Vulcan Materials Company — Q2 2014 Form 10-Q
Business context and period: Vulcan is a U.S. producer of construction aggregates and a producer of asphalt mix and ready-mixed concrete. This unaudited filing covers the quarter and six months ended June 30, 2014. Results are seasonal and cyclical; management says the third quarter is normally the strongest.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $756.3m | $696.1m | $1,304.8m | $1,200.6m |
| Total revenues, including delivery | $791.1m | $738.7m | $1,365.6m | $1,276.9m |
| Gross profit | $174.8m | $132.9m | $208.9m | $150.6m |
| Operating earnings | $103.2m | $86.9m | $297.9m | $36.8m |
| Continuing-operations earnings (loss) | $46.5m | $30.1m | $101.0m | $(31.5)m |
| Net earnings (loss) | $46.0m | $28.8m | $100.0m | $(26.1)m |
| Diluted EPS | $0.35 | $0.22 | $0.75 | $(0.20) |
| Adjusted EBITDA | $172.7m | $140.8m | $211.7m | $166.7m |
Q2 gross profit was 23.1% of net sales, versus 19.1% a year earlier. Aggregates shipments rose 10%, freight-adjusted pricing improved 3%, and cash gross profit per ton reached a record $5.00, up 8%. Aggregates gross profit increased 27% to $161.7m. The first-half increase in earnings was substantially affected by asset-sale gains; the company reported a $229.1m pretax gain on the Florida cement and concrete divestiture and a $72.9m pretax debt-tender charge.
Cash flow and liquidity: First-half operating cash flow was $22.9m, compared with a $45.3m use in 2013. Capital expenditures were $116.3m, producing negative free cash flow of $93.4m. Investing activities provided $560.9m, mainly from the Florida sale; financing activities used $549.9m, primarily for debt purchases. Cash and cash equivalents were $227.7m at June 30, including $62.1m of restricted cash reported separately. The company had $446.7m of available capacity under its $500m credit line, with no borrowings and $53.3m supporting letters of credit.
Debt and balance sheet: Total debt was $2.01bn, down from $2.52bn at December 31, 2013; debt was 32.9% of total capital versus 39.0% at year-end. In March, Vulcan repurchased $506.4m principal of notes for $579.7m, including a $71.8m premium and transaction costs. The line of credit was extended to March 2019. Equity was $4.09bn and total current assets were $1.10bn at June 30.
Changes, outlook, and management commentary
- Q2 net sales rose 9%; first-half net sales also rose 9%. First-half aggregates shipments increased 9%, while ready-mixed concrete shipments declined 15% and cement shipments declined 66%, primarily reflecting the March sale of the Florida cement and concrete businesses.
- The Florida businesses were sold for $719.1m net cash proceeds, generating a $229.1m pretax gain. Vulcan retained its Florida aggregates operations and entered a 20-year aggregates supply agreement for the divested concrete facilities.
- Management maintained its 2014 forecast for freight-adjusted aggregates pricing growth of 3%–5% and aggregates shipment growth of 7%–9%. It expected full-year non-aggregates gross profit of $40m–$50m, versus $13.6m in 2013, and 2014 capital spending of approximately $240m.
- Management cited improving construction demand, private-market activity, and operating leverage, while expecting modest growth in public-market shipments. It noted the highway funding extension through May 31, 2015 and expressed optimism about infrastructure construction in 2015 and beyond. These are forward-looking expectations, not guarantees.
- Unusual items include the Florida divestiture gain, the debt-tender loss, and a $3.0m long-lived-asset impairment charge in Q1. The company also disclosed a $3.8m postretirement-plan curtailment gain associated with the divestiture.
Risks and contingencies
- Vulcan cannot reasonably estimate its potential liability in the Texas Brine sinkhole litigation and denies liability. A proposed $48.1m settlement between other parties remained subject to court approval; Vulcan says it is expected to be a released party under the agreement, but the agreement does not release contribution and indemnity claims against it.
- For the Lower Passaic River, the EPA proposed a remedy estimated to cost $950m–$1.73bn across the site. The remedy and cost allocation were not final; Vulcan said its potential liability could not be reasonably estimated and expected any liability to be immaterial based on then-available facts.
- Other disclosed risks include construction-market cyclicality, weather, public infrastructure funding, product pricing, energy and raw-material costs, interest rates, below-investment-grade debt ratings, pension assumptions, environmental liabilities, permitting of reserves, and potential asset impairment. The filing reports no material change to the prior annual report’s risk factors.
- Management reported effective disclosure controls. The filing also identifies continued implementation of replacement information technology systems as an operational consideration.
Important facts for investors to verify
- Whether volume, pricing, and unit-profitability trends support the 2014 aggregates shipment and pricing outlook.
- How much reported earnings and cash generation depend on divestiture gains, and whether underlying operating cash flow improves as volumes grow.
- Execution of the approximately $240m capital-spending plan and the expected $40m–$50m non-aggregates gross profit target.
- Debt and interest costs after the tender offer, including the substantial tender premium and remaining debt maturities.
- Developments in the Texas Brine and Passaic River matters, including any changes in potential exposure or insurance coverage.
- Subsequent events: a July 18 acquisition of four Northern California quarries for approximately $49.3m total consideration, partly paid with 705,205 shares and assumed debt; and a July-declared quarterly dividend of $0.06 per share.