Vulcan Materials Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unless otherwise noted, financial amounts below are in millions of dollars. Vulcan is a U.S. producer of construction aggregates and also operates concrete, asphalt mix and cement businesses. First-quarter results are typically seasonally weak and are sensitive to weather and construction activity.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $548.5 | $504.6 |
| Total revenues, including delivery | $574.4 | $538.2 |
| Gross profit | $34.1 | $17.7 |
| Gross margin on net sales | 6.2% | 3.5% |
| Operating earnings (loss) | $194.7 | $(50.1) |
| Continuing operations earnings (loss) | $54.5 | $(61.6) |
| Net earnings (loss) | $54.0 | $(54.8) |
| Diluted EPS | $0.41 | $(0.42) |
| Adjusted EBITDA (non-GAAP) | $39.0 | $25.9 |
| Cash from operating activities | $(5.0) | $(12.9) |
| Capital expenditures | $46.0 | $26.9 |
| Free cash flow (non-GAAP) | $(51.0) | $(39.7) |
Net sales rose 9%; gross margin improved 2.7 percentage points. Management reported aggregates shipments up 6% (29.6 million tons) and pricing up 2%; cash gross profit per ton increased 8%. Aggregates segment gross profit rose 55% to $38.5 million. Asphalt mix gross profit improved to $4.7 million; concrete remained loss-making at $(9.2) million, and cement gross profit was $0.1 million.
GAAP earnings were materially affected by the Florida cement and concrete business sale: the company recorded a $230.1 million pretax gain on that sale, plus gains on other property sales. It also recorded a $72.9 million pretax debt-tender loss in interest expense. Management’s adjusted continuing-operations result, excluding these discrete items, was a loss of $37.0 million, or $(0.28) per diluted share, versus a loss of $61.6 million, or $(0.47) per diluted share, a year earlier. These adjusted figures are non-GAAP measures.
Balance sheet, liquidity and debt
- At March 31, cash and cash equivalents were $268.8 million; an additional $63.0 million was restricted in escrow for potential replacement-property acquisitions. Cash included $77.7 million held at a foreign subsidiary, primarily permanently reinvested offshore.
- Total assets were $7.87 billion, current assets $1.05 billion, and current liabilities $340.9 million. Equity was $4.03 billion.
- Total debt was $2.01 billion, down from $2.52 billion at December 31, 2013. Debt was 33.2% of total capital, compared with 39.0% at year-end. Approximately 99% of debt was fixed-rate.
- The $500 million revolving credit facility had no borrowings and $425.8 million of available capacity at quarter-end; $53.3 million of capacity supported standby letters of credit. The facility was extended to March 2019 and may become unsecured upon meeting specified credit metrics or ratings.
- Investing cash flow was $628.8 million, principally reflecting $720.1 million of net proceeds from the Florida business sale. Financing cash outflow was $548.8 million, chiefly due to the debt tender. The company purchased $506.4 million principal amount of notes for total cash cost of about $579.7 million.
Changes, outlook and notable items
- Florida divestiture: On March 7, Vulcan sold its Florida-area cement and concrete businesses to Cementos Argos for $720.1 million net cash proceeds and a $230.1 million pretax gain. Vulcan retained Florida aggregates operations and agreed to supply aggregates to the divested facilities at market prices for 20 years. The sale was not presented as discontinued operations.
- Management commentary: Management said demand was strengthening across end markets and most of its footprint despite exceptionally cold weather. Aggregates shipments had increased year over year for four consecutive quarters. The company said it was positioned to grow earnings faster than sales as aggregates demand recovered; this was qualitative commentary, not quantified earnings guidance.
- Asset-sale program: The two-year planned asset-sales initiative concluded with the Florida transaction, generating more than $1.1 billion in net proceeds. Management said proceeds supported debt reduction and reinvestment in strategic aggregates markets.
- Costs and unusual items: A $2.987 million impairment charge reduced certain long-lived assets to an estimated fair value of $2.280 million. No restructuring charges were recorded in Q1 2014; Q1 2013 included $1.5 million. A sale-related postretirement-plan curtailment gain of $3.8 million was recorded.
- Contingencies: The EPA proposed a bank-to-bank dredging remedy for the lower eight miles of the Passaic River, with estimated total remediation costs of $950 million to $1.73 billion. The proposal was not final, allocation among potentially responsible parties was undetermined, and Vulcan stated its liability was unknown and believed any liability would be immaterial. In the Texas Brine sinkhole litigation, Vulcan denied liability and said it could not reasonably estimate a potential loss; a proposed $48.1 million settlement did not release Texas Brine’s contribution and indemnity claims against Vulcan.
- Operating and financial risks: Results are seasonal and weather-sensitive; demand depends on public infrastructure funding and private construction. The filing also identifies risks involving product pricing, energy and raw-material costs, interest expense, below-investment-grade debt ratings, reserves and permitting, pensions, environmental liabilities, litigation, and IT systems. The company reported effective disclosure controls and no material change to its previously disclosed risk factors.
- Subsequent rating action: The filing notes that on April 22, 2014, Moody’s upgraded the secured line rating and improved the outlook on unsecured debt; S&P’s outlook was positive as of the filing’s reporting information.
Most important facts for investors to verify
- Reconcile reported profit and EPS to the Florida sale gain, other disposal gains, and $72.9 million debt-tender charge; assess the company’s non-GAAP adjustments.
- Track whether aggregates volume, pricing and margins continue to improve after the weather-affected quarter, and monitor results in concrete and asphalt mix.
- Confirm the debt reduction, ongoing interest burden, available revolver capacity and use of divestiture proceeds; note that Q1 operating cash flow and free cash flow were negative.
- Monitor final EPA decisions, cost allocation and any developments in the Passaic River and Texas Brine matters, for which outcomes or exposure were not estimable in the filing.
- Assess the long-term effect of the Florida divestiture, including retained aggregates exposure, the 20-year supply agreement and the sale’s impact on reported segment comparisons.