Vulcan Materials Company — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; filed August 6, 2013. Financial statements are unaudited. Amounts below are in millions except per-share data, percentages, and where noted.
Business context and operating results
Vulcan is a U.S. construction-materials producer, led by aggregates, with concrete, asphalt mix, and cement operations. Results depend on construction demand and are seasonal and weather-sensitive; management notes that the third quarter is normally the strongest.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenues | $738.7 | $694.1 | $1,276.9 | $1,230.0 |
| Net sales | $696.1 | $648.9 | $1,200.6 | $1,148.7 |
| Gross profit | $132.9 | $105.9 | $150.6 | $127.9 |
| Operating earnings (loss) | $86.9 | $19.7 | $36.8 | ($26.6) |
| Continuing operations earnings (loss) | $30.1 | ($17.0) | ($31.5) | ($74.0) |
| Net earnings (loss) | $28.8 | ($18.3) | ($26.1) | ($70.3) |
| Diluted EPS | $0.22 | ($0.14) | ($0.20) | ($0.54) |
Q2 gross margin was approximately 19.1% of net sales, compared with 16.3% a year earlier. In the first half, it was approximately 12.5%, compared with 11.1%. Q2 operating earnings included a $23.0 million pretax gain on asset sales; prior-year Q2 included exchange-offer and restructuring costs.
Cash flow, debt, and liquidity
- First-half operating cash flow was a use of $45.3 million, versus a use of $3.1 million in 2012. Working capital was a major drag, including a $107.7 million increase in accounts and notes receivable.
- Capital expenditures were $60.0 million; company-defined free cash flow was negative $105.4 million, versus negative $36.6 million in the prior-year period.
- Cash and equivalents were $87.0 million at June 30, down from $275.5 million at year-end 2012. $58.0 million was held at a foreign subsidiary, mostly permanently reinvested and limited to foreign operations.
- Total debt was $2,624.6 million, down from $2,813.6 million at June 30, 2012. Debt was 40.8% of total capital. The company repaid the $140.4 million 6.30% notes in June and retired a $10.0 million medium-term note in January.
- Vulcan had drawn $100.0 million on its revolving credit line. After the draw and $55.6 million of letters of credit, reported remaining borrowing availability was $235.5 million. The facility’s stated capacity is $500 million, subject to eligible collateral.
- Current assets were $911.6 million and current liabilities $391.8 million at June 30. The filing reports no material off-balance-sheet arrangements.
Changes versus prior periods
- Q2 net sales rose 7%; aggregates shipments increased 2% and pricing 4%. Ready-mixed concrete and cement shipments rose 15% and 20%, respectively. Asphalt-mix shipments fell 2%.
- All four segments improved Q2 gross profit: aggregates increased $15.3 million; concrete loss narrowed by $3.2 million; asphalt mix rose $4.1 million; and cement rose $4.4 million. Wet weather nevertheless reduced June shipments in several markets.
- First-half net sales increased 4.5%, and the net loss narrowed by $44.3 million. First-half results remained loss-making; aggregates volumes and production efficiency were affected by poor weather.
- Q2 EBITDA was $164.1 million versus $103.1 million; adjusted EBITDA was $141.1 million versus $127.3 million. First-half adjusted EBITDA was $167.3 million versus $174.8 million.
- First-half cash flow was weaker despite improved earnings before noncash depreciation and amortization, reflecting working-capital outflows, higher capital spending, and acquisitions.
Outlook, commentary, risks, and unusual items
- Management said improving private construction, particularly housing, supported demand and its expectation of 2013 volume and earnings improvement. Assuming more normal weather, it expected to recover most first-half shipment delays in the second half. The filing does not provide specific numeric full-year earnings or revenue guidance.
- The company’s asset-sale initiative targeted approximately $500 million of net proceeds; $208.8 million had been achieved to date. First-half 2013 acquisitions totaled approximately $90.0 million, while asset disposals generated approximately $39.9 million in net pretax proceeds. Timing and value of future sales are uncertain.
- Q2 and first-half 2013 results included pretax asset-sale gains of $23.0 million and $26.2 million, respectively. First-half results also included $1.5 million in restructuring charges. The prior-year periods included substantial costs relating to an unsolicited exchange offer and restructuring.
- In May, Vulcan announced that future salaried pension accruals would cease after December 31, 2013. The plan change produced a remeasurement and a one-time curtailment loss; management estimated it would reduce 2013 pension expense by approximately $7.6 million, net of that loss.
- Environmental and legal matters include former-chemicals-business perchloroethylene claims and the Lower Passaic River remediation. EPA alternatives for part of the river were estimated at $0.9–$3.5 billion overall, but Vulcan said it could not reasonably estimate its share. The company said certain focused remediation and settlement amounts were immaterial and accrued; final approval of one settlement remained pending.
- Other key risks include construction spending and infrastructure funding, weather, product pricing, energy and raw-material costs, interest rates, below-investment-grade debt ratings, pension assumptions, permitting and reserve access, acquisitions, and potential environmental liabilities or asset impairments.
Important facts for investors to verify
- Whether second-half demand and more favorable weather support management’s expected recovery of delayed shipments and 2013 improvement.
- The quality and sustainability of earnings excluding asset-sale gains and other discrete items, and the trajectory of adjusted EBITDA.
- Working-capital needs, especially receivables, and the company’s ability to restore positive operating cash flow after negative first-half free cash flow.
- Revolver availability and debt-service capacity, including collateral-based limits and the cost of below-investment-grade borrowing.
- Potential exposure from the Lower Passaic River, perchloroethylene litigation, reclamation obligations, and pension changes; the filing does not provide a reasonably estimable loss range for certain legal matters.