Aggregates Manager Digital Magazine
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32 AGGREGATES MANAGER / November 2016 SPECIAL REPORT product inventory they are purchasing varies from one to an- other, but most will limit the amount they'll value based upon some metric of historical annual sales volumes. For example, an amount equal to one or two year's sales volume. Obviously, there are exceptions. Impact on reported earnings: Often, we fi nd that operators are overstating reported earnings, sometimes signifi cantly, due to the inventory build of the relatively slow moving byproducts. To illustrate, let's consider the operator's reported fi nancial statements summarized by Figure 3. As summarized, the four- year average revenues and profi ts (EBITDA) were $7.7 million and $2.5 million, respectively. However, its fi nancial performance was actually quite different. In this instance, the volume of byproduct added to the stockpiles each year was nearly equal to the byproduct's annual sales volume. After several years of pursuing the estab- lished product mix, the byproduct's inventory level was equal to more than six years of its annual sales volume. Still, each year the increased byproduct inventory was booked on the fi nancial statements. As a result, the quarry's fi nancial performance had been materially overstated. Figure 4 illustrates our assessment of the quarry's fi nancial performance following a recasting of the fi nancial impact of the excessive byproduct inventory. As indicated, although sales rev- enues are unchanged, the recast average EBITDA of $1.6 million represents a decrease of nearly $900,000, or 35 percent. Additional examples include two limestone quarries where their reported earnings were recast downwards by 17 percent and 40 percent. To the extent their earnings decrease, so does a quarry's fair market value. Risks associated with forecasts? We have found there is often signifi cant earnings risks associated with newly established quarries and those instances where the quarry is targeting increased market share. One quarry's perfor- mance against forecast illustrates this observation very well. Its four-year forecast included a 25-percent increase in sales volume (600,000 to 750,000 tons) and a 33-percent increase in sales revenues ($3.6 to $4.8 million). Profi ts (EBITDA) were forecast to increase from $1.5 to $2.2 million, a nearly 50-percent increase. As illustrated by Figure 5, the quarry's annual sales volume forecast turned out to be moderately conservative as the sales forecast was exceeded in three of the four years. This was especially true in year three when the quarry shipped 864,000 $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 Yr1 Yr2 Yr3 Yr4 Yr5 Figure 3: Reported financial performance Sales EBITDA $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 Yr1 Yr2 Yr3 Yr4 Yr5 Figure 4: Recast versus reported performance Sales Adj Sales EBITDA Adj EBITDA $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 Yr1 Yr2 Yr3 Yr4 Yr5 Figure 3: Reported financial performance Sales EBITDA $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 Yr1 Yr2 Yr3 Yr4 Yr5 Figure 4: Recast versus reported performance Sales Adj Sales EBITDA Adj EBITDA $0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 Yr1 Yr2 Yr3 Yr4 Figure 5: Actual versus forecast sales volumes (tons) F'cst Tons Actual Tons $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 Yr1 Yr2 Yr3 Yr4 Figure 6: Actual versus forecast Performance F'cst Sales Actual Sales F'cst EBITDA Actual EBITDA $0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 Yr1 Yr2 Yr3 Yr4 Figure 5: Actual versus forecast sales volumes (tons) F'cst Tons Actual Tons $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 Yr1 Yr2 Yr3 Yr4 Figure 6: Actual versus forecast Performance F'cst Sales Actual Sales F'cst EBITDA Actual EBITDA