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VMC > SEC Filings for VMC > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for VULCAN MATERIALS CO

Form 10-Q for VULCAN MATERIALS CO


12-May-2014

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.

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, rendering them uncompetitive compared to locally produced 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 quarries that have access to long-haul transportation - 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, 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 First Quarter 2014

Net sales increased $43.9 million, or 9%, from the prior year

Gross profit increased $16.4 million, or 93%

Gross profit margin as a percentage of net sales increased 2.7 percentage points (270 basis points)

Aggregates segment gross profit improved $13.7 million, or 55%

Shipments increased 6% or 1.8 million tons

Pricing increased 2%

Cash gross profit per ton improved 8%

Non-aggregates gross profit improved $2.7 million

Earnings from continuing operations were $54.5 million, or $.41 per diluted share. Included in the current year's results are:

a net after-tax gain of $137.6 million, or $1.04 per diluted share, related to the sale of our Florida-area cement and concrete businesses in March

a net after-tax interest expense charge of $46.1 million, or $0.35 per diluted share, referable to the $506.4 million of debt purchased in March

Adjusted for these discrete items, earnings from continuing operations were a loss of $37.0 million, or $0.28 per diluted share versus a loss of $61.6 million, or $0.47 per diluted share in the prior year

Adjusted EBITDA was $39.0 million as compared to $25.9 million in the prior year

Our aggregates business reported solid growth in the first quarter despite extremely cold weather in most of our markets. We continue to experience strengthening demand in each of our end markets and across most of our footprint. Our operations and sales teams continue to deliver strong incremental margins. On a 6% increase in aggregates volume, our teams delivered a 55% increase in Aggregates segment gross profit - despite the production and shipping challenges that come with a cold, wet winter. Aggregates pricing continues to benefit from improving demand, and we are realizing price improvements across virtually all of our markets.

Although construction activity and aggregates consumption remain far below historical levels, our aggregates shipments have now increased year-over-year for four consecutive quarters. With the strength of our aggregates reserve positions, our continuing profit enhancements, the divestiture of non-strategic operations, and significant debt reduction, we remain very well positioned to grow earnings faster than sales during this period of aggregates demand recovery.

In February 2012, our Board approved a two-year Planned Asset Sales initiative with targeted net proceeds of at least $500 million through the sale of non-core assets. The initiative concluded in the first quarter of 2014 with the sale of our cement and concrete business in the Florida area to Cementos Argos.
Including the $720.1 million of net proceeds from the Argos transaction, the Planned Asset Sales initiative generated over $1.1 billion of net proceeds. The proceeds from these sales were used to strengthen our balance sheet, unlock capital for more productive uses, improve our operating results and create value for shareholders. Over this two-year period, we retired over $800 million of debt and reinvested over $240 million to strengthen our aggregates position in our strategic markets of California, Georgia, Texas and Virginia.


RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

Generally Accepted Accounting Principles (GAAP) does not define "free cash flow," "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, 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 and to assess the operating performance of a company's businesses. We use free cash flow, 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.

                                                        Three Months Ended
                                                                  March 31
in millions                                          2014            2013
Net cash used for operating activities         $     (5.0)     $    (12.9)
Purchases of property, plant & equipment            (46.0)          (26.8)
Free cash flow                                 $    (51.0)     $    (39.7)

cash gross profit

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

                                                        Three Months Ended
                                                                  March 31
in millions, except per ton data                    2014             2013
Aggregates segment
Gross profit                                  $     38.5       $     24.8
DDA&A                                               54.6             55.9
Aggregates segment cash gross profit          $     93.1       $     80.7
Unit shipments - tons                               29.6             27.9
Aggregates segment cash gross profit per ton  $     3.14       $     2.90
Concrete segment
Gross profit                                 $      (9.2)     $     (10.0)
DDA&A                                                6.0              8.0
Concrete segment cash gross profit           $      (3.2)     $      (2.0)
Asphalt Mix segment
Gross profit                                  $      4.7       $      1.9
DDA&A                                                2.4              2.0
Asphalt Mix segment cash gross profit         $      7.1       $      3.9
Cement segment
Gross profit                                  $      0.1       $      1.0
DDA&A                                                1.1              3.9
Cement segment cash gross profit              $      1.2       $      4.9


EBITDA and adjusted ebitda

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

                                                                     Three Months Ended
                                                                               March 31
in millions                                                     2014              2013
Net earnings (loss)                                       $     54.0       $     (54.8)
Provision for (benefit from) income taxes                       22.9             (38.8)
Interest expense, net                                          120.1              52.8
(Earnings) loss on discontinued operations, net of taxes         0.5              (6.8)
Depreciation, depletion, accretion and amortization             69.4              75.5
EBITDA                                                    $    266.9        $     27.9
Gain on sale of real estate and businesses               $    (236.0)      $      (3.2)
Charges associated with divestitures                             9.1               0.0
Revenue amortized from deferred revenue                         (1.0)             (0.3)
Restructuring charges                                            0.0               1.5
Adjusted EBITDA                                           $     39.0        $     25.9


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
                                                                 March 31
in millions, except per share data                 2014             2013
Net sales                                    $    548.5       $    504.6
Cost of goods sold                                514.4            486.9
Gross profit                                 $     34.1       $     17.7
Selling, administrative and general expenses $     66.1       $     64.7
Operating earnings (loss)                    $    194.7      $     (50.1)
Interest expense, net                        $    120.1       $     52.8
Earnings (loss) from continuing operations
 before income taxes                         $     77.4      $    (100.4)
Earnings (loss) from continuing operations   $     54.5      $     (61.6)
Earnings (loss) on discontinued operations,
 net of taxes                                      (0.5)             6.8
Net earnings (loss)                          $     54.0      $     (54.8)
Basic earnings (loss) per share
 Continuing operations                       $     0.42      $     (0.47)
 Discontinued operations                          (0.01)            0.05
Basic net earnings (loss)                    $     0.41      $     (0.42)
Diluted earnings (loss) per share
 Continuing operations                       $     0.41      $     (0.47)
 Discontinued operations                           0.00             0.05
Diluted net earnings (loss)                  $     0.41      $     (0.42)
EBITDA                                       $    266.9       $     27.9
Adjusted EBITDA                              $     39.0       $     25.9

First quarter 2014 Compared to First Quarter 2013

First quarter 2014 net sales were $548.5 million, up 9% from the first quarter of 2013. Shipments were higher in both aggregates (+6%) and asphalt mix (+17%) and lower in both ready-mixed concrete (-6%) and cement (-31%). The reduction in ready-mixed concrete and cement shipments resulted primarily from the March 7, 2014 sale of our cement and concrete businesses in the Florida area. Pricing was up in aggregates (+2%) and ready-mixed concrete (+4%) but down slightly (-1%) in asphalt mix.

Net earnings for the first quarter of 2014 were $54.0 million, or $0.41 per diluted share, compared to a net loss of $54.8 million, or $0.42 per diluted share, in the first quarter of 2013. Each period's results were impacted by discrete items, as follows:

The first quarter of 2014 results include a pretax gain of $226.9 million (net of $9.1 million of disposition related charges) related to the sale of real estate and businesses including our cement and concrete businesses in the Florida area, and a pretax loss on debt purchase of $72.9 million presented as a component of interest expense (see Note 8 to the condensed consolidated financial statements)

The first quarter of 2013 results include a pretax gain of $3.2 million related to the sale of real estate and businesses, and $1.5 million of restructuring charges


Continuing Operations - Changes in earnings from continuing operations before income taxes for the first quarter of 2014 versus the first quarter of 2013 are summarized below:

earnings from continuing operations before income taxes

in millions
First quarter 2013                                                $  (100.4)
Higher aggregates earnings due to
 Higher volumes                                                         9.5
 Higher selling prices                                                  6.5
 Higher costs and other items                                          (2.3)
Higher concrete earnings                                                0.8
Higher asphalt mix earnings                                             2.8
Lower cement earnings                                                  (0.9)
Higher selling, administrative and general expense                     (1.5)
Higher gain on sale of property, plant & equipment and businesses     232.3
Higher interest expense                                               (67.3)
All other                                                              (2.1)
First quarter 2014                                                $    77.4

Aggregates segment gross profit was $38.5 million, a $13.7 million, or 55%, increase from the prior year. The earnings improvement was due to higher volumes and selling prices offset in part by higher costs. Despite the unfavorable weather impact, cash gross profit per ton of aggregates continued to expand, increasing 8% above the prior year. Aggregates shipments increased 6% versus the prior year. Shipments in California, Florida, Georgia, Illinois and Texas showed strength, each increasing by more than 15% versus the first quarter of last year. In contrast, first quarter shipments in certain other markets were lower versus the prior year due to unfavorable weather, including key markets in North Carolina, South Carolina and Virginia. Overall, pricing increased 2% versus the prior year's first quarter. Prices improved broadly with virtually all of our markets realizing price increases in the quarter versus the prior year.

Concrete segment gross profit was a loss of $9.2 million, an improvement of $0.8 million from the first quarter of 2013. Unit profitability for concrete increased 11% as measured by materials margin.

Asphalt Mix segment gross profit of $4.7 million increased $2.8 million from the first quarter of 2013 while unit profitability for asphalt-mix increased 7% as measured by materials margin.

Cement segment gross profit of $0.1 million was down from the $1.0 million in the first quarter of 2013 due primarily to the March 7, 2014 sale of our cement business in the Florida area.

Selling, administrative and general (SAG) expenses of $66.1 million were up $1.5 million, or 2%, compared with the prior year.

Gain on sale of property, plant & equipment and businesses was $236.4 million in the first quarter of 2014 compared to $4.1 million in the first quarter of 2013. As noted previously, the March 2014 sale of our cement and concrete businesses in Florida to Cementos Argos resulted in a pretax gain of $230.1 million. Additionally, the sale of two reclaimed production sites increased the pretax gain by $6.0 million.

The current quarter included no restructuring charges as compared to $1.5 million in the first quarter of 2013. See Note 1 to the condensed consolidated financial statements for an explanation of these prior period costs.

Net interest expense was $120.1 million in the first quarter of 2014 compared to $52.8 million in 2013. The higher interest cost resulted from the aforementioned $72.9 million pretax loss on debt purchase.

We recorded an income tax provision from continuing operations of $22.9 million in the first quarter of 2014 compared to an income tax benefit from continuing operations of $38.8 million in the first quarter of 2013. In the first quarter of 2014, income taxes were calculated based on the EAETR as discussed in Note 3 to the condensed consolidated financial statements. In the first quarter of 2013, income taxes were calculated based on the year-to-date effective tax rate as discussed in Note 3 to the condensed consolidated financial statements. The change in our income tax provision for the year resulted largely from applying the statutory rate to the increase in our pretax book earnings.


Earnings from continuing operations were $0.41 per diluted share compared to a loss of $0.47 per diluted share in the first quarter of 2013.

Discontinued Operations - The $0.8 million pretax loss from discontinued operations in the first quarter of 2014 compared unfavorably with the $11.2 million pretax gain in the first quarter of 2013. Both periods include charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. The 2013 gain was the result of an $11.7 million pretax gain related to the final payment from the earn-out. 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 sources of liquidity 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:

cash contractual obligations

capital expenditures

debt service obligations

potential future acquisitions

dividend payments

We actively manage our capital structure and resources in order to minimize the cost of capital while properly managing financial risk. We seek to meet these objectives by adhering to the following principles:

maintain substantial bank line of credit borrowing capacity

use the bank line of credit only for seasonal working capital requirements and other temporary funding requirements

proactively manage our long-term debt maturity schedule such that repayment/refinancing risk in any single year is low

minimize financial and other covenants that limit our operating and financial flexibility

opportunistically access the capital markets when conditions and terms are favorable

Cash

Included in our March 31, 2014 cash and cash equivalents balance of $268.8 million is $77.7 million of cash held at one of our foreign subsidiaries. The majority of this $77.7 million of cash relates to earnings prior to January 1, 2012 that are permanently reinvested offshore. Use of this permanently reinvested cash is currently limited to our foreign operations.

cash from operating activities

                                                                  Three Months Ended
                                                                            March 31
in millions                                                   2014             2013
Net earnings (loss)                                    $      54.0      $     (54.8)
Depreciation, depletion, accretion and amortization
(DDA&A)                                                       69.4             75.6
Net earnings before noncash deductions for DDA&A       $     123.4      $      20.8
Net gain on sale of property, plant & equipment and
businesses                                                  (236.4)           (17.1)
Cost of debt purchase                                         72.9              0.0
Other operating cash flows, net                               35.1            (16.6)
Net cash used for operating activities                 $      (5.0)     $     (12.9)


As noted in the table above, net earnings before noncash deduction for DDA&A increased $102.6 million during the first quarter of 2014 to $123.4 million. Included in net earnings for the first quarter of 2014 is a pretax gain of $230.1 million (see Note 16 to the condensed consolidated financial statements) for the sale of our cement and concrete businesses in the Florida area. Cash received associated with the gain on sale of property, plant & equipment and businesses is presented as a component of investing activities. Additionally, we purchased $506.4 million principal amount of outstanding debt through a tender offer for a loss of $72.9 million (see Note 7 to the condensed consolidated financial statements). Cash paid for the debt purchase is presented as a component of financing activities.

cash flows from investing activities

Net cash provided by investing activities was $628.8 million during the three months ended March 31, 2014, a $696.1 million increase compared to the same period of 2013. This increase resulted from a $718.1 million increase in proceeds from the sale of property, plant & equipment and businesses. During the first three months of 2014, we sold: a previously mined and subsequently reclaimed tract of land for $10.7 million, land previously containing a sales yard for $5.8 million, and our cement and concrete businesses in the Florida area for $720.1 million. Conversely, $63.0 million of the cash proceeds from the sale of property was placed into an escrow account (restricted cash) that is available for the acquisition of replacement property under like-kind exchange agreements.

cash flows from financing activities

Net cash used for financing activities of $548.8 million increased $541.5 million in the first three months of 2014 compared with the same period of 2013. This increase in cash used for financing activities is attributable to a $569.7 million increase in debt payments. As previously mentioned, in the first quarter of 2014 we purchased $506.4 million principal amount of outstanding debt through a tender offer, as follows: $375.0 million of 6.50% notes due in 2016 and $131.4 million of 6.40% notes due in 2017. Total tender offer costs were $579.7 million including a $71.8 million premium and $1.5 million of transaction costs. The increase in debt payments is partially offset by a $22.8 million increase in proceeds from the issuance of common stock. For the three months ended March 31, 2014, we issued 0.4 million shares of common stock to the trustee of our 401(k) retirement plans for cash proceeds of $22.8 million.

debt

Certain debt measures are outlined below:

                                                         March 31       December 31          March 31
dollars in millions                                         2014              2013              2013
Debt
Current maturities of long-term debt                  $      0.2        $      0.2        $    140.6
Long-term debt                                           2,006.8           2,522.2           2,525.4
Total debt                                           $   2,007.0       $   2,522.4       $   2,666.0
Capital
Total debt                                           $   2,007.0       $   2,522.4       $   2,666.0
Equity                                                   4,031.1           3,938.1           3,714.9
Total capital                                        $   6,038.1       $   6,460.5       $   6,380.9
Total Debt as a Percentage of Total Capital                33.2%             39.0%             41.8%
Weighted-average Effective Interest Rates
 Bank line of credit 1                                        N/A               N/A               N/A
 Long-term debt                                            8.10%             7.73%             7.71%
Fixed versus Floating Interest Rate Debt
 Fixed-rate debt                                           99.3%             99.4%             99.5%
 Floating-rate debt                                         0.7%              0.6%              0.5%

1 There were no borrowings at the periods above. However, we do pay fees for unused borrowing capacity and standby letters of credit.

. . .

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