Vulcan Materials Company — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Vulcan is a U.S.-focused producer of construction aggregates, asphalt mix, ready-mixed concrete and calcium products. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial performance
- Second quarter: Revenue was $956.8 million, up 7%; gross profit was $292.2 million, up 25%, and gross margin increased to 30.5% from 26.2%. Operating earnings were $213.8 million versus $153.8 million. Net earnings were $123.8 million ($0.91 diluted EPS) versus $48.2 million ($0.36).
- First half: Revenue was $1.712 billion, up 12%; gross profit was $456.9 million versus $312.3 million, and gross margin was 26.7% versus 20.5%. Net earnings were $142.7 million ($1.05 diluted EPS) versus $8.5 million ($0.06).
- Segments, Q2: Aggregates gross profit rose 23% to $254.0 million; Asphalt Mix increased to $30.9 million from $21.1 million; Concrete increased to $6.1 million from $4.9 million; Calcium was $1.1 million, broadly unchanged. Aggregates shipments rose 3% to 48.8 million tons, freight-adjusted price increased 7%, and freight-adjusted gross margin rose to 41.3% from 37.1%.
- Cash flow, first half: Operating cash flow was $102.5 million versus $64.6 million. Investing cash outflow was $195.9 million, including $199.8 million of property, plant and equipment purchases. Financing cash outflow was $98.8 million. Cash declined $192.2 million from year-end to $91.9 million.
- Liquidity and debt: At June 30, cash was $91.9 million, total debt was $1.983 billion, and debt was 30.7% of total capital. The $750 million revolving credit facility had $475.2 million available after $235.0 million drawn and $39.8 million supporting letters of credit. Vulcan was in compliance with debt covenants. Of cash, $57.7 million was held offshore and designated indefinitely reinvested, for use in foreign operations.
- Other metrics: Q2 Adjusted EBITDA, a non-GAAP measure, was $279.8 million, up 21%; first-half Adjusted EBITDA was $435.7 million. The quarterly dividend was $0.20 per share, versus $0.10 a year earlier. First-half dividends and repurchases returned $122.5 million to shareholders.
Material changes and drivers
- Q2 strength reflected higher aggregates pricing and volumes, improved unit profitability, and stronger Asphalt Mix and Concrete gross profit. Aggregates freight-adjusted price rose 7%; gross profit per ton increased 19%. First-half aggregates shipments grew 9% and price increased 8%.
- Growth was partly offset by higher selling, administrative and general expense: $82.7 million in Q2 versus $69.2 million, primarily from compensation-related charges and sales initiatives. Diesel costs were lower by $7.1 million in Q2 and $13.5 million in the first half.
- Interest expense fell to $33.3 million in Q2 from $83.7 million and to $67.1 million in the first half from $146.1 million. The comparison is materially affected by $45.3 million of Q2 2015 and $67.1 million of first-half 2015 debt-refinancing charges; the improvement is not solely a change in ongoing borrowing costs.
- Operating cash flow increased, but the filing attributes substantial cash use to working-capital and other operating changes. Capital spending rose, including $50.3 million for replacement ships, site development and other growth investments.
Outlook, commentary and risks
- Management reaffirmed full-year Adjusted EBITDA guidance of $1.0–$1.1 billion. It expects full-year aggregates shipments to exceed 190 million tons, with growth of 8%–9%, and expects core capital expenditures of approximately $275 million plus approximately $125 million of internal growth capital, excluding acquisitions. The filing states that reconciliation of forward-looking Adjusted EBITDA to GAAP is unavailable without unreasonable effort.
- Management described underlying demand and longer-term project pipelines as favorable, while noting unusually wet weather, delayed large-project starts, uneven state-level activity and possible shipment pull-forward into Q1. Full-year volume expectations depend on recovering weather-delayed shipments, avoiding further project delays and the length of the fourth-quarter construction season.
- Unusual Q2 items included an $11.0 million pretax business-interruption claims recovery related to the 2010 Gulf Coast oil spill, $4.2 million of acquisition/divestiture-related charges and a $0.9 million impairment. First-half items also included $10.5 million of impairments, $16.5 million of acquisition/divestiture-related charges and $0.3 million of restructuring charges.
- Key legal and environmental exposures include the Passaic River Superfund matter: EPA estimated its proposed remedy at $1.38 billion, while the group’s draft study estimated $475–$725 million; Vulcan says it is not currently obligated to fund the remedy and recorded an immaterial loss in 2015. In the Texas Brine litigation, alleged damages exceed $500 million; Vulcan said it could not reasonably estimate its potential liability. Hewitt Landfill remediation costs and a subsequent EPA request for North Hollywood groundwater remedial-design work also could not be reasonably estimated.
- Other risks include construction spending and infrastructure funding, weather, fuel and other input costs, competition, permitting and access to reserves, interest rates, pension assumptions, environmental liabilities, litigation, and potential asset impairment. The company said ordinary-course environmental claims were not expected to materially affect consolidated results, financial position or cash flows overall, though amounts in a particular period could be material.
Important facts for investors to verify
- Whether delayed projects and weather-affected volumes recover sufficiently to meet the 8%–9% shipment-growth outlook and Adjusted EBITDA guidance.
- How much earnings growth reflects recurring pricing, volume and cost performance versus the 2015 debt-refinancing comparison and 2016 claims recovery or other unusual items.
- Working-capital trends, cash conversion and the funding needs associated with elevated capital expenditures, dividends and share repurchases.
- Potential exposure, insurance coverage and future developments in the Texas Brine, Hewitt Landfill and Passaic River matters; the filing does not provide clear estimates for some of these liabilities.
- The availability of offshore cash for U.S. liquidity needs and continued compliance with revolving-credit and term-debt covenants.