Vulcan Materials Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. Vulcan is a U.S.-focused producer of construction aggregates and also sells asphalt mix, ready-mixed concrete, and calcium products. Results are seasonal, and the company cautions that first-quarter results are not necessarily indicative of full-year performance. Figures below are in U.S. dollars; millions unless stated otherwise.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $754.7 | $631.3 |
| Gross profit / margin | $164.7 / 21.8% | $77.9 / 12.3% |
| Operating earnings | $64.9 | $10.8 |
| Continuing-operations earnings (loss) | $20.7 | $(36.7) |
| Net earnings (loss) | $18.9 | $(39.7) |
| Diluted EPS | $0.14 | $(0.30) |
| Adjusted EBITDA | $155.9 | $77.8 |
| Cash from operations | $42.9 | $19.2 |
| Capital expenditures | $108.3 | $49.6 |
- Revenue rose 20%; gross profit more than doubled. Consolidated gross margin expanded to 21.8% from 12.3%.
- Aggregates shipments increased 17% to 39.2 million tons; freight-adjusted average price rose 9.5%. Aggregates freight-adjusted revenue was $486.9 million, up 28%, and segment gross profit was $148.4 million versus $67.7 million.
- Asphalt mix gross profit increased to $12.2 million from $8.8 million; concrete gross profit rose to $3.5 million from $0.8 million. Asphalt shipments fell 4%, while ready-mixed concrete shipments increased 13% overall.
- Operating cash flow improved by $23.7 million year over year. Capital expenditures exceeded operating cash flow by approximately $65.4 million. Cash and equivalents were $191.9 million at quarter-end, down from $284.1 million at year-end 2015.
- Total debt was $2.0 billion, including $235 million of floating-rate revolver borrowings; debt was 30.9% of total capital. Management reported total debt to trailing-twelve-month Adjusted EBITDA of 2.2x. The company had $475.1 million of available revolver capacity and was in compliance with debt covenants.
- Quarterly dividend was $0.20 per share, compared with $0.10 a year earlier. Vulcan repurchased 257,000 shares for $26.6 million.
Changes, outlook, and management commentary
- The earnings turnaround reflected stronger volumes and pricing, improved aggregates margins, and lower interest expense. Q1 2015 interest expense included a $21.7 million debt-purchase charge; Q1 2016 net interest expense was $33.7 million versus $62.5 million.
- Q1 2016 included a $9.6 million long-lived-asset impairment after Vulcan exited an aggregates-site lease, $12.4 million of acquisition/divestiture-related charges, and $0.3 million of restructuring charges. Adjusted EBITDA excludes specified items and is a non-GAAP measure.
- Management raised its 2016 aggregates shipment growth expectation to 8%–9% versus 2015, from its prior estimate of 7%. It said the strong start put the company on track toward the high end of its $1.0–$1.1 billion full-year Adjusted EBITDA guidance. Other expectations, including aggregates pricing, gross-profit growth, and selling, administrative and general expense, were described as consistent with the 2015 Form 10-K.
- Management attributed unusually strong Q1 volume growth in part to favorable weather in some markets, customer project execution, public construction spending, and an extra shipping day in the leap-year quarter. It noted weaker conditions in California and the Houston area, and stated that aggregate demand remained below demographic-driven historical trends.
- Core 2016 capital expenditures, excluding acquisitions and internal growth investments, were expected to be approximately $275 million. Q1 spending included $27.6 million for replacement ships, site development, and other growth opportunities.
- Standard & Poor’s and Fitch upgraded Vulcan to investment-grade ratings in March 2016; management said it intends to maintain investment-grade ratings through business cycles.
Risks, contingencies, and other items
- Environmental and litigation exposure: In the Lower Passaic River matter, the EPA’s March 2016 remedy decision estimated implementation costs of $1.38 billion; a group study estimated its preferred remedy at $475–$725 million. Vulcan disputed the EPA approach and said it was not currently obligated to fund the remedy; its recorded loss was described as immaterial.
- Texas Brine litigation: Claims related to a Louisiana sinkhole exceed $500 million. Vulcan said it could not reasonably estimate its potential liability; a trial was scheduled for March 2017.
- Hewitt Landfill: Vulcan was conducting investigation work under a cleanup order and could not yet estimate the cost of a remedial action plan. Investigation costs were described as immaterial and fully accrued.
- The former Chemicals business continued to generate discontinued-operation losses from liability and environmental costs: $1.8 million after tax in Q1 2016 versus $3.0 million in Q1 2015.
- Management identified risks including construction demand and public funding, weather, competition, fuel and raw-material costs, interest rates, pension exposure, environmental liabilities, permitting and reserve access, acquisitions, cyber risks, and pending legal proceedings.
Investor verification priorities
- Confirm the composition and sustainability of the $155.9 million Q1 Adjusted EBITDA and the $1.0–$1.1 billion full-year guidance, including the effect of seasonal demand.
- Track whether the projected 8%–9% aggregates shipment growth and pricing gains persist, particularly in California and Texas, and distinguish weather-related comparisons from underlying demand.
- Monitor cash conversion, the elevated capital-spending program, shareholder returns, revolver utilization, and compliance with debt covenants.
- Review developments and any revised estimates or accruals for the Passaic River, Texas Brine, and Hewitt Landfill matters; the filing states that liability estimates are unavailable for some matters.
- Assess the impact of Q1 impairment and acquisition/divestiture charges, and compare reported results with management’s non-GAAP Adjusted EBITDA measure.