Vulcan Materials Company — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Vulcan is a U.S. construction-materials producer, principally aggregates, with concrete, asphalt mix and cement operations. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue | $702.0 | $736.2 | $1,189.2 | $1,229.4 |
| Gross profit | $100.8 | $122.3 | $93.7 | $123.2 |
| Operating earnings (loss) | $23.5 | $1.2 | ($37.7) | ($35.6) |
| Loss from continuing operations | ($7.1) | ($22.5) | ($71.7) | ($67.0) |
| Net loss | ($8.1) | ($24.0) | ($62.9) | ($62.7) |
| Diluted loss per share | ($0.06) | ($0.19) | ($0.49) | ($0.49) |
| Net interest expense | $70.9 | $43.7 | $113.2 | $87.0 |
- Q2 net sales fell 5%; shipments declined in all product lines except asphalt mix, while average selling prices rose across all major product lines. Aggregates shipments fell 9%, with severe April storms and flooding disrupting activity in several markets.
- Freight-adjusted aggregates prices increased 2.5%; asphalt mix and ready-mixed concrete prices each rose about 8%, and cement prices rose 2%. Diesel and liquid asphalt unit costs increased 43% and 17% in Q2, respectively, reducing pretax earnings by $19.2 million.
- Q2 segment gross profit was $102.8 million for aggregates, ($9.0) million for concrete, $8.3 million for asphalt mix and ($1.3) million for cement. Concrete’s 12% volume decline outweighed improved unit materials margin; asphalt mix benefited from 3% volume growth and higher prices.
- Q2 selling, administrative and general expenses fell $7.5 million year over year. First-half expenses fell $16.5 million, or 10%.
- First-half operating cash flow was $7.0 million, versus $18.7 million a year earlier. Capital expenditures were $51.5 million, resulting in company-defined free cash flow of negative $44.5 million, compared with negative $23.5 million. Q2 operating cash flow was negative $37.0 million.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $106.7 million; working capital was $471.4 million, compared with $206.4 million at December 31, 2010.
- Total debt, including short-term borrowings, was $2.891 billion, compared with $2.718 billion at year-end 2010. Debt was 42.7% of total capital, up from 40.7%; the covenant limit is 65%.
- In June, Vulcan issued $1.1 billion of notes: $500 million at 6.50% due 2016 and $600 million at 7.50% due 2021. Proceeds principally refinanced a term loan and revolving borrowings and funded tenders for existing notes. The tender and debt retirement generated $26.5 million of pretax interest expense, including premiums and write-offs.
- The $1.5 billion revolving credit facility expires November 16, 2012. At quarter-end, $100 million was drawn and $60.9 million supported letters of credit, leaving $1.339 billion available. Long-term debt ratings were BB/stable at S&P and Ba1/stable at Moody’s; both agencies had downgraded ratings earlier in 2011.
- Dividends declared were $0.25 per share in Q2 and $0.50 per share for the first half.
Changes, outlook and notable items
- Q2 continuing-operations loss improved from the prior year, but included the $26.5 million debt-retirement charge. The prior-year quarter included a $40 million charge for the Illinois Joliet Road settlement, plus related legal costs. Excluding the cited specific charges, management reported continuing-operations earnings of $9.4 million, or $0.07 per diluted share, versus $5.0 million, or $0.03, in Q2 2010.
- For the first half, lower volumes, higher fuel costs and reduced gains on asset sales contributed to a larger pretax loss. The 2011 period included a $25.5 million recovery related to the Illinois settlement; 2010 included a $39.5 million gain on sales of Virginia facilities.
- Management described conditions as challenging, citing weaker-than-expected demand, severe weather and flooding, and higher diesel costs. It noted improved pricing across segments and ongoing cost-control efforts. The filing gives no numerical full-year earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results; the business is seasonal, with the third quarter normally strongest.
- Legacy Chemicals operations remain discontinued. First-half discontinued-operations results included an $11.1 million gain on the 5CP earn-out and a $7.5 million insurer recovery in litigation; related liability, legal-defense and environmental-remediation costs continued.
- Material unresolved matters include perchloroethylene contamination and exposure cases, Florida concrete antitrust litigation, and the Lower Passaic River cleanup. The company said it could not determine the likelihood or reasonably estimate a loss range for several matters; no liability was recorded where losses were only reasonably possible or not estimable.
- The June 2010 comparative balance sheet was restated for deferred-tax errors described as immaterial to previously issued statements. The filing reports effective tax rates of 85.0% for Q2 and 52.0% for the first half of 2011, reflecting interim tax-estimation methods and benefits.
Important facts for investors to verify
- Whether shipment trends and weather disruptions improve, and whether pricing gains continue to offset fuel, asphalt and other cost inflation.
- The sustainability of cash generation: first-half operating cash flow was only $7.0 million against $51.5 million of capital spending and $64.6 million of dividends paid.
- Debt-service costs, refinancing execution and access to capital, particularly given the increased debt-to-capital ratio, below-investment-grade ratings and 2012 facility expiry.
- Potential outcomes and insurance recoveries for the listed lawsuits, environmental matters and former Chemicals liabilities; several exposures are not reasonably estimable.
- The effect of interim tax-rate estimates and unusual items on reported losses, and the distinction between GAAP results and management’s adjusted comparison.