Vulcan Materials Company — Q3 2014 Form 10-Q
Business context and reporting period. Vulcan is a U.S. construction materials producer, led by aggregates, with asphalt mix, concrete and cement businesses. This unaudited quarterly report covers the three and nine months ended September 30, 2014; results are seasonal and may not indicate full-year performance.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $873.6m | $813.6m | $2,239.1m | $2,090.5m |
| Gross profit | $209.0m | $159.0m | $417.9m | $309.5m |
| Gross margin | 23.9% | 19.5% | 18.7% | 14.8% |
| Operating earnings | $140.3m | $99.8m | $438.2m | $136.6m |
| Continuing-operations earnings | $67.8m | $42.2m | $168.8m | $10.7m |
| Net earnings | $66.9m | $41.4m | $166.9m | $15.3m |
| Diluted EPS | $0.50 | $0.31 | $1.26 | $0.12 |
| Adjusted EBITDA | $215.4m | $170.9m | $427.8m | $337.6m |
- Q3 drivers: Aggregates shipments rose 12% (10.5% same-store); aggregates average price rose 2%, or 4% excluding unfavorable mix. Aggregates gross profit increased 26% to $188.0m. Freight-adjusted gross margin was 26.3%, versus 21.3%.
- Cash flow: Nine-month operating cash flow was $149.7m, down from $260.0m. Capital spending was $169.2m, making free cash flow negative $19.5m, compared with positive $142.7m. Investing activities provided $302.6m, mainly reflecting divestiture proceeds; financing used $554.2m.
- Liquidity and debt: At September 30, cash was $91.9m and current assets were $954.6m against current liabilities of $364.8m. Total debt was $2.006bn, down from $2.524bn a year earlier; debt was 32.3% of total capital, versus 39.5%. The $500m credit facility had $446.7m available, with no borrowings; Vulcan reported covenant compliance. $62.7m of cash was held at a foreign subsidiary, mostly permanently reinvested offshore.
- Other metrics: Q3 aggregates cash gross profit was $5.15 per ton, up from $4.83. The quarterly dividend was $0.06 per share. The nine-month effective tax rate was 29.9%; 2013’s 195.1% rate reflected a pretax loss and tax benefit.
Material changes versus the prior comparable period
- Q3 revenue increased 7%, gross profit 31%, and diluted EPS from $0.31 to $0.50. Management attributed stronger results principally to aggregates volume growth, improved unit profitability and lower interest expense.
- Nine-month net earnings rose to $166.9m from $15.3m. Comparability was significantly affected by a $227.9m pretax gain on the Florida cement and concrete divestiture and other asset-sale gains; 2014 also included a $72.9m pretax debt-tender charge. In 2013, results included $35.4m of pretax asset-sale gains and $153.1m of proceeds from a sale of future aggregates production.
- In March, Vulcan sold its Florida cement and concrete businesses for $721.4m total consideration, receiving $719.1m in cash by quarter-end. It retained Florida aggregates operations and entered a 20-year aggregates supply agreement. During Q3, six acquisitions were completed for $318.0m, including assets in California, Arizona, New Mexico, Texas and the Mid-Atlantic; acquired operations contributed $13.1m of revenue and $0.1m of net earnings in the reported periods.
- Vulcan repurchased $506.4m principal amount of notes in a tender offer for $579.7m, including premium and transaction costs. Long-term debt declined, but the tender generated the stated $72.9m charge. Q3 interest expense fell to $40.9m from $49.1m.
Outlook, commentary, risks and unusual items
- Management described demand and leading indicators in its served markets as favorable, with private construction driving growth. It expected continued volume momentum to support accelerating aggregates price growth; cited 5%–10% price increases in some markets. The filing provides no specific quantified full-year earnings or revenue guidance.
- Management said its planned asset-sales initiative concluded in Q1 2014, generating more than $1.1bn of net proceeds over two years. Proceeds funded debt reduction and strategic aggregates investment. A new divisional structure is scheduled to take effect January 1, 2015; future related restructuring charges could not be estimated.
- Q3 results included $3.9m of acquisition/divestiture costs and $0.8m of restructuring charges. Nine-month results also included $15.5m of acquisition/divestiture costs and the debt-tender charge. The Florida sale generated a major one-time gain; the sale structure, together with an earlier reserves investment, enabled deferral of taxes on approximately $145m of capital gains.
- Key stated risks include construction and infrastructure spending, weather, product pricing, energy and raw-material costs, interest rates and below-investment-grade debt ratings, permitting and access to reserves, acquisition integration, pension assumptions, environmental liabilities and litigation.
- For the Lower Passaic River Superfund matter, the EPA proposed a remedy estimated to cost $950m–$1.73bn for the site; Vulcan said its own liability could not be reasonably estimated and it believed potential liability would be immaterial. In Louisiana sinkhole litigation, Vulcan denied liability and said exposure could not be reasonably estimated. No liability was recorded for claims deemed only reasonably possible or not estimable.
Important facts for investors to verify
- How much of earnings growth reflects recurring operating improvement versus the Florida divestiture gain, other asset sales and debt-tender costs.
- Whether aggregates shipment growth and pricing momentum persist, and how the acquired businesses perform after integration.
- Why operating cash flow and free cash flow declined despite higher earnings, including working-capital movements and ongoing capital spending needs.
- The amount and timing of any ultimate exposure from the Passaic River, Louisiana sinkhole, former Chemicals business environmental and liability matters, and reclamation obligations.
- Debt maturity, interest-cost and refinancing implications following the tender offer, and the availability and restrictions associated with offshore cash and the credit facility.
- The assumptions behind the deferred tax asset valuation allowance, the expected tax benefit from capital-gain deferrals, and any future restructuring charges.