Vulcan Materials Company — Q3 2009 Form 10-Q
Period: Three and nine months ended September 30, 2009. Unaudited results; amounts below are in U.S. dollars. The company is a major U.S. supplier of aggregates and also produces asphalt mix, concrete and cement. Results are seasonal and depend heavily on construction activity.
Financial performance
| Metric | Q3 2009 | Q3 2008 | First 9 months 2009 | First 9 months 2008 |
|---|---|---|---|---|
| Total revenues | $778.2 million | $1,013.3 million | $2,100.3 million | $2,852.2 million |
| Net sales | $738.7 million | $958.8 million | $1,987.9 million | $2,696.6 million |
| Gross profit | $154.5 million | $200.8 million | $377.9 million | $600.5 million |
| Operating earnings | $82.7 million | $128.3 million | $147.1 million | $433.5 million |
| Continuing-operations earnings | $47.9 million | $59.8 million | $31.2 million | $215.5 million |
| Net earnings | $54.2 million | $59.1 million | $43.7 million | $213.7 million |
| Diluted EPS | $0.43 | $0.53 | $0.37 | $1.93 |
- Q3 gross margin was approximately 21%, essentially level with the prior-year quarter. Nine-month gross margin was approximately 19%, down from 22%.
- Aggregates shipments fell 20% in Q3 and 27% year to date. Aggregates pricing rose 2.4% in Q3 and 2.7% year to date, but lower volumes outweighed pricing gains.
- Q3 asphalt mix and concrete gross profit increased to $20.7 million from $12.6 million, principally as lower liquid-asphalt costs improved asphalt margins. Cement gross profit declined to $0.5 million in Q3; the segment recorded a $1.3 million gross loss year to date.
- Operating cash flow was $354.8 million for the first nine months, versus $278.2 million a year earlier. Capital spending was $94.2 million, compared with $294.9 million.
- At September 30, cash was $46.5 million; current assets were $885.5 million and current liabilities $675.8 million, giving working capital of $209.7 million. The filing reports working capital of negative $769.2 million at December 31, 2008.
- Total debt was $2.85 billion, down $694.8 million from December 31, 2008. Debt to total capital was 41.1%, versus 50.0% at year-end. Shareholders’ equity was $4.09 billion.
- Liquidity included $1.675 billion in committed bank lines, with $1.3295 billion reported available after commercial-paper support and letters of credit. Commercial paper outstanding was $286.4 million; cash dividends declared were $0.25 per share in Q3 and $1.23 year to date.
Changes versus comparable periods
- Q3 net sales declined 23% year over year; nine-month net sales declined 26%. Management attributed the weakness primarily to lower construction demand, reduced shipments and wet weather in some markets.
- Year-to-date continuing-operations earnings fell sharply, partly because the 2008 period included $73.8 million of operating earnings from required quarry-site divestitures. Lower volume was the principal underlying pressure; lower diesel costs partly offset it.
- Q3 diesel unit costs were 49% lower than a year earlier, adding $16.6 million to operating earnings; the 48% year-to-date decrease added $52.2 million.
- The company raised $520.1 million net from a June 2009 equity offering and issued $400 million of long-term notes in February. Proceeds were used primarily to reduce short-term borrowings and for general corporate purposes.
Outlook, risks and unusual items
- Management described construction conditions as challenging, with weak private construction and uncertainty about the timing and amount of a new federal highway program. Highway awards were up 5% year over year through September, but stimulus-funded work had been slow to reach construction in many Vulcan-served states.
- No specific earnings or revenue guidance is provided. Management said cost control and productivity efforts position the company to benefit if the economy and construction activity recover. It expects to target debt-to-capital of 35%–40% over the next three to five years and intends to maintain an investment-grade rating.
- Q3 included a $10.5 million pretax gain from an insurer settlement related to the Modesto litigation. Nine-month discontinued-operations results included $23.5 million of such insurance gains and $0.8 million from a Chemicals-business earn-out; discontinued operations contributed $6.3 million to Q3 net earnings and $12.4 million year to date.
- The continuing-operations tax benefit was $6.0 million in Q3 and $9.6 million year to date, versus tax expense in the comparable 2008 periods. The nine-month effective tax rate was a 44.5% benefit; management linked the unusual rate to lower earnings and the greater relative effect of certain tax items.
- Accounting items: from September 1, 2009, depreciation at the Newberry cement facilities changed from straight-line to units-of-production, increasing Q3 earnings by about $90,000. The filing also restated prior-period deferred-tax balances for errors; the corrections did not affect 2009 earnings or cash flows. A separate 2008 cash-flow correction reclassified $47.4 million between operating and investing activities without changing total cash flows.
- Risks and contingencies include construction-market weakness, stimulus timing, fuel and raw-material costs, interest rates, pension funding, environmental matters, and litigation. The company could not estimate potential losses for several legal matters, including certain former Chemicals-related claims. A Florida antitrust action filed in October 2009 names its subsidiary; Vulcan said it intended to defend the case. The Miami quarry also faced permit-related mining restrictions in parts of the Lake Belt.
- Moody’s assigned a negative outlook to the company’s long-term debt and commercial-paper ratings; Standard & Poor’s outlook was stable. Management reported effective disclosure controls as of September 30, 2009.
Important facts for investors to verify
- Whether stimulus-funded projects in Vulcan’s markets translate into completed work and improved shipment volumes.
- How much of reported earnings depends on insurance recoveries, earn-out proceeds, tax benefits and other nonrecurring items.
- Liquidity, refinancing needs and borrowing costs, including the high-coupon 2009 notes and outstanding commercial paper.
- Resolution and potential financial effects of the Lake Belt permitting issue, environmental and product-liability litigation, and the Florida antitrust case.
- Final purchase-price allocations for 2009 acquisitions and the effects of the prior-period deferred-tax restatements in subsequent filings.