Vulcan Materials Company — Q2 2017 Form 10-Q
Business and period. Vulcan is a U.S.-focused construction materials producer, led by aggregates, with asphalt, ready-mixed concrete and calcium operations. This unaudited quarterly report covers the three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless noted. Results are seasonal and weather-sensitive.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1,030.8m | $956.8m | $1,818.1m | $1,711.6m |
| Gross profit | $291.8m | $292.2m | $451.8m | $456.9m |
| Operating earnings | $194.0m | $213.8m | $266.4m | $278.7m |
| Continuing-operations earnings | $111.7m | $127.2m | $155.3m | $169.2m |
| Net earnings | $120.1m | $124.7m | $165.1m | $164.9m |
| Diluted EPS, continuing operations | $0.83 | $0.93 | $1.15 | $1.24 |
| Adjusted EBITDA | $287.7m | $279.5m | $437.0m | $434.9m |
Q2 gross margin was 28.3%, down from 30.5%; first-half margin was 24.8%, versus 26.7%. Q2 revenue grew 8%, but gross profit was nearly flat and continuing-operations earnings declined. Net earnings included gains from discontinued operations: $8.4m after tax in Q2 2017, versus a $2.5m loss in Q2 2016. Adjusted EBITDA is a non-GAAP measure.
Aggregates shipments fell 2% in Q2 to 48.0m tons (3% lower on a same-store basis), while freight-adjusted average price rose 4% (5% same-store). The company cited record Q2 aggregates unit profitability despite lower volumes. Wet weather and flooding in Southeastern markets, weaker demand in Illinois and coastal Texas, higher diesel costs, product mix and operating inefficiencies weighed on results. Concrete gross profit improved; asphalt gross profit declined.
Cash, debt and liquidity
- Cash and cash equivalents were $1,129.8m at June 30, 2017, versus $259.0m at December 31, 2016; $69.9m was held in foreign subsidiaries and designated indefinitely reinvested.
- Total debt book value was $3,335.1m, including $525.8m classified as current; debt to total capital was 42.0%. The company subsequently retired $522.5m of 2018 notes in July. It stated that the debt-to-capital ratio would have been 37.9% after that retirement.
- Operating cash flow for the first half was $155.2m, essentially unchanged from $155.0m. Investing cash outflow was $483.6m, including $291.0m of capital expenditures and $210.6m cash paid for acquisitions. Financing cash inflow was $1,199.2m, principally reflecting new debt issuance.
- The $750m unsecured revolving credit facility had $706.5m of available capacity at June 30; none was drawn and $43.5m supported standby letters of credit. Vulcan reported compliance with debt covenants.
Outlook, material changes and notable items
- Following Q2 shipment shortfalls, management lowered its 2017 aggregates shipment outlook to 182m–187m tons, implying 5%–10% growth from August through year-end, and projected full-year adjusted EBITDA of $1.05bn–$1.13bn. Other stated expectations, including aggregates price improvement, downstream gross-profit growth, selling and administrative expense, capital spending and tax rate, remained as previously outlined.
- Management cited improving private demand, accelerating highway project starts, stronger public-work backlogs and growth in construction starts as signs of recovery, while noting that shipment timing and customers’ catch-up on deferred work affect the pace of growth. Full-year core capital investment was expected to be approximately $300m; the company also reported $107m of first-half growth investment.
- Vulcan agreed to acquire Aggregates USA for $900m in cash, expected to close in the second half of 2017, subject to conditions. Potential Tennessee quarry divestitures may be needed to expedite regulatory approval. First-half acquisitions already completed totaled $212.4m.
- June debt issuance included $1.0bn of notes and a $250m term-loan draw. The 2018 notes were retired in July for $565.6m, including a $43.0m premium. Management expected full-year interest expense of approximately $193.2m, including $46m of one-time charges in Q3 associated with early retirement.
- Q2 included $15.0m of pretax charges associated with divested operations, including a $14.2m accrual for on-site work at the Hewitt Landfill. Q2 2016 included an $11.0m business-interruption recovery and a $0.9m impairment charge. The 2017 six-month effective tax rate was 21.5%, affected by share-based compensation tax benefits; management’s full-year 2017 tax-rate expectation was 28%.
Risks and contingencies
- For the Texas Brine sinkhole litigation, Vulcan reported settlements in certain claims, with insurers funding settled amounts above the self-insured retention. A trial on remaining pipeline claims was scheduled for September 2017. The company said it could not reasonably estimate its potential liability for unsettled claims.
- At the Hewitt Landfill, Vulcan accrued $14.2m for on-site remediation and monitoring work. A separate EPA groundwater-remedy design matter remained under discussion; Vulcan said it could not yet identify an appropriate remedial action or reasonably estimate a loss.
- For the Lower Passaic River Superfund matter, the EPA’s proposed remedy was estimated to cost $1.38bn, but participating parties and allocations had not been determined. Vulcan stated it was not currently obligated to fund the remedial action and had previously recorded an immaterial loss.
- Other disclosed risk factors include construction demand and public infrastructure funding, weather, fuel and raw-material costs, interest rates, environmental liabilities, permitting and reserve access, acquisition integration and approval, and potential asset impairment. Management said there were no material changes to the risk factors in its 2016 Form 10-K.
Key facts for investors to verify
- Whether the revised shipment and adjusted EBITDA outlook was achieved, and the extent to which weather-related volume weakness reversed.
- Closing terms, regulatory conditions and any required divestitures for the Aggregates USA acquisition.
- Final costs and timing for Hewitt Landfill work, and developments in Texas Brine and Passaic River matters.
- Post-July debt balances, the effect of the early-retirement premium on reported earnings, and ongoing interest expense and liquidity.
- How much of reported earnings and adjusted EBITDA reflects recurring operations versus discrete legal, environmental, tax and other items.