Vulcan Materials CO annual report, FY2020

Business context and reporting period

Vulcan Materials Company’s Form 10-K covers the fiscal year ended December 31, 2020; it is an annual report, not a standalone fourth-quarter filing. Vulcan is a major U.S. construction-materials producer, led by aggregates, with asphalt, ready-mixed concrete and calcium businesses. COVID-19 disrupted construction activity, but the company continued operating as an essential business.

Financial results and liquidity

Revenue declined 1.5%, while gross profit rose 2.0% and gross margin expanded 0.9 percentage points. Operating earnings increased 2.1%; net earnings fell about 5% and continuing-operations diluted EPS fell 5.6%. Adjusted diluted EPS, which excludes specified items, was $4.68 versus $4.70. Adjusted EBITDA and ROIC (14.3%, up from 13.9%) improved despite lower reported earnings.

Aggregates shipments fell 3% to 208.3 million tons, while freight-adjusted price rose 3.2% to $14.44 per ton. Aggregates gross profit increased 1% to $1.159 billion. Combined asphalt, concrete and calcium gross profit rose 12% to $122.3 million. Asphalt and concrete volumes declined; pricing, material margins and cost control supported profitability.

Operating cash flow increased 9%. Capital expenditures were $362.2 million, including $122.9 million for internal growth projects. Year-end cash and restricted cash totaled $1.198 billion; reported available liquidity was $2.141 billion, including $943.9 million of undrawn bank-line capacity. Total debt to Adjusted EBITDA was 2.5x, versus 2.2x; net debt to Adjusted EBITDA was 1.6x, versus 2.0x. A $500 million floating-rate note maturity was due in March 2021, which management expected to repay using cash on hand. The company paid $180.2 million in dividends and repurchased $26.1 million of shares.

Material changes, outlook and management commentary

• Pricing and margins strengthened even as shipment volumes weakened, with aggregates unit gross profit rising 5% to $5.57 per ton. Lower diesel costs benefited aggregates earnings by $34.0 million; lower liquid-asphalt costs benefited asphalt costs by $37.2 million.
• 2020 included pretax charges of $22.7 million for a pension settlement, $10.2 million for direct COVID-19 costs, $7.3 million for non-routine business development, $6.9 million for divested-operation environmental liabilities and $1.3 million for restructuring. The pension settlement was noncash and management said it should benefit future pension expense and funding needs.
• Management’s 2021 outlook: aggregates shipments down 2% to up 2%; freight-adjusted aggregates pricing up 2%–4%; combined asphalt, concrete and calcium gross profit up mid- to high-single digits; continuing-operations diluted EPS of $4.80–$5.40; net earnings of $640–$720 million; and Adjusted EBITDA of $1.340–$1.440 billion. Planned capital expenditures, including growth projects, are $450–$475 million. Outlook assumes no major changes in COVID-related shelter-in-place restrictions.
• Management cited improving residential activity, highway lettings and awards, and continued demand from data centers, distribution centers and warehouses. It also cautioned that recovery and infrastructure funding remain uncertain.
• Key risks include construction-cycle sensitivity, COVID-19 effects, timing and amount of infrastructure funding, weather, energy and transportation costs, permits and reserve access, environmental regulation and liabilities, competition, interest rates and the LIBOR transition.

Contingencies and unusual exposures

The filing identifies environmental matters and litigation, including the Hewitt Landfill/San Fernando Valley groundwater matter, Texas Brine litigation arising from the former Chemicals business, New York water-district cases and a NAFTA arbitration involving Mexican operations. The company says it cannot reasonably estimate potential additional losses for several of these matters. Deloitte identified the Hewitt Landfill matter as a critical audit matter because of the uncertainty and judgment involved in estimating and disclosing remediation exposure; the on-site costs then anticipated had been accrued, but potential off-site responsibility remained uncertain. The company reported $36.5 million of accrued environmental remediation costs and $283.2 million of asset-retirement obligations at year-end. It reported no material off-balance-sheet arrangements. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

• Whether 2021 shipment, pricing and earnings guidance was achieved, and how much results depended on continued margin gains versus volume recovery.
• Repayment or refinancing of the $500 million March 2021 maturity and subsequent cash, liquidity and leverage levels.
• Actual cash conversion and capital spending relative to operating cash flow and the $450–$475 million 2021 capital plan.
• Developments, accrual changes and potential cash costs in the Hewitt Landfill, Texas Brine and other legacy litigation and environmental matters.
• The comparability of management’s non-GAAP measures, including Adjusted EBITDA and Adjusted EPS, with GAAP results and other companies’ measures.