Vulcan Materials Company — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009; unaudited. Vulcan is a U.S. construction-materials producer, principally of aggregates, with asphalt mix, concrete and cement operations. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $721.9 | $1,021.6 | $1,322.2 | $1,838.9 |
| Gross profit | $145.8 | $245.2 | $223.4 | $399.7 |
| Operating earnings | $65.7 | $238.5 | $64.4 | $305.2 |
| Continuing-operations earnings (loss) | $15.6 | $141.2 | $(16.7) | $155.7 |
| Net earnings (loss) | $22.2 | $140.8 | $(10.6) | $154.7 |
| Diluted EPS | $0.20 | $1.27 | $(0.09) | $1.40 |
| Gross margin | 20.2% | 24.0% | 16.9% | 23.0% |
| Operating margin | 9.1% | 23.3% | 4.9% | 17.6% |
Margins are calculated as gross profit or operating earnings divided by total revenue. Q2 discontinued-operations earnings included a $12.2 million pretax insurance recovery related to the Modesto matter; Q2 net income also benefited from lower diesel costs. The six-month loss from continuing operations contrasts with reported net loss partly because of discontinued-operations gains.
- Revenue and segment trends: Q2 net sales fell 29% year over year. Aggregates shipments declined 31%, while average aggregates pricing rose 3%. Asphalt mix and ready-mixed concrete shipments fell 30% and 35%, respectively. Cement revenue and gross profit also declined; cement recorded a $0.5 million gross loss in Q2.
- Cash flow: First-half operating cash flow was $169.4 million, versus $134.1 million in 2008. Investing used $50.2 million versus $5.0 million; financing used $85.7 million versus $12.7 million. Cash rose $33.5 million from year-end to $43.7 million. Capital-project and acquisition spending was reduced; property, plant and equipment purchases were $60.1 million versus $198.7 million.
- Liquidity and debt: June 30 cash was $43.7 million, with $6.8 million of medium-term investments. Working capital was $178.5 million, compared with a deficit of $769.2 million at December 31, 2008. Total debt was $2,993.9 million, down $553.9 million since year-end; debt-to-total-capital was 42.8%, versus 50.2%. The company had $1,675 million of committed bank lines, with $1,203.7 million available after borrowings, commercial-paper support and letters of credit. Management stated it believed resources were sufficient for expected requirements.
- Financing and shareholder items: Vulcan issued $400 million of notes in February at 10.125% and 10.375% coupon rates, and raised $520.1 million net in a June stock offering of 13.225 million shares at $41 per share. Proceeds were used primarily to reduce debt and for general corporate purposes. First-half interest expense rose to $88.0 million from $81.7 million. Dividends declared were $0.49 per share in Q2 and $0.98 for the half; the company announced an intention to reduce its dividend when it conducted the equity offering.
Material changes and management commentary
- The prolonged recession, weak construction demand and wet weather drove substantial volume declines and lower earnings. Aggregates cash fixed costs fell 17% in Q2 and 19% for the first half; average employment was down 14% year over year in the first half.
- Lower diesel costs supported operating earnings by $23.2 million in Q2 and $35.3 million in the first half. Improved aggregates pricing partly offset lower shipments. Asphalt margins recovered toward more normal levels as liquid-asphalt costs moderated.
- Comparisons with 2008 were affected by $73.8 million of operating earnings from required divestitures in the prior-year periods. The Q2 2009 effective tax rate was 38.2%; a second-quarter revision to the estimated annual tax rate reduced Q2 earnings by about $7.1 million. The first-half continuing-operations effective tax rate was 17.9%.
- Management cited increased state transportation bid activity and highway contract awards in May and June as evidence that federal stimulus funding was entering the economy. It expected construction activity from these awards to begin in the second half of 2009 and contribute meaningfully to aggregates demand in 2010. No specific company revenue or earnings guidance was provided.
- Management stated a target of reducing debt to 35%–40% of total capital over three to five years, while seeking to maintain an investment-grade rating. The bank-facility covenant requires debt to total capital below 65%.
Risks, contingencies and unusual items
- Demand and operating exposure: Results depend on construction activity, public infrastructure funding, private construction, weather, pricing, energy and hydrocarbon-based input costs, and seasonal patterns. Management noted results are typically strongest in Q3 and weakest in Q1.
- Credit and interest-rate risk: The company relies on bank commitments and commercial-paper access; it warned that lenders might not fund commitments promptly or fully. Moody’s assigned a negative outlook to long-term debt and commercial-paper ratings; S&P’s outlooks were stable after a long-term debt downgrade and commercial-paper outlook revision. Variable-rate borrowing costs could rise with LIBOR or a ratings downgrade.
- Legal and permitting matters: The Miami-area Lake Belt litigation again halted mining in areas covered by a January 2009 court order; Vulcan appealed, with oral argument scheduled for October 2009. The Corps had issued a Final Supplemental Environmental Impact Statement, with a permit decision pending. Other proceedings include environmental and insurance disputes, including the remanded R.R. Street case, and industrial-sand injury claims. The company said outcomes could not be predicted and some possible losses could not be reasonably estimated.
- Reserve investments: $6.8 million remained invested in Reserve funds affected by the 2008 suspension of redemptions and Lehman-related exposure. Valuation includes estimates for potential legal, accounting and litigation costs that could reduce distributions.
- Reporting correction: Prior 2008 cash flows were restated to correct classification between operating and investing activities. The correction reduced first-half 2008 operating cash flow by $47.4 million and changed investing cash flow correspondingly; total cash flows, earnings, balance sheets, liquidity and covenant compliance were unaffected.
- Other significant items: The 2009 stock issuance increased shares outstanding; the company reported 124,989,302 common shares outstanding at June 30. Goodwill was $3,091.5 million. The prior year included a $252.7 million cement goodwill impairment, recorded in 2008.
Important facts for investors to verify
- Whether stimulus-funded highway awards translate into actual project starts, shipment recovery and improved aggregates profitability in late 2009 and 2010.
- The pace of debt reduction, refinancing needs, borrowing costs, credit ratings and availability of committed credit facilities.
- The amount and timing of any dividend reduction following management’s announcement, and the impact of the June equity issuance on per-share results.
- Progress and outcomes in Lake Belt permitting and litigation, insurance recoveries, and other legal matters that could create unestimated liabilities.
- Whether the Reserve investments are recovered at the estimated value and within the expected timing, and how first-half earnings and cash flows compare after considering the unusual insurance gain and prior-year divestiture gains.