Vulcan Materials Company — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Vulcan is a U.S. construction-materials producer, led by aggregates, with concrete, asphalt mix and cement operations. Results are seasonal and depend heavily on construction activity and weather.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $648.9 million | $657.5 million | $1,148.7 million | $1,113.8 million |
| Total revenues, including delivery | $694.1 million | $702.0 million | $1,230.0 million | $1,189.2 million |
| Gross profit | $105.9 million | $100.8 million | $127.9 million | $93.7 million |
| Operating earnings (loss) | $19.7 million | $23.5 million | $(26.6) million | $(37.7) million |
| Net loss | $(18.3) million | $(8.1) million | $(70.3) million | $(62.9) million |
| Diluted loss per share | $(0.14) | $(0.06) | $(0.54) | $(0.49) |
| Adjusted EBITDA (non-GAAP) | $127.3 million | $117.4 million | $174.8 million | $123.0 million |
- Gross margin on net sales was approximately 16.3% in Q2, versus 15.3% a year earlier; first-half gross margin was approximately 11.1%, versus 8.4%. These percentages are calculated from reported figures.
- Q2 aggregates gross profit increased $9.0 million, driven by improved productivity and lower costs; aggregates shipments declined 1% overall, while same-store shipments increased slightly. Lower non-aggregates segment gross profit, mainly due to higher liquid asphalt costs, partly offset the improvement.
- First-half aggregates gross profit rose $32.3 million, supported by 3% higher shipments and lower costs. Asphalt mix earnings weakened as volumes fell 4% and liquid asphalt unit costs rose 10%.
Cash flow, debt and liquidity
- First-half operating cash flow was $(3.1) million, compared with $7.0 million in 2011; free cash flow, as defined by Vulcan, was $(36.6) million versus $(44.5) million. Capital expenditures were $33.6 million, down from $51.5 million.
- Cash and cash equivalents were $158.3 million at June 30, 2012, including $50.0 million held by a foreign subsidiary, largely designated as permanently reinvested offshore.
- Total debt was approximately $2.814 billion, broadly unchanged from December 31, 2011. Debt was 42.9% of total capital; 99.5% was fixed-rate. Current maturities were $285.2 million, including $134.7 million due in Q4 2012 and $150.5 million due in the first half of 2013.
- The $600 million revolving credit facility had no borrowings outstanding; $65.7 million supported standby letters of credit. Availability can be below the stated facility amount because borrowing capacity depends on eligible receivables and inventory.
- Vulcan reported $616.5 million of current liabilities and $951.2 million of current assets. Long-term debt, excluding current maturities, was $2.528 billion.
Material changes, outlook and risks
- Q2 net sales decreased 1% year over year; first-half net sales increased 3%. Q2 net loss widened despite higher gross profit, largely because of $32.1 million of costs responding to Martin Marietta’s unsolicited exchange offer. The offer and proxy contest were enjoined by Delaware courts for four months; the takeover attempt ended during the quarter.
- Management said controllable costs declined $55 million in the first half. The Profit Enhancement Plan targets more than $100 million of annual EBITDA improvement at current volumes. Vulcan expected to achieve its 2012 goal and forecast about $2.9 million of further restructuring charges in the second half; total estimated plan costs were $8.87 million.
- Vulcan’s objective was $500 million of net after-tax proceeds from planned asset sales. Discussions with potential buyers were ongoing, but the company said the mix and timing of transactions were difficult to project.
- Management described private and public construction trends as positive and cited passage of a multi-year federal highway bill as supportive of infrastructure planning. No specific full-year earnings or revenue guidance was provided; the filing cautions that interim results may not indicate full-year performance.
- Key risks include construction-market cyclicality, seasonality and weather, infrastructure funding, energy and liquid asphalt costs, interest expense and below-investment-grade ratings, pension funding, environmental obligations, and possible goodwill impairment. Moody’s downgraded Vulcan’s long-term rating to Ba3/negative on July 12, 2012, after quarter-end.
- Legal and environmental contingencies include former Chemicals business claims and Lower Passaic River matters. The EPA’s draft alternatives for the river-wide cleanup estimated total costs of $0.9–$2.3 billion; Vulcan said it could not reasonably estimate its share. A separate focused river remediation action was estimated by the company to be immaterial and accrued.
- The company disclosed correction of prior-period tax-accounting errors, principally related to the Florida Rock acquisition. It restated the June 2011 balance sheet; the errors did not affect earnings or cash flows for periods presented and were not material to previously issued statements.
Important facts for investors to verify
- Whether operating cash flow becomes positive as seasonal working-capital needs and construction activity evolve.
- Progress and realized savings from the Profit Enhancement Plan, and whether asset sales approach the $500 million after-tax objective.
- Funding and refinancing of the $285.2 million current debt maturities, along with the effect of the Moody’s downgrade on borrowing costs and access to capital.
- Exposure, insurance recoveries and potential loss ranges for environmental and former Chemicals business litigation, particularly the Lower Passaic River proceedings.
- Underlying volume, pricing and cost trends by segment, separating recurring performance from exchange-offer costs, asset-sale gains and other unusual items.