Vulcan Materials Company — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also includes unaudited quarterly results; “2018 Q4” is not the reporting period of this annual report. Vulcan is a U.S.-focused construction materials producer, with aggregates as its core business and additional asphalt, ready-mixed concrete and calcium operations.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $4.383 billion | $3.890 billion |
| Gross profit / margin | $1.101 billion / 25.1% | $993.5 million / 25.5% |
| Operating earnings | $747.7 million | $639.0 million |
| Continuing-operations earnings | $517.8 million; diluted EPS $3.87 | $593.4 million; diluted EPS $4.40 |
| Net earnings | $515.8 million; diluted EPS $3.85 | $601.2 million; diluted EPS $4.46 |
| Operating cash flow | $832.8 million | $644.7 million |
| Adjusted EBITDA | $1.132 billion | $981.9 million |
- Revenue rose 13%, gross profit 11%, and operating earnings 17%. Aggregates shipments increased 10% to 201.4 million tons, including 6% same-store growth. Freight-adjusted aggregates price increased 1% overall and 2% same-store.
- Aggregates gross profit increased 16% to $991.9 million. Combined gross profit for asphalt, concrete and calcium fell 22% to $109.1 million; asphalt gross profit declined 38% to $56.5 million, with higher liquid asphalt costs reducing segment earnings by $54.4 million.
- Net earnings fell 14% despite stronger operating results, principally because 2017 included $297.0 million of discrete tax benefits, including the Tax Cuts and Jobs Act remeasurement. The effective tax rate was 16.9% in 2018 versus negative 64.2% in 2017. Interest expense was $138.0 million versus $295.5 million; 2017 included $153.1 million of charges related to debt purchases.
- Cash from operations increased by $188.1 million. Investing activities used $669.9 million, including $469.1 million of capital expenditures and $221.4 million of cash consideration for acquisitions. Capital spending included $221.7 million for core and maintenance needs and $247.4 million for internal growth.
- Year-end debt was $2.912 billion, or 2.6 times 2018 Adjusted EBITDA; debt was 35.9% of total capital. Cash and cash equivalents were $40.0 million, with another $4.4 million restricted. Working capital was $476.6 million. The $750 million revolving credit facility had $572.0 million of available capacity after borrowings and letters of credit; the company reported covenant compliance.
- Vulcan returned $282.1 million to shareholders through dividends and repurchases, up from $192.6 million in 2017. Dividends declared were $1.12 per share, versus $1.00.
Changes, outlook and risks
Four acquisitions in 2018 had total consideration of $219.9 million, expanding operations in Alabama, California and Texas. Vulcan sold its Georgia ready-mixed concrete operations. Debt refinancing extended the portfolio’s weighted-average term to approximately 15 years. The company reported 16.3 billion tons of permitted, proven and probable aggregates reserves.
Management expected 2019 aggregates shipments to grow 3%–5%, freight-adjusted price to increase 5%–7%, and combined asphalt, concrete and calcium gross profit to grow 15%–20%. Guidance also included net earnings of $610–$670 million, Adjusted EBITDA of $1.25–$1.33 billion, diluted continuing-operations EPS of $4.55–$5.05, interest expense of about $130 million, and an effective tax rate of about 20%. Planned capital spending was approximately $250 million for maintenance and $200 million for internal growth. Management cited stronger public-infrastructure demand, stable private demand, pricing initiatives and cost control, while noting the business remained below historical demand peaks.
- Operating and market risks: Construction cyclicality, weather, competition, shipment volumes, diesel and energy costs, and liquid asphalt prices can affect results. Public-sector demand depends on the timing and amount of government infrastructure funding.
- Legal and environmental contingencies: The filing describes unresolved matters involving the Lower Passaic River, Texas Brine, New York water districts and the Hewitt Landfill. The Hewitt matter generated a $10.4 million fourth-quarter 2018 accrual for on-site source-control work; the company said it could not reasonably estimate a loss for certain remaining matters. Vulcan also filed a NAFTA arbitration concerning Mexican quarry operations; recovery, if any, was not quantifiable.
- Total accrued environmental remediation costs were $50.4 million at year-end, including $39.7 million for continuing operations; asset retirement obligations were $225.7 million. Management cautioned that actual environmental and litigation costs could differ materially from estimates.
- Other identified risks include permitting and reserve access, acquisition integration, pension funding and asset returns, regulatory and climate-related changes, cybersecurity, transportation constraints and potential impairment of goodwill. Goodwill was 32% of total assets, though annual impairment testing found reporting-unit fair values substantially above carrying values.
Investor verification priorities
- Check 2019 performance against the shipment, pricing, segment-profit and earnings guidance, and distinguish reported earnings from adjustments and prior-year tax benefits.
- Track asphalt input-cost recovery and whether aggregates pricing, volume and operating efficiencies offset fuel and other cost inflation.
- Review debt maturities, revolver availability, leverage and the effect of planned capital spending, acquisitions and shareholder returns on liquidity.
- Monitor developments and potential exposure in the Hewitt, Passaic, Texas Brine, New York water district and Mexican arbitration matters; several outcomes or losses were not estimable.
- Confirm the status of aggregates permitting and reserve access, pension assumptions, and environmental and reclamation obligations.
The independent auditor issued an unqualified opinion on the financial statements and internal controls. The filing states that disclosure controls and internal control over financial reporting were effective as of December 31, 2018.