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VMC > SEC Filings for VMC > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for VULCAN MATERIALS CO

Form 10-Q for VULCAN MATERIALS CO


6-Aug-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

GENERAL COMMENTS

Overview

Vulcan provides the basic materials for the infrastructure needed to expand the U.S. economy. We are the nation's largest producer of construction aggregates, primarily crushed stone, sand and gravel; a major producer of asphalt mix and ready-mixed concrete as well as a leading producer of cement in Florida.

Demand for our products is dependent on construction activity. The primary end uses include public construction, such as highways, bridges, airports, schools and prisons, as well as private nonresidential (e.g., manufacturing, retail, offices, industrial and institutional) and private residential construction (e.g., single-family houses, duplexes, apartment buildings and condominiums). Customers for our products include heavy construction and paving contractors; commercial building contractors; concrete products manufacturers; residential building contractors; state, county and municipal governments; railroads and electric utilities.

We operate primarily in the United States and our principal product - aggregates
- is used in virtually all types of public and private construction projects and in the production of asphalt mix and ready-mixed concrete. Aggregates have a high weight-to-value ratio and, in most cases, must be produced near where they are used; if not, transportation can cost more than the materials. Exceptions to this typical market structure include areas along the U.S. Gulf Coast and the Eastern Seaboard where there are limited supplies of locally available high quality aggregates. We serve these markets from inland quarries - shipping by barge and rail - and from our quarry on Mexico's Yucatan Peninsula. We transport aggregates from Mexico to the U.S. principally on our three Panamax-class, self-unloading ships.

There are practically no substitutes for quality aggregates. Because of barriers to entry created by zoning and permitting regulation and because of high transportation costs relative to the value of the product, the location of reserves is a critical factor to long-term success.

While aggregates is our primary business, we believe vertical integration between aggregates and downstream products, such as asphalt mix and concrete, can be managed effectively in certain markets to generate acceptable financial returns. We produce and sell asphalt mix and ready-mixed concrete primarily in our mid-Atlantic, Georgia, Florida, southwestern and western markets. Aggregates comprise approximately 95% of asphalt mix by weight and 78% of ready-mixed concrete by weight. In all of these downstream businesses, we supply virtually all of the required aggregates from our own operations.

Seasonality and cyclical nature of our business

Almost all our products are produced and consumed outdoors. Seasonal changes and other weather-related conditions can affect the production and sales volumes of our products. Therefore, the financial results for any quarter do not necessarily indicate the results expected for the year. Normally, the highest sales and earnings are in the third quarter and the lowest are in the first quarter. Furthermore, our sales and earnings are sensitive to national, regional and local economic conditions and particularly to cyclical swings in construction spending, primarily in the private sector. The levels of construction spending are affected by changing interest rates and demographic and population fluctuations.


EXECUTIVE SUMMARY

Financial highlights for second Quarter 2013

Net sales increased $47.2 million, or 7%, versus the second quarter of 2012

Gross profit increased $27.0 million, or 25%, from the prior year's second quarter

Aggregates segment gross profit increased $15.3 million and gross profit margin increased 1.3 percentage points (130 basis points)

Aggregates shipments increased 2% from the prior year despite significantly more wet weather in the eastern half of the U.S.

Aggregates pricing increased 4% versus the prior year

Non-aggregates segment gross profit improved $11.7 million

Volumes in ready-mixed concrete and cement increased 15% and 20%, respectively, due to continued improvement in private construction

Earnings from continuing operations were $30.1 million, or $0.23 per diluted share, versus a loss of $17.0 million, or $0.13 per diluted share, in the prior year

We divested certain non-core operating assets for approximately $34.7 million in gross proceeds and a gain of $0.10 per diluted share

EBITDA was $164.1 million, an increase of $61.0 million, or 59%, compared to the second quarter of last year. Excluding gains on the sale of real estate and businesses , as well as restructuring an exchange offer costs, Adjusted EBITDA increased 11%

Each of our operating segments reported solid growth in second quarter earnings, contributing to improved gross profit margin and earnings per share. We achieved these results despite challenging, wet weather conditions that sharply reduced June shipments in several markets. Demand for our products continues to benefit from recovery in private construction activity, particularly residential construction, in many of our key markets. We realized strong increases in second quarter aggregates shipments in key states - driven mostly by housing demand. Growth in residential construction activity, and its traditional following impact on private nonresidential construction, continues to underpin our expectations for volume and earnings improvement in 2013. Assuming more normal weather patterns, we expect that most of the delays in shipments due to weather in the first half of the year can be recovered in the second half of the year.

In February 2012, our Board approved a Planned Asset Sales initiative with targeted net proceeds of approximately $500 million through the sale of non-core assets. To date, we have achieved $208.8 million of net proceeds including $40.2 million in the first six months of 2013 as described in Note 16 to the condensed consolidated financial statements. The sales (actual and intended) are consistent with our strategic focus on building leading aggregates positions in markets with above-average long-term demand growth. The ultimate composition and timing of such transactions is difficult to project. The proceeds of these sales will be used to strengthen our balance sheet, unlock capital for more productive uses, improve our operating results and create value for shareholders.

During the first half of 2013, we divested certain assets in lower margin, lower growth markets in the Midwest for approximately $39.9 million of net pretax cash proceeds. Additionally, we added aggregates reserves and operations in attractive markets in Texas and Georgia through acquisitions totaling approximately $90.0 million. Going forward, we will continue to look for opportunities to further enhance our strategic coast-to-coast footprint.


RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

Generally Accepted Accounting Principles (GAAP) does not define "free cash flow," "segment cash gross profit" and "Earnings Before Interest, Taxes, Depreciation and Amortization" (EBITDA). Thus, free cash flow should not be considered as an alternative to net cash provided by operating activities or any other liquidity measure defined by GAAP. Likewise, segment cash gross profit and EBITDA should not be considered as alternatives to earnings measures defined by GAAP. We present these metrics for the convenience of investment professionals who use such metrics in their analyses and for shareholders who need to understand the metrics we use to assess performance and to monitor our cash and liquidity positions. The investment community often uses these metrics as indicators of a company's ability to incur and service debt. We use free cash flow, segment cash gross profit, EBITDA and other such measures to assess liquidity and the operating performance of our various business units and the consolidated company. Additionally, we adjust EBITDA for certain items to provide a more consistent comparison of performance from period to period. We do not use these metrics as a measure to allocate resources. Reconciliations of these metrics to their nearest GAAP measures are presented below:

free cash flow

Free cash flow deducts purchases of property, plant & equipment from net cash provided by operating activities.

                                                            Six Months Ended
                                                                     June 30
in millions                                           2013             2012
Net cash used for operating activities         $     (45.3)     $      (3.1)
Purchases of property, plant & equipment             (60.1)           (33.5)
Free cash flow                                 $    (105.4)     $     (36.6)

segment cash gross profit

Segment cash gross profit adds back noncash charges for depreciation, depletion, accretion and amortization (DDA&A) to gross profit.

                                                  Three Months Ended                   Six Months Ended
                                                             June 30                            June 30
in millions, except per ton data              2013             2012              2013             2012
Aggregates segment
Gross profit                            $    127.1       $    111.8        $    151.9       $    145.9
DDA&A                                         56.6             61.7             112.5            124.0
Aggregates segment cash gross profit    $    183.7       $    173.5        $    264.4       $    269.9
Unit shipments - tons                         39.6             38.7              67.4             68.2
Aggregates segment cash gross profit
per ton                                 $     4.64       $     4.48        $     3.92       $     3.96
Concrete segment
Gross profit                           $      (5.8)     $      (9.0)      $     (15.9)     $     (21.3)
DDA&A                                          8.2             10.4              16.2             21.6
Concrete segment cash gross profit      $      2.4       $      1.4        $      0.3       $      0.3
Asphalt Mix segment
Gross profit                            $      9.2       $      5.1        $     11.2       $      4.5
DDA&A                                          2.1              2.2               4.2              4.5
Asphalt Mix segment cash gross profit   $     11.3       $      7.3        $     15.4       $      9.0
Cement segment
Gross profit                            $      2.4      $      (2.0)       $      3.4      $      (1.2)
DDA&A                                          4.4              3.7               8.3              7.8
Cement segment cash gross profit        $      6.8       $      1.7        $     11.7       $      6.6


EBITDA and adjusted ebitda

EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization.

                                                  Three Months Ended                   Six Months Ended
                                                             June 30                            June 30
in millions                                   2013             2012              2013             2012
Net earnings (loss)                     $     28.8      $     (18.3)      $     (26.1)     $     (70.3)
Provision for (benefit from) income
taxes                                          6.2            (17.7)            (32.7)           (56.1)
Interest expense, net                         50.9             53.7             103.6            106.0
(Earnings) loss on discontinued
operations, net of taxes                       1.4              1.3              (5.4)            (3.7)
Depreciation, depletion, accretion and
amortization                                  76.8             84.1             152.6            169.2
EBITDA                                  $    164.1       $    103.1        $    192.0       $    145.1
Gain on sale of real estate and
businesses                             $     (23.0)     $     (12.3)      $     (26.2)     $     (18.3)
Restructuring charges                            0              4.5               1.5              5.9
Exchange offer costs                             0             32.0                 0             42.1
Adjusted EBITDA                         $    141.1       $    127.3        $    167.3       $    174.8


RESULTS OF OPERATIONS

Net sales and cost of goods sold exclude intersegment sales and delivery revenues and cost. This presentation is consistent with the basis on which we review our consolidated results of operations. We discuss separately our discontinued operations, which consist of our former Chemicals business.

The following table shows net earnings in relationship to net sales, cost of goods sold, operating earnings, EBITDA and Adjusted EBITDA.

consolidated operating Results

                                            Three Months Ended                     Six Months Ended
                                                       June 30                              June 30
in millions, except per share
data                                   2013              2012               2013              2012
Net sales                        $    696.1        $    648.9        $   1,200.6       $   1,148.7
Cost of goods sold                    563.2             543.0            1,050.0           1,020.8
Gross profit                     $    132.9        $    105.9         $    150.6        $    127.9
Operating earnings (loss)        $     86.9        $     19.7         $     36.8       $     (26.6)
Earnings (loss) from continuing
operations
 before income taxes             $     36.3       $     (34.7)       $     (64.2)      $    (130.2)
Earnings (loss) from continuing
operations                       $     30.1       $     (17.0)       $     (31.5)      $     (74.0)
Earnings (loss) on discontinued
operations,
 net of taxes                          (1.3)             (1.3)               5.4               3.7
Net earnings (loss)              $     28.8       $     (18.3)       $     (26.1)      $     (70.3)
Basic earnings (loss) per share
 Continuing operations           $     0.23       $     (0.13)       $     (0.24)      $     (0.57)
 Discontinued operations              (0.01)            (0.01)              0.04              0.03
Basic net earnings (loss) per
share                            $     0.22       $     (0.14)       $     (0.20)      $     (0.54)
Diluted earnings (loss) per
share
 Continuing operations           $     0.23       $     (0.13)       $     (0.24)      $     (0.57)
 Discontinued operations              (0.01)            (0.01)              0.04              0.03
Basic net earnings (loss) per
share                            $     0.22       $     (0.14)       $     (0.20)      $     (0.54)
EBITDA                           $    164.1        $    103.1         $    192.0        $    145.1
Adjusted EBITDA                  $    141.1        $    127.3         $    167.3        $    174.8

SECOND quarter 2013 Compared to SECOND Quarter 2012

Second quarter 2013 net sales were $696.1 million, up 7% from the second quarter of 2012. Shipments were up in aggregates (+2%), ready-mixed concrete (+15%) and cement (+20%) and down in asphalt mix (-2%). Pricing was up in aggregates (+4%) and cement (+7%), flat in ready-mixed concrete and down in asphalt mix (-1%).

Results for the second quarter of 2013 were net earnings of $28.8 million, or $0.22 per diluted share, compared to a net loss of $18.3 million, or $0.14 per diluted share, in the second quarter of 2013. Each period's results were impacted by discrete items, as follows:

The second quarter of 2013 results include a pretax gain of $23.0 million related to the sale of real estate and businesses

The second quarter of 2012 results include a pretax charge of $32.1 million related to the unsolicited exchange offer, a pretax charge of $4.6 million related to restructuring charges and a $12.3 million gain related to the sale of mitigation credits


Continuing Operations - Changes in earnings from continuing operations before income taxes for the second quarter of 2013 versus the second quarter of 2012 are summarized below:

earnings from continuing operations before income taxes

in millions
Second quarter 2012                                               $   (34.7)
Higher aggregates gross profit due to
 Higher selling prices                                                 14.6
 Higher volumes                                                         4.7
 Higher costs and other items                                          (4.0)
Higher concrete gross profit                                            3.2
Higher asphalt mix gross profit                                         4.1
Higher cement gross profit                                              4.4
Higher selling, administrative and general expense                     (3.0)
Higher gain on sale of property, plant & equipment and businesses      10.3
Lower restructuring charges                                             4.6
Exchange offer costs - 2012                                            32.1
Lower interest expense                                                  2.8
All other                                                              (2.8)
Second quarter 2013                                                $   36.3

Aggregates segment gross profit was $127.1 million, a $15.3 million increase from the prior year. This earnings improvement was due to higher prices in virtually all markets and higher volumes in many markets. Overall, freight-adjusted aggregates prices increased 4% versus the prior year. Aggregates shipments in a number of our markets increased sharply versus the prior year. Shipments in Arizona and Florida increased more than 50% due mostly to strong private construction demand. Shipments in Texas and along the central Gulf Coast also benefited from stronger demand, particularly large industrial projects, increasing more than 20% versus the prior year. Aggregate shipments in North Carolina and California increased 10% to 20% compared to the prior year. Shipments in the Midwest and Virginia were sharply lower due to wet weather and the timing of certain large projects in the prior year.

Concrete segment gross profit was a loss of $5.8 million, an improvement of $3.2 million from the second quarter of 2012. This improvement was due mostly to a 15% increase in ready-mixed concrete shipments.

Asphalt Mix segment gross profit was $9.2 million versus $5.1 million in the prior year. Unit profitability, as measured by materials margin, increased 20% compared to the prior year due to lower liquid asphalt costs.

Cement segment gross profit was $2.4 million, up $4.4 million versus the prior year due to stronger volumes and price improvement.

SAG expenses of $64.9 million were up $3.0 million, or 5%, compared with the prior year due mostly to increased employee incentives.

Gain on sale of property, plant & equipment and businesses was $23.4 million in the second quarter of 2013 compared to $13.2 million in the second quarter of 2012. As detailed in Note 16 to the condensed consolidated financial statements, divestitures in the second quarter of 2013 accounted for a $23.0 million pretax gain while divestitures in the second quarter of 2012 accounted for a $12.3 million pretax gain.

The current quarter included no restructuring charges or exchange offer costs compared to $4.6 million and $32.1 million, respectively, in the second quarter of 2012. See Note 1 to the condensed consolidated financial statements for an explanation of these prior period costs.

We recorded an income tax provision from continuing operations of $6.2 million in the second quarter of 2013 compared to an income tax benefit from continuing operations of $17.7 million in the second quarter of 2012. In the second quarters of 2013 and 2012, income taxes were calculated based on the year-to-date effective tax rate discussed in Note 3 to the condensed consolidated financial statements. The change in our income tax provision for the second quarter resulted largely from applying the statutory rate to the increase in our pretax book earnings.

Earnings from continuing operations were $0.23 per diluted share compared to a loss of $0.13 per diluted share in the second quarter of 2012.


Discontinued Operations - Second quarter 2013 pretax loss on discontinued operations was $2.2 million in 2013 and $2.1 million in 2012. The losses primarily reflect charges related to general and product liability costs, including legal defense cost, and environmental remediation costs associated with our former Chemicals business. For additional details, see Note 2 to the condensed consolidated financial statements.

year-to-date june 30, 2013 Compared to year-to-date june 30, 2012

First half 2013 net sales were $1,200.6 million, an increase of 4.5% versus $1,148.7 in the first half of 2012. Shipments were higher in ready-mixed concrete and cement while lower in aggregates and asphalt mix. Pricing was higher in all major product lines except asphalt mix which was down 1%.

Results for the first six months of 2013 were a net loss of $26.1 million, or $0.20 per diluted share, compared to a net loss of $70.3 million, or $0.54 per diluted share, in the first half of 2012. Gross profit increased $22.7 million reflecting improved profitability in all four segments. Each period's results were impacted by discrete items, as follows:

The 2013 first half results include a pretax gain of $26.2 million related to the sale of real estate and businesses and a $1.5 million charge for restructuring

The 2012 first half results include a pretax charge of $42.1 million related to an unsolicited exchange offer, an $18.3 million gain related to the sale of real estate and mitigation credits, and $6.0 million of restructuring charges

Continuing Operations - Changes in earnings from continuing operations before income taxes for year-to-date June 30, 2013 versus year-to-date June 30, 2012 are summarized below:

earnings from continuing operations before income taxes

in millions
Year-to-date June 30, 2012                                        $  (130.2)
Higher aggregates gross profit due to
 Higher selling prices                                                 28.3
 Lower volumes                                                         (5.5)
 Higher costs and other items                                         (16.8)
Higher concrete gross profit                                            5.4
Higher asphalt mix gross profit                                         6.7
Higher cement gross profit                                              4.6
Higher selling, administrative and general expenses                    (2.7)
Higher gain on sale of property, plant & equipment and businesses       7.8
Lower restructuring charges                                             4.5
Exchange offer costs - 2012                                            42.1
Lower interest expense                                                  2.3
All other                                                             (10.7)
Year-to-date June 30, 2013                                        $   (64.2)

Gross profit for the Aggregates segment was $151.9 million for the first six months of 2013 versus $145.9 million in 2012. As noted in the table above, this $6.0 million increase in earnings resulted from higher selling prices offset by lower volumes and higher costs. Unfavorable weather conditions prevailed across much of our geographic footprint impacting both shipment levels and production efficiencies.

The Concrete segment gross profit was a loss of $15.9 million, an improvement of $5.4 million from the prior year. Ready-mixed concrete shipments increased 11% from the prior year and pricing remained essentially flat.

Asphalt Mix segment gross profit of $11.2 million was $6.7 million above the first half 2012 level. Lower liquid asphalt costs drove much of the positive variance.

The Cement segment gross profit of $3.4 million was $4.6 million above the first half 2012 level. Shipments and pricing were up 17% and 6%, respectively, from the prior year.


SAG expenses in the first half of 2013 were up $2.7 million, or 2%, from the prior year.

Gain on sale of property, plant & equipment and businesses was $27.5 million for the first six months of 2013 compared to $19.7 million in the first half of 2012. The sale of five aggregates production facilities comprise $23.9 million of the gain in 2013 while the sale of mitigation credits and real estate account for $18.3 million of the gains in the first half of 2012.

For details of the restructuring charges of $1.5 million and $6.0 million in the first half of 2013 and 2012, respectively, see Note 1 to the condensed consolidated financial statements.

The $42.1 million of exchange offer costs in the prior year's first half reflects legal, professional and other costs incurred in response to an unsolicited exchange offer. For additional details, see Note 1 to the condensed consolidated financial statements.

Net interest expense was $103.6 million in the first six months of 2013 compared to $106.0 in 2012. Lower interest costs resulted from intervening payments on current maturities of long term debt.

We recorded income tax benefits from continuing operations of $32.7 million for the six months ended June 30, 2013 compared to $56.1 million for the six months ended June 30, 2012. For the six month periods ended June 30, 2013 and 2012, income taxes were calculated based on the year-to-date effective tax rate discussed in Note 3 to the condensed consolidated financial statements. The decrease in our income tax benefit for the six month period resulted largely from applying the statutory rate to the decrease in our pretax book loss.

Results from continuing operations were a loss of $0.24 per diluted share compared to a loss of $0.57 per diluted share in the first half of 2012.

Discontinued Operations - Year-to-date June pretax earnings on discontinued operations were $9.0 million in 2013 and $6.1 million in 2012. The 2013 earnings include an $11.7 million 5CP earn-out gain (net of transaction costs) while the 2012 earnings include a $10.2 million 5CP earn-out gain (net of transaction costs). These gains were partially offset by general and product liability costs, including legal defense cost, and environmental remediation costs associated with our former Chemicals business. For additional details, see Note 2 to the condensed consolidated financial statements.

LIQUIDITY AND FINANCIAL RESOURCES

Our primary sources of liquidity are cash provided by our operating activities, a bank line of credit and access to the capital markets. Additional financial resources include the sale of reclaimed and surplus real estate, and dispositions of non-strategic operating assets. We believe these liquidity and financial resources are sufficient to fund our future business requirements, including:

. . .

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