Vulcan Materials Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Vulcan is a U.S.-focused producer of construction aggregates, asphalt mix, ready-mixed concrete and calcium products. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | First 9 months 2017 | First 9 months 2016 |
|---|---|---|---|---|
| Revenue | $1,094.7 | $1,008.1 | $2,912.8 | $2,719.7 |
| Gross profit | $305.5 | $304.2 | $757.3 | $761.1 |
| Operating earnings | $229.5 | $227.1 | $495.9 | $505.8 |
| Net earnings | $108.6 | $142.0 | $273.6 | $306.9 |
| Diluted EPS | $0.81 | $1.05 | $2.03 | $2.26 |
| Adjusted EBITDA | $311.8 | $301.0 | $748.8 | $735.9 |
- Gross margin was 27.9% in Q3 versus 30.2% a year earlier; for the first nine months it was 26.0% versus 28.0%. Gross profit increased slightly in Q3 but declined year to date.
- Q3 aggregates shipments rose 1% to 50.9 million tons; freight-adjusted average price increased 3%. Year-to-date aggregates shipments fell 1%, while price increased 4%.
- Q3 segment gross profit increased in Concrete but declined in Aggregates and Asphalt. Year-to-date Concrete improved substantially, while Aggregates and Asphalt declined.
- Operating cash flow was $399.5 million for the first nine months, compared with $404.6 million. Capital expenditures were $366.8 million, and cash used for acquisitions was $210.6 million.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $701.2 million, total debt was $2,814.8 million, and equity was $4,685.1 million. Debt was 37.5% of total capital, compared with 30.2% at year-end 2016.
- Cash increased from $259.0 million at December 31, 2016. The company reported $55.1 million held by foreign subsidiaries, restricted to foreign operations.
- Debt increased primarily following new debt issuances. In July, Vulcan retired 2018 notes with $522.5 million principal for a total cost of $565.6 million, including a $43.0 million premium and related costs. The resulting $46.1 million charge materially reduced Q3 earnings.
- Vulcan reported no line-of-credit borrowings and $706.7 million of available borrowing capacity, net of $43.3 million of letters of credit. It was in compliance with credit and term-debt covenants.
Changes, outlook and risks
- Q3 revenue rose 9%, but net earnings fell 24%, chiefly because net interest expense rose to $82.0 million from $33.1 million, including the debt-retirement charge. Excluding that unusual charge, operating performance was supported by pricing and stronger Concrete results.
- Management said Hurricanes Harvey and Irma and other severe weather disrupted more than half of the operating footprint, affecting shipments, plant efficiency and costs. Higher diesel and asphalt input costs also pressured margins. Management described underlying demand and pricing as solid and noted lingering storm effects.
- Management revised its full-year outlook: aggregates shipments were expected to approximate the prior year, and full-year Adjusted EBITDA was expected to be approximately $1.0 billion. It projected full-year interest expense of approximately $190.2 million, including the debt-retirement charge. Management cited construction starts, order backlogs and private demand as supporting a return to growth in 2018 and beyond.
- Year-to-date capital spending was $366.8 million, including $136.8 million for growth projects. Core replacement capital expenditures were expected to be approximately $300 million for the full year.
- Vulcan expected to close its pending $900 million cash acquisition of Aggregates USA in Q4 2017, subject to regulatory approval; potential quarry divestitures could be required. Completed 2017 acquisitions totaled $212.4 million.
- Material contingencies include Texas Brine litigation related to a Louisiana sinkhole; Vulcan said it could not reasonably estimate a range of liability for open cases. At the Hewitt Landfill, Vulcan accrued $14.2 million for a proposed treatment system and stated that further potential remediation liability could not yet be estimated. The filing also discusses Superfund and other environmental matters.
- Management identified weather, construction demand and public infrastructure funding, fuel and raw-material costs, interest rates, environmental obligations, litigation, permitting and acquisition integration among relevant risks. The filing reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether full-year Adjusted EBITDA and aggregates shipment guidance was achieved, and how weather affected Q4 results.
- How much of the earnings decline reflected the one-time $46.1 million debt-retirement charge versus recurring interest expense and operating trends.
- Completion, financing, integration and any required divestitures related to the Aggregates USA acquisition.
- Future costs and insurance coverage for the Texas Brine and Hewitt Landfill matters, including any changes to the recorded accruals or liability estimates.
- Whether aggregates pricing and unit profitability continued to improve despite higher fuel costs and the year-to-date shipment shortfall.