Vulcan Materials Company — Q2 2010 Form 10-Q
Business context and period. Vulcan is a U.S.-focused construction materials producer, led by aggregates, with asphalt mix, ready-mixed concrete, and cement businesses. This unaudited report covers the quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods. Results are seasonal and depend on construction demand, weather, pricing, and fuel and raw-material costs.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenues | $736.2 million | $721.9 million | $1,229.4 million | $1,322.2 million |
| Net sales | $692.8 million | $681.4 million | $1,157.3 million | $1,249.3 million |
| Gross profit | $122.3 million | $145.8 million | $123.2 million | $223.4 million |
| Gross margin, based on net sales | 17.7% | 21.4% | 10.6% | 17.9% |
| Operating earnings (loss) | $1.2 million | $65.7 million | ($35.6 million) | $64.4 million |
| Net earnings (loss) | ($24.0 million) | $22.2 million | ($62.7 million) | ($10.6 million) |
| Diluted EPS | ($0.19) | $0.20 | ($0.49) | ($0.09) |
| EBITDA, non-GAAP | $97.3 million | $168.2 million | $156.1 million | $265.1 million |
- Cash flow: First-half operating cash flow was $18.7 million, down from $169.4 million. Capital expenditures were $42.2 million, producing negative free cash flow of $23.5 million versus positive $109.3 million in 2009. Cash and equivalents were $42.2 million at June 30.
- Debt and liquidity: Total debt, including current maturities and short-term borrowings, was $2.75 billion; debt to total capital was 40.4%. Current maturities were $425.3 million and commercial paper borrowings were $320 million. Working capital was negative $206.8 million. The $1.5 billion committed facility had $1.12 billion available after commercial-paper and letter-of-credit support.
- Other balance-sheet facts: Total assets were $8.50 billion and shareholders’ equity was $4.04 billion. The current ratio was below 1.0, reflecting current debt maturities and seasonal liabilities.
Material changes and operating drivers
- Q2 net sales rose 2%, and shipments increased in every major product line; aggregates shipments rose 6%, the first quarterly year-over-year increase in four years. However, aggregates average price fell 2% and segment gross profit declined to $122.0 million from $126.8 million.
- Higher input costs and weaker downstream performance pressured results: diesel unit cost rose 38% in Q2 and liquid asphalt unit cost rose 26%. Asphalt mix gross profit fell to $7.3 million from $21.7 million; concrete gross loss widened to $5.6 million from $2.2 million. Cement also reported a gross loss.
- First-half net sales fell 7%. Aggregates shipments declined 3%; concrete shipments declined 8% and pricing 12%; asphalt mix volume fell 3% and pricing 7%. The first-half aggregates gross profit decline was $53.0 million.
- Results included a $41.5 million Q2 pretax charge for the Illinois IDOT/Joliet Road settlement and related legal costs, and $2.8 million in Nashville flood charges. First-half results also included a $39.5 million pretax gain on the sale of three Virginia aggregates facilities and an $8.4 million gain related to donated real estate.
- Quarterly dividends were reduced from $0.49 to $0.25 per share beginning in Q3 2009; first-half 2010 dividends declared were $0.50 per share versus $0.98 in 2009.
Outlook, commentary, and risks
- Management described Q2 volume growth as encouraging and pointed to improving highway contract awards and single-family housing starts. It expected stimulus-funded highway work to support activity in the remainder of 2010 and 2011. The filing provides no formal earnings or revenue guidance.
- Management said first-half highway contract awards in Vulcan-served states increased 11% year over year, and reported that 38% of $26 billion in obligated federal highway stimulus funds had been spent through June 2010.
- Vulcan expected to seek insurance recovery for the IDOT settlement above its $2 million self-insured retention and estimated $1.8 million of flood charges might be recovered. Timing and amounts of recoveries were uncertain and would be recorded when realized.
- On July 7, 2010, after quarter-end, Vulcan closed a $450 million, five-year floating-rate term loan at LIBOR plus a 2.0% spread. Management expected to use it or other available borrowing capacity to address near-term debt maturities.
- Credit ratings carried negative outlooks: S&P BBB long-term and A-3 short-term; Moody’s Baa2 long-term and P-2 short-term. S&P had lowered the short-term rating in April 2010. Key risks include construction demand, competitive pricing, energy and asphalt costs, weather, debt and interest expense, pension funding, and legal and environmental claims.
- Environmental and product-liability matters relating to the former Chemicals business remain unresolved; the company said some losses could not be reasonably estimated. The filing also notes the ongoing Lower Passaic River matter and multiple perchloroethylene cases.
Most important facts for investors to verify
- Whether the post-quarter $450 million term loan was applied to the $425 million of near-term maturities, and the resulting debt, interest expense, and liquidity position.
- Whether the anticipated insurance recoveries for the IDOT settlement and Nashville flooding are received, and their amount and timing.
- Whether improving shipments and public-infrastructure awards continue, and whether pricing can recover rising diesel, asphalt, and freight costs.
- Cash generation and working-capital trends, given negative first-half free cash flow and negative working capital at June 30.
- Developments in environmental and litigation exposures, including claims for which the company said losses could not be estimated.
- The filing’s accounting note states that certain prior-period deferred-tax balances were corrected and 2009 comparative amounts were restated; review the related disclosures when comparing periods.