Vulcan Materials Company — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. Vulcan is a U.S.-focused producer of construction aggregates, ready-mixed concrete, asphalt mix and cement. Results are seasonal: the first quarter is normally the weakest, and the quarter’s performance is not necessarily indicative of the full year.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $499.9 million | $456.3 million |
| Total revenues, including delivery | $535.9 million | $487.2 million |
| Gross profit (loss) | $22.0 million | ($7.1) million |
| Operating loss | ($46.3) million | ($61.2) million |
| Continuing-operations loss | ($57.1) million; $0.44 per diluted share | ($64.6) million; $0.50 per diluted share |
| Net loss | ($52.1) million; $0.40 per diluted share | ($54.7) million; $0.42 per diluted share |
| Operating cash flow | $29.1 million | $44.1 million |
| Free cash flow (company-defined) | $10.3 million | $19.8 million |
| EBITDA / Adjusted EBITDA (non-GAAP) | $42.0 million / $46.1 million | $30.8 million / $5.3 million |
Gross profit margin on net sales improved to approximately 4.4% from negative 1.6%, an increase of about six percentage points. The company reported a 40.2% effective tax rate on continuing operations and a $38.4 million tax benefit, versus a 36.7% rate and $37.4 million benefit.
At March 31, cash and cash equivalents were $191.2 million, including $46.3 million held offshore that Vulcan said was not available for domestic operations. Total debt was $2.814 billion, including $144.7 million of current maturities; there were no revolver borrowings. The $600 million revolving facility, due December 2016, had $66.6 million committed to backstop letters of credit. Debt was 42.9% of total capital, versus 41.2% a year earlier; 99.5% was fixed-rate. The debt covenant limit is 65%. Total assets were $8.216 billion and equity was $3.746 billion.
Changes versus the prior period
- Net sales rose 10%; shipments increased in aggregates 10%, ready-mixed concrete 12%, asphalt mix 3% and cement 23%. Average selling prices rose in all product lines except aggregates, where product mix contributed to a 1% decline.
- Aggregates gross profit increased to $34.0 million from $10.7 million, supported by volume growth and lower unit costs. Concrete remained loss-making but improved to a $12.3 million loss from $14.4 million. Asphalt mix recorded a $0.6 million loss, near break-even; cement improved to $0.9 million gross profit from a $3.2 million loss.
- Selling, administrative and general expenses declined $12.6 million, reflecting cost-reduction measures. Net interest expense rose $10.0 million to $52.3 million, primarily following the 2011 refinancing and higher interest rates.
- Operating cash flow fell $15.0 million, mainly as working-capital cash contribution declined, including a comparative increase in receivables associated with higher sales. Capital expenditures were $18.8 million. Cash increased to $191.2 million from $155.8 million at year-end.
- Quarterly dividends declared were $0.01 per share, compared with $0.25 in Q1 2011.
Outlook, commentary and notable items
- Management cited improving construction demand, particularly infrastructure work and some recovery in private construction, and said favorable weather aided the quarter. It expressed optimism about continued market recovery but gave no specific full-year revenue or earnings forecast.
- The Profit Enhancement Plan targets $100 million of annual EBITDA improvement at current volumes: $25 million expected in 2012, $75 million in 2013 and the full amount in 2014. This is in addition to $55 million of run-rate overhead reductions achieved in 2011.
- Vulcan expects approximately $500 million of net proceeds from planned sales of non-strategic assets by mid-2013. Timing and valuations remain uncertain. Management said the initiatives are intended to improve earnings, cash flow and credit profile and help restore a meaningful dividend as rapidly as possible.
- Q1 2012 included $10.1 million of costs related to Martin Marietta’s unsolicited exchange offer and a $6.0 million gain on California real estate. Q1 2011 included a $25.5 million recovery related to the Illinois Department of Transportation settlement. Management’s adjusted comparisons exclude these items; adjusted EBITDA is a non-GAAP measure.
- Discontinued operations generated $5.0 million after tax, including a 5CP earn-out gain; associated former Chemicals business liabilities and environmental costs remain relevant. The company accrued an expected $1.1 million transaction bonus related to earn-out receipts.
- Key risks include construction cyclicality, public infrastructure funding, private construction demand, weather, fuel and other input costs, below-investment-grade ratings, interest expense, pension assumptions, reserve permitting, goodwill impairment and legal or environmental claims. The EPA’s preliminary cost range for Lower Passaic River remediation alternatives was $0.9 billion–$2.3 billion; Vulcan said its share could not yet be reasonably estimated. Shareholder and other litigation relating to the Martin Marietta offer was ongoing, and the company could not estimate losses for certain proceedings.
- Vulcan disclosed a correction to prior-period tax-related balance sheet items identified during IRS examination preparation. It said the errors arose before 2009, did not affect earnings or cash flows for years presented and were not material to previously issued statements; the March 2011 balance sheet was restated.
Important facts for investors to verify
- Whether shipment growth, pricing and productivity improvements persist beyond a seasonally weak first quarter, and whether higher diesel and asphalt input costs pressure margins.
- Delivery of the planned $100 million EBITDA improvements and approximately $500 million asset-sale proceeds, including execution, timing and realized valuations.
- Cash availability and refinancing plans for $134.7 million of debt due in Q4 2012 and $10.0 million due in Q1 2013; confirm the distinction between offshore cash and domestic liquidity.
- Developments in the Martin Marietta exchange-offer litigation and related costs, and in environmental and former-Chemicals claims for which potential exposure was not reasonably estimable.
- The filing reports different estimated fair values for debt in its debt note and market-risk discussion ($2.865 billion and $3.009 billion, respectively); verify the intended basis and figure. Also monitor debt ratings and covenant headroom.