Vulcan Materials Company — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Vulcan is a major U.S. producer of construction aggregates, asphalt mix, ready-mixed concrete and cement. Results are seasonal and depend heavily on construction activity.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $760.8m | $743.2m | $1,949.9m | $1,972.6m |
| Gross profit | $115.8m | $126.7m | $209.5m | $250.0m |
| Operating earnings | $106.7m | $50.4m | $69.0m | $14.9m |
| Continuing-operations earnings (loss) | $22.4m | $10.6m | ($49.3m) | ($56.4m) |
| Net earnings (loss) | $20.0m | $13.2m | ($42.9m) | ($49.5m) |
| Diluted EPS | $0.15 | $0.10 | ($0.33) | ($0.39) |
- Q3 net sales rose 2%, but gross profit fell about 9%; gross margin on net sales was approximately 16.2%, versus 18.1% a year earlier. Nine-month gross margin declined to approximately 11.5% from 13.5%.
- Q3 earnings included a $39.7m pretax gain on selling four aggregates facilities and a $24.1m insurer-arbitration award associated with the IDOT settlement. Higher diesel and liquid-asphalt costs reduced pretax earnings by $21.4m.
- For the first nine months, aggregates shipments fell 5%; higher selling prices partly offset lower volume and increased diesel costs. Ready-mixed concrete shipments fell 8%; asphalt-mix volume rose 1%. Diesel unit costs rose 39% year to date, and liquid-asphalt costs also increased.
- Interest expense was $50.7m for Q3 and $163.8m for the first nine months, up from $47.5m and $134.5m, respectively. Nine-month expense included $26.5m of charges related mainly to the June debt tender and retirement.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $121.7m, down from $127.8m. Capital expenditures were $77.3m, up from $62.1m; reported free cash flow, a non-GAAP measure, was $44.4m versus $65.7m.
- Cash and equivalents were $152.4m at September 30. Total debt was $2.82bn, with no short-term borrowings; debt was 42.1% of total capital, compared with 40.7% at year-end 2010. The covenant ceiling is 65%.
- In June, Vulcan issued $1.1bn of notes: $500m at 6.50% due 2016 and $600m at 7.50% due 2021. Proceeds refinanced debt, repaid revolving borrowings, funded a tender offer and supported general corporate purposes. Long-term debt’s weighted-average rate was 7.67% at quarter-end.
- Working capital was $637.8m, up from $206.4m at December 31, 2010. The $1.5bn credit facility had no borrowings and $1.439bn of available credit after letters of credit. Management planned to replace it with a $500m five-year asset-based facility, then projected to close in November 2011.
- Reported nine-month EBITDA, a non-GAAP measure, was $340.3m versus $305.8m; Q3 EBITDA was $193.9m versus $149.8m. These figures include material asset-sale and legal-recovery effects.
Changes, outlook and risks
- Management described business conditions as challenging, citing a fragile recovery, weak job growth and elevated energy-related costs. Improved pricing in most product lines helped offset cost pressure; SAG expenses declined $9.7m in Q3 and $26.2m year to date.
- The October 14, 2011 board declaration reduced the quarterly dividend from $0.25 to $0.01 per share, expected by management to improve annual cash availability by about $124m. No specific earnings or revenue guidance is provided in the supplied filing text.
- Credit ratings/outlooks weakened: S&P rated long-term debt BB/negative and Moody’s Ba2/negative; Moody’s had downgraded the rating from Ba1/stable. S&P and Moody’s short-term outlooks were negative; S&P later withdrew its short-term rating at Vulcan’s request.
- Risks include uncertain infrastructure funding and construction demand, energy and raw-material costs, interest expense and below-investment-grade ratings, pension obligations, environmental remediation and litigation, and possible goodwill impairment if construction recovery is delayed. Goodwill was $3.09bn; management had not identified impairment indicators but warned a material noncash write-down was possible.
- Legal matters include former Chemicals-business perc claims, the Florida antitrust litigation and Lower Passaic River cleanup proceedings. The company said outcomes and potential losses could not be determined or reasonably estimated for certain matters; some claims may be subject to insurance.
- The filing restated the September 30, 2010 balance sheet for previously identified deferred-tax errors that management said were not material to previously issued financial statements. The former Chemicals business remained in discontinued operations, with ongoing liability, legal-defense and environmental-remediation costs.
Important facts for investors to verify
- How much Q3 and year-to-date operating performance depended on the facility sale and IDOT insurance recoveries, and what underlying earnings look like excluding them.
- Whether pricing can continue to offset weak shipment volumes and elevated fuel and asphalt costs.
- Completion and terms of the planned $500m replacement credit facility, and the effect of higher debt costs and negative credit outlooks.
- Cash generation after capital spending and the actual liquidity impact of the dividend reduction.
- Developments in litigation and environmental matters, and whether a prolonged construction downturn could trigger goodwill impairment or increase covenant pressure.