Vulcan Materials Company — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; unaudited. Vulcan is a U.S.-focused construction materials producer, with aggregates as its primary business and asphalt mix, concrete and calcium operations. Financial amounts below are in U.S. dollars; “Q3” means the three months ended September 30.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,008.1 million | $1,038.5 million | $2,719.7 million | $2,564.9 million |
| Gross profit | $304.2 million | $291.3 million | $761.1 million | $603.6 million |
| Operating earnings | $227.1 million | $212.2 million | $505.8 million | $376.7 million |
| Continuing-operations earnings | $142.9 million | $126.2 million | $289.9 million | $139.4 million |
| Net earnings | $139.8 million | $123.8 million | $282.4 million | $132.3 million |
| Diluted EPS, net earnings | $1.04 | $0.91 | $2.09 | $0.98 |
| Operating cash flow | Not separately presented for the quarter | $345.4 million | $281.3 million |
- Q3 GAAP gross margin increased to 30.2% from 28.1%; nine-month margin rose to 28.0% from 23.5%. Q3 adjusted EBITDA was $301.0 million, up 6%; nine-month adjusted EBITDA was $736.7 million, up from $592.3 million.
- Interest expense was $33.1 million in Q3, down from $37.8 million. For nine months it was $100.2 million versus $183.9 million, largely because 2015 included $67.1 million of debt-refinancing charges.
- At September 30, cash was $135.4 million, total debt approximately $2.0 billion, and debt to total capital 30.6%. The $750 million revolving credit facility had $475.2 million of available capacity, after $235.0 million borrowed and $39.8 million supporting letters of credit. The company was in compliance with debt covenants.
- Current assets were $1.077 billion and current liabilities $360.9 million. Cash includes $56.7 million held offshore and designated for foreign operations.
- Nine-month capital expenditures were $287.4 million, including $83.6 million for replacement shipping capacity, site development and other growth investments. Cash dividends and stock repurchases totaled $241.3 million; the company repurchased about 1.4 million shares at an average $113.18 per share.
Changes versus comparable periods
- Q3 revenue fell 3%, while gross profit rose 4% and net earnings rose 13%. Aggregates shipments declined 4% to 50.3 million tons, but freight-adjusted average price rose 7%; aggregates segment gross profit increased 4%.
- Management attributed Q3 volume weakness to unusually wet weather, slower-than-expected large-project starts and uneven market activity. Shipments varied substantially by state. Aggregates per-ton gross profit increased 9% year over year.
- For the first nine months, revenue grew 6%, aggregates shipments rose 4%, and aggregates pricing increased 8%. Gross profit increased 26% and net earnings more than doubled; the comparison was aided by the prior-year debt-refinancing charges and improved operating performance.
- Q3 selling, administrative and general expenses increased $4.9 million, principally from business-process and sales initiatives. Nine-month expenses rose $28.1 million, reflecting compensation-related costs and sales investments.
Outlook, commentary and notable items
- Management expected full-year 2016 adjusted EBITDA of approximately $1 billion, about 20% above 2015, and said the company remained on track for the low end of its 2016 profit plan despite shipments below initial expectations. Full-year core capital expenditures were expected to be about $275 million, including approximately $125 million of internal growth investment excluding acquisitions.
- Management said longer-term project pipelines were healthy and expected broad-based volume and pricing growth with continued margin expansion in 2017, while noting it was too early to issue firm 2017 guidance.
- Q3 included a $6.5 million tax benefit from utilization of foreign tax credits, a $1.1 million pretax charge primarily for environmental matters related to divested assets, and a $0.2 million pretax business-interruption gain net of incentives. Nine-month results also included $10.5 million of asset impairment charges and $11.2 million of business-interruption recoveries. These items affect period-to-period comparisons.
- The company recorded ongoing losses from its former Chemicals business as discontinued operations: $3.1 million after tax in Q3 and $7.5 million for nine months, mainly related to legal, liability and environmental costs.
- Contingencies: In the Lower Passaic River matter, EPA’s March 2016 remedy calls for dredging estimated by EPA at $1.38 billion. Vulcan said its allocation and potential participation were undetermined, it was not obligated to fund the remedy at that time, and it had recorded an immaterial loss. In the Texas Brine sinkhole litigation, claimed damages exceed $500 million; Vulcan said it could not reasonably estimate its potential liability. At the Hewitt Landfill, remediation costs could not yet be estimated; Vulcan agreed to negotiate an EPA remedial-design order, with design costs accrued as immaterial.
- Other risks identified include construction demand and public infrastructure funding, weather, product pricing, energy and raw-material costs, interest rates, environmental obligations, permitting and reserves, pension exposures, competition, and potential asset impairment. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether volume recovery and favorable pricing persist, particularly given Q3 weather impacts and variation among markets.
- Progress toward the approximately $1 billion 2016 adjusted EBITDA outlook and planned capital spending; adjusted EBITDA is a non-GAAP measure.
- Cash availability, including the offshore cash restriction, revolving-credit capacity, debt covenants and floating-rate exposure.
- Developments in Texas Brine, Lower Passaic and Hewitt matters, including liability allocation, insurance coverage and whether any exposure becomes estimable or material.
- The composition and persistence of unusual tax benefits, impairment charges, environmental accruals and business-interruption recoveries.