Eagle Materials Inc (EXP)

[Democritus_of_Abdera]

EXP’s current financial position...

EXP has a relatively strong financial position that has come about as a result of a dramatic reduction in capital expenditures. A major factor has been a slow down in the planned $200M Nevada Cement Plant modernization; the slowdown was initiated in the Spring of 2008. Expected capital expenditures for fiscal 2009 will be approximately $15-20M, compared to expenditures of $96.8M and $126.9M in FY2008 and FY2007, respectively.

Instead of capital improvements, EXP is positioning itself to paydown debt by converting Senior Notes to Bank Credit Facility obligations.

On February 5, 2009, we accepted for repurchase $93.0 million in aggregate principal amount of our Series 2007A Senior Notes for $88.3 million, plus accrued interest of $2.0 million, and $7.0 million in aggregate principal amount of our Series 2005A Senor Notes for $6.7 million, plus accrued interest of $0.1 million. The purchase of the Senior Notes was funded through borrowings under our Bank Credit Facility.

Before the restructuring its debt profolio, EXP had $400M in Senior Notes at a weighted annual interest rate of 5.87%. Now the $300M in Senior Notes has a weighted annual interest rate of 5.74%. The $95M credit facility has a variable interest rate of LIBOR + upto 150 basis points, where the current 6 month LIBOR is about 1.7%. Thus, I calculate that the annual interest expense from this debt is reduced from about $23.5M to $20.3M, a saving of about $0.8M/quarter.

In the Feb 5 CC, Mark Dendle, the CFO, explained the rationale for this restructuring in the following way:

In addition to lower cost borrowings, the purchase of the senior notes modestly reduces our outstanding debt and improves our financial flexibility, with a combination of fixed-term debt, variable revolving debt and cash, while at the same time maintaining a large amount of readily available liquidity.... (and Rowley in the Q&A)... [we] wanted to have the flexibility to not have a gross debt covenant but more of a net debt covenant. So switching over to having a piece of the term debt, a piece of variable revolving debt, as well as cash on the balance sheet, it allows [us] to handle any situation that may potentially come your way.

Retiring debt is a reversal of the general theme of increasing leverage that was extant just two years ago. In Q2 2008 EXP had issued $200M of the Senior debt to pay down the borrowings from the bank credit facility that had been used to buy back stock and maintain capital spending for a planned $200M modernization of the Nevada Cement plant. During the six month period ending the first week in October, 2007, EXP had purchased about 4M shares at about $38/share (about $150M total). At the time this was a good price which I, for one, thought was a good use of borrowed funds.

EXP is in compliance with all financial ratios and covenants at December 31, 2008. It has a cash balance of $47.8M and $126.2M of working capital. The net debt to capital ratio improved from 48% in the September quarter to 45% in the December quarter. EXP’s had operating earnings of $29.4M in the quarter ending December 31 and $87.6M for the past nine months. In the Feb 6 10-Q, EXP describes its financial condition in the following terms:

Based on our financial condition and results of operations as of and for the three and nine month periods ended December 31, 2008, along with the projected net earnings for the remainder of fiscal 2009, we believe that our internally generated cash flow, coupled with funds available under various credit facilities, will enable us to provide adequately for our current operations, declared dividends and capital expenditures through the end of fiscal 2009.... The Company does not have any off balance sheet debt except for operating leases. The Company does not have any transactions, arrangements or relationships with “special purpose” entities. Also, the Company has no outstanding debt guarantees.