Vulcan Materials Company — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparative figures are for Q1 2010 unless otherwise noted. Vulcan is a major U.S. producer of construction aggregates, asphalt mix, ready-mixed concrete and cement. Results are seasonal, with the first quarter typically the weakest; management cautions that quarterly results may not indicate full-year performance.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total revenues | $487.2 million | $493.3 million |
| Net sales | $456.3 million | $464.5 million |
| Gross profit (loss) | $(7.1) million | $0.9 million |
| Operating loss | $(61.2) million | $(36.8) million |
| Continuing-operations loss | $(64.6) million | $(44.5) million |
| Net loss | $(54.7) million | $(38.7) million |
| Diluted loss per share | $(0.42) | $(0.31) |
| Operating cash flow | $44.1 million | $6.4 million |
| Capital expenditures | $24.2 million | $19.8 million |
| Free cash flow, company-defined | $19.8 million | $(13.3) million |
| EBITDA, company-defined | $30.8 million | $58.8 million |
- Gross margin was approximately negative 1.5%, compared with positive 0.2% a year earlier. Higher costs and lower volumes weighed on results despite production-efficiency improvements.
- Net cash increased to $63.2 million from $47.5 million at year-end 2010. Working capital was $147.0 million, down from $206.4 million at year-end, primarily reflecting seasonal increases in payables and other current liabilities.
- Total debt was approximately $2.733 billion, including $300 million of short-term bank borrowings. Debt-to-total-capital was 41.2%, versus 40.7% at December 31, 2010. The covenant ceiling is 65%.
- The $1.5 billion revolving bank facility had $1.139 billion available after borrowings and letter-of-credit support. The facility expires November 16, 2012.
- Quarterly dividends declared were $0.25 per share. Interest expense was $42.3 million, compared with $43.3 million.
Changes and operating drivers
- Revenue declined 1.2%; shipments fell in most product lines. Aggregates shipments declined 3%, with wet March weather disrupting activity in several markets. Freight-adjusted aggregates pricing was approximately flat year over year.
- Concrete and asphalt mix prices each rose about 4%. Concrete’s segment loss improved to $14.4 million from $16.1 million; asphalt mix recorded a $0.2 million loss versus $1.1 million of earnings.
- Aggregates gross profit fell to $10.7 million from $15.4 million, mainly on lower shipments. Cement posted a $3.2 million loss versus $0.5 million of earnings, largely due to scheduled maintenance.
- Diesel fuel and liquid asphalt unit costs rose 34% and 12%, respectively, reducing pretax earnings by $9.8 million. Management said aggregates efficiency gains and asphalt pricing offset much of the impact.
- Selling, administrative and general expenses fell to $77.5 million from $86.5 million; excluding a prior-year noncash donated-real-estate charge, management said these expenses were flat.
- Operating cash flow improved year over year, but included working-capital movements and lower pension contributions. Investing cash flow was a $10.9 million use, versus $28.7 million provided in Q1 2010, when asset-sale proceeds were substantially higher.
Outlook, unusual items and risks
- No specific earnings or revenue guidance was provided. Management cited challenging shipments, weather-related disruption and uncertainty in construction demand; public infrastructure funding and private construction activity remain important drivers.
- Q1 2011 included a $25.5 million pretax insurance-arbitration recovery related to the 2010 Illinois Department of Transportation settlement. Q1 2010 included a $39.5 million pretax gain on the sale of three aggregates facilities, making comparisons less favorable in 2011.
- Discontinued operations contributed $9.9 million after tax, including earn-out proceeds from the former Chemicals business and a $7.5 million pretax insurer recovery related to perchloroethylene litigation, partly offset by legal, liability and environmental costs.
- Short-term and long-term debt ratings were downgraded in March 2011. Vulcan reported that it no longer had access to the commercial-paper market; the long-term rating changes raised the spread on its $450 million floating-rate term loan to the 2.50% cap.
- Material uncertainties include pending perchloroethylene claims, Florida antitrust litigation and the Lower Passaic River cleanup matter. The company stated it could not determine the likelihood or reasonably estimate a loss range for several matters; no liability was recorded where losses were only reasonably possible or not estimable.
- Other risks include weather, construction spending and infrastructure funding, fuel and raw-material costs, interest rates, pension asset values, environmental obligations and below-investment-grade credit ratings. Management reported disclosure controls were effective and no material risk-factor changes from the 2010 Form 10-K.
- The March 31, 2010 balance sheet was restated for deferred-tax errors identified in 2010. The company said the errors were not material to previously issued financial statements; the restatement affected deferred taxes, goodwill, prepaid expenses and retained earnings.
Investor verification priorities
- Track shipment volumes, pricing and margins by segment, especially the effects of weather and construction demand.
- Assess liquidity and refinancing exposure, including the bank-facility expiration, rating downgrades, short-term borrowings and floating-rate term loan.
- Separate recurring operating performance from the insurance recovery, prior-year asset-sale gain and discontinued-operation earn-outs and recoveries.
- Monitor the status and potential financial exposure of material litigation, environmental matters and insurance recoveries; several loss amounts remain unestimable.
- Review cash conversion, working-capital seasonality, capital spending, pension funding and the sustainability of the dividend.