Vulcan Materials Company — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing reports annual results and unaudited quarterly data; fourth-quarter revenue was $873.0 million and net earnings were $112.6 million. Vulcan is the largest U.S. construction-aggregates supplier, with asphalt mix, ready-mixed concrete, and calcium businesses. Aggregates generated 76% of 2016 revenue.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $3,592.7 million | $3,422.2 million |
| Gross profit / margin | $1,000.8 million / 27.9% | $857.5 million / 25.1% |
| Operating earnings | $679.6 million | $549.8 million |
| Continuing-operations earnings | $422.4 million; $3.11 diluted EPS | $232.9 million; $1.72 diluted EPS |
| Net earnings | $419.5 million; $3.09 diluted EPS | $221.2 million; $1.64 diluted EPS |
| Adjusted EBITDA | $966.0 million | $834.9 million |
| Cash from operations | $644.6 million | $519.5 million |
| Capital expenditures | $350.1 million | $289.3 million |
- Aggregates shipments rose 2% to 181.4 million tons; freight-adjusted selling price rose 7%. Aggregates gross profit increased 16% to $873.1 million, with unit gross profit up 14% to $4.81 per ton.
- Cash and cash equivalents were $259.0 million, working capital was $764.9 million, and total debt was approximately $1.983 billion. Debt was 30.2% of total capital. The company reported $475.5 million of available capacity under its $750 million revolving credit line; $235 million was drawn and $39.5 million supported letters of credit.
- Cash dividends declared were $0.80 per share for 2016, double 2015’s $0.40. The board subsequently declared a $0.25-per-share first-quarter 2017 dividend.
Changes versus prior year and unusual items
- Revenue increased 5%, gross profit 17%, continuing-operations earnings 81%, and net earnings 90% year over year. The filing attributes improved results primarily to higher aggregates pricing and gross profit, with further contributions from asphalt mix and concrete.
- Interest expense fell to $134.1 million from $220.6 million; 2015 included $67.1 million of debt-purchase charges. This makes the year-over-year earnings comparison less representative of recurring operations.
- 2016 included $36.1 million of tax benefits, including $24.8 million of excess share-based compensation tax benefits; pretax gains of $16.2 million on real estate and $11.0 million on business-interruption claims; $16.9 million of charges related to divested operations; and $10.5 million of asset-impairment losses.
- Vulcan repurchased $161.5 million of shares and paid $106.3 million in dividends in 2016. It completed acquisitions in New Mexico, Texas, and Georgia for $33.3 million of total consideration.
Outlook, risks, and contingencies
- For 2017, management projected Adjusted EBITDA of $1.125–$1.225 billion. Assumptions included aggregates shipment growth of 5%–8%, freight-adjusted aggregates price increases of 5%–7%, and approximately 15% gross-profit growth in asphalt mix, concrete, and calcium. Other estimates: core capital spending of about $300 million, interest expense of about $140 million, depreciation, depletion, accretion and amortization of about $300 million, and a 28% effective tax rate. These are management forecasts, not guarantees.
- Management cited continuing construction recovery, improving public infrastructure activity, and favorable pricing. It expects shipment growth to be weighted toward the second half of 2017 and aggregates unit margins to continue growing faster than price.
- Key business risks include construction and economic cycles, weather, infrastructure-funding timing, competition and pricing, fuel and energy costs, transportation disruptions, permitting and reserve access, environmental regulation, interest rates, pension assumptions, cybersecurity, and acquisition integration.
- Legal and environmental matters include the Lower Passaic River Superfund site, where the EPA estimated a proposed remedy at $1.38 billion; Vulcan said it was not obligated to fund the remedy at that time and had recorded an immaterial loss. Texas Brine litigation alleges damages exceeding $500 million; apart from specified settlements and insured claims, Vulcan said it could not reasonably estimate its potential liability. The company has accrued the estimated cost of the Hewitt Landfill interim plan but cannot yet estimate ultimate remediation costs.
- Other notable exposures include $223.9 million of asset-retirement obligations and $19.9 million of accrued environmental remediation costs. Goodwill was $3.095 billion, or 37% of assets; the 2016 impairment test found reporting-unit fair values substantially above carrying values, though future downturns could create impairment risk.
Important facts for investors to verify
- Whether 2017 shipment and pricing assumptions, and the $1.125–$1.225 billion Adjusted EBITDA outlook, were achieved; review the company’s definition and reconciliation of this non-GAAP measure.
- How much earnings growth was attributable to recurring operations versus tax benefits, claims recoveries, asset-sale gains, and the prior-year debt-purchase charge.
- Actual capital spending, cash conversion, debt maturities and refinancing, and shareholder returns, including any additional buybacks.
- Developments, insurance coverage, accruals, and potential cash exposure in the Texas Brine, Lower Passaic River, and Hewitt Landfill matters.
- Changes in reserve estimates, permit access, goodwill valuation, and environmental or reclamation liabilities.