Vulcan Materials Company — FY 2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. Vulcan is a major U.S. construction materials producer, led by aggregates, with concrete, asphalt mix and cement operations. Results are seasonal, with earnings typically highest in the third quarter and lowest in the first.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $2,628.7 million | $2,411.2 million |
| Gross profit / margin | $426.9 million / 16.2% | $334.0 million / 13.9% |
| Operating earnings | $190.4 million | $84.8 million |
| Continuing-operations earnings (loss) | $20.8 million; $0.16 diluted EPS | $(53.9) million; $(0.42) diluted EPS |
| Net earnings (loss) | $24.4 million; $0.19 diluted EPS | $(52.6) million; $(0.41) diluted EPS |
| Adjusted EBITDA | $467.8 million | $411.3 million |
| Cash from operating activities | $356.5 million | $238.5 million |
| Free cash flow (non-GAAP) | $81.1 million | $145.1 million |
Sales grew about 9%. Aggregates shipments rose 4% and freight-adjusted pricing rose 3%; aggregates cash gross profit reached $4.37 per ton, up 4%. The filing reports capital expenditures of $275.4 million in the cash-flow statement, including $117.0 million to purchase land with 136 million tons of reserves; management describes spending excluding that land purchase as $158.4 million. Free cash flow is a company-defined non-GAAP measure.
At year-end, cash was $193.7 million, working capital $652.4 million, total debt $2,522.4 million and equity $3,938.1 million. Debt was 39.0% of total capital; the weighted-average effective rate on long-term debt was 7.73%. The company reported $382.6 million of available borrowing capacity under its $500 million secured credit facility, with no year-end borrowings. Of cash, $72.3 million was held by a foreign subsidiary, with most of that amount permanently reinvested and limited to foreign operations.
Changes versus prior year and segment results
- Gross profit increased $92.9 million and all four segments reported higher earnings. Selling, administrative and general expense was essentially flat at $259.4 million.
- Aggregates gross profit rose $61.2 million, supported by higher volumes and prices. Aggregates shipments increased for the first time since the 2005 peak.
- Concrete shipments rose 14%, but the segment remained loss-making, with a $24.8 million gross loss, improved from $38.2 million.
- Asphalt mix gross profit increased to $32.7 million from $22.9 million; cement gross profit improved to $5.7 million from a $2.8 million loss.
- Operating cash flow increased, partly due to $153.1 million of net proceeds from selling a percentage of future aggregates production. Investing cash flow turned to a $296.2 million outflow, including acquisitions and reserve-land purchases. Debt declined from $2,677.0 million.
For the fourth quarter specifically, net sales were $652.9 million, gross profit $117.3 million, operating earnings $53.8 million and net earnings $9.1 million. Results remain subject to normal seasonal effects.
Outlook, commentary, risks and unusual items
- Management expected operating momentum to continue in 2014, citing improving construction demand, continued pricing improvement and cost discipline. This was management’s outlook, not a quantified earnings forecast.
- The company expected 2014 capital spending of $220 million and income-tax cash requirements of $70.6 million, assuming completion of the announced Florida transaction.
- In January 2014, Vulcan agreed to sell its Florida cement and concrete businesses for $720 million gross cash proceeds, subject to regulatory approval and customary conditions. Vulcan planned to retain Florida aggregates and supply the divested facilities at market prices under a 20-year agreement. The transaction was expected to close in Q1 2014.
- Conditional on that transaction closing, Vulcan initiated a $500 million debt tender offer; expected purchases were $375 million of 6.50% notes due 2016 and $125 million of 6.40% notes due 2017.
- The 2013 tax benefit was $24.5 million despite a $3.7 million pretax loss from continuing operations; the reported effective tax rate was 660.5%, heavily affected by statutory depletion and the small pretax-loss denominator. State net operating loss carryforwards had a $46.3 million valuation allowance.
- Cash flow also benefited from production-payment proceeds: purchasers acquired interests in a percentage of future output from specified quarries, while Vulcan retained operational control. These proceeds were recorded as deferred revenue, not current sales at receipt.
- Principal risks include construction-cycle and funding variability, weather, competition and pricing, fuel and input costs, permitting and reserve access, leverage and refinancing, environmental obligations, and pension assumptions. The company cited complex legacy Chemicals-business litigation, including a Louisiana sinkhole matter for which it could not reasonably estimate liability; no loss was recorded for matters whose loss was only reasonably possible or not estimable.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management said disclosure controls and internal control were effective; implementation of the quote-to-cash system was expected to continue into 2014.
Investor verification priorities
- Verify closing proceeds, taxes, retained assets and ongoing supply-agreement economics for the $720 million Florida divestiture.
- Check the debt tender’s actual settlement, remaining maturities and post-transaction liquidity and leverage.
- Assess how much operating cash flow and earnings improvement is recurring versus attributable to asset sales and production-payment proceeds.
- Track aggregates volume, pricing and unit profitability, and the continuing losses in the concrete segment.
- Review legal and environmental contingencies, reclamation obligations, and deferred-tax-asset realizability, particularly state carryforwards.