Financial Statements Analysis

Financial Statement Analysis Roadmap
What is the companys business, strategy, and competitive

environment?
Is the company growing?
What was the companys performance this year?
Is the company investing for the future?
What are its debt obligations?
Are there significant off balance sheet items?
KNOWLEDGE FOR ACTION
Analyzing Growth
Why does growth matter for Vulcan?
Market share in competitive market
Scale economies; covering fixed costs
Investors growth expectations affect stock prices
Measuring growth
Growth is commonly measured using revenue
Growth = (Current Year - Prior Year) / Prior Year
Identifying sources of growth

Segment analysis
Unit vs. Sales price growth
Organic vs. Acquisitions
Growth in Selected Items

2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
$ 2,405.9 $ 2,543.7 $ 3,453.1 $ 3,090.1 $ 3,041.1 $ 2,615.0 $ 2,213.2 $ 2,086.9 $ 1,980.6 $ 2,113.6 $ 1,885.9 $ 1,810.6
$ 300.7 $ 446.0 $ 749.7 $ 950.9 $ 932.0 $ 708.8 $ 584.4 $ 555.7 $ 538.3 $ 579.5 $ 499.0 $ 486.9
Net Sales
Gross Profit
Net Earnings From
Continuing Ops
$ (102.4) $
Total Assets
Total Liabilities
Shareholders' Equity
$ 8,337.9
$ 4,372.9
$ 3,965.0
18.7
$ 8,525.1
$ 4,487.6
$ 4,037.2
3.3
$ 463.1
$ 480.2
$ 344.1
$ 262.4
$ 237.5
$ 233.2
$ 231.5
$ 224.1
$ 217.5
$ 8,914.1
$ 5,391.4
$ 3,522.7
$ 8,936.4
$ 5,176.8
$ 3,759.6
$ 3,427.8
$ 1,416.9
$ 2,010.9
$ 3,590.4
$ 1,456.8
$ 2,133.6
$ 3,667.5
$ 1,646.7
$ 2,020.8
$ 3,636.9
$ 1,834.1
$ 1,802.8
$ 3,448.2
$ 1,751.2
$ 1,697.0
$ 3,413.3
$ 1,809.0
$ 1,604.3
$ 3,250.4
$ 1,778.9
$ 1,471.5
$ 2,839.5
$ 1,515.8
$ 1,323.7
Growth Rates
Net Sales
Gross Profit
Net Earnings From
Continuing Ops
Total Assets
Total Liabilities
2010
-5.4%
-32.6%
2009
-26.3%
-40.5%
2008
11.7%
-21.2%
2007
1.6%
2.0%
2006
16.3%
31.5%
2005
18.2%
21.3%
2004
6.1%
5.2%
2003
5.4%
3.2%
2002
-6.3%
-7.1%
2001
12.1%
16.1%
2000
4.2%
2.5%
1999
56.3%
24.7%
-647.6%
466.7%
-99.3%
-3.6%
39.6%
31.1%
10.5%
1.8%
0.7%
3.3%
3.0%
5.1%
-2.2%
-2.6%
-1.8%
-4.4%
-16.8%
14.6%
-0.2%
4.1%
-6.3%
160.7%
265.4%
87.0%
-4.5%
-2.7%
-5.8%
-2.1%
-11.5%
5.6%
0.8%
-10.2%
12.1%
5.5%
4.7%
6.2%
1.0%
-3.2%
5.8%
5.0%
1.7%
9.0%
14.5%
17.4%
11.2%
71.2%
200.2%
14.7%
Vulcan made large acquisitions in 1999 and 2007

Subprime crisis started in 2006
(Source: Supplemental pages 4-5)
Growth by Segment, Units, and Price
Given its size, growth in Aggregates segment is most important

Prices and Units growth has been negative
(Source: p. 30-2, Supplemental page 3)

environment?
Analyzing Current Performance

Earnings
Operating income, Net Income, EBITDA
Line items: Revenue, Margins
One-time items vs. persistent changes
Cash flow
Operating, Free Cash Flow
DuPont analysis
Sources of advantages or problems
Measures of Earnings
Operating Earnings
Revenues expenses from core business
Earnings continuing ops

Above net interest expense +/- gains or losses
from non-core items
Net Earnings
Above earnings from discontinued operations
Diluted EPS
Net Earnings / Shares outstanding (adjusted for
potential dilution)
Non-GAAP earnings (EBITDA)
(Source: p. 27-8)
Margin Analysis
Common-size income statement
Divide everything by revenue
Removes growth to allow time-series comparisons

Reveals your cost structure
COGS vs. SG&A vs. Other
Useful in forecasting financial statements for future periods
Common Size Income Statement

Net Sales
Cost of Goods Sold
Gross Profit
SG&A expenses
Gain (Loss) on Sale of PPE
Other operating income (expe
Goodwill Impairment
Charge for Legal Expenses
Operating Earnings
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
87.5% 82.5% 78.3% 69.2% 69.4% 72.9% 73.6% 73.4% 72.8% 72.6% 73.5% 73.1%
12.5% 17.5% 21.7% 30.8% 30.6% 27.1% 26.4% 26.6% 27.2% 27.4% 26.5% 26.9%
13.6%
2.5%
-0.3%
0.0%
1.7%
-0.6%
12.6%
1.1%
-0.1%
0.0%
0.0%
5.8%
9.9%
2.7%
0.0%
7.3%
0.0%
7.2%
9.4%
0.0%
1.7%
0.0%
0.0%
23.1%
8.7%
0.0%
0.9%
0.0%
0.0%
22.9%
8.9%
0.0%
0.0%
0.0%
0.0%
18.2%
8.9%
0.0%
0.7%
0.0%
0.0%
18.2%
8.6%
0.0%
0.1%
0.0%
0.0%
18.1%
8.2%
0.0%
0.0%
0.0%
0.0%
19.0%
7.7%
0.0%
-1.0%
0.0%
0.0%
18.7%
7.3%
0.0%
-0.5%
0.0%
0.0%
18.7%
7.3%
0.0%
-0.8%
0.0%
0.0%
18.8%
0.1%
0.0%
7.5%
0.2%
0.1%
6.9%
-0.1%
0.1%
5.0%
-0.2%
0.2%
1.6%
0.9%
0.2%
0.9%
0.9%
0.6%
1.4%
0.4%
0.3%
1.8%
0.3%
0.2%
2.5%
0.2%
0.1%
2.7%
0.1%
0.1%
2.8%
1.1%
0.1%
2.7%
1.5%
0.2%
2.8%
-8.0%
-0.8%
2.2%
21.6%
23.1%
18.4%
17.0%
16.1%
16.6%
16.1%
17.1%
17.6%
Provision for Income Taxes

Net Earnings - Continuing
Ops
-3.7%
-1.5%
2.1%
6.6%
7.3%
5.2%
5.2%
4.7%
4.8%
5.1%
5.3%
5.6%
-4.3%
0.7%
0.1%
15.0%
15.8%
13.2%
11.9%
11.4%
11.8%
11.0%
11.9%
12.0%
Discontinued Operations
Net Earnings
0.3%
-4.0%
0.5%
1.2%
-0.1%
0.0%
-0.4%
14.6%
-0.3%
15.5%
1.7%
14.9%
1.2%
13.0%
-1.1%
9.3%
-2.2%
8.6%
-0.4%
10.5%
-0.2%
11.7%
1.2%
13.2%
Other income, net

Interest Income
Interest Expense
Earnings - Continuing Ops
Before Income Taxes
Bad trends in gross profit, SG&A, and interest expense

Large effects of gain on PPE, legal expenses, goodwill
(Source: p. 30-2, Supplemental page 3)
Earnings Persistence
Which items/margins will persist into
next year?
See MD&A, p. 28-34
COGS & SG&A

Adjust for any unusual items this year
Gain on PPE, Other expense, Impairment

Generally dont persist
Interest Expense
Any changes in borrowing/rates?

environment?
What was the companys performance this year? (continued)
Cash Flow from Operations

How did Vulcan do in generating cash from operating the business?
What are major differences between earnings and cash flows?
What are their interpretations? (MD&A, p. 37)
Will these differences persist?
Cash From Operations
Earnings has large noncash and PPE items (backed out of CFO)
A/R and Other assets were big cash drain in 2010
(Source: p. 54)
Issues with Interpreting Cash Flows

Cash flow statement is completely backwards looking
Susceptible to timing issues
No estimates of future activities (unlike earnings)
Cash from operations has no deduction for costs associated with

capital investment
Cash required for fixed assets shows up in cash from investing activities (but
mismatch in timing)
Need to look at Free Cash Flow (p. 27)
Earnings vs. Cash Flows

Earnings
Did the company earn enough revenue to cover all costs of running the
business?
Cash from Operations

Did the company collect more cash than it paid out during the period?
Both numbers are useful

Earnings are a better predictor of future cash flows
Cash flows are more objective measure of activity
Vulcan good at managing cash position this year, but there wont be
any cash to manage in the future unless they become profitable soon
DuPont Ratio Analysis Framework

Return on Equity (ROE)
Return on Assets (ROA)
Return on Sales (ROS)
ROE
Financial Leverage
Asset Turnover
= Net Income/Sales x Sales/Assets

= Profitability
x Efficiency
x Assets/Equity
x Leverage
DuPont Analysis
(NI)
(I)
(t)
(DNI)
(NS)
(ASE)
(ATA)
2010
(96.3)
181.6
35%
21.7
2,405.9
4,001.1
8,431.5
2009
30.4
175.3
35%
144.3
2,543.7
3,780.0
8,719.6
2008
0.9
172.8
35%
113.2
3,453.1
3,641.2
8,925.3
2007
450.9
48.2
35%
482.2
3,090.1
2,885.3
6,182.1
2006
470.2
26.3
35%
487.3
3,041.1
2,072.3
3,509.1
2005
389.1
37.1
35%
413.2
2,615.0
2,077.2
3,629.0
2004
288.6
40.3
35%
314.8
2,213.2
1,911.8
3,652.2
2003
195.0
53.2
35%
229.6
2,086.9
1,749.9
3,542.6
2002
169.9
53.7
35%
204.8
1,980.6
1,650.6
3,430.8
2001
222.7
59.7
35%
261.5
2,113.6
1,537.9
3,331.9
2000
219.9
51.8
35%
253.6
1,885.9
1,397.6
3,045.0
1999
239.7
50.8
35%
272.7
1,810.6
1,238.7
2,249.1
-2.4%
0.8%
0.0%
15.6%
22.7%
18.7%
15.1%
11.1%
10.3%
14.5%
15.7%
19.4%
Return on Assets [DNI/ATA]

Financial Leverage [ATA/ASE]
0.3%
2.11
1.7%
2.31
1.3%
2.45
7.8%
2.14
13.9%
1.69
11.4%
1.75
8.6%
1.91
6.5%
2.02
6.0%
2.08
7.8%
2.17
8.3%
2.18
12.1%
1.82
Return on Sales [DNI/NS]

Asset Turnover [NS/ATA]
0.9%
0.29
5.7%
0.29
3.3%
0.39
15.6%
0.50
16.0%
0.87
15.8%
0.72
14.2%
0.61
11.0%
0.59
10.3%
0.58
12.4%
0.63
13.4%
0.62
15.1%
0.81
Gross Margin
SG&A / Sales
Operating Margin
12.5%
13.6%
-0.6%
17.5%
12.6%
5.8%
21.7%
9.9%
7.2%
30.8%
9.4%
23.1%
30.6%
8.7%
22.9%
27.1%
8.9%
18.2%
26.4%
8.9%
18.2%
26.6%
8.6%
18.1%
27.2%
8.2%
19.0%
27.4%
7.7%
18.7%
26.5%
7.3%
18.7%
26.9%
7.3%
18.8%
Days Receivables
Days Inventory
Days Payable
Trade Cycle
40.3
55.9
19.3
76.9
42.9
60.0
22.9
80.0
38.3
48.6
24.8
62.1
43.5
51.2
33.7
61.0
40.9
38.2
26.2
52.8
42.4
35.9
23.0
55.3
51.8
44.4
24.5
71.7
58.5
54.7
29.6
83.6
61.0
59.2
35.2
85.1
63.7
50.8
40.6
73.9
70.7
49.7
42.4
78.0
57.3
44.4
34.5
67.2
Net Income
Interest Expense
Tax Rate
De-levered Net Income [NI (1-t)*I]
Net Sales
Stockholders' Equity - Avg
Total Assets - Avg.
Return on Equity [NI/ASE]
ROE down due to lower ROA from both lower ROS and ATO
Trade cycle up due to DI up, DP down (DR steady)
Allowance for Uncollectibles

During a recession, collections of receivables are a big concern
Measure trends either using:
Balance Sheet: Allowance / Gross Accounts Receivable
Income Statement: Bad Debt Expense / Net Sales
Allowance for Uncollectibles
Accts Receivables - Gross
2010
7.5
260.8
2009
8.7
254.8
2008
8.7
326.2
2007
6.0
383.0
2006
3.4
344.1
2005
4.3
329.3
2004
5.2
268.7
2003
8.7
345.0
2002
8.9
306.6
2001
6.9
340.1
2000
9.0
381.9
1999
9.7
329.7
Allowance Percentage
2.9%
3.4%
2.7%
1.6%
1.0%
1.3%
1.9%
2.5%
2.9%
2.0%
2.4%
2.9%
Bad Debt Expense

Net Sales
Bad Debt Expense / Sales
3.1
2,405.9
0.1%
4.2
2,543.7
0.2%
5.4
3,453.1
0.2%
1.1
3,090.1
0.0%
1.3
3,041.1
0.0%
0.7
2,615.0
0.0%
1.8
2,213.2
0.1%
2.9
2,086.9
0.1%
Expected uncollectibles jumped in 2008, stayed high

(Source: p. 109)
4.6
1,980.6
0.2%
8.2
2,113.6
0.4%
1.9
1,885.9
0.1%
1,810.6
0.0%

environment?
Analyzing Investment
Common Size Balance Sheet
Express all numbers as a percent of Total Assets
Removes effect of growth in the balance sheet
What is the mix of working capital and long-term assets?

What are the trends in investment?
Cash flows from Investing Activities

Trend in recent investment
Are there large intangible assets that are not on the balance sheet?
Common Size Balance Sheet

Assets
Cash
Medium Term Investments
Accounts & Notes Receivable
Inventories
Deferred Taxes
Prepaid Expenses
Assets Held For Sale
Total Current Assets
Investments
PPE, net
Goodwill
Other Assets
Total Assets
2010
0.6%
0.0%
3.8%
3.8%
0.6%
0.2%
0.2%
9.3%
0.4%
43.6%
37.1%
9.6%
100.0%
2009
0.3%
0.0%
3.1%
3.8%
0.7%
0.5%
0.2%
8.6%
0.4%
45.5%
36.3%
9.2%
100.0%
2008
0.1%
0.4%
4.0%
4.1%
0.8%
0.6%
0.0%
10.0%
0.3%
46.6%
34.6%
8.5%
100.0%
2007
0.4%
0.0%
4.7%
4.0%
0.5%
0.4%
2.9%
12.9%
0.3%
40.5%
42.4%
3.9%
100.0%
2006
1.6%
0.0%
11.4%
7.1%
0.7%
0.4%
0.0%
21.3%
0.2%
54.5%
18.1%
5.9%
100.0%
2005
7.7%
4.9%
13.3%
5.5%
0.6%
0.5%
0.0%
32.4%
0.2%
44.7%
17.2%
5.5%
100.0%
2004
7.4%
4.9%
7.7%
4.8%
0.9%
0.4%
12.5%
38.7%
0.2%
41.9%
16.4%
2.9%
100.0%
2003
4.1%
7.5%
9.9%
6.0%
0.9%
0.4%
0.0%
28.9%
0.6%
52.0%
15.9%
2.6%
100.0%
2002
3.7%
1.3%
9.6%
6.9%
1.1%
0.3%
0.0%
22.9%
0.5%
57.3%
16.7%
2.6%
100.0%
2001
2.7%
0.3%
10.0%
6.7%
1.6%
0.2%
0.0%
21.4%
0.4%
58.6%
17.2%
2.4%
100.0%
2000
1.7%
0.0%
11.7%
6.1%
1.4%
0.4%
0.0%
21.4%
2.2%
56.9%
17.3%
2.2%
100.0%
1999
1.9%
0.0%
11.6%
6.3%
1.9%
0.4%
0.0%
22.0%
2.7%
57.7%
16.0%
1.5%
100.0%
Liabilities and Shareholders Equity

6.8%
Current Liabilites
Long-term Obigations
29.1%
Other non-current liabilities
16.5%
52.4%
Total Liabilities
47.6%
100.0%
Total
10.0%
24.8%
17.8%
52.6%
47.4%
100.0%
18.7%
24.2%
17.7%
60.5%
39.5%
100.0%
28.2%
17.1%
12.5%
57.9%
42.1%
100.0%
14.2%
9.4%
17.7%
41.3%
58.7%
100.0%
15.9%
9.0%
15.7%
40.6%
59.4%
100.0%
6.3%
16.5%
17.0%
44.9%
55.1%
100.0%
14.9%
16.7%
18.8%
50.4%
49.6%
100.0%
8.6%
24.9%
17.3%
50.8%
49.2%
100.0%
10.1%
26.6%
16.4%
53.0%
47.0%
100.0%
17.6%
21.1%
16.0%
54.7%
45.3%
100.0%
13.6%
24.6%
15.2%
53.4%
46.6%
100.0%
Current assets dropping, big investment in PP&E, Goodwill

(Source: p. Supplemental 5)
Cash flow from Investing Activities
Capital expenditures (Purchases of PPE) dropping

Much less than Depreciation of 382,093
Acquisitions stable (big ones in 1999 and 2007)

Research and Development
About $1.5 million / year (p. 12)
(Source: p. 54)

environment?
Analyzing Debt
Cash flow from Financing Activities
Trend in issuances and repayments
Debt Ratios
Short-term liquidity
Long-term leverage
Future debt servicing requirements

Debt ratings
Upcoming principal and interest payments
Interest coverage ratios
Cash from Financing Activities
What is Vulcan doing with excess free cash flow?

Big dividends!
New debt issued to replace old debt
Short Term Liquidity Ratios

Does Vulcan have enough liquid assets to cover current obligations?
Current Ratio = Current Assets
Current Liabilities
Quick Ratio =
Cash + Receivables
Current Liabilities
Quick ratio is more conservative (accurate) because it only includes

highly-liquid assets
Long Term Debt Ratios

Also called capitalization ratios or leverage ratios
How does the company finance its growth?
What is bankruptcy risk?
Debt to Equity =
Long-Term Debt to Equity =
Total Liabilities
Shareholders Equity
Long Term Debt
Shareholders Equity
Total Assets is sometimes used in the denominator
Vulcan Liquidity and Leverage

2010
Short Term Liquidity Measures
Cash + Receivables
365.9
Total Current Assets
772.1
Current Liabilites
565.7
Quick Ratio
Current Ratio
Leverage Measures
Long-Term Debt
Total Liabilities
Total Assets
0.65
1.36
2,428
4,373
3,965
8,338
2009
2008
2007
294.5
733
856.7
403.9
893.8
1663.1
456.8
1157.2
2521.9
0.34
0.86
0.24
0.54
0.18
0.46
2,116
4,488
4,037
8,525
2,154
5,391
3,523
8,914
1,530
5,177
3,760
8,936
2006
2005
446.7 926.6
731.2 1164.6
487.5 570.7
0.92
1.50
322
1,417
2,011
3,428
2004
2003
2002
2001
2000
1999
732.3 781.7
1418 1050.2
231.3
543
502.8
789.6
297.7
440.9
730
344.5
437.2
694.5
572.2
382.5
624.7
386.6
1.69
2.65
1.28
2.12
0.76
1.21
0.99
1.62
1.62
2.04
323
1,457
2,134
3,590
3.17
6.13
605
1,647
2,021
3,668
1.44
1.93
608
1,834
1,803
3,637
858
1,751
1,697
3,448
906
1,809
1,604
3,413
685
1,779
1,472
3,250
699
1,516
1,324
2,840
Long-Term Debt / Equity

Liabilities / Equity
0.61
1.10
0.52
1.11
0.61
1.53
0.41
1.38
0.16
0.70
0.15
0.68
0.30
0.81
0.34
1.02
0.51
1.03
0.56
1.13
0.47
1.21
0.53
1.15
Long-Term Debt / Assets

Liabilities / Assets
0.29
0.52
0.25
0.53
0.24
0.60
0.17
0.58
0.09
0.41
0.09
0.41
0.16
0.45
0.17
0.50
0.25
0.51
0.27
0.53
0.21
0.55
0.25
0.53
Short-term liquidity has been improving

Vulcan has been replacing ST debt with LT debt
Vulcan made large acquisitions in 1999 and 2007

Long-term debt up substantially in 2007
Other Debt Information

S&P downgraded credit rating in 2010
Commercial paper rates up 30 basis points (p. 35)
Upcoming principal payments and other future cash contractual
obligations (p. 41)
Line of credit payments of $285 million due in 2011
Low principal payments on LTD in 2011 ($5 million), jumps to $280-95 million per
year in 2012-15
Estimated fair value of long-term debt (Note 6, p. 72)

Higher than book value, indicating that interest rates have dropped
Interest Coverage
Interest Coverage Ratio
Interest Coverage =
Operating Earnings
Interest Expense
Interest Coverage Ratio
Operating Earnings
Interest Expense
2010
-14.5
181.6
2009
148.5
175.3
2008
249
172.8
2007
714.4
48.2
2006
695.1
26.3
2005
476.8
37.1
2004
403.6
40.3
2003
378.3
53.2
2002
375.6
53.7
2001
395.6
59.7
2000
352.2
51.8
1999
340
50.8
N/A
0.8
1.4
14.8
26.4
12.9
10.0
7.1
7.0
6.6
6.8
6.7
Could also calculate this as:

Operating Cash Flow over Interest Payments

environment?
Off-Balance Sheet Items

Operating Leases (Note 7, p. 74)
Pension Plans (Note 10, p. 79-87)
Contingent Liabilities (Note 12, p. 90-3)
Commitments
Lawsuits
Guarantees
Variable Interest Entities (p. 40)

No off balance sheet arrangements
Conclusions
Vulcans business is largely driven by large construction projects
Need recovery of public and private sector spending
Acquisition of Florida Rock in 2007 greatly increased the scale of the

company, but Vulcan hasnt grown into the new scale yet
Need more aggregates shipments to cover fixed costs
Managing short-term cash position well despite recession

Looming issue with debt principal payments
Big dividend is a drain on cash flow, keeping borrowing high

Financial Statements Analysis

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Financial Statements Analysis

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Financial Statement Analysis Roadmap

What is the companys business, strategy, and competitive

KNOWLEDGE FOR ACTION

Identifying sources of growth

KNOWLEDGE FOR ACTION

Growth in Selected Items

Vulcan made large acquisitions in 1999 and 2007

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Growth by Segment, Units, and Price

Given its size, growth in Aggregates segment is most important

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Financial Statement Analysis Roadmap

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Analyzing Current Performance

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Earnings continuing ops

Non-GAAP earnings (EBITDA)

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Removes growth to allow time-series comparisons

Useful in forecasting financial statements for future periods

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Common Size Income Statement

Provision for Income Taxes

Other income, net

Bad trends in gross profit, SG&A, and interest expense

KNOWLEDGE FOR ACTION

COGS & SG&A

Gain on PPE, Other expense, Impairment

KNOWLEDGE FOR ACTION

Financial Statement Analysis Roadmap

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Cash Flow from Operations

KNOWLEDGE FOR ACTION

Cash From Operations

KNOWLEDGE FOR ACTION

Issues with Interpreting Cash Flows

Cash from operations has no deduction for costs associated with

KNOWLEDGE FOR ACTION

Earnings vs. Cash Flows

Cash from Operations

Both numbers are useful

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DuPont Ratio Analysis Framework

Return on Assets (ROA)

Return on Sales (ROS)

= Net Income/Sales x Sales/Assets

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Return on Assets [DNI/ATA]

Return on Sales [DNI/NS]

Allowance for Uncollectibles

Bad Debt Expense

Expected uncollectibles jumped in 2008, stayed high

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Financial Statement Analysis Roadmap

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What is the mix of working capital and long-term assets?

Cash flows from Investing Activities

KNOWLEDGE FOR ACTION

Common Size Balance Sheet

Liabilities and Shareholders Equity

Current assets dropping, big investment in PP&E, Goodwill

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Cash flow from Investing Activities