Elkcorp (NYSE:ELK)
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ElkCorp (NYSE:ELK) announced today financial results for its second
fiscal quarter, ended December 31, 2006. Earnings from continuing
operations for the second quarter were $2.3 million, or $0.11 per
diluted share.
Second Quarter Overview
ElkCorp Consolidated
ElkCorp recorded revenue of $193.1 million, compared to $228.9 million
reported for the second quarter of fiscal 2006.
The Company reported income from continuing operations of $2.3
million, or $0.11 per diluted share, compared to $11.1 million, or
$0.54 per diluted share reported for the second quarter of fiscal
2006. The decline in income for the quarter was primarily due to lower
sales and production volumes in all key segments and a significant
increase in asphalt costs partially offset by improved product pricing.
On a non-GAAP basis, income from continuing operations, excluding $1.0
million, or $0.05 per diluted share, of stock-based compensation, was
$3.3 million, or $0.16 per diluted share, compared to $12.4 million,
or $0.60 per diluted share, for the second quarter of fiscal 2006,
which excludes $1.3 million or $0.06 per diluted share of stock-based
compensation. A reconciliation of GAAP to non-GAAP income from
continuing operations is included with this press release.
During the quarter the company incurred acquisition related expenses
of approximately $1.9 million after tax, or $0.09 per diluted share.
These expenses include fairness opinions completed by the financial
advisors to Elk and the Board of Directors Special Committee of
Independent Directors.
Premium Roofing Products
Revenue for Premium Roofing Products was $174.8 million, compared to
the $205.6 million reported in the second quarter of fiscal 2006.
Operating income was $14.7 million, or 8.4% of sales, compared to
$26.2 million, or 12.7% of sales, reported in the second quarter of
fiscal 2006. The decrease in operating income was primarily
attributable to a 20% decline in shingle and accessory sales volume,
lower production rates reducing period cost absorption into inventory
and a 27% increase in asphalt costs over the prior year. This was
partially offset by improved pricing, a positive adjustment for over
accrued end of the year customer rebates and reduced manufacturing
expenses. The lower volumes were a result of a continued decline in
the new home and reroof markets.
Freight costs improved over the prior year quarter due to lower fuel
costs and improvements in internal logistical processes which have
allowed for better utilization of rail transportation and warehouses,
particularly from the Edgerton, WI, facility.
Composite Building Products
Sales in the second quarter were $7.0 million, compared to $8.7
million recorded in the same quarter of fiscal year 2006. The sales
decline was primarily attributed to lower volumes that were affected
by a slower building products market and some delay in sales through
the winter buy program as we believe distributors waited for the
January launch of the CrossTimbers® VL board.
Operating loss for the second quarter was $2.5 million compared to a
loss of $1.4 million in the second quarter of fiscal 2006 and was
primarily attributable to reduced sales.
In January 2007, the company launched the CrossTimbers VL board on
time and with great acceptance in the market. The company is recording
sales for the product in January and has a backlog for the product.
Specialty Fabrics
Revenue declined to $9.0 million in the second quarter from $12.3
million in the same quarter last year. The decline was primarily due
to lower external roofing mat sales as a result of the decline in the
building products market.
Operating income was $1.5 million, or 17% of sales, compared to $1.4
million, or 11.1% of sales, for the prior year period reflecting
continued improved mix of higher margin specialty fabrics products.
During the quarter Elk entered into an agreement with a large
distributor in the flooring industry to exclusively market and
distribute Elk’s VersaShield™
flooring underlayment.
Financial Condition
At December 31, 2006, the contractual principal amount of ElkCorp’s
long-term debt, including the $26 million current portion of long-term
debt, was $201.3 million. Net debt (contractual principal debt minus
cash and short-term investments) was $172.3 million, and the net debt to
capital ratio was 33.7%. Liquidity consisted of $29.0 million of cash,
cash equivalents and short-term investments and $121.1 million of
borrowing availability under a $125 million committed revolving credit
facility expiring November 30, 2008. Long-term debt included $1.0
million for the net fair value of two interest rate swap agreements.
Business Overview
“As we anticipated, the slowdown of the new
home and reroof markets had a significant impact on our results for the
second fiscal quarter,” said Thomas Karol,
chairman and chief executive officer of ElkCorp. “We
continue to believe that the slowdown in the building products market is
short-term and is largely due to the uncertainty in the new home market.
We anticipate that the building products market will begin to rebound as
we see more certainty that a bottom has been reached in the new home
market.”
Mr. Karol continued, “We do believe that the
slowdown in the industry is a short-term event, however, during the
quarter we have focused our efforts on reducing costs and inventory
management. As we mentioned last quarter, we have adjusted the
production speeds in our shingle plants to approximately 70% to 75% of
capacity in order to avoid an excessive amount of inventory. Currently
our inventory level approximates 1.4 months of sales in a normal market.
Although our inventory is typically less than current levels, we believe
that when the market returns there will be a surge of orders that will
need to be filled quickly, as we have experienced coming out of previous
market downturns, and we want to be positioned to accommodate our
customers.”
“The composites business has been impacted by
similar market conditions as we’ve seen in
roofing. Like roofing, we have implemented several initiatives to reduce
manufacturing expenses and control inventories and expect these
initiatives to continue in the third fiscal quarter. However, losses in
this segment are likely to continue until the building products market
improves. In January we started shipping the CrossTimbers VL board with
our new patent-pending Sabre Clip™ hidden
fastening system which has received a great response in the industry and
already has a backlog. The appeal of the new board is that it’s
up to 40% lighter than other composite products yet does not sacrifice
the performance or strength characteristics and is offered at a price
point closer to that of treated lumber. Additionally, we enhanced our
hidden fastening system with the Sabre Clip, which reduces the need for
face fastening. We believe the introduction of these two innovative
products to our existing line will assist us in further penetrating the
composites market and offers homeowners a wider variety of products
customizable to their individual needs.”
Mr. Karol concluded, “We have also made some
significant in roads in our specialty fabric technologies business with
the exclusive distribution agreement with a large flooring distributor
for our new flooring underlayment product. This not only gives us
credibility in a market where we previously had little exposure but it
further validates the quality of our product. We have already begun to
sell our VersaShield flooring underlayment and anticipate seeing more
substantial sales over the next year.”
Earnings Outlook
The Company expects earnings for fiscal 2007 to be in the range of $1.79
to $1.87 per diluted share. However, there could be downside to this
guidance due to weakened markets, increased price competition and
confusion due to the extended process involving the sale of the company.
Use of Non-GAAP Financial Metrics
Effective in fiscal 2006, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 123R, which requires the company to
begin recognizing compensation expense relating to stock options and
changes the accounting for certain other elements of stock-based
payments. The press release contains income from continuing operations
and earnings per share information that exclude stock-based compensation
and accordingly, have not been calculated in accordance with GAAP. The
company has provided these metrics in addition to GAAP financial results
because it believes they provide a meaningful comparison between the
second quarters of fiscal years 2006 and 2007. We believe comparing the
results on a non-GAAP basis is important to understanding the Company’s
underlying operational results. However, these metrics should not be
considered an alternative to GAAP and these non-GAAP measures may not be
comparable to information provided by other companies.
Safe Harbor Provisions
In accordance with the safe harbor provisions of the securities law
regarding forward-looking statements, in addition to the historical
information contained herein, the above discussion contains
forward-looking statements that involve risks and uncertainties. The
statements that are not historical facts are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of
1995. These statements usually are accompanied by words such as “optimistic,”
”vision,” “outlook,”
“believe,” “estimate,”
“feel confident,” “potential,”
“forecast,” “goal,”
“project,” “expect,”
“anticipate,” “plan,”
“predict,” “could,”
“should,” “may,”
“likely,” or
similar words that convey the uncertainty of future events or outcomes
and include the earnings outlook for the third quarter and fiscal year
2007. These statements are based on judgments the company
believes are reasonable; however, ElkCorp's actual results could differ
materially from those discussed here. Factors that could cause or
contribute to such differences could include, but are not limited to,
changes in demand, prices, raw material costs, transportation costs,
changes in economic conditions of the various markets the company
serves, failure to achieve expected efficiencies in new operations,
changes in the amount and severity of inclement weather, acts of God,
war or terrorism, as well as the other risks detailed herein, and in the
company's reports filed with the Securities and Exchange Commission,
including but not limited to, its Form 10-K for the fiscal year ending
June 30, 2006. ElkCorp undertakes no obligation to update or
revise publicly any forward-looking statements, whether as a result of
new information, future events or otherwise.
ElkCorp, through its subsidiaries, manufactures Elk brand premium
roofing and building products (90% of consolidated revenue) and provides
technologically advanced products and services to other industries. Its
common stock is listed on the New York Stock Exchange (NYSE: ELK). See www.elkcorp.com
for more information.
Condensed Results of Operations
($ in thousands)
Three Months Ended
Six Months Ended
December 31,
December 31,
2006
2005
2006
2005
Sales
$
193,114
$
228,949
$
411,222
$
444,806
Costs and Expenses:
Cost of sales
164,220
186,812
341,429
362,941
Selling, general & administrative
18,993
21,521
41,810
41,627
Merger related expenses
3,000
0
3,000
0
Operating Income from Continuing Operations
6,901
20,616
24,983
40,238
Interest expense, net
3,300
2,968
6,612
5,825
Income from Continuing Operations
Before Income Taxes
3,601
17,648
18,371
34,413
Provision for income taxes
1,279
6,567
6,649
12,805
Income from Continuing Operations
2,322
11,081
11,722
21,608
Income (Loss) from Discontinued Operations, Net
0
(66)
0
(66)
Net Income
$
2,322
$
11,015
$
11,722
$
21,542
Income (Loss) Per Common Share-Basic
Continuing Operations
$
0.11
$
0.54
$
0.57
$
1.07
Discontinued Operations
0.00
(0.00)
0.00
(0.00)
$
0.11
$
0.54
$
0.57
$
1.07
Income (Loss) Per Common Share-Diluted
Continuing Operations
$
0.11
$
0.54
$
0.57
$
1.05
Discontinued Operations
0.00
(0.00)
0.00
(0.00)
$
0.11
$
0.54
$
0.57
$
1.05
Average Common Shares Outstanding
Basic
20,498
20,270
20,450
20,227
Diluted
20,736
20,595
20,615
20,586
Financial Information by Company Segments
($ in thousands)
Three Months Ended
Six Months Ended
December 31,
December 31,
2006
2005
2006
2005
Sales
Premium Roofing Products
$
174,757
$
205,642
$
372,997
$
400,359
Composite Building Products
7,033
8,678
12,441
13,758
Specialty Fabrics Technologies
8,989
12,336
21,174
26,080
Surface Finishes
2,335
2,293
4,610
4,609
$
193,114
$
228,949
$
411,222
$
444,806
Operating Profit (Loss)
Premium Roofing Products
$
14,728
$
26,160
$
39,902
$
53,719
Composite Building Products
(2,455)
(1,398)
(4,689)
(5,518)
Specialty Fabrics Technologies
1,527
1,373
3,215
2,883
Surface Finishes
467
171
972
444
Corporate & Eliminations
(7,366)
(5,690)
(14,417)
(11,290)
$
6,901
$
20,616
$
24,983
$
40,238
Condensed Balance Sheet
($ in thousands)
December 31,
Assets
2006
2005
Cash and cash equivalents
$
1,762
$
5,385
Short-term investments
27,200
61,700
Receivables, net
130,164
137,725
Inventories
132,772
89,804
Deferred income taxes
9,334
8,287
Prepaid expenses and other
9,770
8,035
Discontinued operations
2,844
2,606
Total Current Assets
313,846
313,542
Property, plant and equipment, net
301,394
295,556
Other assets
36,462
29,704
Discontinued operations - noncurrent
1,770
2,251
Total Assets
$
653,472
$
641,053
December 31,
Liabilities and Shareholders' Equity
2006
2005
Accounts payable and accrued liabilities
$
59,956
$
86,270
Discontinued operations
560
881
Current maturities on long-term debt
25,972
971
Total Current Liabilities
86,488
88,122
Long-term debt, net
176,246
202,985
Deferred income taxes
51,024
53,150
Shareholders' equity
339,714
296,796
Total Liabilities and Shareholders' Equity
$
653,472
$
641,053
Condensed Statement of Cash Flows
($ in thousands)
Six Months Ended
December 31,
2006
2005
Cash Flows From Operating Activities:
Net income
$
11,722
$
21,542
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
13,497
12,766
Deferred income taxes
(1,275)
(842)
Stock-based compensation
4,805
4,040
Changes in current assets and liabilities, net of acquisition
(18,236)
(8,906)
Net cash from operating activities
10,513
28,600
Cash Flows from Investing Activities
Additions to property, plant and equipment
(12,332)
(9,538)
Acquisitions, net of cash acquired
(6,000)
(24,285)
Other investing activities, net
5,365
5,486
Net cash from investing activities
(12,967)
(28,337)
Cash Flows from Financing Activities
160
(4,139)
Net Increase in Cash and Cash Equivalents
(2,294)
(3,876)
Cash and Cash Equivalents at Beginning of Year
4,056
9,261
Cash and Cash Equivalents at End of Period
$
1,762
$
5,385
Reconciliation of GAAP to Non-GAAP Income from Continuing
Operations
($ in thousands, except per share data)
Three Months Ended
December 31,
2006
2005
GAAP Income from Continuing Operations
$
2,322
$
11,081
Stock-Based Compensation
970
1,321
Non-GAAP Income From Continuing Operations
$
3,292
$
12,402
Shares Used in Non-GAAP per share Calculation
20,736
20,595
GAAP Income per Diluted Share
From Continuing Operations
$
0.11
$
0.54
Stock-Based Compensation
0.05
0.06
Non-GAAP Income per Diluted Share
$
$
0.16
$
$
0.60
From Continuing Operations