Vulcan Materials Company — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Vulcan is the largest U.S. producer of construction aggregates and also produces ready-mixed concrete, asphalt mix and cement.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $2,406.9 million | $2,405.9 million |
| Total revenues, including delivery revenues | $2,564.6 million | $2,558.9 million |
| Gross profit; gross margin | $283.9 million; 11.8% | $300.7 million; 12.5% |
| Operating earnings (loss) | $63.4 million | ($14.5 million) |
| Net earnings (loss); diluted EPS | ($70.8 million); ($0.55) | ($96.5 million); ($0.75) |
| Net cash from operations | $169.0 million | $202.7 million |
| Capital expenditures; free cash flow | $98.9 million; $70.1 million | $86.3 million; $116.4 million |
| Cash and cash equivalents at year-end | $155.8 million | $47.5 million |
| Total debt at year-end | $2,815.5 million | $2,718.2 million |
- 2011 EBITDA was $425.2 million, up 15% from $370.6 million. This non-GAAP measure included $86.1 million of gains from a business sale and legal settlement, partly offset by $15.2 million of restructuring and exchange-offer costs.
- Working capital was $456.8 million at year-end, versus $191.4 million in 2010. Vulcan had no bank-line borrowings at year-end; $63.8 million of its $600 million facility supported standby letters of credit. A portion of reported cash, $40.1 million, was held by a foreign subsidiary and not available for domestic operations unless repatriated.
- Debt-to-total-capital increased to 42.6% from 40.7%. Long-term debt carried a 7.30% weighted-average interest rate, excluding the bank line.
- Fourth-quarter 2011 net sales were $578.2 million and net loss was $27.9 million, or $0.22 per diluted share. Fourth-quarter operating loss was $5.5 million.
Changes versus the prior comparable period
- Net sales were essentially flat, but gross profit fell 5.6% and gross margin declined 0.7 percentage points. Cost of goods sold rose despite nearly unchanged sales.
- Net loss narrowed by $25.7 million; operating results improved by $77.9 million. The comparison benefited from a $46.4 million insurance recovery related to the prior-year Illinois Department of Transportation settlement and lower selling, administrative and general costs. Interest expense rose to $220.6 million from $181.6 million.
- Aggregates shipments declined 3%, while freight-adjusted pricing increased 1%; gross profit per ton was $2.14 versus $2.17. Diesel fuel unit costs rose 35%, and liquid asphalt costs rose 17%, reducing pretax earnings by $63.0 million.
- Operating cash flow decreased $33.7 million and free cash flow decreased $46.3 million. Cash increased mainly as financing and investing cash uses were lower year over year.
- The quarterly dividend was reduced from $0.25 per share to $0.01 beginning with the fourth quarter of 2011; the board declared another $0.01 dividend for first-quarter 2012.
Outlook, management commentary and material risks
- Management said it expected operating momentum to continue in 2012, assuming stable demand and continued pricing improvement, while emphasizing overhead reduction, debt reduction, liquidity improvement and asset divestitures. The filing provides no consolidated 2012 earnings forecast.
- In February 2012, Vulcan announced a Profit Enhancement Plan targeting a $100 million run-rate earnings effect within 18 months, in addition to previously announced annualized overhead savings exceeding $55 million. It also planned non-core asset sales targeting approximately $500 million in net after-tax proceeds over 12 to 18 months, with proceeds intended to reduce debt. These are targets subject to execution and timing risks.
- Construction demand remained weak and recovery uncertain. Single-family housing starts were historically low; private nonresidential contract awards showed some improvement. The expired federal transportation authorization had been extended only temporarily, creating uncertainty for state highway projects.
- Martin Marietta had made an unsolicited exchange offer of 0.50 Martin Marietta shares per Vulcan share and launched a proxy contest. Vulcan’s board rejected the offer as inadequate. Related litigation and shareholder suits were pending; associated costs and business disruption could be material.
- Other key exposures include high leverage and below-investment-grade credit ratings, interest expense, fuel and asphalt input costs, severe weather, competition, permitting and reserve access, environmental and legacy Chemicals-business liabilities, pension assumptions, and possible goodwill impairment. Goodwill was 38% of total assets; one reporting unit’s fair value exceeded carrying value by only 8% in the 2011 impairment test.
- Environmental remediation accruals totaled $12.0 million; asset retirement obligations were $154.0 million. The company said it could not reasonably estimate its liability for the Lower Passaic River matters or certain other litigation. A 2011 tax-related correction restated prior balance-sheet and equity amounts; management said it did not affect earnings or cash flows for the years presented and was not material to previously issued statements.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Progress and realized savings from the $100 million earnings initiative, and timing and net proceeds from planned asset sales.
- Whether aggregate volumes and pricing improve, and whether higher fuel and other input costs continue to pressure margins.
- Debt reduction, refinancing needs, covenant headroom, credit ratings and the sustainability of operating cash flow and liquidity.
- Outcome and costs of the Martin Marietta offer, proxy contest and related litigation, including any effects on employees or operations.
- Developments in goodwill impairment assumptions, pension funding, legacy environmental matters and other contingencies.
- Dividend policy after the reduction to $0.01 per share and the company’s capacity to maintain payments.