Vulcan Materials Company — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Vulcan is a U.S.-focused construction materials producer, led by aggregates, with asphalt mix, ready-mixed concrete and calcium businesses. Results are seasonal and sensitive to construction activity and weather.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $1,327.7 million | $1,200.2 million | $2,324.2 million | $2,054.6 million |
| Gross profit | $370.5 million | $323.2 million | $562.2 million | $482.5 million |
| Gross margin | 27.9% | 26.9% | 24.2% | 23.5% |
| Operating earnings | $276.1 million | $230.3 million | $380.5 million | $311.4 million |
| Net earnings | $197.6 million | $159.7 million | $260.9 million | $212.6 million |
| Diluted EPS | $1.48 | $1.19 | $1.96 | $1.58 |
| Adjusted EBITDA | $372.0 million | $324.8 million | $564.7 million | $492.7 million |
Q2 revenue rose 11%, net earnings 24%, and adjusted EBITDA 15% year over year. First-half revenue rose 13% and net earnings 23%. Aggregates drove the improvement: Q2 shipments increased 4%, freight-adjusted price per ton rose 5.9%, and segment gross profit increased 16%. First-half aggregates shipments rose 8% and freight-adjusted price rose 5.7%; aggregates gross profit increased 19%.
Other segments were mixed. Q2 asphalt shipments rose 8% and gross profit rose 7%; concrete shipments fell 7% and gross profit fell 2%. For the first half, asphalt gross profit declined 6% and concrete gross profit declined 9%. Higher liquid-asphalt costs reduced first-half asphalt earnings by $19.7 million; management said pricing gains were beginning to offset those costs. Q2 operating earnings benefited from higher aggregates profit and had no discrete items reported for 2019. Prior-year comparisons included business-development and restructuring charges; first-half 2018 also included debt-refinancing costs.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $301.9 million, versus $275.8 million a year earlier. Changes in assets and liabilities used $201.3 million of cash, compared with $55.4 million in the prior-year period; management attributed the principal difference to working capital.
- Investing cash outflow was $216.3 million, including $225.8 million of capital expenditures. Financing cash outflow was $103.5 million. Cash and restricted cash totaled $26.5 million at June 30.
- Total debt was $2.919 billion, up from $2.912 billion at year-end 2018 and down from $3.137 billion at June 2018. Debt was 35.2% of total capital, and management reported total debt at 2.4 times trailing-twelve-month adjusted EBITDA.
- The $750 million revolving credit facility had $558.5 million of available capacity after borrowings and letters of credit. Vulcan reported compliance with debt covenants. A $250 million floating-rate note due in 2020 is classified as long-term because the company intends and is able to refinance it.
- Six-month dividends paid were $81.9 million, or $0.62 per share. No shares were repurchased in the first half of 2019.
Outlook, commentary and risks
- Management maintained full-year 2019 guidance of $4.55–$5.05 diluted EPS from continuing operations and $1.250–$1.330 billion adjusted EBITDA. Capital spending expectations also remained unchanged: $250 million for maintenance and $200 million for internal growth.
- Management described demand as healthy, with robust public construction activity led by highways and continued growth in private construction. It cited highway starts 21% above the level two years earlier and expected shipment growth and price improvement to continue. Wet weather delayed shipments in some markets.
- Key risks include construction-cycle exposure, infrastructure funding and private construction demand, weather, product pricing, diesel and hydrocarbon costs, interest rates, permitting and access to reserves, environmental regulation, and pension and litigation exposures. Management said there were no material changes to the risk factors in its 2018 Form 10-K.
- Contingencies include the Lower Passaic River Superfund matter, Texas Brine litigation, Hewitt Landfill remediation, New York water-district cases and a NAFTA arbitration involving Mexican operations. Vulcan said several matters could not be reasonably estimated; the EPA’s estimated $1.38 billion Passaic remedy is a site-wide estimate, not Vulcan’s allocated share. The company reported no current obligation to fund that remedy and had previously recorded an immaterial loss.
- Vulcan adopted lease accounting in 2019, recognizing $442.7 million of operating lease liabilities at adoption; at June 30, lease liabilities were $428.3 million. The company reported effective disclosure controls and procedures.
Important facts for investors to verify
- Whether aggregates shipment growth and pricing gains persist, and whether weather affects the full-year outlook.
- Whether working-capital cash use moderates and operating cash flow keeps pace with earnings and planned capital spending.
- Whether higher liquid-asphalt costs continue to pressure asphalt margins, alongside weaker concrete volumes.
- Refinancing plans for the $250 million 2020 floating-rate notes, available revolver capacity and continued covenant compliance.
- Developments and potential financial exposure in environmental matters, lawsuits and the NAFTA arbitration, for which some outcomes remain unquantifiable.
- Progress against full-year EPS, adjusted EBITDA and capital expenditure guidance.