Vulcan Materials Company — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. Vulcan is a major U.S. producer of construction aggregates, asphalt mix and ready-mixed concrete, and a leading Florida cement producer. Results are seasonal and sensitive to construction demand.
Financial performance
Amounts below are in millions of dollars except per-share data, percentages and where otherwise noted.
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $743.2, down 4.5% from $778.2 | $1,972.6, down 6.1% from $2,100.3 |
| Net sales | $699.8, down 5.3% | $1,857.1, down 6.6% |
| Gross profit | $126.7 vs. $154.5; gross margin on net sales about 18.1% vs. 20.9% | $250.0 vs. $377.9; gross margin on net sales about 13.5% vs. 19.0% |
| Operating earnings | $50.4 vs. $82.7 | $14.9 vs. $147.1 |
| Continuing-operations earnings (loss), net | $10.6 vs. $47.9 | $(56.4) vs. $31.2 |
| Net earnings (loss) | $13.2 vs. $54.2; diluted EPS $0.10 vs. $0.43 | $(49.5) vs. $43.7; diluted EPS $(0.39) vs. $0.37 |
| EBITDA, non-GAAP | $149.8 vs. $184.7 | $305.8 vs. $449.8 |
| Operating cash flow | $109.1 vs. $185.4 | $127.8 vs. $354.8 |
| Free cash flow, non-GAAP | $89.2 vs. $151.3 | $65.7 vs. $260.6 |
At September 30, cash and cash equivalents were $82.5 million. Working capital was $260.8 million, compared with negative $113.4 million at December 31, 2009. Total debt, including current maturities, was $2.758 billion; debt was 40.6% of total capital, against a 65% covenant ceiling. The company had no short-term borrowings and reported $1.438 billion of available capacity under its $1.5 billion credit facility, after letters of credit.
Capital spending was $62.1 million for the first nine months, down from $94.2 million. Dividends declared were $0.25 per share in Q3 and $0.75 year to date, versus $1.23 year to date in 2009.
Material changes and operating drivers
- Q3 aggregates shipments fell 2.6%; aggregates prices were approximately flat year over year. Management attributed much of the volume decline to an Illinois construction-worker strike. Aggregates segment gross profit fell to $125.2 million from $133.3 million.
- Q3 concrete gross profit declined by $9.5 million, primarily because of lower selling prices; ready-mixed concrete shipments fell 4%. Asphalt mix gross profit declined by $7.9 million amid lower prices and higher liquid-asphalt costs; volumes fell 3%. Cement recorded a $1.8 million gross loss.
- For the first nine months, aggregates shipments fell 3%, while average price declined 1% and higher costs reduced earnings. Concrete shipments fell 7% and prices fell 11%; asphalt mix volume fell 3% and prices fell 6%.
- Q3 diesel unit costs rose 17%, reducing pretax earnings by $4.3 million; liquid asphalt unit costs rose 14%, reducing pretax earnings by $6.0 million. Excluding energy, Q3 aggregates unit cost of sales declined 2%.
- Operating cash flow for the first nine months fell substantially year over year, reflecting lower earnings and working-capital effects, including a comparative increase in receivables. Investing cash use was $42.2 million; financing cash use was $25.4 million.
Outlook, commentary, risks and unusual items
- No quantified full-year earnings or revenue guidance is provided. Management said trailing 12-month aggregates shipments had risen since February and asphalt shipments had been relatively stable; it cited improving underlying trends despite weak Q3 comparisons.
- Management said highway contract awards in Vulcan-served states rose 7% in the 12 months through September 2010, versus 3% in other states. It noted that 42% of highway stimulus funds obligated in its 10 largest revenue states had been spent by September, which management viewed as potential support for activity in the remainder of 2010 and 2011.
- Q3 production of aggregates equaled sales; management said cost and inventory discipline had reduced inventories over the prior two years and positioned operations to benefit from higher production if demand recovers.
- The nine-month results included a $40.0 million IDOT/Joliet Road settlement charge, plus related legal expense; a $39.5 million pretax gain on the sale of three Virginia aggregates facilities; $2.8 million of Nashville-area flood costs; and losses attributed to higher diesel and liquid-asphalt costs. The filing also reports a noncash charge related to donated real estate and an associated gain.
- Former Chemicals business discontinued operations contributed $6.9 million of after-tax earnings for the first nine months, including 5CP earn-out and insurer-recovery gains. Q3 discontinued-operations earnings included an insurer recovery, partly offset by legal, liability and environmental costs.
- Vulcan disclosed pending antitrust, environmental and perchloroethylene-related litigation. For the Passaic River and listed perc matters, the company said it could not determine the likelihood or reasonably estimate a loss range. It stated recorded accruals cover matters deemed probable and estimable.
- Credit ratings were lowered in August 2010: S&P long-term BBB-/stable and Moody’s Baa3/negative; Moody’s short-term rating was P-3/negative. A $450 million floating-rate term loan bears LIBOR plus a rating-dependent spread. The company also had $325.0 million of debt maturities due in Q4 2010.
- Other disclosed exposures include energy and hydrocarbon input costs, interest rates, pension funding, construction-cycle weakness, weather, infrastructure funding, permitting and reserve access, and environmental and legacy-business liabilities. Management reported effective disclosure controls and no material change in risk factors from the 2009 Form 10-K.
Most important facts for investors to verify
- Whether construction demand, shipment volumes and pricing recover, particularly in aggregates, concrete and asphalt mix, and whether stimulus-funded projects translate into sales.
- Whether input-cost inflation—especially diesel and liquid asphalt—can be passed through without further margin deterioration.
- How the Q4 2010 $325 million maturity is funded, and the effect of the floating-rate term loan, credit-rating changes and interest costs on liquidity.
- Whether operating cash flow and free cash flow improve from the weak first nine months, and whether working-capital needs remain elevated.
- The eventual outcomes and potential costs of IDOT insurance recovery, antitrust claims, Passaic River cleanup and perc litigation; several exposures have no reasonably estimable loss range in the filing.
- The extent to which reported earnings depend on asset-sale gains, discontinued-operation recoveries and tax benefits rather than recurring operating performance.