Vulcan Materials Company — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the same 2012 periods unless noted. Vulcan is a U.S. construction-materials producer, led by aggregates, with concrete, asphalt mix and cement businesses. Amounts below are in millions except per-share data and where stated.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $775.2 | $687.6 | $1,975.8 | $1,836.4 |
| Total revenues, including delivery | $813.6 | $728.9 | $2,090.5 | $1,958.9 |
| Gross profit | $159.0 | $126.9 | $309.5 | $254.8 |
| Operating earnings | $99.8 | $55.9 | $136.6 | $29.2 |
| Continuing-operations earnings (loss) | $42.2 | $15.6 | $10.7 | $(58.4) |
| Net earnings (loss) | $41.4 | $14.3 | $15.3 | $(56.1) |
| Diluted EPS, net | $0.31 | $0.11 | $0.12 | $(0.43) |
| Operating cash flow | — | $260.0 | $93.8 |
- Gross margin, calculated on net sales, was 20.5% in Q3 versus 18.5%; for the first nine months it was 15.7% versus 13.9%.
- Q3 EBITDA was $180.4, up 27%; adjusted EBITDA was $171.2 versus $146.0. Nine-month EBITDA was $372.4 versus $286.8, while adjusted EBITDA was $338.5 versus $320.9. These are non-GAAP measures.
- Nine-month free cash flow, defined by Vulcan as operating cash flow less capital expenditures, was $142.7 versus $44.3. Operating cash flow included $153.1 of net proceeds from a sale of future aggregates production.
- Cash was $245.8 at September 30, down $29.7 from year-end 2012. Total debt was $2,523.6, down $289.0 year over year; debt was 39.5% of total capital versus 42.7% at September 30, 2012. The reported effective long-term debt rate was 7.72%.
- The $500.0 credit facility had no borrowings outstanding. Available capacity was $380.3 after $55.0 of standby letters of credit; the facility matures in March 2018. Cash included $67.8 held at a foreign subsidiary, mostly permanently reinvested offshore and limited to foreign operations.
Material changes and operating drivers
- Q3 net sales rose 13%, with higher shipments and pricing across major product lines: aggregates volumes/pricing +9%/+2%; ready-mixed concrete +17%/+2%; asphalt mix +4%/+0.2%; cement +10%/+5%. Management cited stronger private construction, especially residential activity.
- Aggregates gross profit increased $24.9 to $149.8; cash gross profit per ton rose to $4.83 from $4.69. Concrete remained loss-making, with gross loss of $3.9, although improved by $4.6. Asphalt mix gross profit rose to $13.6; cement recorded a $0.5 gross loss.
- Nine-month net sales increased 8%. Gross profit improved in all four segments. Continuing-operations results shifted to $10.7 earnings from a $58.4 loss, but the period still had a $11.2 pretax loss from continuing operations; a $21.9 income tax benefit resulted in positive after-tax earnings.
- Q3 included a $9.2 pretax gain on reclaimed real estate sales; Q3 2012 included $4.3 of restructuring and exchange-offer charges. Nine-month 2013 included $35.4 of asset-sale gains and $1.5 of restructuring charges. The prior-year nine months included $43.3 of exchange-offer costs, $18.3 of asset-sale gains and $9.0 of restructuring charges.
- Capital spending was $117.3 for nine months, versus $49.4. Investing cash outflow was $140.7, including approximately $90.0 for acquisitions; the company also received proceeds from divestitures. Financing cash outflow was $149.0, chiefly reflecting scheduled debt repayments.
Outlook, management commentary and risks
- No quantified earnings or revenue guidance is provided. Management described market recovery and expected continued volume growth and earnings improvement, supported by private construction and pricing; results remain seasonal and weather-sensitive, with the third quarter normally the strongest.
- Management’s planned asset-sales initiative targeted approximately $500 of net proceeds; $373.2 had been achieved to date, including $204.6 in the first nine months of 2013. Timing and value of additional sales are uncertain. Proceeds are intended to strengthen the balance sheet and support strategic investment.
- A September 2013 volumetric production payment generated $153.1 net cash proceeds, recorded as deferred revenue rather than immediate sales. Total deferred revenue was $225.9. The arrangement transfers a share of future production from specified quarries, while Vulcan retains operational control; the 2013 agreement covers up to 250.8 million tons and may extend to 2051.
- Legal and environmental exposures include former-chemicals-business litigation. For the Lower Passaic River, the EPA’s draft alternatives estimate total remediation costs of $0.9–$3.5 billion; Vulcan says its own liability cannot currently be reasonably estimated. Other perchloroethylene cases also have uncertain outcomes. Accrued costs for certain specified settlements/actions were described as immaterial.
- Asset-retirement obligations were $233.6, up from $148.7 at September 30, 2012, with 2013 increases tied principally to reclamation requirements and revised restoration estimates. The filing also identifies risks from construction demand, public funding, weather, input costs, interest rates, below-investment-grade debt ratings, pensions, permitting, acquisitions and potential asset impairments.
- Future salaried pension accruals were scheduled to cease December 31, 2013; the change was expected to reduce 2013 pension expense by approximately $7.6 net of a one-time curtailment loss. Management said existing plan funding was sufficient for required qualified-plan contributions through 2013.
- The company reported effective disclosure controls and no material change in risk factors from its 2012 Form 10-K.
Important facts for investors to verify
- How much of operating cash flow and free cash flow reflects the one-time $153.1 future-production payment, and how the deferred-revenue balance will amortize into sales.
- Whether volume and pricing gains continue, particularly in aggregates, and whether concrete can move from gross losses to profitability.
- The sustainability of earnings excluding asset-sale gains and prior-year unusual charges, alongside the unusually high reported nine-month effective tax rate of 195.1% arising in a pretax-loss period.
- Future asset-sale progress, acquisition returns, capital expenditures and debt reduction; also confirm the available credit capacity and any restrictions on foreign-held cash.
- Developments in Passaic River and former-chemicals litigation, reclamation obligations and pension funding, where ultimate costs or timing may differ materially from current estimates.