Vulcan Materials Company — Q3 2012 Form 10-Q
Business context and period. Vulcan is a U.S. construction-materials producer, led by aggregates, with concrete, asphalt mix and cement businesses. This unaudited filing covers the quarter and nine months ended September 30, 2012. Results are seasonal and depend on construction activity; the company cautions that interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $728.9 million | $760.8 million | $1,958.9 million | $1,949.9 million |
| Gross profit | $126.9 million | $115.8 million | $254.8 million | $209.5 million |
| Gross margin (approx.) | 17.4% | 15.2% | 13.0% | 10.7% |
| Operating earnings | $55.9 million | $106.7 million | $29.2 million | $69.0 million |
| Net earnings (loss) | $14.3 million | $20.0 million | $(56.1) million | $(42.9) million |
| Diluted EPS | $0.11 | $0.15 | $(0.43) | $(0.33) |
| Adjusted EBITDA | $146.0 million | $134.2 million | $320.9 million | $257.2 million |
- Cash flow: Nine-month operating cash flow was $93.8 million, down from $121.7 million. Capital expenditures were $49.4 million versus $77.3 million; reported free cash flow, a non-GAAP measure, was $44.3 million versus $44.4 million.
- Balance sheet and liquidity: September 30 cash was $243.1 million. Total debt was $2.813 billion, nearly unchanged from December 31, 2011; debt was 42.7% of total capital. The $600 million secured revolver had no borrowings, with $58.6 million of capacity supporting letters of credit. Current debt maturities were $285.2 million, including $134.7 million due in Q4 2012 and $150.5 million during the first half of 2013. Management expected to use existing cash for 2012 maturities and operating cash flow or the revolver for 2013 maturities.
- Interest and dividends: Nine-month net interest expense was $159.0 million, versus $163.8 million. The quarterly dividend declared was $0.01 per share, compared with $0.25 a year earlier.
Material changes versus comparable periods
- Q3 revenue declined 4%, but gross profit rose about 10% and gross margin expanded approximately 2.3 percentage points. Aggregates pricing increased 4%, unit cost of sales declined 1%, and same-store aggregates shipments fell 6%.
- Q3 operating earnings and net earnings were substantially below 2011, which included a $39.7 million gain on facility sales and a $20.9 million legal-settlement recovery. Q3 2012 included $4.3 million of restructuring and exchange-offer costs. Management presented comparable continuing-operations EPS of $0.14 versus a prior-year loss of $0.13 after adjusting for cited items.
- For nine months, revenue was nearly flat while gross profit improved. Adjusted EBITDA increased 25% to $320.9 million, aided by aggregates pricing, productivity and lower selling, administrative and general expenses (down 12%). GAAP net loss widened, including $43.3 million of exchange-offer costs and fewer gains/recoveries than in 2011.
- Volumes were mixed: nine-month aggregates shipments declined 1%, asphalt mix 6%, ready-mixed concrete rose 8%, and cement rose 23%. Concrete and cement growth reflected stronger private construction, particularly in Florida and Texas.
- The balance sheet showed much higher current debt maturities than at September 2011, although total debt remained broadly stable. The filing attributes the near-term maturity balance chiefly to notes due in 2012 and 2013.
Outlook, commentary, risks and unusual items
- Management said private residential and nonresidential construction indicators were improving and expected this to support demand over time. The July 2012 federal highway bill was described as providing greater funding stability; management said it had no material effect on Q3 shipments. No quantitative earnings or revenue guidance is provided.
- Management cited ongoing cost-control and productivity initiatives and expected no additional significant future costs from the 2012 Profit Enhancement Plan.
- Key uncertainties include construction and infrastructure spending, weather, product pricing, fuel and asphalt input costs, interest expense, below-investment-grade credit ratings, pension funding, permitting and access to aggregates reserves, and possible goodwill impairment. Debt ratings included S&P BB/stable and Moody’s Ba3/negative.
- Legal and environmental exposure: In Lower Passaic River matters, the EPA’s draft alternatives for part of the river had estimated total costs of $0.9–$2.3 billion; this is not an estimate of Vulcan’s share. Vulcan said its liability could not be reasonably estimated while studies, remedies and cost allocations remained unresolved. Other disclosed matters include perc-related litigation and a derivative shareholder suit; potential losses were not estimable for certain proceedings.
- Other unusual items: The company reported $43.3 million of 2012 costs responding to Martin Marietta’s unsolicited exchange offer, of which $43.0 million had been paid by September 30. It also corrected prior-period tax-balance errors relating primarily to the Florida Rock acquisition; the correction did not affect earnings or cash flows for years presented, but reduced retained earnings by $9.2 million in the restated opening balances.
Important facts for investors to verify
- Debt maturity schedule, planned funding of 2012–2013 maturities, and availability of the secured revolver.
- Whether aggregates pricing, productivity gains and improving private construction demand persist despite weaker public-construction volumes.
- Underlying earnings and cash generation excluding exchange-offer costs, asset-sale gains and prior-year legal recoveries.
- Developments in Lower Passaic River and other former-Chemicals litigation, including eventual remediation costs and Vulcan’s share.
- Dividend policy, liquidity needs, and the effect of below-investment-grade ratings and interest costs.