Financial Analysis of Vulcan Materials

Vulcan Materials Company

 Vulcan Overview

Founded in Birmingham, Al. in 1909 by Charles Lincoln, Birmingham Slag Company begun servicing local areas until after the Great Depression when it noticed its first profitable gains. In 1959, Birmingham Slag merged with  Vulcan Detinning Company of Sewaren, New Jersey and thus Vulcan Materials Company was born. Vulcan became a publicly traded company on the NYSE and has since become the largest U.S. aggregates company by production and revenues. Vulcan (‘VMC”, or “the company”) specializes in construction aggregates, primarily crushed stone, sand and gravel. The Company also is a major producer of asphalt mix and ready-mix concrete and a leading producer of cement in Florida. Vulcan owns 317 aggregate production and related facilities serving 21 states, the District of Columbia, and the local markets surrounding our operations in the Bahamas and Mexico.

    Vulcan currently holds the top 9% of total U.S. market share competing with 5,000 aggregate companies managing 10,000 operations. Since 1956, Vulcan has grown mainly through mergers and acquisitions totaling up to 14.2 billion tons of permitted and proven  or probable reserves.

Vulcan has clear long-term advantages, Vulcan’s growth potential is undeniable.  In 1999 Vulcan acquired CalMat inc. expanding their aggregates operations into California, Arizona, and New Mexico.  Then in 2007 Vulcan acquired Florida Rock Industries inc. the largest acquisitions in their history.  It is estimated that 74% of the U.S population growth over then next decade will occur in Vulcan-served states.  This is clearly Vulcan's competitive advantage over their peer companies.  Being the largest producer of aggregates in the United States helps to limit the transportation expense considering that the aggregates are expensive to transport relative to their value.  Being set up in the local markets cuts the cost to deliver. Also when analyzing the demographic trends for the growth rate of the Vulcan served states population, households, and employment per state are increasing at an annual growth rate of 0.5%, 0.5%, and 0.2% respectively over the other states.  

When analyzing the liquidity of Vulcan I determined that judging by the industry and the size of Vulcan the the most beneficial numbers to use would be the cash to cash cycle(operating cycle ratio) and the current ratio.  Vulcan’s cash to cash cycle has been superior to that of their peers since 2002. This we determined allows Vulcan to have access to their cash more quickly. Reinvesting in the company I established was the reason for Vulcan’s recent low current ratio numbers.  There cash to cash cycle was still up, so they were still acquiring there cash with no problem which they then reinvested in the company creating more liabilities.  So we felt that the low numbers for Vulcan in 2008 and 2009 were no cause for concern due to the recent expansion and growth of Vulcan.

Profit is the vital reason why business in the United States and rest of the world operate.  There are many different ratios, which directly affect to the companies profitability. Most of these ratios that have higher value compared to their industrial average indicate that the companies have better control of profitability. In recent year, profitability of Vulcan material have decreased, and the worst profitability is in 2008, but I assume that Vulcan Company has clear plan that they will be able to catch up on their loss while the economic recession has been occurring. In fact, Vulcan company is trying to expand their business such as the acquisition of Florida Rock or the Highway Projects. Thus, Vulcan Company has a couple opportunities to gain huge profitability in the near future.

    The solvency of Vulcan Materials is connected with long-term debt. Too much debt can ruin a company. Vulcan Materials is a company that has been paying down long-term debt and reinvesting with funds from stockholders. In essence, Vulcan Materials is creating their own cash flow.



Analysis of Liquidity

When analyzing the liquidity of Vulcan Materials it is essential to compare Vulcan to its leading competitor, along with the industry averages.  There are many different ratios that can be used when looking over the liquidity of Vulcan.  However, the industry that Vulcan is in and the way that Vulcan does business, I feel that the most important numbers to consider would be the cash to cash cycle.  This cycle measures the length of time, in days that it takes for Vulcan to convert resource inputs into cash.  Starting in 2002 this cash to cash cycle number has steadily been improving.  In 2002 Vulcan’s cash to cash number was 116.20 days and in 2009 Vulcan’s number was 100.26 days. Now when comparing these numbers to the industry average there is a clear difference, in 2002 peers cash to cash cycle number was 138.31 days and in 2009 there number was only 103 days.  This is why Vulcan’s number of days sale in inventory and receivables is much lower then the industry average. This is important because this number represents the number of days Vulcan's cash remains tied up within the operations of the business, having a lower amount of time to receive cash opens up a lot of business options.  For instance cash provided by operating activities increased 4% to $453.0 million in 2009 compared to $435.2 million in 2008.  This efficient cash to cash cycle has also increased the free cash flow to 343.3 million in 2009 compared to 82.0 million in 2008.  The cash provided by operating activities on Vulcan is far superior of that of the leading competitor Martin Marietta Materials whose cash from operating activities is only $318,368 million decreasing even from their numbers in 2008 of $345,634 million.

           Starting in 2002 through 2009 respectively Vulcan’s current ratios are 2.65, 1.93, 3.32, 2.04, 1.50, 0.46, 0.54, 0.8676. Now if we just look at Vulcan’s numbers it would be easy to jump to conclusions that they are heading downhill so investing it them would be foolish.  Yet, when looking at the industry averages from 2002 until now the industry follows a similar trend.  With this being the case we can speculate that it is not so much Vulcan as a company as it is the economy on the entire construction aggregate industry. The reason for Vulcan’s recent low numbers derives from their inability to pay their current liabilities.  This inability is set forth not only by the economy but also by Vulcan’s expansion, they are acquiring more current liabilities than they are able to pay right off largely in part due to the acquisition of Florida Rock. Comparing Vulcan to their leading competitor, Martin Marietta Material, whose current ratio for 2008 and 2009 respectively are 1.9075 and 2.2938, far better than Vulcan’s. Being Vulcan’s leading competitor this may throws up a big red flag. However, this is due in large part to the companies growth. Vulcan is acquiring more liabilities in debt so that the company can expand. Since Vulcan has a better cash to cash ratio than its competitors it can acquire more liabilities. Vulcan is acquiring cash faster from accounts receivable and as a result they are expanding and creating more liabilities.


 Vulcan Analysis of Solvency

After reviewing Vulcan Materials Company, it is evident the mining industry has taken a hit, however ratios aren’t the only item to review before creating an opinion. Vulcan’s Times Interest Earned Ratio (TIE) has fallen to .753 from a 1.43 in ’08. Already establish as falling, the company shows an inability to pay its interest obligations. Without utilizing retained earnings or cash, VMC will need to borrow funds to cover their debts and obligations.

Increases in interest rates worried us as results from the Florida Rock acquisition. Vulcan purchased Florida rock in 2007 for $4.6 billion in a cash and stock offer that provides a 45% premium to Florida Rocks’ current closing price. These rates spike a larger interest rate due to their loans used to acquire the company however we feel this will provide Vulcan with large profits in the long run. By taking multiple smaller loans, Vulcan will pay a smaller amount of interest all while paying off the principle quicker.

Since 2007, Long Term debt has steadily decreased proving an already positive feedback on the acquisition. We do not feel the increase in interest expenditure is an issue seeing as though Capital in Excess of Par Value increased to $2,368,228 from a previous $1,734,835. In June, Vulcan received net proceeds of $519,993,000 after the sale of 1,725,000 shares and increased its Shareholders’ Equity (common stock by $13,225,000 and capital in excess of par by $506,768,000). By selling common stock, Vulcan will avoid the need for obtaining a loan and can continue operations off their customers’ money and will use additional funds for reinvestment in the company.

Their Debt to Equity ratio decreased to 1.11 from 1.51 the previous year, a decrease in Accounts Receivable appears to be a contingency to this positive decrease. After receiving $71,451 during fiscal year ’09 we have seen a decrease in the Accounts Receivable Turnover from 37 days to 41 days to collect their money from credit sales. Although the days turnover increased, we are impressed by the decrease seeing as though it took Vulcan 60 days to receive money back in 2002.

Vulcan’s Long Term Debt to Equity ratio declined to .58 from a previous .61 in 2008. This positive change is not abnormal seeing as though Vulcan is paying down debt from prior acquisitions while remaining a healthy equity balance.

    In 2009, Vulcan held investments of $5,554,000 and $38,837,000 in a money market fund at The Reserve. During that year, The Reserve filed for “bankruptcy protection” putting a freeze in the inflows/outflows of cash. To save their earnings, Vulcan moved their cash and cash equivalents to medium-term investments resulting in an increase from a zero balance in ‘08. Vulcan believes to receive their money within 12 months from Dec. 31, ’09, therefore listed as a current asset. During Q4 of ’08 and early ’09, The Reserve redeemed $33,282,000 and $258,000 of the initial investment.
    We believe Vulcan has the advantage over leading competition by creating aggregate reserves in the fastest growing states. It is predicted that Vulcan-served states will have 74% growth in the U.S. population through 2020. By planning for the future, Vulcan will see a decrease in Goodwill as well as PP & E. Through their acquisitions in the field, VMC will enable themselves to utilize their acquired companies’ equipment over the next 11 years, thus diminishing the use of Retained Earnings and need to acquire debt.

NOTE: Solvency: The use of borrowed capital to produce more income than needed to pay the interest on the debt

 Analysis of Profitability

Over the past several years Vulcan Materials has experienced a drastic change in Net earnings which has had a direct affect on profitability. Net earnings the past three fiscal years are 30,314 in 2009, 918 in 2008 and 450,910 in 2007. When analyzing these numbers it is apparent that this is a cause for the sharp decline in Net earnings in  2008. When looking over the financial statements, we found goodwill impairment in the amount of 252,664. This was due to the acquisition of Florida Rock Industry. Vulcan explained that the decrease in sales could be accounted for by decrease in demand in economic turmoil. One way Vulcan Material Company has been able to achieve positive result in net earnings during tough times is by increasing the selling price of their products.

Gross margin has slowly declined from 2007 to 2009 (28.88% 2007, 20.53% 2008, 17.53% 2009), this decline has had no relation to the cost of goods sold as they have remained relatively static over the past three years. However, total revenues in 2009 took a big hit due to the state of the economy along with the financial burdens that came with the purchase of Florida Rock. Comparing Vulcan’s Gross Margin to Martin Marietta Material in 2009, Martin Marietta’s Gross Margin Ratio was 22.56%. Being Vulcan’s leading comparison this difference may be an indicator that Vulcan is falling from the top, however when analyzing the characteristics of the gross margin ratio Vulcan’s net sales are far superior to that of Martin Marietta, even with sales being down.  The reason for this difference in ratios is due to Vulcan’s lowest gross profit in the last three years, less than half of 2007s gross profit.  Since the acquisition of Florida Rock Vulcan has experienced a continued positive drop in delivery cost, this being one of Vulcan’s competitive advantages.  With markets being generally local and aggregates being expensive to transport relative to their costs location is an important competitive factor and this will prove to be an advantage as Vulcan continues to grow.

The Return on Asset has been decreasing (13.39% 2006, 7.80% 2007, 1.27% 2008, 1.69% 2009). The cause for the reduction in the Return on Assets in recent years is directly related to the purchase of Florida Rock. Florida Rock was the largest acquisition in the company’s history, which entails that Vulcan acquired a multitude of new assets. This is the major reason why Return on Assets in 2008 is the worst record in recent year. Furthermore, once management has been established and adapted to the huge change the assets acquired will begin to pay off.

There are a few factors that play into Vulcan’s recent low numbers for 2008 and 2009. Just as the previous ratios were affected by the economy, or the drop in net income, so is the return on equity.  There is another underlying factor that also plays into this low number, this being the  selling of 1,725,000 shares and increasing Shareholders’ Equity (common stock by $13,225,000 and capital in excess of par by $506,768,000). So with a lower net income and with a higher equity the return on equity has been drastically affected. Although the numbers may not agree we feel that this was a good move on Vulcan’s part. Vulcan sold more stock in order to pay down the huge debt they acquired with the purchase of Florida Rock, consequently making Vulcan less leveraged keeping the company in the hands of the owners.

Section 5- Other Operational Considerations

While analyzing the annual report we found numerous contingency cases. However, only one of the issues stands out. Most of the cases are not able to be reasonably estimated. Vulcan has assured in the Annual report that the amounts on the financial statements will be able to cover the claims.

Perchloroethylene (Perc) was manufactured by Vulcan’s formally owned Chemical Company.  There are eight law suit cases involving contamination from Perc. The likelihood of these cases is currently unable to be determined or the reasonable estimate for loss is not able to be estimated.  The amount of cases from one chemical used by the company is unnerving. However, because Vulcan no longer owns the Chemical Company and because no reasonable estimate can be made on damages, we can be assured that though this is a cause for concern it does not diminish the value of Vulcan Materials.

In addition, in 2005 Vulcan sold the chemical business, Vulcan Chemicals. The business was sold to Occidental Chemical Corporation. Since many of the contingency cases were from the Perchloroethylene made by the Chemical company, the selling of this Chemical business may reduce the amount of contingency cases over time.