another mining company over the right to mine certain areas. The amounts owed under this adverse ruling were paid in March 2012. See Footnote (O) to the Unaudited Consolidated Financial Statements for more information regarding the lawsuit against the IRS.
Other Income. Other income consists of a variety of items that are non-segment operating in nature and includes non-inventoried aggregates income, gypsum wallboard distribution center income, asset sales and other miscellaneous income and cost items.
Interest Expense, Net. Interest expense decreased approximately $0.4 million and $2.2 million during the three and nine month periods ended December 31, 2012, respectively, as compared to the three and nine month periods ended December 31, 2011. The 9% and 17% decrease in interest expense for the three and nine month periods ended December 31, 2012, respectively, as compared to the similar three and nine month periods in the prior fiscal year, is due primarily to the repurchase of approximately $81.1 million in Senior Notes during December 2011, funded principally by additional borrowings under our Credit Facility, which resulted in both a lower outstanding debt balance, and lower average interest rates on our outstanding debt for most of fiscal 2013, as the interest rate on our Credit Facility is lower than the interest rate on the Senior Notes. As a result of the Acquisition, outstanding debt increased in December 2012, which likely will result in increased interest expense for the remainder of fiscal 2013 and fiscal 2014. The increase in interest expense related to our unrecognized tax benefit of approximately $0.1 million and $0.7 million for the three and nine month
periods ended December 31, 2012, respectively, as compared to similar periods in the prior year, is due primarily to our ability to participate in several state amnesty programs. During the quarter ended December 31, 2011, we filed amended returns with several states that offered amnesty for certain penalties and interest. Due to the amnesty relief, we received credits of approximately $0.4 million for interest accrued in prior periods.
Loss on Debt Retirement. This premium is related to the repurchase of certain of our Senior Notes during the quarter ended December 31, 2011. On December 16, 2011, we repurchased a total of approximately $88.1 million of our Series 2005A and Series 2007A Notes. This expense consists of a 2% premium paid on the repurchase, plus brokerage and miscellaneous fees related to the repurchase.
Earnings Before Income Taxes. Earnings before income taxes were $27.3 million and $0.5 million during the three month periods ended December 31, 2012 and 2011, respectively. The $26.8 million increase was primarily due to a $18.8 million increase in gross profit, a $1.1 million increase in equity in earnings of our unconsolidated joint venture, a decrease of $6.6 million in acquisition and litigation expense, a decrease of $0.4 million in interest expense, a $2.1 million decrease in loss on debt retirement, partially offset by increases of $1.4 million and $0.8 million in corporate general and administrative expenses and other expense, respectively.
Earnings before income taxes were $73.3 million and $9.3 million during the nine month periods ended December 31, 2012 and 2011, respectively. The $64.0 million increase was primarily due to a $61.1 million increase in gross profit, a $2.9 million increase in equity in earnings of our unconsolidated joint venture, a decrease of $2.2 million in interest expense, a decrease of $2.1 million in loss on debt retirement, partially offset by increases of $3.4 million and $1.1 million in corporate general and administrative expenses and other expense, respectively.
Income Taxes. The effective tax rate for the nine month period ended December 31, 2012 was approximately 32% compared to approximately (5%) for nine month period ended December 31, 2011. The effective tax rate during fiscal 2012 was positively impacted by our participation in state amnesty programs with the states of Arizona, Colorado and California, as well as the expiration of the statute of limitations for certain items related to the 2004 through 2006 tax years. These events were treated as discrete items in the tax provision and a benefit totaling approximately $2.5 million on an after-tax basis was recognized. The effective tax rate for the full 2012 fiscal year, excluding the discrete items, was approximately 22%. The expected tax rate for the full fiscal year is expected to be 32% in fiscal 2013. The increase in the effective tax rate during fiscal 2013 is primarily due to the reduction in the impact of our depletion deduction associated with increased earnings.
Net Earnings and Diluted Earnings per Share. Net earnings for the quarter ended December 31, 2012 of $18.0 million increased 521% from last year's net earnings of $2.9 million; while net earnings of $49.9 million for the nine month period ended December 31, 2012 increased 413% from last year's net earnings of $9.7 million. Diluted earnings per share for the three and nine month periods ended December 31, 2012 were $0.37 and $1.07, respectively, compared to $0.07 and $0.22 for the three and nine month periods ended December 31, 2011, respectively.
The following table highlights certain operating information related to our four business segments:
For the Three Months For the Nine Months Ended
Ended December 31, December 31, Percentage
2012 2011 Percentage 2012 2011 Change
(In thousands except per unit) Change (In thousands except per unit)
Revenues (1)
Cement (2) $ 74,935 $ 61,510 22 % $ 229,492 $ 194,208 18 %
Gypsum Wallboard 80,737 54,063 49 % 228,284 156,386 46 %
Recycled Paperboard 31,331 30,001 4 % 93,390 90,414 3 %
Concrete and Aggregates 14,201 10,250 39 % 41,335 36,032 15 %
Gross Revenues $ 201,204 $ 155,824 29 % $ 592,501 $ 477,040 24 %
Sales Volume
Cement (M Tons) (2) 818 700 17 % 2,530 2,191 15 %
Gypsum Wallboard (MMSF) 519 421 23 % 1,476 1,236 19 %
Recycled Paperboard (M Tons) 65 57 14 % 187 174 7 %
Concrete (M Yards) 143 112 28 % 421 391 8 %
Aggregates (M Tons) 639 463 38 % 2,101 1,846 14 %
Average Net Sales Prices (3)
Cement (2) $ 82.68 $ 80.02 3 % $ 82.17 $ 80.77 2 %
Gypsum Wallboard 120.55 94.86 27 % 119.60 92.35 30 %
Recycled Paperboard 480.51 527.42 (9 %) 498.16 519.20 (4 %)
Concrete 71.55 67.11 7 % 67.94 63.98 6 %
Aggregates 6.13 5.99 2 % 6.04 5.95 2 %
Operating Earnings
Cement (2) $ 16,615 $ 15,493 7 % $ 43,923 $ 39,392 10 %
Gypsum Wallboard 16,870 228 7299 % 47,356 (4,074 ) 1262 %
Recycled Paperboard 7,963 5,146 55 % 20,934 12,214 71 %
Concrete and Aggregates (1,335 ) (620 ) (115 %) (1,496 ) (811 ) (84 %)
Other, net (223 ) 591 (138 %) (427 ) 627 (168 %)
Net Operating Earnings $ 39,890 $ 20,838 91 % $ 110,290 $ 47,348 133 %
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(1) Gross revenue, before freight and delivery costs.
(2) Includes proportionate share of our Joint Venture.
(3) Net of freight and delivery costs.
Cement Operations. Cement revenues were $74.9 million for the three months ended December 31, 2012, which is a 22% increase over revenues of $61.5 million for the three months ended December 31, 2011. The increase in revenues during three months ended December 31, 2012, as compared to the similar quarter in 2011, is primarily due to a 17% increase in sales volumes, as well as a 3% increase in the average net sales price. The increase in sales volumes and average net sales price positively impacted revenues by approximately $9.9 million and $3.5 million, respectively, in the third quarter of fiscal 2013, as compared to the third quarter of fiscal 2012. The increase in sales volume was primarily due to the Acquisition, which positively increased revenue by $6.2 million, as well as increased construction activity in Texas and our Mountain region.
Operating earnings for the cement business increased to $16.6 million from $15.5 million for the third quarter of fiscal 2013 and 2012, respectively. The increase in operating earnings of approximately $1.1 million is due primarily to increased average net sales prices, which positively impacted operating earnings by approximately $3.7 million, as well as an increase in sales volumes, which positively impacted operating earnings by approximately $2.3 million. The increase in average net sales price and sales volumes was partially offset by increased operating costs during the three month period ended December 31, 2012, as compared to the similar period in 2011, of approximately $4.9 million, primarily related to increased maintenance, purchased raw materials and fixed costs of approximately $2.6 million, $0.8 million and $1.5 million, respectively, partially offset by decreased fuel and power costs of . . .
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