Vulcan Materials Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless stated otherwise. Vulcan is a U.S.-focused construction materials producer, led by aggregates, with asphalt, ready-mixed concrete and calcium businesses. Results are seasonal, and first-quarter results are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $996.5 million | $854.5 million |
| Gross profit / margin | $191.7 million / 19.2% | $159.3 million / 18.6% |
| Operating earnings | $104.4 million | $81.2 million |
| Continuing-operations earnings | $63.9 million; diluted EPS $0.48 | $53.4 million; diluted EPS $0.40 |
| Net earnings | $63.3 million; diluted EPS $0.48 | $53.0 million; diluted EPS $0.39 |
| Operating cash flow | $116.2 million | $93.0 million |
| Capital expenditures | $122.0 million | $128.7 million |
| Adjusted EBITDA (non-GAAP) | $192.7 million | $167.8 million |
- Revenue rose 17%, gross profit 20%, operating earnings 29%, and net earnings 19%. Gross margin improved 0.6 percentage points. Lower net interest expense helped earnings; the prior-year period included $7.4 million of debt-refinancing charges.
- Operating cash flow less capital expenditures was negative $5.9 million in Q1 2019. The prior-year cash-flow comparison was affected by a $100 million discretionary pension contribution in Q1 2018.
- At March 31, cash and cash equivalents were $30.8 million; current assets were $1.084 billion and current liabilities $659.6 million. Available capacity under the $750 million credit line was $517.0 million, after borrowings and letters of credit.
- Total debt was $2.959 billion, versus $2.912 billion at December 31, 2018 and $2.976 billion a year earlier. Debt was 36.2% of total capital; management reported debt at 2.6 times trailing-twelve-month Adjusted EBITDA. The company was in compliance with debt covenants.
- Operating lease accounting adoption added $426.4 million of net right-of-use assets and $434.7 million of lease liabilities at quarter-end. The comparative 2018 balance sheets were not restated.
Business drivers and changes
- Aggregates was the primary growth driver: segment sales increased 19% to $835.0 million; shipments rose 13% to 45.6 million tons and freight-adjusted average price increased 5.4%. Segment gross profit rose 25% to $185.7 million, or $4.07 per ton versus $3.66.
- Asphalt shipments increased 11%, but segment gross profit moved to a $3.3 million loss from a $0.2 million profit. Liquid asphalt unit costs were up 29% year over year, adding $9.0 million in cost; pricing gains are expected to offset this gradually.
- Concrete shipments fell 18%, with weather in Virginia cited as a driver; segment gross profit decreased to $8.6 million from $10.3 million. California rainfall also reduced aggregates shipments there, despite growth across most of the company’s footprint.
- Higher wages and incentives contributed to selling, administrative and general expenses rising to $90.3 million from $78.3 million. As a share of revenue, these expenses declined to 9.1% from 9.2%.
- Q1 2019 included a $4.1 million pretax gain related to business sales. The company paid $40.9 million in dividends ($0.31 per share) and repurchased no shares; it repurchased $55.6 million in Q1 2018.
Outlook, risks and contingencies
- Management reiterated 2019 continuing-operations diluted EPS guidance of $4.55–$5.05 and Adjusted EBITDA guidance of $1.25–$1.33 billion. It described first-quarter results as consistent with full-year expectations, citing public and private construction demand, shipment growth, pricing and operating discipline.
- 2019 capital expenditure expectations remain approximately $250 million for maintenance and $200 million for internal growth. Full-year SAG expense expectation remains $355 million. These are management expectations, not guarantees.
- Key risks include construction and infrastructure spending, weather, product pricing, liquid asphalt and energy costs, interest rates, environmental and legal liabilities, pension assumptions, permitting and access to aggregates reserves, and cybersecurity and other technology disruptions. The business is typically weakest in Q1 and strongest in Q3.
- Material proceedings include the Lower Passaic River matter, Texas Brine litigation, New York water district cases, the Hewitt Landfill cleanup and a NAFTA arbitration concerning Mexican quarry operations. For several matters, the company says the outcome or its share of liability cannot be determined or reasonably estimated. The EPA’s estimated $1.38 billion Passaic remedy is a site-wide estimate; Vulcan’s share has not been determined. Hewitt remediation costs of $34.3 million had been accrued through 2018; further liability could not be estimated. The company reported no material change to its previously disclosed risk factors.
Important facts for investors to verify
- Whether aggregates shipment and pricing momentum continues and supports the reiterated EPS and Adjusted EBITDA ranges.
- Whether asphalt pricing catches up with elevated liquid asphalt costs, and whether concrete demand recovers after weather-related weakness.
- How working capital, capital spending and seasonal cash flows affect liquidity and debt over the remainder of 2019.
- Developments, insurance coverage, potential company exposure and any new accruals related to environmental and legal proceedings, particularly Hewitt, Texas Brine and Passaic River.
- Performance against the stated maintenance and growth capital plans, and the effect of the newly recognized operating lease obligations on leverage comparisons.