Vulcan Materials Company — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Vulcan is the largest U.S. construction-aggregates producer, with asphalt mix, ready-mixed concrete and calcium businesses. Results reflect a continuing construction-market recovery and the company’s aggregates-focused strategy.
Financial performance
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Revenue | $3.422 billion | $2.994 billion | Up 14% |
| Gross profit / margin | $857.5 million / 25.1% | $587.6 million / 19.6% | Gross profit up 46%; margin up 5.5 percentage points |
| Operating earnings | $549.8 million | $538.1 million | 2014 included substantially larger asset-sale gains |
| Continuing-operations earnings | $232.9 million; $1.72 diluted EPS | $207.1 million; $1.56 diluted EPS | Up 12% in earnings |
| Net earnings | $221.2 million; $1.64 diluted EPS | $204.9 million; $1.54 diluted EPS | Includes discontinued-operations losses |
| Adjusted EBITDA | $836.3 million | $604.7 million | Up 38%; non-GAAP measure |
| Operating cash flow / capital spending | $503.4 million / $289.3 million | $260.3 million / $224.9 million | Free cash flow was $214.1 million versus $35.4 million |
- Aggregates: Shipments increased 10% to 178.3 million tons; same-store shipments rose 7%. Freight-adjusted price increased 7%, and gross profit rose 39% to $755.7 million. Cash gross profit per ton reached $5.52, up 16%.
- Other segments: Asphalt Mix gross profit increased to $78.2 million from $38.1 million. Concrete gross profit was $20.2 million versus $2.2 million; adjusted for portfolio changes, same-store shipments rose 7% and gross profit increased $8.9 million. Calcium gross profit was $3.5 million.
- Margins and costs: Selling, administrative and general expense was $286.8 million, or 8.4% of revenue, versus 9.1% in 2014. Aggregates unit cost of sales excluding freight fell 1%, as lower fuel and energy costs offset higher labor and maintenance costs.
- Liquidity: Year-end cash was $284.1 million; working capital was $731.1 million. The unsecured revolving facility is $750 million, with $476.1 million available after $235 million borrowed and $38.9 million supporting letters of credit. The company stated its resources were sufficient for 2016 needs.
- Debt: Total debt was approximately $1.980 billion, versus $1.985 billion a year earlier; debt was 30.8% of total capital. Interest expense was $220.6 million, including $67.1 million of debt-purchase and refinancing charges. Term-debt effective interest was 7.52%; credit ratings remained below investment grade (Moody’s Ba2; Fitch BB+; S&P BB+).
- Capital returns: Dividends declared were $0.40 per share for 2015, up from $0.22 in 2014. Vulcan repurchased 228,000 shares for $21.5 million. The board declared a $0.20-per-share first-quarter 2016 dividend.
Fourth-quarter results
Q4 2015 revenue was $857.3 million, gross profit $253.9 million, continuing-operations earnings $93.6 million and net earnings $88.9 million. Q4 2014 revenue was $755.0 million, gross profit $169.7 million, continuing-operations earnings $38.3 million and net earnings $38.0 million. The filing attributes normal seasonality to outdoor construction activity, with the third quarter typically strongest and the first quarter weakest.
Material changes and unusual items
- Revenue growth reflected higher aggregates volume and pricing, acquisitions, and contributions from downstream businesses. Aggregates shipments rose 10% overall; same-store volume rose 7%.
- 2014 results included a $227.9 million pretax gain from selling Florida cement and concrete businesses. In 2015, Vulcan exchanged its California ready-mixed concrete operations for 13 asphalt plants, primarily in Arizona, and acquired aggregates and concrete operations in Arizona, New Mexico and Tennessee.
- 2015 debt refinancing extended maturities and lowered the weighted-average interest rate, but generated $67.1 million in pretax charges. The refinancing eliminated or addressed $621.1 million of maturities scheduled for 2015–2018; $522.5 million of principal was scheduled for 2018 at year-end 2015.
- Other 2015 items included a $5.2 million asset impairment, $5.0 million restructuring charge, $9.5 million of acquisition/divestiture charges, a $6.5 million foreign tax-credit impairment charge and a $4.7 million state NOL tax benefit.
- Former Chemicals business liabilities drove a $19.3 million pretax discontinued-operations loss, principally from legal defense, product-liability and environmental costs.
Outlook, risks and contingencies
- Management forecast approximately 7% demand growth in Vulcan-served markets in 2016 and Adjusted EBITDA of $1.0–$1.1 billion. Assumptions included aggregates shipments of about 191 million tons, 7% higher freight-adjusted aggregates pricing, 25% aggregates gross-profit growth and approximately $295 million in SAG expense, excluding business-development costs.
- Management expected core capital spending of approximately $275 million; the broader liquidity discussion cited total 2016 capital spending of $400 million. Other outlook assumptions included about $140 million interest expense, $285 million depreciation, depletion, accretion and amortization, and a 31% effective tax rate.
- Management cautioned that weather and project start dates could shift shipments into the second half of 2016. El Niño-related rainfall was already affecting early-year shipments in California, Arizona and New Mexico.
- Key business risks include construction cyclicality and weather, changes in public infrastructure funding, intense local competition, fuel and energy price volatility, transportation disruptions, difficulty permitting reserves, environmental regulation, pension assumptions, cybersecurity and below-investment-grade credit ratings.
- Legal and environmental matters: In the Lower Passaic River matter, EPA’s proposed remedy was estimated at $950 million–$1.73 billion, while the cooperating parties’ draft estimate was $475 million–$725 million. Vulcan said its participation and allocation were unresolved and recorded an immaterial loss. In the Texas Brine litigation, claimed damages exceed $500 million; Vulcan could not reasonably estimate its potential liability. For the Hewitt Landfill, Vulcan accrued site-investigation costs but could not estimate the eventual remediation liability. Environmental remediation accruals totaled $17.9 million, including $11.0 million retained from the former Chemicals business.
- Goodwill was $3.095 billion, 37% of total assets. The 2015 impairment tests found reporting-unit fair values materially above carrying values; a significant construction downturn could nevertheless lead to future impairment.
Important facts for investors to verify
- Reconcile 2015 earnings and cash generation to non-GAAP Adjusted EBITDA, especially the effects of refinancing costs and 2014 asset-sale gains.
- Track delivery of the 2016 volume, pricing, margin and EBITDA assumptions, including weather-related shipment timing and the difference between $275 million core and $400 million total capital-spending expectations.
- Review debt maturities, revolver utilization, covenant compliance and the company’s below-investment-grade ratings.
- Monitor developments and potential exposure in the Texas Brine, Lower Passaic River and Hewitt Landfill matters; the filing states that certain liabilities cannot yet be reliably estimated.
- Assess the sustainability of aggregates price gains, the 2015 margin improvement, and growth from acquisitions and portfolio exchanges.