Vulcan Materials Company — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Vulcan is a major U.S. producer of construction aggregates, asphalt mix and ready-mixed concrete. Results are seasonal and depend on construction demand and weather.
Financial performance
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Revenue | $1,038.5m | $873.6m | $2,564.9m | $2,239.1m |
| Gross profit | $291.3m | $209.0m | $603.6m | $417.9m |
| Gross margin | 28.1% | 23.9% | 23.5% | 18.7% |
| Operating earnings | $212.2m | $140.3m | $376.7m | $438.2m |
| Earnings from continuing operations | $126.2m | $67.8m | $139.4m | $168.8m |
| Net earnings | $123.8m | $66.9m | $132.3m | $166.9m |
| Diluted EPS, net earnings | $0.91 | $0.50 | $0.98 | $1.26 |
| Adjusted EBITDA | $281.9m | $215.4m | $588.0m | $427.8m |
- Q3 growth and margins: Revenue rose 19% and gross profit 39%. Gross margin expanded 4.2 percentage points. Adjusted EBITDA increased 31%.
- Aggregates: Q3 shipments increased 10% overall and 7% same-store; same-store freight-adjusted price rose 8%. Aggregates gross profit was $250.9m, up 33%, and same-store incremental gross profit equaled 72% of incremental freight-adjusted revenue.
- Other segments: Q3 asphalt mix gross profit rose to $30.0m from $14.5m; concrete gross profit increased to $9.6m from $5.5m. Reported concrete volumes were affected by the California business exchange.
- Year-to-date comparison: Adjusted EBITDA increased to $588.0m, but net earnings and continuing-operations earnings declined. 2014 included a $227.9m pretax gain on the Florida cement and concrete businesses sale; 2015 included $67.1m of debt-purchase charges. These items materially affect period-to-period comparisons.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $281.3m, versus $149.7m in 2014. Capital expenditures were $214.8m, producing reported free cash flow of $66.5m, compared with negative $19.5m in 2014.
- September 30 cash and equivalents were $168.7m. This included $51.9m held by a foreign subsidiary; most of that amount was permanently reinvested offshore and limited to foreign operations.
- Total debt was $1.980bn, versus $1.985bn at December 31, 2014. Cash on hand and the new $750m unsecured revolver support liquidity; available borrowing capacity was $626.1m, after $85.0m drawn and $38.9m committed to letters of credit. Management reported compliance with debt covenants.
- Debt to trailing-twelve-month adjusted EBITDA was 2.6x. Floating-rate debt represented 4.2% of total debt at quarter-end. The company planned to refinance $150m of 10.125% notes due December 2015 using the revolver; management expected year-end debt of about $2.0bn.
- Interest expense, net, was $37.8m in Q3 and $183.9m year to date. The latter includes debt-refinancing and repurchase charges.
Outlook, commentary and risks
- Management reaffirmed full-year 2015 adjusted EBITDA guidance of $775m–$825m, assuming normal Q4 weather, and estimated a 28% full-year effective tax rate. It cited improving demand and pricing, but said full-year shipments could fall below plan, principally because of first-half weather.
- Management expected gradual demand recovery and positive pricing trends to continue into 2016. Capital spending remained on plan, with possible pull-forward of some 2016 spending; acquired operations’ full-year EBITDA contribution could fall short of the original forecast.
- Operating commentary noted customer project-completion bottlenecks, including skilled-labor availability, and higher employee-benefit, repair and maintenance, and overtime costs. Lower diesel expense partly offset cost pressure. Other operating expense rose to $8.0m in Q3, mainly due to environmental charges at former sites.
- Contingencies include the Lower Passaic River Superfund matter: EPA’s proposed remedy was estimated at $950m–$1.73bn, compared with the cooperating parties’ draft estimate of $475m–$725m. Vulcan said its AOC does not require it to fund or perform the remedy; it recorded an immaterial loss.
- In the Texas Brine sinkhole litigation, claimed damages exceed $500m; Vulcan said it could not reasonably estimate its potential liability. A California cleanup and abatement order concerning the former Hewitt Landfill also carries no reasonably estimable liability at this stage. The filing notes that actual losses could differ materially from accrued amounts.
- Former Chemicals business discontinued operations generated a nine-month after-tax loss of $7.1m, primarily from liability, legal-defense and environmental costs. Management identified construction spending, weather, product pricing, energy and raw-material costs, interest rates, pension exposure, environmental liabilities, permitting, acquisitions and below-investment-grade debt ratings among forward-looking risks.
Investor verification priorities
- Track whether Q4 weather, shipment volumes and pricing support the $775m–$825m adjusted EBITDA guidance; note that adjusted EBITDA is a non-GAAP measure.
- Reconcile year-to-date earnings against the 2014 asset-sale gain and 2015 debt-refinancing charges; assess recurring operating performance separately.
- Verify the December 2015 note refinancing, revolver usage, covenant headroom and sensitivity to floating interest rates.
- Monitor cash conversion, capital expenditures and the effect of offshore cash restrictions on available liquidity.
- Follow developments and potential allocation of costs in the Passaic River, Texas Brine and Hewitt Landfill matters; the filing does not provide clear loss estimates for the latter two.