Business context and reporting period
Vulcan Materials Company’s Form 10-K covers the fiscal year ended December 31, 2014; it is an annual filing, not a standalone fourth-quarter report. Vulcan is the largest U.S. construction-aggregates producer and also operates asphalt mix, ready-mixed concrete and calcium businesses. Aggregates are its core business.
During 2014, Vulcan operated 335 aggregates facilities and reported 15.8 billion tons of permitted proven and probable aggregates reserves. It sold its Florida cement and concrete businesses in March and completed multiple acquisitions focused on aggregates and selected downstream markets.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $2,994.2 million | $2,770.7 million |
| Gross profit / margin | $587.6 million / 19.6% | $426.9 million / 15.4% |
| Continuing-operations earnings | $207.1 million | $20.8 million |
| Net earnings | $204.9 million | $24.4 million |
| Diluted EPS | $1.54 | $0.19 |
| Adjusted EBITDA | $599.7 million | $468.3 million |
| Cash from operating activities | $260.3 million | $356.5 million |
| Free cash flow | $35.4 million | $81.1 million |
Revenue increased 8%; gross profit rose 38%. Aggregates segment gross profit increased 32% to $544.1 million. Aggregates shipments grew 11% to 162.4 million tons, while freight-adjusted average selling price rose 2%. Aggregates gross profit as a percentage of freight-adjusted revenues improved to 30.3% from 26.2%; this is a non-GAAP measure. Management attributed improving unit profitability to pricing, operating efficiency and product mix.
Fourth-quarter unaudited revenue was $755.0 million versus $680.2 million in fourth-quarter 2013. Diluted net EPS was $0.28 versus $0.07. Results are seasonal, with the third quarter typically strongest and the first quarter typically weakest.
At year-end, cash was $141.3 million, working capital was $468.6 million and total debt was $2,005.6 million, down from $2,522.4 million. Debt was 32.4% of total capital versus 39.0%. The $500 million revolving credit facility had $446.5 million of available capacity; Vulcan reported covenant compliance. Interest expense was $243.4 million. The company’s debt ratings remained below investment grade: Moody’s Ba3/stable for senior unsecured debt and S&P BB+/stable.
Changes versus the prior year and unusual items
- Reported 2014 earnings included a $227.9 million pretax gain on the Florida cement and concrete divestiture; total net gains on sales of property, equipment and businesses were $244.2 million. The divestiture generated $721.4 million in net pretax cash proceeds.
- Vulcan used proceeds from the sale to purchase $506.4 million principal amount of debt for $579.7 million, recognizing a $72.9 million pretax loss on the debt purchase. Total debt declined by $516.8 million.
- Adjusted EBITDA excludes specified items, including gains on asset sales, acquisition and divestiture charges, restructuring and deferred-revenue amortization. It is a non-GAAP measure and should not be treated as a substitute for net income or operating cash flow.
- Operating cash flow fell year over year, mainly because 2013 included $153.1 million in proceeds from a sale of future aggregates production. Free cash flow also declined, despite lower capital spending.
- 2014 acquisitions totaled $331.8 million and added more than 440 million tons of proven and probable aggregates reserves, according to management. A January 2015 exchange of California concrete operations for asphalt plants, primarily in Arizona, occurred after year-end.
Outlook, risks and contingencies
Management described aggregates demand as recovering gradually and still below normalized levels, with recovery expected to continue for several years. For 2015, Vulcan expected demand from private end uses to increase 14%–18% and public end uses 3%–5%. Management said mid-to-high-single-digit price gains associated with a cyclical recovery could begin to take hold in 2015; this is commentary, not formal company-wide earnings guidance.
Key risks include construction-cycle and volume sensitivity, public infrastructure funding, pricing and competition, weather, fuel and energy costs, transportation constraints, permitting and access to reserves, environmental regulation, pension assumptions, below-investment-grade debt and refinancing needs, acquisition integration, and information-technology and cybersecurity risks. Management reported no cybersecurity incident with a material operational impact.
Vulcan reported a $226.6 million asset-retirement obligation and $9.0 million of accrued environmental remediation costs. In the Lower Passaic River matter, the EPA’s proposed remedy was estimated to cost $950 million–$1.73 billion; Vulcan said it could not reasonably estimate its ultimate liability and believed any liability would be immaterial based on available facts. In the Texas Brine litigation, Vulcan denied liability and said it could not reasonably estimate any potential liability. The filing states that outcomes of these proceedings and other contingencies cannot be predicted with certainty.
Other notable items include a $266.3 million pension-plan funded deficit at year-end and an increase in the recorded pension liability amid lower discount rates. Goodwill was 38% of total assets, but annual impairment tests found reporting-unit fair values substantially above carrying values and no goodwill impairment was recorded. Management said 2015 capital expenditures were expected to be approximately $250 million and cash income taxes approximately $80.3 million.
Most important facts for investors to verify
- How much of 2014 earnings growth reflects recurring operating improvement versus the Florida divestiture gain and debt-tender charge; review the company’s reconciliations of non-GAAP measures.
- Whether 2015 shipment growth, pricing and end-market demand develop in line with management’s stated outlook, and how much capacity utilization improves.
- Debt maturities, interest expense, covenant headroom and available revolver capacity, particularly the $150.1 million of 2015 maturities and the 2018 maturity concentration.
- Cash conversion and capital needs: operating cash flow was $260.3 million and free cash flow $35.4 million in 2014; confirm the effects of acquisitions, capital spending and future-production transactions.
- Developments in the Texas Brine and Passaic River matters, environmental obligations and pension funding assumptions, including whether exposures or required contributions change.