Vulcan Materials Company — Q2 2018 Form 10-Q
Business and period: Vulcan is a U.S.-focused construction materials producer, led by aggregates, with asphalt mix, ready-mixed concrete and calcium operations. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Amounts below are USD unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,200.2M | $1,030.8M | $2,054.6M | $1,818.1M |
| Gross profit | $323.2M | $290.0M | $482.5M | $448.2M |
| Operating earnings | $230.3M | $192.0M | $311.4M | $262.3M |
| Continuing-operations earnings | $160.3M | $111.7M | $213.7M | $155.3M |
| Net earnings | $159.7M | $120.1M | $212.6M | $165.1M |
| Diluted EPS, continuing operations | $1.20 | $0.83 | $1.59 | $1.15 |
| Adjusted EBITDA | $324.8M | $287.7M | $492.7M | $437.0M |
- Q2 revenue grew 16%; gross profit grew 11% and operating earnings 20%. Approximate gross margin was 26.9% versus 28.1%; operating margin was 19.2% versus 18.6%.
- For the first half, revenue increased 13% and gross profit 8%. Approximate gross margin was 23.5% versus 24.7%; operating margin was 15.2% versus 14.4%.
- Q2 aggregates shipments rose 15% (11% same-store); freight-adjusted price increased 1%, or 3% excluding mix. Aggregates segment gross profit increased 13% to $283.5M. First-half aggregates shipments rose 11% (6% same-store).
- Q2 asphalt gross profit fell $3.0M as liquid asphalt unit costs rose 28%; concrete gross profit increased $3.9M. For the first half, asphalt gross profit fell $11.2M, while concrete increased $4.0M.
- Q2 net interest expense was $33.2M versus $38.5M. The continuing-operations effective tax rate was 20.0% versus 29.0% in Q2 and 14.1% versus 21.5% for the first half; the company attributed the lower tax expense largely to the U.S. federal rate reduction to 21%.
Cash flow, debt and liquidity
- First-half operating cash flow was $275.8M, up from $155.2M. Investing cash outflow was $456.6M, including $247.2M of property and equipment purchases and $219.0M of acquisition cash consideration. Financing cash inflow was $95.3M. Cash and restricted cash totaled $61.1M at June 30, down from $146.6M at year-end 2017.
- Cash flow included a discretionary $100.0M qualified pension contribution, compared with total pension contributions of $4.7M in the prior-year half.
- Total debt was $3.137B, including $360.0M of short-term line-of-credit borrowings; debt to total capital was 38.5%, compared with 36.5% at year-end. Cash was $55.1M, plus $6.1M restricted cash. Current assets were $1.183B and current liabilities $811.8M.
- The unsecured revolving credit facility is $750M, matures in 2021, and had $344.9M available at quarter-end after borrowings and letters of credit. Vulcan reported compliance with debt covenants. It had $45.1M of standby letters of credit outstanding.
- Debt refinancing extended the weighted-average debt term to approximately 16 years. First-half interest expense included $7.4M of charges related to early debt retirement/refinancing.
Changes, outlook and notable items
- Management reiterated 2018 guidance of continuing-operations diluted EPS of $4.00–$4.65 and Adjusted EBITDA of $1.15–$1.25B. It forecast same-store aggregates shipment growth of 7%–9% for the year and approximately $825M of after-tax cash flow from earnings.
- Expected 2018 spending included approximately $250M of core operating and maintenance capital and $350M of internal growth capital; management expected significantly lower internal growth spending in 2019. It completed three first-half bolt-on acquisitions for approximately $219M and sold its Georgia ready-mixed concrete operations.
- Management cited improving demand, including stronger growth in Vulcan-served markets and increased public transportation funding converting into shipments. It expects aggregates shipment growth through the rest of the year to be consistent with Q2, while noting a lower-priced geographic sales mix.
- Higher input costs remain a headwind: diesel unit cost rose 30% in Q2 and reduced aggregates segment gross profit by $7.3M; liquid asphalt costs rose 28% and reduced Q2 asphalt earnings by $13.3M. Management said first-half asphalt margins may improve but are expected to remain below beginning-of-year expectations.
- Q2 included $4.5M of business-development charges and $1.1M of restructuring charges. First-half results also included $7.4M of debt-retirement charges, a $2.9M gain on a business sale, a $1.7M business-interruption recovery, and $5.4M of restructuring charges. Discontinued operations, related to the former Chemicals business, recorded a $0.7M after-tax loss in Q2 versus $8.4M income in Q2 2017.
- Contingencies include environmental and litigation matters. In July 2018, Occidental sued Vulcan and other parties over the Lower Passaic River Superfund site; the EPA’s estimated $1.38B remedy is a site-wide estimate, not Vulcan’s assessed share. Vulcan said its allocation and potential liability remain uncertain. In the Texas Brine matter, a trial court assigned Vulcan 15% fault in a pipeline case; the ruling is on appeal, and Vulcan could not reasonably estimate liability for remaining cases. At the Hewitt Landfill, the company had accrued $15.2M in 2017 and reported approval of a remediation plan.
- Other exposures and uncertainties include reclamation obligations of $215.4M, construction and infrastructure funding, weather, energy and raw-material costs, interest rates, pension funding, permitting and reserve access, environmental rules, and acquisition integration. Management reported no material change to the previously disclosed risk factors.
Investor facts to verify
- Whether shipment growth and pricing can offset diesel, liquid-asphalt and geographic-mix pressures and support the reiterated full-year guidance.
- Progress on the Passaic River allocation and litigation, Texas Brine appeals and remaining claims, and Hewitt Landfill remediation costs; the filing does not provide a clear final company liability for these matters.
- Debt and liquidity after refinancing, including short-term borrowings, the remaining credit-facility availability, and compliance with covenants.
- Cash generation after the pension contribution, acquisitions and planned capital expenditures; first-half operating cash flow is seasonal and not necessarily indicative of the full year.
- The impact of TCJA accounting estimates and future lease-accounting adoption; management said certain tax accounting was incomplete and lease effects were still being evaluated.