Vulcan Materials Company — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless stated otherwise. Vulcan is a U.S.-focused producer of construction aggregates, asphalt mix, ready-mixed concrete and calcium products. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,240.2 million | $1,094.7 million | $3,294.8 million | $2,912.8 million |
| Gross profit | $343.1 million | $303.8 million | $825.7 million | $752.0 million |
| Operating earnings | $249.2 million | $227.5 million | $561.2 million | $489.8 million |
| Earnings from continuing operations | $179.9 million | $110.2 million | $393.6 million | $265.4 million |
| Net earnings | $179.2 million | $108.6 million | $391.8 million | $273.6 million |
| Diluted EPS, continuing operations | $1.34 | $0.82 | $2.94 | $1.97 |
| Adjusted EBITDA | $353.5 million | $311.8 million | $846.2 million | $748.8 million |
- Q3 revenue and gross profit each rose 13%; operating earnings increased 10%, while net earnings rose 65%. The prior-year quarter included $46.1 million of interest charges related to debt purchases, affecting the year-over-year earnings comparison.
- Q3 gross margin was approximately 27.7%, versus 27.8% a year earlier. The filing reports nine-month gross profit of $825.7 million.
- Aggregates drove growth: Q3 shipments increased 10% (6% same-store), and freight-adjusted average price rose 2% (3% excluding mix). Aggregates segment gross profit increased 18% to $303.8 million. Asphalt segment gross profit fell $7.3 million in Q3 and $18.6 million year to date, primarily due to higher liquid asphalt costs.
- Q3 net interest expense was $33.5 million, down from $82.0 million; nine-month expense was $104.6 million versus $154.6 million. Comparisons reflect prior-period debt-retirement charges and 2018 refinancing costs.
- Nine-month operating cash flow was $572.6 million, up from $399.5 million. Capital spending on property, plant and equipment was $348.2 million; business acquisitions used $213.1 million. Cash, including restricted cash, was $43.1 million at September 30, down from $146.6 million at year-end 2017. The company made a $100 million pension contribution during Q1.
- Total debt was $2,978.1 million, including $200 million of short-term borrowings; debt was 36.7% of total capital. The $750 million credit facility had $505.0 million of available borrowing capacity after borrowings and letters of credit. The company reported compliance with debt covenants.
Changes and capital allocation
- Nine-month revenue increased 13%, with aggregates shipments up 11% and asphalt mix shipments up 5%; ready-mixed concrete shipments declined 7%. Acquisitions contributed to reported growth.
- Diesel unit costs rose 28% year over year, increasing nine-month costs by $21.4 million. Liquid asphalt unit costs rose 25% year to date and reduced Asphalt segment earnings by $32.2 million.
- Vulcan refinanced debt in early 2018, issuing $850 million of notes and repaying term loans and credit-line borrowings. Management said the refinancing more than doubled the weighted-average debt maturity to approximately 16 years.
- For the first nine months, Vulcan repurchased 866,490 shares for $99.9 million and paid $111.2 million in dividends. It also spent $194.8 million on internal growth projects.
Outlook, risks and unusual items
- Management expected 2018 net earnings of approximately $530 million, continuing-operations diluted EPS of $3.85–$3.95, Adjusted EBITDA of $1.125–$1.135 billion and after-tax cash flow from earnings of approximately $810 million. Planned 2018 capital spending was approximately $225 million for maintenance and $300 million for internal growth.
- Preliminary 2019 outlook called for mid-single-digit growth in both aggregates volume and price. Management cited demand growth, pricing momentum and weather as important factors; Hurricane Michael and wet Texas weather affected shipments in early October.
- Management estimated Q3 weather reduced earnings by approximately $27 million. It also cited higher diesel costs. Asphalt price increases were beginning to offset liquid asphalt cost inflation, but management expected full-year Asphalt segment gross profit to be about $25 million below 2017.
- Q3 included $10.0 million of charges associated with divested operations, including a $9.2 million Hewitt Landfill environmental accrual; the nine-month period also included $7.4 million of debt-retirement charges. Q3 taxes included recognition of $7.2 million in previously unrecognized tax benefits after a statute of limitations expired. The lower tax rate also reflected the Tax Cuts and Jobs Act.
- Legal and environmental matters include the Passaic River Superfund proceedings, where the EPA estimated a proposed remedy at $1.38 billion; Vulcan’s share has not been determined. In the Texas Brine litigation, a trial court assigned Vulcan 15% of fault in pipeline cases, a ruling the parties appealed; the company said remaining claims could not be reasonably estimated. For Hewitt Landfill, Vulcan had accrued $23.9 million for the on-site system and said additional North Hollywood groundwater liability could not yet be estimated.
- Other risks identified include construction demand and public infrastructure funding, weather, energy and raw-material costs, interest rates, pension funding, environmental liabilities, litigation, permitting and reserve access, acquisitions, and tax or regulatory changes. Management reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether 2018 and preliminary 2019 shipment and pricing expectations were achieved, particularly given weather disruption.
- Whether higher liquid asphalt and diesel costs continue to pressure segment margins, and whether pricing offsets those costs.
- Actual operating cash generation, capital spending and liquidity, including the use of credit-facility capacity and the effect of pension contributions.
- Developments in the Passaic River, Texas Brine and Hewitt Landfill matters, including any changes in estimated company exposure or accruals.
- How much reported earnings growth reflects underlying operations versus acquisitions, tax changes, debt-refinancing effects and other unusual items.