Vulcan Materials Company — Q1 2015 Form 10-Q
Business context and reporting period
Vulcan is a major U.S. producer of construction aggregates, asphalt mix and ready-mixed concrete. This unaudited filing covers the three months ended March 31, 2015; the company cautions that first-quarter results are not necessarily indicative of full-year results. Construction materials demand is seasonal and weather-sensitive, and the first quarter is normally the company’s weakest.
Financial performance and liquidity
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with Q1 2014.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $631.3 | $574.4 |
| Gross profit / margin | $77.9 / 12.3% | $34.1 / 5.9% |
| Operating earnings | $10.8 | $194.7 |
| Continuing operations, net | $(36.7) | $54.5 |
| Net earnings (loss) / diluted EPS | $(39.7) / $(0.30) | $54.0 / $0.41 |
| Adjusted EBITDA | $76.8 | $39.0 |
| Operating cash flow | $19.2 | $(5.0) |
| Capital expenditures | $49.6 | $46.0 |
| Free cash flow (non-GAAP) | $(30.4) | $(51.0) |
Revenue rose 10% and gross profit more than doubled. Gross margin excluding freight and delivery revenues was 14.8%, versus 7.0%. Aggregates freight-adjusted revenue increased 17% to $379.9 million; shipments rose 13% to 33.5 million tons (9% same-store), while average freight-adjusted selling price increased 4%. Aggregates gross profit was $67.7 million, up $29.2 million, and its margin on freight-adjusted revenue improved to 17.8% from 11.9%. Lower diesel prices contributed approximately $13.8 million in pretax savings, mainly in aggregates.
Q1 reported earnings are not directly comparable without considering unusual items. Q1 2014 included a $236.4 million net gain on asset and business sales, chiefly the Florida cement and concrete divestiture; Q1 2015 included only $6.4 million of such gains. The 2015 quarter also included a $21.7 million debt-purchase charge and $2.8 million in restructuring charges. Net interest expense was $62.5 million versus $120.1 million, with the prior-year period including a larger debt-purchase charge. Management reported adjusted continuing-operations diluted loss of $0.16 per share, compared with an adjusted loss of $0.28 in Q1 2014.
At March 31, cash and cash equivalents were $392.7 million, up from $141.3 million at year-end; $56.6 million was held at a foreign subsidiary, with most of that amount permanently reinvested offshore. Total debt was $2.278 billion, including $365.4 million classified as current because of intended repayments; total debt was approximately $2.006 billion at December 31, 2014. Debt was 35.4% of total capital, up from 32.4%. The reported quarter-end debt increase was temporary in management’s view: following April redemptions, debt was expected to return to about $2.0 billion. The company had $446.5 million of borrowing capacity on its $500 million revolving facility, with no borrowings and $53.5 million supporting letters of credit. A $750 million facility was expected to close in May. The company reported compliance with debt covenants. Quarterly dividends were $0.10 per share, versus $0.05 a year earlier.
Material changes, outlook and management commentary
- Performance improved across the operating businesses: asphalt mix gross profit rose to $8.8 million from $4.7 million; concrete gross profit was $0.8 million versus a $9.2 million loss; and calcium gross profit was $0.6 million versus $0.1 million. Comparisons are affected by the Florida divestiture and California concrete-for-asphalt asset exchange.
- In January, Vulcan exchanged 12 California ready-mixed concrete operations for 13 asphalt plants, primarily in Arizona, recording a pretax gain of $5.9 million before $2.4 million of transaction-related charges.
- In March, Vulcan issued $400 million of 4.50% senior notes due 2025 and used part of the proceeds to repurchase $127.3 million of 7.00% notes due 2018. In April, it redeemed an additional $343.8 million of notes due in 2016, 2017 and 2018. The April transactions generated a further $45.3 million noncash and cash refinancing charge, expected in Q2; total refinancing expenses for completed and planned actions were estimated at approximately $68.6 million. The company also planned to refinance its $150 million note due December 2015.
- Management forecast 2015 adjusted EBITDA of $775–$825 million, supported by expected aggregates shipment growth of 11% (8% same-store), pricing growth of 6%, stronger aggregates gross profit, improvement in non-aggregates businesses and control of selling, administrative and general expenses. If diesel prices remained at then-current levels, management expected results toward the high end of guidance. These are forward-looking estimates, not reported results.
- Management cited improving construction activity, stronger aggregates shipment momentum and accepted April price increases, but noted that demand remained below historical levels. Cold and adverse weather affected several markets. The company also expected full-year pension and post-retirement costs to be about $9.6 million higher than 2014, or $5.8 million higher excluding the prior-year one-time curtailment gain.
Risks, contingencies and unusual items
- The company recorded an immaterial loss accrual for the Lower Passaic River matter. The EPA’s proposed remedy for the lower eight miles was estimated at $950 million–$1.73 billion, while the cooperating parties’ preferred remedy estimate was $475 million–$725 million. The ultimate remedy, participating parties and cost allocations remained undetermined; Vulcan said the existing order did not require it to fund or perform the remediation.
- Vulcan denied liability in litigation connected to the Louisiana sinkhole and said it could not reasonably estimate any potential liability. It was not released from certain claims by the related class-action settlement. The filing also describes ongoing liability and environmental costs from the former Chemicals business, reported as discontinued operations; the Q1 2015 after-tax loss was $3.0 million.
- Asset retirement obligations rose to $238.7 million from $226.6 million at year-end, including $14.2 million of upward revisions mainly for revised reclamation estimates and spending patterns at quarries, primarily in California.
- Other risks identified include construction and infrastructure spending, weather, product pricing, energy and raw-material costs, interest rates and below-investment-grade debt ratings, pension assumptions, environmental liabilities, permitting and reserves, litigation, cyber and technology risks, and successful integration of acquisitions and organizational changes. Management reported no material change to the risk factors in its 2014 Form 10-K.
Important facts for investors to verify
- Whether aggregates shipment and pricing trends support the 2015 adjusted EBITDA guidance, and how much performance depends on diesel costs and weather.
- Actual post-April debt, interest costs and refinancing charges; completion and terms of the planned $750 million revolving credit facility; and refinancing of the 2015 maturity.
- How much of the reported earnings improvement reflects recurring operating performance versus unusual gains, debt-purchase charges and restructuring costs.
- Developments in Passaic River cost allocation and the Louisiana sinkhole litigation, including any change in the company’s ability to estimate exposure.
- Cash availability, including restrictions on offshore cash, and the company’s ability to fund capital spending, debt service and dividends while free cash flow remains negative.