Vulcan Materials Company — 2015 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Vulcan is a major U.S. producer of construction aggregates, asphalt mix and ready-mixed concrete. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $895.1 | $791.1 | $1,526.4 | $1,365.6 |
| Gross profit | $234.4 | $174.8 | $312.3 | $208.9 |
| Gross margin | 26.2% | 22.1% | 20.5% | 15.3% |
| Operating earnings | $153.8 | $103.2 | $164.5 | $297.9 |
| Interest expense, net | $83.7 | $40.6 | $146.1 | $160.6 |
| Continuing-operations earnings | $49.8 | $46.5 | $13.2 | $101.0 |
| Net earnings | $48.2 | $46.0 | $8.5 | $100.0 |
| Diluted EPS | $0.36 | $0.35 | $0.06 | $0.75 |
| Adjusted EBITDA | $229.2 | $172.7 | $306.1 | $211.7 |
Q2 adjusted EBITDA is a non-GAAP measure. Q2 revenue rose 13% and gross profit 34% year over year. First-half operating earnings and net earnings declined versus 2014, principally because the prior-year period included substantial gains on the sale of Florida cement and concrete businesses; 2015 also included significant debt-refinancing charges.
Operating trends and material changes
- Aggregates led performance: Q2 segment gross profit was $207.3, up 28%; shipments increased 9% to 47.5 million tons, same-store shipments increased 5%, and same-store freight-adjusted pricing rose 6%.
- Q2 asphalt mix gross profit increased to $21.1 from $9.0. Concrete gross profit was $4.9 versus $3.2; same-store concrete shipments fell 5%, partly due to wet weather. Calcium gross profit was $1.1 versus $0.9.
- Severe rain in April and May disrupted shipments and operating efficiency. Management said first-half weather may leave full-year volumes below plan; June same-store aggregates shipments improved 9% year over year.
- Q2 company gross margin increased to 26.2% from 22.1%; selling, administrative and general expenses were 7.7% of revenue versus 8.5%.
- In January, Vulcan exchanged its California ready-mixed concrete operations for 13 asphalt plants, primarily in Arizona, recording a pretax gain of $5.9. During the first half it also acquired aggregates and concrete operations in Arizona and New Mexico.
Cash flow, balance sheet and debt
- First-half operating cash flow was $64.6, compared with $22.9 in 2014. Capital expenditures were $148.7, producing negative free cash flow of $84.1, versus negative $93.4 a year earlier. Investing activities used $167.0; financing activities provided $35.8.
- At June 30, cash and equivalents were $74.7; current assets were $1,022.2 and current liabilities $506.6. Cash included $49.8 held at a foreign subsidiary, most of which was described as permanently reinvested offshore and limited to foreign operations.
- Total debt was $2,046.3, versus $1,984.7 at December 31, 2014; debt was 32.6% of total capital. The company reported $138.5 drawn on its credit line and $558.3 of remaining borrowing capacity after letters of credit.
- Vulcan issued $400.0 of 4.50% senior notes due 2025 and retired or repurchased $471.1 principal amount of debt due 2016–2018. Related refinancing charges were $67.1 for the first half, including $45.3 in Q2, materially raising Q2 interest expense.
- The company replaced its secured $500.0 credit facility with an unsecured $750.0 facility expiring in 2020. It said it was in compliance with facility and term-debt covenants. Management intended to refinance $150.0 of 10.125% notes due December 2015 using the facility and expected year-end 2015 debt of approximately $2.0 billion.
Outlook, risks and unusual items
- Management reaffirmed full-year adjusted EBITDA guidance of $775–$825, citing expected growth in aggregates gross profit per ton, improvement in non-aggregates businesses and operating-expense leverage. It expected a higher rate of aggregates pricing growth in the second half; recovery of weather-delayed customer shipments remained uncertain.
- Q2 unusual items included the $45.3 pretax debt-purchase charge, $5.2 asset impairment loss, $2.6 of acquisition/divestiture costs and $1.3 restructuring charge. Management estimated less than $2.0 of additional restructuring costs related to organizational changes.
- First-half discontinued-operations losses were $4.7 after tax, related to legal, product-liability and environmental costs from the former Chemicals business.
- Legal and environmental exposures include the Lower Passaic River Superfund matter: EPA’s proposed remedy was estimated at $950–$1,730, while the cooperating parties’ preferred remedy estimate was $475–$725. Vulcan said its agreement did not obligate it to fund or perform the remedy and recorded an immaterial loss. In the Texas Brine sinkhole litigation, claimed damages exceed $500, but Vulcan said it could not reasonably estimate its potential liability. It also could not estimate potential liability relating to the Hewitt Landfill groundwater matter.
- Other stated risks include construction demand and public infrastructure funding, weather, product pricing, energy and raw-material costs, interest rates and debt ratings, permitting and access to aggregates reserves, pension assumptions, regulation, acquisitions, and potential asset impairment. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether second-half construction activity and recovery of weather-delayed work support the reaffirmed $775–$825 adjusted EBITDA outlook.
- Whether aggregates pricing and unit-margin gains continue, and how volumes and weather affect operating leverage.
- The cash-flow effect of capital spending, the vessel-construction commitments ($121.8 total), dividends and working-capital needs.
- Execution of the planned December 2015 refinancing, debt levels, interest costs and ongoing covenant compliance.
- Developments and potential financial exposure in the Passaic River, Texas Brine and Hewitt Landfill matters; the filing does not provide a clear estimate for Vulcan’s liability in the latter two matters.