Vulcan Materials Company — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless noted. Vulcan is a U.S. construction-materials producer, led by aggregates, with asphalt mix, concrete and cement businesses. Results are seasonal and the company cautions that first-quarter performance is not necessarily indicative of full-year results. Dollars below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net sales | $464.5 | $567.9 |
| Total revenues, including delivery | $493.3 | $600.3 |
| Gross profit | $0.9 | $77.6 |
| Operating loss | $(36.8) | $(1.3) |
| Loss from continuing operations | $(44.5) | $(32.3) |
| Net loss | $(38.7) | $(32.8) |
| Diluted loss per share | $(0.31) | $(0.30) |
| Operating cash flow | $6.4 | $105.1 |
| Capital expenditures | $19.8 | $25.6 |
| Free cash flow (non-GAAP) | $(13.3) | $79.5 |
| EBITDA (non-GAAP) | $58.8 | $96.9 |
Gross margin was approximately 0.2% of net sales, versus 13.7% in Q1 2009. Operating margin was approximately negative 7.9%, versus negative 0.2%. Interest expense was $43.8 million, broadly flat year over year. The continuing-operations tax benefit was $34.2 million, with a reported effective tax rate of 43.5%; the filing says an alternative interim tax method was used.
Debt and liquidity
- Total debt was $2,726.4 million at March 31, 2010, versus $2,738.0 million at December 31, 2009 and $3,514.9 million a year earlier. Debt to total capital was 40.2%, compared with 50.2% a year earlier; the credit agreement limit is below 65%.
- Cash and cash equivalents were $35.9 million; restricted cash was $3.6 million. Current liabilities exceeded current assets by $143.1 million (negative working capital), compared with negative $113.4 million at year-end 2009.
- Commercial paper outstanding was $300 million. The company had a $1.5 billion committed credit facility, with $1,138.7 million reported available after support for commercial paper and letters of credit. The facility expires November 2012.
- $325.0 million of debt was due in Q4 2010, principally the 3-year floating-rate notes. Management expected to fund maturities through operating cash, commercial paper, bank lines or capital markets.
- Standard & Poor’s lowered the short-term debt rating to A-3 and assigned a negative outlook, and changed the long-term outlook to negative (BBB). Moody’s ratings were P-2 and Baa2, both with negative outlooks.
Changes and operating drivers
- Net sales fell 18%; aggregates shipments fell 14%. Management attributed the weak quarter to adverse snow and rainfall, soft private construction demand, higher energy costs and lower production. Aggregates’ average selling price rose 1%, with substantial variation by market.
- Aggregates gross profit declined to $15.4 million from $63.6 million. Concrete gross profit was a loss of $16.1 million; asphalt mix gross profit was $1.1 million. Cement gross profit improved to $0.5 million from a loss of $1.3 million.
- Diesel unit costs rose 48%, which management estimated reduced earnings by $0.03 per diluted share. Lower aggregates shipments reduced earnings by an estimated $0.18 per diluted share.
- Reported results included a $39.5 million pretax gain on selling three rural Virginia aggregates facilities and an $8.4 million gain related to donated real estate. The donation also generated a $9.2 million noncash selling, administrative and general expense; excluding that charge, such expenses declined 3%.
- Operating cash flow was pressured by pension contributions of $73.9 million, including a $53.9 million stock contribution. Management said the contribution, together with funding credits, should cover expected qualified-plan contributions through 2012.
- The quarterly dividend was $0.25 per share, down from $0.49 in Q1 2009. Q1 dividends paid were $31.6 million versus $54.1 million.
Outlook, risks and unusual items
- No quantified full-year earnings or revenue guidance is provided. Management said demand recovered in March: aggregates shipments were 4% above the prior-year month, and April shipments were 9% higher. Highway construction contract awards in Vulcan-served states rose 37% year over year in Q1. Management expressed optimism that stimulus-funded highway work and restored federal highway funding would support 2010 demand.
- Management emphasized uncertainty from construction spending, federal/state/local infrastructure funding, weather, pricing, competition, diesel and other energy costs, and interest rates. The business is seasonal, with the first quarter normally its weakest.
- Florida Lake Belt mining resumed around April 12, 2010 after a new permit was received March 3. A prior permit ruling had halted much of the region’s excavation; management considered the old-permit litigation moot after issuance of the new permit.
- Legal and environmental matters include former-chemicals perchloroethylene claims, Florida concrete antitrust litigation, the Joliet Road claim (over $40 million sought; loss considered reasonably possible but not estimable), and Lower Passaic River cleanup proceedings. The company said it could not estimate potential losses for several matters and recorded no liability for losses only reasonably possible or not estimable.
- The filing reports a prior-period correction of deferred-tax balances, with 2009 comparative balance-sheet figures presented as restated. It also reports a $4.1 million medium-term investment in Reserve funds, whose underlying Lehman securities were valued using estimates and were trading at approximately 21.5% of face value; timing and proceeds of remaining liquidation were uncertain.
Important facts for investors to verify
- Whether the March/April shipment improvement continued and translated into sustained volume and margin recovery, rather than reflecting weather or timing effects.
- The Q4 2010 refinancing or repayment plan for the $325 million maturity, and continued access to commercial-paper markets given the negative rating outlooks.
- Cash generation after pension contributions, seasonal working-capital needs, capital expenditures and dividends; note Q1 operating cash flow was only $6.4 million.
- The sustainability and comparability of earnings excluding the facility-sale gain and donated-real-estate items, and the impact of rising fuel and asphalt input costs.
- Developments and potential exposure in the listed litigation and environmental matters, including the Joliet Road claim and Florida Lake Belt permitting.
- Recovery value and timing for the Reserve medium-term investment, and the effect of the restated deferred-tax balances on comparisons.