Vulcan Materials Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; compared with Q1 2016 unless otherwise stated. Vulcan is a U.S.-focused construction materials producer, led by aggregates, with asphalt mix, concrete and calcium operations. The company notes that first-quarter results are generally its weakest because of seasonality and weather.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $787.3 million | $754.7 million; up 4% |
| Gross profit and margin | $160.0 million; 20.3% | $164.7 million; 21.8% |
| Operating earnings | $72.4 million | $64.9 million |
| Continuing-operations earnings | $43.5 million; diluted EPS $0.32 | $42.0 million; diluted EPS $0.31 |
| Net earnings | $44.9 million; diluted EPS $0.33 | $40.2 million; diluted EPS $0.30 |
| Adjusted EBITDA | $149.3 million | $155.4 million; down 4% |
| Operating cash flow | $94.2 million | $88.7 million |
All dollar amounts are U.S. dollars. Gross margin declined despite higher revenue, as cost of revenues rose to $627.3 million from $590.0 million. Net earnings included a $1.4 million gain from discontinued operations; discontinued operations had a $1.8 million loss in Q1 2016. Reported results also reflect significant share-based compensation tax benefits.
Cash used in investing was $307.8 million, including $133.0 million of capital expenditures and $185.1 million for acquisitions. Operating cash flow less capital expenditures was negative $38.9 million, before acquisitions and other investing items. Financing provided $241.6 million, including net proceeds from a $350 million debt issuance; the company also paid $33.2 million in dividends and repurchased $49.2 million of shares.
At March 31, cash and cash equivalents were $287.0 million, including $59.2 million held offshore and restricted to foreign operations. Total debt was $2.329 billion, versus $1.983 billion at December 31, 2016; debt was 34.0% of total capital, compared with 30.2% at year-end. The $750 million credit facility had $471.5 million of available capacity after borrowings and letters of credit. Vulcan reported compliance with debt covenants.
Material changes and operating drivers
- Aggregates shipments fell 2% to 38.2 million tons, while freight-adjusted average selling price rose 5% ($0.57 per ton). Aggregates gross profit declined 6% to $140.2 million; cash gross profit was $5.17 per ton for the quarter.
- Management attributed $14.4 million of incremental year-over-year aggregates costs to higher diesel prices, increased stripping, California flooding and costs associated with transitioning to replacement ships. Diesel unit costs rose 35%.
- Concrete shipments increased 22%; segment gross profit rose to $10.5 million from $3.5 million. Asphalt mix shipments rose 5%, but gross profit declined to $8.6 million from $12.2 million. Calcium gross profit was $0.7 million versus $0.6 million.
- Selling, administrative and general expense increased to $82.1 million from $76.5 million. The prior-year quarter included a $9.6 million long-lived asset impairment charge; none was recorded in Q1 2017.
- Vulcan acquired California and Tennessee construction-materials businesses for $185.1 million cash. Preliminary purchase accounting included $62.9 million of amortizable intangible assets and $6.4 million of goodwill.
Outlook, risks and unusual items
- Management reaffirmed full-year 2017 Adjusted EBITDA guidance of $1.125 billion to $1.225 billion, with a midpoint of $1.175 billion, and expects strong year-over-year earnings growth. It projected aggregates shipment growth of 5%–8%, subject to timing of larger public transportation projects, and a full-year effective tax rate of approximately 28%.
- Management cited improving construction demand and pricing, growing project backlogs, and anticipated greater public infrastructure activity. It also said Q1 results were in line with plans and trailing-twelve-month aggregates cash gross profit reached a first-quarter record of $6.11 per ton.
- The Q1 effective tax rate from continuing operations was negative 7.9%. A $15.5 million excess tax benefit from share-based compensation was a major factor; the comparable 2016 benefit was $21.2 million. These discrete tax items make reported quarterly tax rates and earnings less representative of underlying performance.
- A useful-life estimate change for railcars reduced Q1 depreciation by $0.7 million and increased net earnings by $0.5 million, with no diluted EPS effect. The company also reported $1.9 million of restructuring charges.
- 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 then obligated to fund the remedy and had recorded an immaterial loss. In the Texas Brine litigation, alleged damages exceed $500 million, but the company said it could not reasonably estimate its potential liability; certain settlements were funded by insurers above the company’s self-insured retention. Costs for the Hewitt Landfill remediation could not yet be estimated.
- Other risks identified include weather, changes in public infrastructure funding and private construction, energy costs, interest rates, permitting and access to reserves, acquisition integration, environmental liabilities, and potential asset impairment. Management reported no material change in disclosed risk factors.
Important facts for investors to verify
- Whether shipment recovery and public infrastructure project timing support the 5%–8% aggregates volume outlook and EBITDA guidance.
- Whether pricing gains can offset fuel, stripping, weather-related and other operating costs, and whether gross margins recover.
- How much of reported earnings reflects recurring operations versus share-based tax benefits, discontinued-operation recoveries, restructuring and other unusual items.
- How acquisition spending, capital expenditures, dividends and buybacks affect cash flow and debt; note that some cash is held offshore and unavailable for domestic operations.
- Developments in the Passaic River, Texas Brine and Hewitt matters, including potential liability, insurance coverage and any change to recorded accruals.